MANJUNATH GOLD FINANCE LIMITED

FORENSIC AUDIT REPORT

NAGARAJA EMMADI
CHARTERED ACCOUNTANT, MEMBERSHIP NO: 218286
FAFD BATCH – 172, BENGALURU.
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Table of Contents
DISCLAIMER....................................................................................................................................... 2
1. BACKGROUND ........................................................................................................................... 3
2. EXECUTIVE SUMMARY........................................................................................................... 5
3. SCOPE / OBJECTIVE OF FORENSIC AUDIT ....................................................................... 6
4. METHODOLOGY AND APPROACH ...................................................................................... 7
5. KEY FINDINGS AND OBSERVATIONS ................................................................................. 8
6. RECOMMENDATIONS .............................................................................................................. 9

MANJUNATH GOLD FINANCE LIMITED |

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DISCLAIMER

This Report is based exclusively on the facts and circumstances described during the
engagement of the team for conducting Forensic Audit and is given based on the
representations, express or implied, and based on our interpretation of the law, which may
differ to another person. Existence of any other factual or historical background not provided
to us might require a conclusion different from the one expressed herein.

The information contained herein is specific only to the facts of the present case and cannot be
used in any other matter and is not intended to address the circumstances of any individual or
entity other than what has been described in the Report. Although we have endeavoured to
provide accurate and timely information, there can be no guarantee that such information is
accurate as of the date it is received or that it will continue to be accurate thereafter. No person
should act on such information without appropriate professional advice based on the
circumstances of a situation.

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1. BACKGROUND

Manjunath Gold Finance Ltd has started its business activity of issuing Gold Loans to retail
customers during the month of April 2012, with the low-interest rate compared to the prevailing
market rate.

Company management is very optimistic on this new initiative and estimated a business growth
in the area of gold loans around 5% on a Quarter to Quarter and around 20% Year on Year
basis. Management reviewed their internal control processes and implemented new controls to
address the risks arising from the gold loan scheme. As part of business initiative, Manjunath
Gold Finance Company appointed Mr. Rathna Chari as a gold appraiser for verification of
purity of the gold, against to the purity of the gold 80% to 85% of the value will be issued as a
loan to the borrower.

The appraiser has to verify the gold ornaments for the weight, purity the same has to be captured
on the prescribed Appraisal form. For this activity, “MGFC” has signed an agreement with the
Gold Appraiser Mr. Rathna Chari for the authenticity of the gold ornaments.

As per the agreements, Mr. Rathna Chari, Appraiser visits the “Finance Company” every day
at 11AM and stays till 02 PM, if any borrower approaches the “Finance Company” for the gold
loan, initially the borrower need to go to the appraiser desk and get the appraiser form duly
filled, which includes the description of the ornament, weight, purity of the gold, if the
ornament contains stones, value of stones/removal of stone weight etc., has to be completed in
all aspects. Depending upon the appraiser report “Finance Company” used to disburse the loan
to the extent of 80% to 85% of the value of the ornaments.

After disbursement of the loan the gold ornaments were to be sealed with the signatures of the
two officers of the “Finance Company”. The “Finance Company” is covered under CCTV
equipment’s, which captures all the above sequences.

Many people have approached the “Finance Company” for the gold loan, as the loan
component was up to 85% of the value of the ornaments and the interest rate on the loans also
little low.

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While reviewing the performance of gold loans business activity by management during fourth
quarter, it was observed that the gold loans issued by the Company during the third quarter and
fourth quarter surged to more than 50% of that issued in the first two quarters of the year which
was not anticipated by the management considering the current prevailing economic
conditions. Further management observed that the considerable amount of loans issued during
the first quarter and second quarter have become overdue by more than 4 to 5 instalments.

Though there is a significant increase in the gold loans and gold assets, because of overdue
loan accounts the risk of those loans resulting in NPA has become a major cause of concern to
the Company. Board of Directors had decided to appoint a forensic auditor to audit and identify
the root cause for this issue.

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2. EXECUTIVE SUMMARY

The Forensic Team reviewed the Loan requests evaluation process, approval and amounts
disbursement process, internal controls design and operative effectiveness of those controls
around this process by inspecting supporting documentation and conducting interviews with
bank personnel including Gold appraiser.

On review, it was observed that the respective controls are in place. During the review of KYC
documents, it was observed that few customers obtained repeated gold loans and frequency of
gold loan requests increased in third and fourth quarters. Upon further review, it was observed
that around 70% of the overdue instalments of loan accounts were pertaining to these
customers. This raised concerns of some suspicious activity and whether there are any process
lapses in due diligence activity of loan requests evaluation and approvals.

On further inquiry and interview with those customers it was observed that they have obtained
the gold loans on the instructions of their employer “Fake gold Ornaments” they don’t have
much knowledge about the same, on obtaining the gold loan successfully he is used to giving
5 % of loan component as an incentive. He assured them that the loan repayment and other
issues were handled by Mr. Laxman owner of “Fake gold ornaments” and the Gold appraiser
who is sitting at the Finance Company Mr. Rathna Chari.

