XYZ & ASSOCIATES

CHARTERED ACCOUNTANTS
10 , Nagji Chowk , Nashik - 422011
Email: anand.khot@rediffmail.com Contact No.: 0253-2593950,9921387297

01/01/2020

PRIVATE & CONFIDENTAL

TO,
THE MANAGER,
NMC Co-Op Bank,
Nashik Phata,
Nshik-422011.

Re: Forensic Investigation of PQR WARE HOUSE

Dear Sirs,

Attached is our report of the results of our forensic investigation of the Pqr Ware House. We have
conducted our investigation pursuant to our engagement letter dated 20/12/2019 between the NMC
Co-Op Bank Ltd and our firm.

Our procedures were performed with the due diligence. Our conclusions and findings are in
confirmatory of our engagement letter. Our analyses and observations are based upon information
provided to us as of the date of this report. It is possible that additional information may become
available following the date of our report and, if so, our analysis and observations could be affected
by such information.

This Report is intended solely for the Office of the NMC Co-Op Bank Ltd, for their internal use and
benefit and are not intended to nor may they be relied upon by any other party (“Third Party”).

We appreciate the opportunity to assist you with this matter.

We are happy to discuss any questions at your convenience.
For Xyz & Associates
Chartered Accountants

CA Xyz
Membership No. 66666
 Forensic Audit Report of Pqr Ware House
Date of report: 01st of January 2020.

1. Background

o PQR Ware House, a very renowned ware house in Nashik, established in the year
2005. The main object of this ware house is, it provides storage facility of raw goods
as of toor dal,chana dal,orid dal ,wheat & etc and finance avaibility against the goods
receipts .Members having shortage of space store their goods in these warehouse and
pays warehouse charges. Particular area wise storage facility to its members are
provided, dealing in foodgrains and pulses. The ware house has 8 godowns and each
of 10000 sq ft and total capacity of storage of 8000 tons of material as on the date of
this report.

o The warehouse is fully occupied throughout the year

o The warehouse stores the goods and charges rent and issues warehouse receipt to the
tenant who has stored the goods.

o When the goods are brought in for storage a particular warehouse receipt is issued to
the tenant storing the goods mentioning the details of the item stored, the quantity
with their lot no. by the owner of the Pqr Warehouse Mr. Anand. And when the goods
are to be issued from the warehouse the Warehouse Receipt is taken back in original
and an acknowledgement is taken from the owner of the goods that the goods has
been disbursed from the warehouse and the warehouse is no more liable for the goods
stored.

o With warehouse receipts some farmer use to take loan from the approved bank. The
bank takes the receipt & provides financing to the farmer or trader upto 70% of its
current market value. The receipt acts as collateral for the bank giving it the right to
take ownership of the stored produce if the loan is not repaid.

o There was warehouse receipt loan provided by the bank from last five years. But huge
warehouse receipt loan was flowing in the month of May’2016 with the Solapur co-
op Bank Ltd... There were two warehouse receipt loan in the same bank with same lot
no. of the agriculture produce with different name but the warehouse receipt was from
the same warehouse i.e. Pqr Warehouse .This thing came to the notice of Mr
Abhishek an internal Auditor of the bank.
 o Mr Abhijit then informed the manager & the board of directors of the bank about this
matter and the board members decided to appoint a forensic auditor to further
investigate.

2. Objective

The objective of the forensic audit were:

 To audit and investigate the discrepancy in the names of Borrower with the warehouse receipt

 To check whether the borrower were genuine.

 To check whether there was real stock in the Warehouse for which the Warehouse receipt was
issued.

 To suggest implementation of internal control wherever required

3. Use of Report:

 The forensic auditor is required to submit two original copies to the Board of Directors of the
Bank for internal purpose only which cannot be used in any legal proceedings

4. Scope of forensic audit:

 The forensic auditor shall find difference appearing in the name of Borrower with the
warehouse receipt

 The forensic auditor shall also find reasons for difference and confirm the whether the
borrowers were genuine

 The forensic auditor shall find weaknesses in the internal control system related to borrower
and suggest improvements

 Period covered in forensic audit will be last 1 year

5. Methodology:

 5.1 Probability of phantom borrower is an issue for concern for the Bank. The purpose of this
report is to validate the exact borrower

 To investigate the causes and reasons, the following methodology was adopted:
o The audit team took digital image of the server hard disk in presence of Mr. Abhishek
and two court supervisors, Mr. Samant and Mr. Kamath. It was kept securely in
sealed bag and signatures were taken of the three witnesses. The same were preserved
with the audit team office in a safe locker.

o The audit team also made clone of the hard disk so that it can be checked and verified
later on.
 o A list of all present borrower was generated from the cloned hard disk

 The audit team went to the Pqe warehouse premises where the different stocks are kept. When
checked there it was found that the original stock is only 2000 Quintal of Toor Dal. But the
warehouse owner Mr. Anand use to issue “N” number of copies and was providing to the
public for taking warehouse receipt Loan and use to charge a commission.

 The audit team prepared an exhaustive list of borrowers and checked the items mentioned in
the Warehouse receipt.

 The Modus operandi of the Abc warehouse was that when the bank people were coming to
check physically the stock they use to show the same stock.

