Recently federal prosecutors indicted Anil Anand, Udhay Shankar Balakrishna, Manoj Nijhawan, and Narendara Kumar Rastogi, all from New Jersey. Prosecutors allege that these four men defrauded various banks, including Fleet National Bank, JP Morgan Chase, and PNC Bank. The fraud originated when they create a company called Jersey Metals with offices in Piscataway, New Jersey, New York and London. The corporation, supposedly in the business of metals trading, then applies for various loans from several banks, and the banks granted the loans. The defendants grabbed the money and wired it to their own accounts. The scam continued until some bank employee finally took a stroll to their Manhattan office and discovered there wasn't much there.

 

By itself, the tale isn't too news-worthy. It has occurred many times in the past under various guises. What's interesting in this case is that the banks have lost at least $600 million, and it may be significantly higher. One would have thought that the banks would have been a tad more careful before loaning out that much money.
 

The case demonstrates how vulnerable banks have become in the sense that they are so bureaucratized that smart crooks can navigate through the maze as long as they look like a real company with some real transactions and some real collateral. It also indicates an over-reliance on spreadsheets and other computerized files. By creating data that look realistic, these men duped the loan officers with their budgets and their financial statements. 

 

Accountants, of course, learned the importance of "kicking the tires" in the McKesson and Robbins scandal during the 1930s.  Recall that auditors previously did not examine receivables or count inventory and so managers at McKesson and Robbins easily defrauded the auditors and the investors with fictitious sales and inflation of ending inventory. As a result, the SEC and the profession mandated the confirmation of receivables and the counting of inventory.

 

It would seem to me that loan officers would as a matter of policy do some investigation of the application that goes beyond merely looking at computerized records. I realize that a bank wants to minimize its investigative costs, but it seems to me that these banks did very little in this particular case. They might want to learn from the auditing profession that numbers in a financial schedule don't necessarily imply the existence of the assets.

 

As an aside, it appears that these crooks could have escaped attention if they had taken the money and retired in some exotic location with no extradition treaty with the U.S. One would think that $150 million minus costs to set up the swindle would have been enough money for each of them. But greed has a strong hold on humans! Avarice plus the illusion that they could cheat the banks forever proved to be their downfall. Justice, however, remains only partial since these banks likely will not recover much of money.

Maybe banks should teach their loan officers some internal auditing. At the very least, they should instruct them to get out of their office chairs and check on the applicants. Much can be learned from such a simple technique.

J. EDWARD KETZ is associate professor of accounting in Penn State's Smeal College of Business Administration.

More articles by Mr. Ketz