The author, Lieutenant Col Amit Sharma, SM, is a President-awarded veteran working in operational logistics, facility management, corporate affairs, and physical & corporate security functions, as well as technical convergence. He provides strategic advisory and solutions at all levels of management functions in a consulting role. Lieutenant Col Amit Sharma is available for designing and implementing anti-fraud strategies.
Introduction
In the subcontinent, the transportation business at the corporate level is reasonably well organized. However, it remains in the realm of the unorganized sector at the grassroots level, often controlled by supervisors, driver contractors, or the drivers themselves. The pace of operations is set by the drivers, who, unfortunately, are frequently overtasked and underpaid, leading to miserable living conditions. While some savvy drivers manage to make a fortune, others engage in undesirable activities that undermine the core ethics of the transport business, such as unprofessionalism, rehearsed lies, seasoned deceit methods, and involvement in well-researched defrauding practices for illegal monetary gains. The drivers may face issues like delayed fuel tank refills and limited access, contributing to their dissatisfaction.
This irrational behavior of some drivers can potentially be disciplined by implementing correct operational processes, practices, and anti-fraud procedures.
Implementing technologies like Geo-fencing and Geo-tagging of vehicles, coupled with offering fixed salaries instead of daily wages or trip-based payments, could contribute to a more disciplined and professional workforce.
Notably, corporate staff can also be complicit in fraudulent activities, receiving kickbacks for successful scams. Those involved in releasing payments play a significant role in setting the pace of operations. Common fraudulent methods employed by corporate staff include commission and kickback schemes.
Fraudulent practices are not uncommon at the C-Suite and consultant levels, as the transportation business processes suffer from loopholes and limitations. Disparities between capability and expectation can lead to unrealistic business targets promised to Original Equipment Manufacturers (OEM), resulting in disappointments, frequent failures, and unexpected risks. Oversight mechanisms are often absent or rudimentary.
External auditors, at times, play a role in misleading management into banking and financial frauds to conceal undesirable results or inflate asset components in balance sheets to secure loans. Falsification of results is a widespread practice in the transportation industry.
Few Common Frauds
1. Driver Committing Frauds
As stated earlier, the conduct of the drivers sets the pulse of the core ethics of the transport industry. A summary of a few frauds committed by the drivers and not limited to, are:
The Fuel Tank Fraud
At the beginning of a trip, the driver receives funds to fill up the tank. Depending on the distance to be covered, they are provided with either cash or a petrol card to refuel the vehicle. Typically, the driver refills the tank at the company-authorized fuel pump. The savings accumulated from using cash for the trip go into the driver’s kitty, while the incentives earned from using the card are credited back to the company accounts.
For instance, consider a scenario where a long-haul truck driver is given a petrol card for a cross-country delivery. The savings from this transaction, if any, would benefit the company directly.
These savings generated by the driver may result from skillful driving or even from avoiding toll tax booths. The discussion on frauds related to the fuel pump and card will be deferred to later in the conversation when addressing corporate office frauds.
The Toll Booth & Permit Fraud
Depending on the route selected by the planning team, a driver receives advance payment to cover tolls and permits en route. Additionally, penalties are incurred en route due to factors such as carrying Over Dimensional Cargo (ODC) and various Road Transport Office (RTO) violations. ODC penalties are contingent upon the cargo size, exceeding the carriage platform dimensions in length, breadth, and height.
The implementation of FasTags has curtailed toll booth fraud since drivers can no longer deviate from the assigned route, a practice they previously exploited to pocket a share of toll tax money under the guise of faulty Global Positioning System (GPS), roadblocks, or other excuses. The dubious receipts produced by some drivers pose challenges for honest businesses when claiming billing dues from vendors or Original Equipment Manufacturers (OEM). Some drivers, citing poor network conditions, switch off their mobile phones to avoid detection, disconnecting both the GPS and the driver's mobile phone from satellites and mobile towers.