 Using ‘find duplicate’ function of MS Excel, the duplicate Lot no. of the agriculture produce
were highlighted and found, the extract of which is as under:

Lot no. Name of the Borrower

2314 Rajesh Paradkar

2160 Sharad Kasarle
2587 Damascene D'souza
2048 Pravin Jani
1403 Dinesh Jani
359 Darshanica Purecha
1461 Devika Shah
1403 Rohinee Rajput
2648 Rupa Divecha
1327 Bankim Dalal
766 Pravin Nair
498 Leela Shah
14 Fulchand Shah
236 Pragnesh Shah
1655 Hemant Dhruv
359 Nilesh Parekh
388 Kishor Rao
766 Smita Bhoite
1205 Nirlep Shah
1575 Ramesh Parekh
970 Vasantlal Gandhi
1575 Nilima Palkar
2438 Rasila Shah
2160 Prathamesh Kasarle
2520 Sheeba Chandran

(vii) Then another excel file with only duplicate Lot no and names against each Lot No was prepared.

This gave List “A” of all Borrowers who has used the Lot of goods more than once with a common key
Lot No.

Duplicate Lot no. Name of the Borrower Name of the Borrower

2160 Prathamesh Kasarle Sharad Kasarle

1403 Rohinee Rajput Dinesh Jani
359 Nilesh Parekh Darshanica Purecha
766 Smita Bhoite Pravin Nair
1575 Nilima Palkar Ramesh Parekh

(viii) Then from the physical file of the borrowers the warehouse receipt was taken and it was noticed
that the warehouse receipt with different Warehouse receipt No. but same Lot no. of the agriculture
produce, the product & the quantity was same. The receipt was issued from Abc Warehouse.

Interview:

The forensic audit team interviewed the Bank staff. The managers Mr. Ratan, collateral managers
colluded with the warehouse and issue the receipt Mr. Ramesh.

These manager Ramesh have expertise in bulk commodities. He certify the goods, monitor the
movement of goods, mark interest in the books of warehouses — the lien of the bank, among others.

In a number of instances, “we’ve been told by the banks that certain people would only get access to
finance with this type of structure in place and with the collateral management company giving
greater weight and authority to warehouse receipts.”
In some cases, the bank found that the quantity mentioned in the receipts was not matching with what
was in the warehouse but relied on the collateral manager Mr. Ramesh as he has certified the
document.

Collateral managers provide comfort

Interviewed with Mr. Ramesh he told that

“The biggest challenge for the financing bank is validating those warehouse receipts,” “It’s one thing
to get a piece of paper saying that X amount of product is at this location. But for that to have any
weight, and for anyone to lend with confidence against it, they need some assurances that the
warehouse receipt hasn’t been written.

“There’s a variety of ways to do that. You make sure that you deal with a large, reputable company
that has a good background and history in that,” he says. In a collateral management capacity, who
will go into that warehouse, verify that the product is there in the correct quantity, being stored
appropriately, and that therefore they will issue the warehouse receipts on behalf of the trader for the
banks to finance against.”

The warehouseman assesses the quality of goods tendered and checks its specifications on the
warehouse receipt. But in this case, nothing was done. A group of traders and bank officials colluded
to dupe the banks.

Mr. Ramesh was getting a commission from abc Warehouse and also from the borrower for
whom he use to certify the false document. This process was going on from few months, but
the borrowed loan was repaid in full within the specified time. So there were no defaulters.
So the situation didn’t come into the lime light.

KEY FINDINGS:
The audit team made the following findings:
1. The contracts had to be backed by warehouse receipts that would serve as collateral for investment.
Warehouse receipts were indeed issued for all the investments, however,
1. Receipts were unreal and the actual goods were not present in warehouse, or
2. Receipts were real and goods were actually present in warehouse, but a receipt issued to multiple
investors simultaneously.
2. The price of the commodity was manipulated by a consortium,

3. The money collected by borrowers in exchange for goods in warehouse (or so called warehouse receipts) was

used for their own business, buying land parcels or possibly money laundering.

CONCLUSION & RECOMMENDATIONS

1. Further independent investigation is called for on the conduct of Owner of Abc Warehouse
Mr. Dilip, Collateral Manager Mr. Ramesh & Bank Manager Mr. Ratan.

2. The bank should have access to guarantees, land and also cash as collateral from these agents.
It has also taken over the control of the commodities in the warehouses.

3. A warehouse receipt is only as good as the collateral it is backing,”. “If you were to buy a
warehouse receipt for 5,000 tonnes of maize, and then when you went to pick it up it was
rotting or it wasn’t all there, straight away word would get out and no one would want to buy
warehouse receipts anymore.” So Continuous quality checking should be there.

4. “There are so many quality issues that you have inside warehouses – everything from the cleanliness
of the warehouse to the way they store things,”.
5. Local banks also need to up skill. As well as introducing transactional or commodity finance capabilities,
they need to implement a risk-management framework and train staff.

6.Two collateral Manager should certify the quantity,the product of the goods stored with the warehouse
department before issuing the warehouse receipt.

For Xyz & Associates

Chartered Accountants

CA Xyz
Membership No. 123