Tuesday, August 07, 2012

NOT only NPA But Loss Due To Frauds Is Growing With Alarming Speed

PSU banks detect frauds worth over 5.2K cr during Apr-Sept AGENCIES: NEW DELHI, DEC 14 2012, 20:28 IST

New Delhi: More than 1,700 fraud cases involving over Rs 5,200 crore were detected in the state-owned banks during the first six months of this fiscal, government said today.

Union Bank of India reported fraud amounting to Rs 656.26 crore, followed by Punjab National Bank (Rs 619.86 crore), Bank of India (Rs 473.45 crore), State Bank of Hyderabad (Rs 429.31 crore), and State Bank of India (Rs 376.97 crore). In all, 28 banks reported these frauds.

As per the data provided by Minister of State for Finance Namo Narain Meena in a written reply in the Lok Sabha, 1,714 cases of frauds were reported in public sector banks in the first half (April-Sept) of the financial year 2012-13. The amount involved in the frauds totalled Rs 5,210.56 crore.

In 2011-12, state owned banks had reported 3,392 frauds involving Rs 4,025.3 crore.
Meena further said that 12,252 employees of public sector banks have been probed in fraud cases since 2009-10 till September 30, 2012.

To another reply, he said that PSU banks have detected home loan scams amounting to Rs 55.4 crore in the first nine months of 2012.

As per the data, there were frauds in the housing loan segment to the tune of Rs 6.77 crore in the Syndicate Bank, followed by Corporation Bank (Rs 6.03 crore) and Allahabad Bank (Rs 4.40 crore) till September 30, 2012.

In all, 288 such banking frauds had taken place till September 30.
During 2011, the amount involved in home loan scams was Rs 180.52 crore crore. There were 596 such incidents in PSBs.

Meena said banks probe staff accountability and their involvement in all the fraud cases. On the completion of the investigation, the commensurate punishment is awarded to the delinquent employees, he added.

In another reply, the minister said Debts Recovery Tribunals (DRTs) disposed of 7,792 cases related to dues of banks and financial institutions involving Rs 13,575 crore till October during this year.

DRTs had disposed of 12,122 cases involving Rs 21,155 crore in 2011.

In yet another answer, Meena said that the ratio of Gross Non-Performing Assets (GNPAs) to Gross Advances in Scheduled Commercial Banks increased from 2.36 per cent in March 2011 to 2.94 per cent in March 2012 and further to 3.57 per cent in September 2012.

India lost Rs 6,600 cr to fraud in FY12: E&Y report
Insiders enable 61% of frauds financial services hit the worst
BS Reporter / New Delhi Nov 02, 2012, 00:59 IST
Businesses in India recorded losses worth a whopping Rs 6,600 crore in the last financial year, with a significant portion of these frauds occurring in the financial services sector.

About 63 per cent of the fraud cases in FY12 were reported in the financial services sector. Banks were the most common victims, followed by insurance and mutual fund companies, according to Fraud Indicator, a first-of-its-kind report by consulting firm Ernst & Young. The report attributes the high number of frauds in the financial sector to oversight from the senior management, deviation from processes, lapses in the system, etc. “With banks and NBFCs (non-banking financial companies) still struggling to recover from the 2008 financial crisis, it’s a double blow for them---they are being exposed to increasing incidents of frauds, loan scams and regulatory bodies raising questions against the soundness of their compliance practices,” said Arpinder Singh, partner, Ernst & Young, and national director, Fraud Investigation and Dispute Services.

The report shows losses incurred by banks due to fraud rose 88 per cent in 2010-11, exceeding Rs 3,790 crore. About 79 per cent of the major fraud cases (cases worth more than Rs 1,000 lakh) were due to the involvement of senior managements of companies and their direct interference in the company’s decisions. The total value of frauds against investors was about Rs 2,700 crore.

Singh said there was an increase in the magnitude of frauds in the country in the second half of FY12, with the value of such incidences rising 36 per cent compared to the first half the year and the number of fraud cases rising eight per cent in the same period.

Fraud Indicator looks at frauds in various areas—businesses, government segments and individuals. About 1,80,000 instances of frauds reported in the media were analysed for the study.

“What we found alarming in this edition was insider-enabled frauds accounted for 61 per cent of the reported fraud cases. Entrusting your employees with confidential information, giving them a right to access the company’s bank accounts, etc, may be essential, but this should be done with some scepticism. This makes it imperative for companies to take some ground-breaking steps like monitoring employee behaviour and taking appropriate action against rogue employees,” Singh said.

With fraud cases reported in 24 of the 29 states and the difference between Tier-I and Tier-II cities (47 per cent and 53 per cent, respectively) very small, it is evident frauds were reported across the country. Delhi saw the highest number of frauds, as well as the highest aggregate losses by fraud in 2011-12. It also recorded the highest average losses (Rs 80 crore), followed by Andhra Pradesh (Rs 50 crore)


CBI developing database to curb banking frauds

As Libor probe grows, it is now every bank for itself
Azam Ahmed & Ben Protess / Aug 08, 2012, 00:55 IST ( Collected from Business Standard)

Major banks, which often band together when facing government scrutiny, are now turning on one another as an international investigation into the manipulation of interest rates gains momentum.