Unfortunately, short-sighted senior functionaries and heads may violate FasTag compliances to avoid the associated increase in the overall cost of operation, ranging from 0.75% to 1%. These losses become more pronounced in large businesses. Heavy Motor Vehicle (HMV) drivers often opt for alternative routes to reduce toll tax expenses, sometimes through single-lane routes in forested areas or gravel and unmetalled roads passing through villages. These choices increase the risk of accidents, subsequently raising the cost of operations and vehicle maintenance. Moreover, such deviations can lead to delays, tarnishing the business's reputation and negatively impacting future prospects.
In some cases, the tracking team at the corporate office may collude in aiding and abetting fraudulent activities. This collaboration becomes more concerning when a team member responsible for trip sheets and driver attendance monitoring sits at the same operation console. To prevent such fraud, employees in the Command Post should undergo thorough vetting to verify their credentials, ensuring their commitment to ethical practices. While technical convergence may provide assistance, it is essential to acknowledge that employees in this position are overseeing a driver, not a machine. These drivers face numerous challenges navigating Indian roads and hostile administrative conditions 24x7, making it imperative to have suitable standbys in the operation console for optimal profitability.
Maintenance Related Fraud
Some companies provide funds to drivers for roadside repairs before or after a journey upon submission of legitimate receipts. However, on numerous occasions, these invoices have been discovered to be exaggerated. The absence of approval systems creates an ideal environment for maintenance-related fraud, where drivers, in collaboration with the maintenance and accounts team, engage in overbilling or submitting false invoices. This problem becomes particularly significant in the case of a large-sized vehicle fleet, leading to substantial financial losses due to fraudulent activities related to items such as tires, batteries, and welding.
For instance, a transportation company with a sizable fleet may encounter instances where drivers inflate the cost of tire replacements or submit false bills for battery replacements. This type of fraudulent activity can extend to welding repairs, where drivers, in connivance with maintenance personnel, overstate the extent or necessity of welding work, resulting in unwarranted financial burdens for the company.
Fraud Related to Accident
Vehicles often take unauthorized routes to evade toll taxes, and drivers embezzle funds earmarked for this purpose by presenting counterfeit receipts. This unethical practice significantly contributes to accidents and can undermine various operational aspects at the Branch, Zonal, or Regional levels. Accidents not only deplete a substantial portion of profits due to vehicle repairs or write-offs but also result in the loss of cargo, necessitating compensation to the client, third-party payments, medical expenses, and entanglement in legal processes. In some tragic instances, drivers lose their lives.
Reputable companies mitigate the risk of life loss by providing insurance coverage for drivers and third parties. Without such coverage, settlement amounts can escalate into exorbitant sums. The common practices of inflating roadside repair bills, receiving undisclosed commissions, and kickbacks are employed by both Original Equipment Manufacturers (OEMs) and dealership staff.
Furthermore, drivers often exaggerate bills for recovery operations and local-level repairs during transportation. In some cases, bills may even be non-existent, making it challenging to account for payments related to accidents. These transactions may also include amounts paid as bribes for expediting administrative tasks. Such deviations are frequently concealed under authorized headings, constituting fraudulent practices within the industry.
While driving OEM vehicles to retailers or body builders, some drivers engage in fraudulent activities, such as diverting them for passenger services or participating in the illegal transportation of goods for financial gain. This practice is unfortunately common. In some instances, drivers commit these fraudulent acts with the knowledge and consent of the Branch Manager (BM) to secure illegal monetary gains.
Using Owners Vehicles for Passenger Duties or Illegal Transport of Goods
The drivers use the owner’s vehicle for passenger duties or engage in the illegal transport of goods. They will go to any extent to avoid accepting a reverse load, employing various delay tactics, as it is less beneficial to them or their contractors. Instead, they prefer to book the reverse load themselves, falsely claiming an empty run, with the owner providing fuel, toll, and en-route expenses. This allows them to pocket fraudulent earnings. When the intent is criminal, the transported load becomes illegal.
