Fraud and Corrupt Practices In LOGISTICS Sector
Updated: Oct 25, 2021
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 and Technical Convergence providing strategic advisory and solutions at all levels of the Management functions in a consulting role and is available for designing and implementing anti-fraud strategies.
In the subcontinent, the transportation business at the corporate level is reasonably well organized; it however, remains in realm of unorganized sector at the grass root level, controlled mostly by supervisors and driver contractors or by the drivers themselves. Pace of drivers sets up the pace of operations. In the subcontinent, they always remain over tasked and underpaid. They spend their lives in miserable living conditions. Smart ones make a fortune out of the business. Then there are undesirable activities in which few indulge in which according to customers drives the core ethics of the transport business i.e. being unprofessional, stating rehearsed lies, seasoned deceit methods and involvement in well researched defrauding practices, unleashing them at an earliest possible opportunity for illegal monetary gains or simply fraud. Since, this blog focuses on only frauds and corrupt practices in logistics industry; I will not dwell upon the reasons for this behavioral pattern. What can be stated with certainty is that the onus of this behavior lies partially in driver’s upbringing in backdrop of our societal set up; cultural practices and partially on their employer payment terms and condition. A driver is happy if his fuel tank is filed up in time and he has an access to it, whenever he desires. I am sure that this irrational behavior can be disciplined by adopting correct operational processes, practices and anti-fraud procedures e.g. Geo fencing and Geo tagging of vehicles, with drivers on fixed salary instead on being on daily wages or trip based.
At times the staff at corporate is also a party to the frauds and receives kickback for each successful scam which is undertaken. Thus, the second set of people who set the pace of operations is the staff at corporate involved in releasing the payments. The favored methods of defrauding employed by them are commission and kickback.
Fraudulent practices by the C-Suite and Consultants are not very uncommon in the transportation business as the processes suffer from loopholes and limitations. At times, there exist a huge disparity between capability and expectation. Under these settings, unrealistic business targets promised to the Original Equipment Manufacturers (OEM) lead to disappointments due to frequent failures and unexpected risks. The oversight mechanism is either absent or has a rudimentary presence.
With due blessings of the external auditors, misleading the management into banking and financial frauds to hide undesirable results, or to inflate the asset component in the balance sheet to take loans have been found to be one of the most common frauds employed by the financial department. Falsification of results is a common practice.
Having understood the prevalent fraud dynamics in nutshell, let us go into the specifics of few frauds.
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
On commencement of a trip, a driver is given money to fill up the tank. Depending upon the distance to be traversed, he is given cash or petrol card to get the tank filled. He normally fills the oil from the Company authorized fuel pump. Whilst the saving out of cash for the trip goes in driver’s kitty, the incentives from filling up the tank using the card are received back in the Company accounts. These savings generated by the driver could be due to his skillful driving or due to evading of toll tax booths. The frauds related to the fuel pump and card will be discussed later while discussing frauds at the corporate office.
The Toll Booth & Permit Fraud
Depending upon the route selected by the planning team, a driver is paid in advance to pay for the tolls and permits enroute. Then there are penalties paid enroute viz because of a cargo being Over Dimensional Cargo (ODC) and host of other Road Transport Office (RTO) violations. ODC penalties depend upon the size of the cargo which overshoots the carriage platform by length, breadth and height. Though FasTags has reduced the toll booth fraud as the drivers cannot deviate from the assigned route, which they otherwise did to pocket share of toll tax money in garb of faulty Global Positioning System (GPS), road blocks or otherwise. The receipts produced by them were dubious in nature and spell trouble for an honest business house while claiming their billing dues from the vendors or Original Equipment Manufacturer (OEM). Citing poor network, they switch off their mobile phones to avoid detection. Thus, both the GPS and the driver’s mobile phone are disconnected from satellite and mobile tower. Without realizing the long-term implications and inherent losses, short sighted senior functionaries and Heads also rally round in violation of FasTag compliances because their implementation result in increasing the overall cost of operation by approximately .75 to 1%. These losses are profound when the business is large. Heavy Motor Vehicle (HMV) drivers avoid the main routes to save on toll tax and take routes which involve lesser toll and permit payments. At times these are single lane routes through forested areas, graveled or un-metaled and passing through villages thereby increasing the chances of accidents resulting in increasing the cost of operations and maintenance of vehicles. This also results in the delays causing loss of reputation to the business house and affecting a direct impact on the future business prospects. The tracking team at corporate office at times acts in collusion in aiding and abetting this particular fraud. Another team member who makes the trip sheet and monitors drivers’ attendance sits in the same operation console. These conditions offer ideal settings for a coordinated fraud effort if the vehicle is driven by any one of their relatives or friends. The employees sitting in the Command Post need special vetting for their credentials and it should be ensured that they are well looked after. To an extent, Technical convergence can come to the owners rescue but ultimately the employees located here are controlling a driver and not a machine, he, who is facing multifold challenges while driving through the Indian roads and hostile administrative conditions. The job being 24x7, suitable standbys in operation console are also required for the desired profits.
