Why Southeast Asia emerged as a hub of organised financial crimes

23 May 2024 Why Southeast Asia emerged as a hub of organised financial crimes

This article covers “Daily current affairs” and the topic details of “Why Southeast Asia emerged as a hub of organised financial crimes”. This topic is relevant in the “Polity and Governance” section of the UPSC- CSE Exam.

Why in the news?

Almost half of the financial frauds targeting Indians originate from the three Southeast Asian countries of Myanmar, Cambodia and Laos.

More about the news:

• Most web applications use the Chinese language to perform financial fraud, thereby not ruling out the Chinese connection.
• Financial crimes such as digital arrest, stock market scams, investment scams and romance or dating scams account for a loss of over ₹1,776 crores in 89,054 cases in the first four months of the year spurt in the organised crime from Southeast Asia.
• In the preceding four months, authorities have taken action by blocking a combined total of 325,000 mule bank accounts, 595 applications, and over 3,000 URLs to counter illicit activities.
• Numerous Indian nationals employed within a suspected fraudulent operation based in Sihanouk City, Cambodia, voiced their grievances against their employers. 
• Their complaints highlight a concerning trend where individuals are either lured under false pretences or coerced into joining these establishments, often promised roles as data entry operators. 
• Many of them enter Thailand on tourist visas, and due to lax border controls and human trafficking networks, they find themselves trapped in these facilities, subjected to extensive work hours. Recently, protests erupted among the Indian workers demanding the return of their passports.

Types of organised financial fraud in India include:

1. Ponzi schemes: These schemes lure investors with promises of unusually high returns, using funds from new investors to pay off earlier ones. Examples include the Saradha chit fund scam and the Sanjivani Credit Cooperative Society fraud.
2. Investment scams: These entities promise individuals with fraudulent opportunities, promising quick and guaranteed returns, often involving fictitious companies or fake investment products. The SpeakAsia Online scam is one such example.
3. Digital banking and credit card fraud, Including phishing attacks, identity theft, and fraudulent transactions using stolen card details. The 2016 debit card data breach compromised millions of debit cardholders’ data.
4. Money laundering: The origins of illegally obtained funds by concealing them  to make them appear legitimate, often using financially vulnerable people. The INX Media money laundering case is a high-profile example.
5. Stock market manipulation: Through activities like price rigging, spreading false information, insider trading, and pump-and-dump schemes. The Satyam Computer Services scandal is a prime example.
6. Bank frauds: It encompasses loan frauds, cheque frauds, forged documents, and unauthorized transactions, resulting in substantial losses for banks and individuals. The Nirav Modi-PNB scam, where fraudulent Letters of Undertaking were issued, caused a massive loss to Punjab National Bank.

According to a PwC survey, 57% of all fraud incidents in India were platform frauds, with more than 26% of organisations losing over USD 1 million due to such frauds[4]. Financial frauds by online transactions account for 89% of all platform frauds.

To combat these organised financial frauds, experts recommend strengthening internal controls, technical capabilities, and reporting, as well as mandating banks and financial institutions to provide data in a predetermined format to aid investigations.

Reasons for the rise of organised financial fraud in India:

• Rapid digitisation and adoption of digital payments: It has made it easier for fraudsters to operate anonymously and target a large number of victims. The pandemic accelerated this shift, with the average Indian company now operating 5 platforms in the normal course of business.
• Lack of awareness and risky behaviour: Among individuals, such as sharing sensitive financial details with others or storing them insecurely it makes them vulnerable to fraud. A survey found that 29% shared ATM pins with family, while 33% stored account details on email/computer.
• Weak internal controls and fraud prevention measures:  Many organisations, especially smaller ones, allow fraudsters to exploit vulnerabilities in platforms and systems. Platforms now account for 89% of all fraud incidents, with 40% of companies losing over $1 million.
• Challenges in investigation and prosecution: Including lack of standardised data formats from banks, difficulty in tracking devices used, and jurisdictional issues in interstate cases hamper law enforcement efforts. Recognising organised digital fraud as a serious crime and mandating preventive measures can help.
• The lure of easy money and lack of deterrence: With only 26% of victims able to recover lost funds, fraudsters are encouraged to target individuals and organisations. The total value of frauds reported in 2021-22 was a staggering ₹60,414 crore.