For instance, in the transport sector, drivers may falsely declare that their return trip is empty, whereas they are actually transporting goods illegally. This deceptive practice allows them to avoid reverse loads, which might be less profitable for them. They manipulate the situation to have the owner cover expenses, enabling them to pocket illicit earnings.
In case of being caught, these drivers often abscond, shifting the entire responsibility for the goods onto the owner. This tactic further complicates the legal consequences and places a burden on the owner who provided the vehicle for legitimate purposes but unknowingly became involved in illicit activities due to the driver's actions.
2. Contractor Frauds
The transportation industry relies heavily on drivers, making it imperative for the assurance of drivers' conduct, character, and, at times, the safe delivery of goods to be guaranteed by their contractors. These contractors, often seasoned drivers well-versed in the intricacies of the business, may possess political connections at the local level, earning them favor with the company's management. Unfortunately, some contractors engage in dubious practices such as withholding vehicles short of their destination and pilfering goods as tactics to negotiate with higher company officials. Regrettably, many drivers find themselves compelled to conform to the contractors' demands.
In this profession, the illicit recording of conversations is a prevalent and sophisticated practice, with these contractors mastering this rare tradecraft. Dealing with them requires a substantial amount of energy, as their cooperation demands expertise in operations. Overcoming their fraudulent practices, which often teeter on the borderline of criminal activity, necessitates a strategic and knowledgeable approach.
3. Branch Manager Frauds
The Regional, Zonal, and Branch Managers (BM) are carefully selected supervisors who possess significant authority within the business organization, either due to their familial ties or close proximity to the Management Committee. Despite being geographically distant, they function as independent entities. A BM with a questionable reputation can significantly impact profits and even take control of entire branch operations. Such occurrences are not uncommon in the industry. Consequently, meticulous oversight is essential for monitoring the activities of these employees, as their actions can lead to a substantial loss of reputation. Some examples of fraudulent activities by BMs, but not limited to, include:
Common Frauds
BMs engage in various fraudulent activities, such as inflating bribes to secure sales, agreeing to overpriced rental deals, participating in illegal agreements with driver contractors, orchestrating accidents, inflating repair bills, making overpayments for driver trip expenses, exaggerating purchases, and generating inflated administrative bills. These practices result in the receipt of kickbacks from the involved business associates.
Using Owners Vehicles for Unautorised Transport of Goods
The practice observed here involves the deliberate booking of the entire reverse load outside the purview of the corporate office, often in collaboration with the driver or by exploiting the vacant space remaining in the vehicle after the legitimate cargo has been loaded. An illustrative instance is when, during the transportation of authentic goods in a 40-foot trailer, the available space following the loading of seven tractors was exploited to transport an automobile. The resulting proceeds from this transportation were then pocketed for personal gain, a deviation from the standard procedure wherein such earnings should rightfully be recorded in the Company's accounts.
Commissions
BMs receive unauthorized incentives in the form of commissions from aggregators for providing their vehicles, which are then used to meet the aggregator's transportation needs. It is important to note that a salaried employee of the company is not supposed to accept commissions and ideally should return these incentives to the company.
Forcing Delays on Drivers and Delivering OEM Vehicles Short of Original Destination if Dealer is Same at Both Retailer ship
Understanding the intricacies of this fraudulent activity can be challenging. Essentially, what occurs is a manipulation of delivery processes. By intentionally causing delays for drivers and delivering original equipment manufacturer (OEM) vehicles short of their intended destinations, particularly when the retailer is the same at both locations, the associated expenses such as route costs, toll taxes, and additional fuel for the remaining distance are shared between the Branch Manager (BM) and the driver.
This deceitful practice often goes unnoticed by the corporate office's tracking team, as GPS and mobile tracking are deliberately turned off for the latter part of the journey. To further complicate matters, some incentives may be offered to the dealer involved, or the dealer might request an early delivery to a different retailer to honor their commitment of timely delivery to the client, despite the prior delays.
This example is brought to light to underscore the fact that certain dishonest BMs and drivers exploit every opportunity to earn money illegally, tarnishing the reputation of the entire driver community in the process.