Maintenance Related Fraud
Some companies also give money to the drivers for the wayside repairs before or after the journey on production of genuine bills. On many an occasion, the bills have been found to be inflated. With approval systems not in place, the situation offers an ideal setting for maintenance related fraud by drivers including over or false billing in collusion with the maintenance and accounts team. This runs into huge sums for tyre, battery and wielding frauds especially if you have a large sized vehicle fleet.
Fraud Related to Accident
Vehicle move on unauthorized routes to avoid toll taxes and drivers pockets the amount meant for the purpose by production of fake receipts. This practice has been found to be a major contributing factor towards accidents and can nullify a host of good operations at Branch, Zonal or Regional level. The accident devours a major portion of the profits as it involves repairing or writing off a vehicle, loss of the load and its consequent payment to the client, third party payments, medical expenses for treatment and the greedy legal processes and encumbrance. At times, the driver loses his life. Good Companies mitigate the risk on life loss by covering the drivers and third party through insurance. Otherwise, the settlement amounts runs into huge sums. The inflated way side repair bills, receiving commissions and kickbacks are a common practice employed both by the OEMs and dealing staff. Inflating of the bills by drivers for recovery operations and repairs at local level during movement is also common. At time the bills are absent as the payments made for accidents are difficult to be accounted for. They also include sums paid for bribery for getting some administrative work done. Deviations are common to record such expenditure under the authorized headings which fall in domain of fraudulent practice.
Using OEM Vehicles for Passenger Duties or Illegal Transport of Goods
While driving OEM vehicles to retailers or to body builders, employing them for passenger duties and illegal transportation of goods for financial gains is again a common fraud employed by the drivers. At times; the drivers commit this fraud with due concurrence of Branch Manager (BM) for illegal monetary gains.
Using Owners Vehicles for Passenger Duties or Illegal Transport of Goods
The drivers uses owner’s vehicle for Passenger Duties or Illegal Transport of Goods. They will go to any extent to avoid reverse load using all delay tactics as it is less beneficial to them or their contractors. They like to book the reverse load by themselves and show an empty run at the behest of the owner who provides them for the fuel, toll and enroute expenses, thus pocketing the fraudulent earnings. When intent is criminal, the load becomes illegal. On getting caught, they will abscond, transferring the complete onus of the responsibility of the goods on the owner.
2. Contractor Frauds
The transport business being driver dependent, the surety for drivers conduct, character and at times the safe delivery of goods is provided by the driver contractors. These are the old drivers who having understood the nuances of business and the associated manpower become champion of the driver cause and get into a negotiating role. They are sometimes politically well connected at local level and are the blue eyed boys of the management. Holding back of vehicles short of destination, stealing of goods etc are the common practices employed by them to negotiate. The drivers dance to their tune. Illegal recording of conversation is a very common practice in this profession and these contractors are the master of this rare tradecraft. To get them perform is an art and takes up a lot of your energy. You need to be an expert at operations to beat some of their fraudulent practices which remains on borderline of crime.
3. Branch Manager Frauds
The Regional, Zonal and Branch Managers (BM) are handpicked supervisors who wield adequate authority in the business house by virtue of being a family member or being in proximity of the Management Committee. Being far located, they are institutions in themselves. A notorious BM can reduce profits substantially and seize the complete branch operations. These cases are not very uncommon in the industry. An extremely close oversight is required on the activities of these employees as they can cause a serious reputation loss. Some frauds of the BMs but not limited to following, are:
Commonly Found Frauds
The frauds by BMs include inflating bribes for obtaining sales, agreeing for over-priced rental deals, illegal deals with driver contractors, stage-managing of accidents and overpricing repair bills, over-payment of trip expenses to drivers, inflating purchases and producing inflated administrative bills. By these practices they end up receiving kickbacks from the concerned business associate.