Strategies to combat financial fraud

• Education and Awareness Campaigns: Develop innovative educational materials and awareness campaigns targeting both individuals and businesses. Emphasise common fraud tactics, warning signs, and steps for prevention.
• Data Analytics and AI: Implement advanced data analytics and artificial intelligence systems to detect unusual patterns or anomalies in financial transactions. Customise these systems to your organisation’s specific needs and regularly  use updated version to stay ahead of evolving fraud tactics.
• Collaboration and Information Sharing: Foster collaboration between financial institutions,regulatory bodies to share information and best practices for fraud detection, law enforcement agencies, and and prevention. 
• Enhanced Authentication Measures: Implement multi-factor authentication and biometric authentication methods to strengthen security and verify the identity of users during financial transactions. More use of emerging technologies such as blockchain for secure and transparent record-keeping is needed.
• Customer Verification Processes: Develop robust customer verification processes, especially for high-risk transactions or accounts. Utilise technology such as digital identity verification and document authentication to ensure the legitimacy of customers and transactions.
• Regular Audits and Reviews: Conduct regular audits and reviews of financial processes, systems, and controls to identify weaknesses or vulnerabilities that fraudsters could exploit. Implement recommendations from audits promptly to strengthen defences against fraud.
• Whistleblower Protection: Establish mechanisms for employees and stakeholders to report suspected fraud anonymously without fear of retaliation. Ensure that whistleblower policies comply with legal requirements and provide adequate protection to encourage reporting of fraudulent activities.
• Regulatory Compliance: Stay abide by regulatory changes and compliance requirements related to financial fraud prevention. Proactively adapt policies and procedures to comply with evolving regulations and industry standards.
• Continuous Improvement and Adaptation: Recognize that fraud tactics will evolve over time, so prioritise continuous improvement and adaptation of anti-fraud strategies. Invest in research and development to stay ahead of emerging threats and technologies.

Fighting financial fraud in Southeast Asia requires a nuanced approach :

• Cross-Border Collaboration: Establish partnerships and information-sharing agreements between regulatory bodies,  law enforcement agencies, financial institutions and across Southeast Asian countries. Collaborate on investigations, share best practices, and coordinate efforts to combat transnational fraud schemes.
• Localised Fraud Detection Systems: Develop fraud detection systems that are tailored to the specific characteristics of Southeast Asian markets, languages, and consumer behaviours. Customise algorithms and analytics models to identify patterns indicative of fraud within the region.
• Partnerships with Fintech Startups: Collaborate with fintech startups and technology innovators in Southeast Asia to leverage their expertise and solutions in fraud prevention. Explore partnerships for developing and implementing latest technologies like  blockchain, AI, and machine learning in fraud detection systems.
• Community Outreach and Education: Raise awareness about common fraud schemes and prevention strategies and launch targeted educational campaigns among consumers, businesses, and vulnerable populations in Southeast Asia. Provide resources in local languages and engage with community leaders to amplify the reach of educational efforts.
• Regulatory Advocacy and Reform: Advocate for regulatory reforms that strengthen anti-fraud measures and enhance cooperation among Southeast Asian countries in combating financial crime.

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Prelims based questions:

1. Consider the following:

1. Counterfeiting
2. Integration
3. Layering
4. Placement

Which of the options given below is/are correct and related to steps involved in money laundering?

1. 1,2 and 3 Only.
2. 2,3, and 4 Only
3. 1,3, and 4 Only
4. All of the above

Answer: B

Mains based Questions:

1. Examine Why Southeast Asia emerged as a hub for financial fraud in India. Discuss a resilient system to fight against this menace.

Vishal Yadav