Recent Fraudulent Activity In Mutual Funds Is An Eye-Opener For Investors
Jul 12, 2019

Author: Vivek Chaurasia

(Image source: Image by mohamed Hassan from Pixabay )

The tall claim of your money being safe with mutual funds is in question once again.

In what may look like a crime serial plot, a fraudster duped a high profile mutual fund investor using a fake identity and bank account.

According to the news reported recently by The Tribune, the owner of Avon Cycle - Mr Onkar Singh Pahwa lost Rs 60.79 lakh of his mutual fund investments through a cyber-scam. The fraudster managed to redeem units worth Rs 49.83 lakh from L&T Mutual Fund and Rs 10.96 lakh from SBI mutual fund,  taking in the bankers, mutual fund houses, RTA's, and, more importantly, the investor for a nasty surprise.

How it happened?

As reported, the fraudster opened an account in Kotak Bank's New Delhi Branch by using a fake driving license in the name of the investor. Then he/she changed phone number, email address, mailing address, and signatures, among others details in the mutual fund records before redeeming the investments.

This incidence highlighted the questionable safety of an investor's money. The precarious nature of this case opens the door to suspicion that due diligence and administrative processes were compromised at the bank and, perhaps, at the concerned mutual funds/their Registrars and Transfer Agents (RTAs) as well.

Some unanswered questions are...

Why didn't the bank conduct a thorough background check before letting the fraudster open a bank account?

Was the driving license sufficient documentation to open a bank account?

Why did bank not bother to ask for a PAN, Aadhaar, or any other document to verify proof of identity? Or was this managed in a dodgy manner too?

There is also a possibility that the concerned bank didn't carry out a thorough verification of documents as prima facie the fraudster might have looked like a genuine person to the bank officials. Nonetheless, there can't be any justifiable excuse for not verifying the documents properly.

As you would know, linking Aadhaar isn't mandatory now to open a new bank account. Had it been compulsory, the fraud probably wouldn't have happened because it's relatively difficult to produce a fake Aadhaar.

What went wrong on the part of respective fund houses?

Ideally, mutual fund houses ask for a signature verification letter from the bank linked with the folios before allowing the change of signature. Apart from this, the fund houses need to inform the investor immediately via a letter and/or email about any change in folio details like address, bank details, email id, phone number, signature, etc.

So the questions that pop up here are...

Did the scammer manage to get a letter from the bank confirming the change in the signature? If yes, this is a matter of concern.

Was the communication about the change in account details sent to the investor on time?

Did the investor miss any initial communication or delay at his end in reporting to the fund house, for whatever reason? Had he reported them instantaneously, the fraud could have been avoided.

Did the fund house not act swiftly and block transactions after the concern was raised by the investor with one of the fund houses? As you may know, there's usually a cooling period of 10 days for redemption after you change your bank details, to avoid any fraudulent activity.

Didn't the investor receive any transaction alert on redemption (via SMS or email), which he could have flagged immediately to the fund house and blocked the pay out?

Whatever the reason may be, the fraudster couldn't have done this at just one click. A series of fraudulent actions had occurred before he/she could redeem the mutual funds units worth lakhs and withdraw the money. An alert at any stage by the bank, fund house / RTA's, or the investor himself could have foiled this fraud. It's important that the bank, mutual fund houses involved, and the regulators look into the matter seriously to protect the interest of mutual fund investors.

Lessons you should learn from this fraud

  • Never share your key information such as bank details, mutual fund folio details with unknown people and even with friends and co-workers. You never know who is planning to shortchange you.

  • Always opt for the ECS facility to receive dividends and redemption proceeds.

  • Register your mobile number and email id in all your folios to receive timely alerts via SMS and email.

  • Don't ignore any communication from your bank and mutual fund houses you have invested in.

  • You should closely monitor all your mutual fund statements as and when you receive them and in case of any discrepancy, you should bring it to the notice of concerned authorities immediately.

  • If you are investing via online, ensure you are accessing the right website and following the internet hygiene protocols.

  • Before you share your Proof of Address (PoA) and Photo Identity proof online, ensure it is required by the law and the seeker is following the standard privacy measures.

  • If you are investing through an intermediary, you must bring any discrepancy to their notice. For instance, in this case, the victim should have communicated the change in the mutual fund records immediately. Responsible intermediaries would always extend their best assistance in such cases as it affects their reputation as well.

This is not the first time mutual funds have been in the news for criminal/negative reasons. Earlier, there have been other instances when the safety of an investor's money was compromised; by an insider or some crooked bank relationship manager. This instance highlights that it is high time for banks and mutual funds to learn and strengthen their process and security to avoid any such fraudulent activity in the future. Moreover as an investor, you need to be alert about your investments. Ignoring any communication from the bank or a fund house may turn out to be costly.

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