Frauds in Proof of Delivery (PoD) Management
Some branch managers, in collusion with drivers, the billing team, and their respective heads, engage in fraudulent activities related to Proof of Delivery (PoD) management for unauthorized returns. It is noteworthy to mention that PoDs for market-loaded shipments are frequently delayed or lost, with the drivers unfairly bearing the blame for the loss in exchange for financial favors from the client. Unfortunately, the remaining 20-30% balance of the trip expenses is seldom recovered at the corporate level.
4. Frauds in Warehouse
The frauds in warehouse operations starts from the storage space agreements, Service Level Agreement (SLA) and goes down to the lowest ebb of fraud generation in the complete fraud cycle i.e. till the driver. The primary transportation, the secondary transportation, the finance and the warehousing operations all fall within the capabilities of a smart fraudster looking to an intended crime in each department. Some of the major warehousing frauds are discussed below:-
Storage Space Agreement
This agreement is typically prepared by the OEM, and they generally prefer minimal amendments. It is essential to bear in mind that this agreement should be mutually agreeable to both parties and must be drafted accordingly. The duration clause in these agreements leaves ample room for fraudulent practices. In a specific instance of fraud, an additional four months' worth of rentals was paid due to a lack of clarity in understanding the terms and conditions of the contract agreement. Subsequent detailed investigations revealed indications of internal kickback sharing between finance leads on both ends.
The above holds true for SLAs as well. The aspect of space utilization within these agreements introduces a significant level of ambiguity regarding potential fraudulent practices during bill preparation. A minor discrepancy of a few paisa per square foot can determine the distinction between profit and loss.
These common frauds are prevalent and frequently reported in the operation of a small shop, such as the shoplifting of items, despite the implementation of checks and balances. It is crucial not to neglect them, as all instances of fraud contribute to a cumulative impact, ultimately leading to a decrease in profit margins.
The warehouses are staffed by a sizable workforce engaged in operations, housekeeping, and security. Kickbacks to executives, in exchange for awarding contracts to their preferred company, are not uncommon and are sometimes considered an acceptable practice. Seeking professional advice can help minimize such practices, ensuring that concessions are accurately reflected in the company's own books.
5. Fraud and Corrupt Practice in Projects
While the projects also exhibit identical instances of fraud and corrupt practices, including commissions and kickbacks as discussed above, there are additional abnormal indicators that may be considered to mitigate losses and avoid risks in transportation projects. These indicators include, but are not limited to, the following:
Overzealous Heads or Vice Presidents pressuring intensely and circumventing processes to secure transportation projects for a Pvt Ltd. Investigation revealed that one of these individuals received kickbacks from profits generated by the Pvt Ltd in a previous business agreement. It is important to note that such a scenario may not be applicable in the case of a Public Sector Undertaking (PSU). Further investigations unveiled that two projects undertaken by this individual in the preceding year with two different vendors resulted in losses, one of which was a company belonging to his friend that later went bankrupt.
Similarly, an overzealous finance lead pressured the company to engage in a project with a client possessing dubious payment credentials. This lead assured the management of securing the project in a highly competitive environment. Past records and investigations indicated a breach of trust by this company, a violation of a term of Service Level Agreement (SLA), and delayed payments, jeopardizing the entire operational cycle.
In another case, Board Members, without delving into the details, excessively bribed officials in cash to secure a prestigious project. This action led to quarterly profits from other businesses being jeopardized, as the initially planned cash flow for operations ceased. The funds allocated for bribery were substantial, resulting in severe damage, including difficulties in salary generation for Q3 and Q4.
In certain situations, as a Project Head, there may be a need for bulk hiring of drivers. When delegating this responsibility to the HR team or supervisors, caution must be exercised to ensure that drivers are not all hired from the same village as the supervisor or from the same town or religious background. In the earliest possible stages, these drivers tend to unionize and make unreasonable demands, posing a threat to overall operations. There is always a possibility of the involvement of a salaried company employee, such as the supervisor, in instigating these drivers, as they may have an unwritten kickback agreement for securing job opportunities. This agreement is typically funded from the drivers' salaries for facilitating their employment or for engaging in fraudulent activities related to fuel, tolls, and permits.