Using Owners Vehicles for Transport of Goods
What is done here is that the complete reverse load is booked outside the information of the corporate office in collusion with the driver or the empty space left in the vehicle after genuine loading is utilized for booking goods for personal gains. In one such case, while transporting genuine goods in a 40 feet trailer, the space left after loading of seven tractors was utilized for transporting an automobile and pocketing the proceeds of its transportation which otherwise should have gone into the accounts of the Company.
Unauthorized incentives are received by the BMs in form of Commissions from the aggregators for providing their vehicles. These vehicles are utilized meeting Company’s transport requirements. A salaried employee of a Company is not expected to take commissions and ideally should deliver 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
This fraud is slightly difficult to understand. What is done here is that by forcing delays on drivers and delivering OEM vehicles short of original destination, if retailer is same at both the places, the route expenses, toll tax amount and fuel amount for the extra distance which remained to be travelled is shared by the BM and the driver. This remains outside the knowledge of the tracking team at the corporate office as GPS and Mobile tracking remains switched off for the balance of the journey. Some incentive is paid to the dealer also or the dealer at times asks for the delivery at an earlier retailer ship to fulfill his commitment of timely delivery of the OEM vehicle to a client which otherwise has been delayed. This example has been highlighted to showcase that some dishonest BMs and drivers do not leave a single opportunity to earn illegally thereby bringing disrepute to the complete driver fraternity.
Frauds in Proof of Delivery (PoD) Management
Some BMs in connivance with drivers, billing team and their Heads indulge in frauds related to PoD management for unauthorized returns. Suffice to say that market load PoD is often delayed or lost with the blame of the loss resting on the drivers in return of financial favors from the client. The balance amount of the trip is never realized at the Corporate.
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 normally drafted by the OEM which does not like it to be amended. The advice here is to remember that it is an agreement which should be mutually acceptable to both parties and need to be drafted accordingly. The duration part of these agreements leaves a fair amount of scope for fraudulent practices. In a case of fraud, four month of rentals were being paid extra due to poor understanding of the terms and conditions of the contract agreement. Detailed investigations pointed towards internal kickback sharing between finance leads at both ends.
The above holds good for SLAs also. The space utilization part of these agreements leaves a fair amount of ambiguity for fraudulent practices while preparing of bills. A few paisa/sq feet here and there could spell out to be the difference between the profit and the loss.
These are common frauds as prevalent and reported in running of a small shop e.g. shoplifting of items, despite all checks and balances. They are important and cannot be neglected as all fraudulent numbers add up leading to decreasing of profit margins.
The warehouses are manned by a large workforce involved in its operations, housekeeping and security. Kickbacks to Heads for swinging of contract to their favorite administrative Company are not very uncommon and are an acceptable practice. Professional advice can reduce such practice to a minimal so that the concessions are realized in own Company books.
5. Fraud and Corrupt Practice in Projects
While the projects also have the identical fraud and corrupt practices including commissions and kickbacks as discussed above, some additional abnormal indicators that may be looked for mitigating losses and avoiding risk in transportation projects include but are not limited to following:
Overzealous Head or Vice President pressurizing hard and short-circuiting processes to take on a project related to transportation of goods of a Pvt Ltd. Investigation revealed that this person received kickbacks from profits made by the Pvt Ltd in an earlier business agreement. This may not be true in case of a Public Sector Undertaking (PSU). Investigations also revealed that two projects undertaken by him in preceding year with two different vendors incurred losses. One was his friends Company which later turned bankrupt.
Similarly, an overzealous finance lead pressurized the Company for getting into project with a Client having dubious payment credentials. This lead assured of the Management of securing the project during a stiff competition. Past records and investigations indicated breach of trust by this Company, violation of a term of SLA and delayed payments putting the complete operation cycle in jeopardy.