“Fake Gold Ornaments” owner Mr. Laxman and the Appraiser colluded and obtained loans
from the “Financial Company” and used the amounts to issue loans to other people at a higher
rate. The borrowers were into real estate ventures and needed funds to finance their venture
and offered Mr. Laxman higher rate for loan amounts financed. Mr. Laxman had some
unaccounted gold assets with him which he purchased from unidentifiable persons who have
stolen them. With a view to earning some quick money, he hatched a plan with Mr. Rathna
Chari to obtain gold loans in the name of other people and use the loan amounts to finance their
financing business activity. It was observed that the gold assets deposited with the bank were
in-fact stolen gold items which were obtained by Mr. Laxman. As the borrowers failed to repay
back the loan instalments to Mr. Laxman, he could not pay the loan instalments and therefore
Mr. Laxman could not pay back the gold loan instalments.
Based on such finding Mr. Laxman and Mr. Rathna Chari has given a full signed confession
to their misdeeds, which is supported by various evidence and confession statement of the
customers who are the employees of the “Fake Gold ornaments”

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3. SCOPE / OBJECTIVE OF FORENSIC AUDIT

Objective and Scope of in the Engagement letter dated 9th March 2019, as aforesaid is
summarized as under:

i) To conduct the audit for the increase of Gold loan base

ii) Why the repayment of loan EMI was delayed?
iii) To check whether the borrower was Genuine
iv) To check the Purity and weight of the Gold Ornaments
v) To suggest any suggestions for the improvement of internal controls

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4. METHODOLOGY AND APPROACH

1. Loan applications along with the Appraiser report for the period were collected and
kept at one place.
2. KYC Verification process cross-checked with the loan application forms.
3. CCTV footage camera backup obtained from the Company in the presence of Branch
Manager the same was kept under safe custody.
4. Collected the Back-up of the Software used for cross verification of customer database
along with the interest and principal details.
5. Agreement between the gold Appraiser and the Company was verified
6. During the verification of loan applications, it was observed that there is a nexus
between the multiple gold loans taken by borrowers, the amount was used for
repayment of the EMI for the previous loan over dues, these trends were continued with
little change in address or locality.
7. The team went for field verification, in that process more issues came into light, the
house # were jumbled, the locality name or street numbers not matching with the
information available on KYC and loan application.
8. On difficulty could meet two to three borrowers they were genuine and could not find
much information related to default as they promised to repay in a weekdays’ time
9. Jewellery packets were opened for untraced borrowers, where on verification it was
found that there was no proper hallmark was found, but the logo of manufacture of the
jewellery was found.
10. On further deep enquiry and investigation it was found that the logo pertains to 1-gram
gold ornament manufacturer there was a showroom in the nearby locality where we
could not find the default borrower physical address.
11. On a visit to the showroom, the model design of the ornaments was matching with the
ornaments available with the bank as well as could able to trace that one of the
defaulting borrowers was an employee of the Showroom.
12. On interviewing the employee, he further revealed that the Gold Appraiser and the
Showroom owners are the friends, both were colluded and planned for this fraud.

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5. KEY FINDINGS AND OBSERVATIONS

1. Before appointing the Gold Appraiser, who is a key person for sanction of loan,
total background needs to be verified, any link to gold showrooms or jewellery
showrooms need to be cross verified.
2. To the extent possible gold ornament purchase bills need to be cross verified for
authenticity of the jewellery etc.,
3. The branch manager should have minimum knowledge about the gold ornaments.
4. Customer database needs to be cross verified with the third party if multiple loans
obtained or the size of the loan exceeds.

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6. RECOMMENDATIONS

As there are lapses in the processing of issue of loans, it is recommended to review the limits
sanction to the borrower and also to conduct total KYC evaluation of the borrower. Also,
branch to randomly verify the authenticity of the customers KYC and visit the customer
residential address.

There should be a stock verification audit to be conducted on regular intervals along with the
appointment of “Gold Appraiser”.

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7. Limitation
1. One of the major limitations faced by the team was the time constraint. Various persons could
not be interviewed due to paucity of time for the entire assignment.
2. Various transactional vouchers could not be made available to the team by the respective
departments since there were poor quality and maintenance of physical records and no internal
control mechanism to monitor document Sequence.
3. The management, especially the ex-management were reluctant to reply to all the questions
being asked by the team and most of the replies given by the management could not also be
corroborated with the documents made available to the team since the concerned transactions
were old and proper records were not maintained. And
4. We have also not received responses from some of the suppliers on time on the consignments
loading videos which will be corroborative evidence for the Invoice quantity.

Place : Bangalore Authorised Signatory

Date : 8th March 2019.

CA. Nagaraja Emmadi

Chartered Accountant
MM. No: 218286.