6. Fraud at Corporate Office
Investigations revealed that dishonest employees in the Financial, Administrative, Maintenance, and Operational departments were found to be aiding and abetting fraudulent and corrupt practices. Some examples are provided in the succeeding paragraphs::-
Fraud in Human Resource (HR) Department
Some frauds in HR department but are not limited to the following:
Over-staffing
Overstaffing can lead to the presence of surplus employees, some of whom may be discontented, while others are distant family members of the Board Members, and still others are relatives of Original Equipment Manufacturers (OEMs). By virtue of their idle time, they tend to engage in rumor mongering. These employees can cause serious damage to the company's reputation, and it is imperative to identify and relieve them at the earliest possible opportunity.
In one instance, during a routine audit, 50 such employees were identified and subsequently relieved. To prevent instability, an additional 25 employees, also identified as surplus, were gradually relieved over the next three months. The surplus had arisen due to reasons other than those stated above. This is not a classical case of fraud but rather a case of HR mismanagement that went unnoticed during both internal and external audits.
Frauds in Payroll
Frauds in payroll management are orchestrated by the HR department in connivance with the payments clerk. These fraudulent activities include making payments for unauthorized absenteeism, pocketing proceeds in collusion with employees, providing salaries to ghost employees and drivers, diverting these payments to their own accounts, and carrying out enrollments of acquaintances while receiving kickbacks. These are not so uncommon in transportation business.
Payment and Attendance of Drivers
A dedicated clerk in the HR department should monitor the payments and attendance of drivers on a daily basis, in addition to the operations department, if the drivers and their contractors are on the company payroll. Instances of fraud by employing ghost drivers and contractors do come to notice during audits.
Fraud by Finance Team
Some examples of contributions by the finance team towards fraudulent activities and corrupt practices include, but are not limited to, the following:
Engaging in false and inflated billing for procurement and receiving kickbacks from clients.
Accepting commissions from vendors in exchange for providing business opportunities.
Creating ghost vendor codes and generating bills while pocketing the resulting payments in cash.
Receiving commissions for delayed payments from vendors/OEMs and not reporting them promptly to the management.
Diverting a share of incentives from card payments into personal accounts, including redirecting card-related incentives received from affiliated petrol pumps.
Receiving commissions for affiliating with petrol pumps.
Accepting payment for fuel intended for personal use by petrol pumps.
Creating complex card payment systems and financial structures.
Lack of transparency in providing financial feedback to the operations teams and management.
Fraud by the Auditors and Management
Then there are some fraudulent and corrupt activities that are undertaken by external auditors and Management also, having a potential to ruin a well-established Company. Facilitation payments are an accepted norm.
It’s a financial conundrum to record excessive hospitality payments, bribes and shady dealings.
7. Conclusion
Approximately 50 instances of fraud and corrupt practices prevalent in the logistics industry have been highlighted above. This serves as just a small reflection of the complete risk profile, and I am certain that many others exist. The business risks posed by such practices are high, with most of these risks being tangible. Some have short-term financial impacts, while others have a more serious long-term reputation impact, potentially leading to the closure of business entities.
There exist numerous anti-fraud methods and strategies that can be employed to identify and address these issues within every organization. Furthermore, these methods can be customized to suit the specific needs of various business organizations.
If implemented correctly as preventive measures, they can contribute to an increase in profits by approximately 5-7%. This percentage is equivalent to the amount lost due to fraudulent and corrupt activities.
The processes of oversight, prevention, detection, investigation, employee selection, and verification all work together to mitigate the chances of fraud, decrease risks, and enhance the company's reputation.
Management must actively get involved and commit to anti-fraud strategies. Their intentions need to be clearly communicated to corrupt employees and defaulters without any ambiguity.
To be continued...
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