In another case, Board Members without getting into the details, over-bribed the official to get a prestigious project. This rendered the quarterly profits from other businesses into jeopardy as the earlier planned cash flow stopped coming in towards operations. This money was utilized for bribery. The damage was severe. Salary generation became a problem for Q3 and Q4.
At times situation so evolves that as a Project Head one must carry out bulk hiring of drivers. When assigning this task to your HR team or your supervisors, care must be taken that these are not hired from the same village as of the supervisor or all of them being from the same town, religion etc. At an earliest possible opportunity, they tend to unionize and come up with an unreasonable demand endangering the complete operations. Involvement of the salaried company employee viz your own Supervisor in instigating them is always a possibility as he has an unwritten kickback agreement with these drivers for giving them a job opportunity. It is met out of their salaries for getting them employed or fuel, toll and permit related frauds.
6. Fraud at Corporate Office
Investigations revealed that the dishonest Financial, Administrative, Maintenance and Operational employees were found in aiding and abetting fraudulent and corrupt practices. Some examples are given in succeeding paras:-
Fraud in Human Resource (HR) Department
Some frauds in HR department but are not limited to the following:
Over-staffing can lead to spare employees, some of them are discontented, some are distant family members of the Board Members and some are relatives of OEMs. They by virtue of being free get into the mode of rumor mongering. These employees cause serious damage to Company’s reputation and should be identified and relieved at an earliest possible opportunity. In one case, during a routine audit 50 such employees were identified and relieved. To avoid instability, another 25 who were also identified as surplus were relieved over the next three months. The surplus had arisen because of reasons which are other then stated above. This is not a classical case of fraud but a case of HR mismanagement which was not spotted during internal and external audits.
Frauds in Payroll
Frauds in payroll management are orchestrated by HR department in connivance with the payments clerk but are not limited to following:
Payment for unauthorized absenteeism and pocketing proceeds in collusion with the employee, giving salary to ghost employees and drivers and diverting this payment to own account and carrying out Enrollment of acquaintances and receiving kickback.
Payment and Attendance of Drivers
A dedicated clerk in HR department should monitor payment and attendance of drivers on daily basis in addition to the operations department if the drivers and their contractors are on Company payroll. Instances of frauds by employment of ghost drivers and contractors do come to notice while conducting audits.
Fraud by Finance Team
Some examples of contribution by finance team towards fraudulent activities and corrupt practices but are not limited to following:
False and inflated billing done for procurement and receiving kickbacks from client, Commissions from the vendors for providing business opportunities, Creating ghost vendor code and generating bills, payments by cash and pocketing the amount, Getting commissions for receiving delayed payments from vendors/ OEMs and not reporting them in time to the Management, Diverting share of incentives of card payments into personal account which may also include diverting some card related incentives received from affiliated petrol pumps into personal accounts or receiving commissions for affiliating them, Payment for fuel meant for personal use by Petrol pumps and Creating complex card payment systems and financial structure and Not being transparent with the financial feedback's to the operation 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.
Approximately 50 frauds and corrupt practices prevalent in the Logistics industry have been highlighted above. This is just a small reflection of the complete risk profile. I am sure that there are many others. The business risks posed by such practices are high. Most of these risks are tangible. A few have a short-term financial impact while others have a more serious long term reputation impact leading to closure of business houses. There are multitudes of anti-fraud methods and strategies which can be employed to identity and arrest them in every organization. They can be also customized to suit some peculiar business organizations as well. If employed correctly as preventive measures, they can increase the profits by approximately 5-7%, which in other words is the same amount of percentage which is lost due to the fraudulent and corrupt activities. The process, oversight, prevention, detection, investigation, employee selection and verification mitigate chances of frauds, decrease risks and enhance Company’s reputation. The Management has to get involved and give their commitment to anti-fraud strategies. Their intentions in no uncertain terms are required to be communicated to the corrupt employees and defaulters.
DRASInt Risk Alliance Private Limited acts as your Consultative Investigative Unit (CIU) for Field Investigation Services and Surveillance. We specialize in investigations related to Arson, White Collar Crime, Financial Fraud and Malpractice, Corporate frauds and Forgery. We specialize in Protective Intelligence, Industrial Surveys, Asset Verification, Accident Investigation Services and Fire Damage Investigation Services, Character R