With billions of dollars and their reputations on the line, financial institutions have been spreading the blame in recent meetings with authorities, according to government and bank officials with knowledge of the matter. While acknowledging their own wrongdoing, institutions are pointing out actions at other banks that they believe are worse — and in some cases, extend to top executives.

One official involved in the case said that banks are emphasising that “we’re not as bad as the next guy.”
The London Inter Bank Offered Rate is the benchmark at which
banks in London lend money to each other for the short-term. Banks submit borrowing costs and the British Bankers Association (BBA) sets the rate daily
  • Regulators examining if banks colluded to move the rates up or down to get extra profits and limit losses on their trading positions
  • Some banks under investigation for reporting artificially low rates to make themselves appear financially healthier
  • UBS
  • Deutsche Bank
  • HSBC 
  • the Royal Bank of Scotland 
  • HSBC 
  • Citigroup 
  • Barclays 
“We’re not as bad as the next guy”
Is what banks are emphasising, according to an official in the probe

The Swiss bank UBS, which has a history of regulatory run-ins, has shared emails, instant messages and other information suggesting it had colluded with traders at Deutsche Bank, HSBC and the Royal Bank of Scotland to manipulate key interest rates, according to court documents and bank employees. In talks with authorities, HSBC is providing its own account of the activities, according to a lawyer briefed on the matter. Citigroup has also detailed rate manipulation with other banks.

When the British bank Barclays recently negotiated a settlement with authorities, it highlighted that other European institutions took part in the rate-rigging scheme, said officials close to the case. Like UBS, Barclays has provided information on activities involving HSBC and Deutsche Bank.

Several banks are using Barclays’ $450 million settlement as a guidepost in preliminary discussions with authorities.
JPMorgan Chase and Citigroup are each emphasising to uthorities that their chief executives were not implicated in the wrongdoing as in the case of Barclays, and therefore the banks deserve to be treated less severely, according to the officials.

A Deutsche Bank manager who oversaw traders is facing scrutiny, according to a person involved in the case. However, a Deutsche Bank spokesman said no managers or top executives had been aware of any rate manipulation, adding that the investigation was continuing.

JPMorgan, Deutsche Bank, HSBC and Citigroup have said they are cooperating with officials.

Authorities around the world are investigating more than 10 big banks for their roles in setting global interest rates like the London interbank offered rate, or Libor. Such benchmarks underpin trillions of dollars of financial products, including mortgages and student loans.

Regulators are examining whether banks colluded to move the rates up or down to get extra profits and limit losses on their trading positions. Some banks are also under investigation for reporting artificially low rates to make themselves appear financially healthier.

When banks first started conducting internal investigations at the behest of regulators two years ago, they figured the potential penalties would be manageable, according to bank officials.

But the size of the Barclays settlement and the growing public outcry have left banks scrambling to limit their culpability as the threat of criminal actions increases. Part of the banks’ problem is that their internal investigations have created a road map that authorities are using to pursue criminal and civil cases.
Those findings provide a detailed portrait of the wrongdoing.

Interviews with dozens of government and bank officials who spoke on the condition of anonymity because the investigation is developing, and a review of court documents and regulatory filings show varying degrees of exposure. Banks like UBS, Deutsche Bank and Citigroup uncovered that employees had worked with traders at other firms to influence rates, according to government and bank officials. A small number of institutions, including Credit Suisse and Bank of America, found more limited actions.

The extent of the evidence has created an every-bank-for-itself attitude.

The financial industry often tries to negotiate a common deal to avoid getting singled out for bad behaviour. This year, five banks collectively struck a multibillion-dollar agreement with federal authorities to address foreclosure abuses.
With the rate investigation, institutions are not sharing information or even discussing the case with rivals, according to lawyers involved in the matter. In part, they do not want to appear to have close ties with their rivals, since such cozy relationships are part of the government’s inquiry.

“There is no information-sharing among banks unlike the past 15 years of federal investigations,” said a lawyer involved in the case.
So far, Barclays has borne the brunt of the fallout. In June, the British bank settled with British and American authorities for reporting false rates to bolster its profits and project a rosier picture of its financial position. The settlement prompted the resignation of top executives, including the chief executive Robert E Diamond Jr, and helped to erase more than $3 billion of the bank’s market value.

At first, Barclays rejected a settlement offer by the Commodity Futures Trading Commission, the regulator leading the investigation, according to officials close to the case. The bank believed the terms were unfavorable, said a lawyer involved in the matter. As the agency prepared to take the case to court, negotiations resumed. While Barclays secured a modestly smaller penalty, the bank still paid record fines.

In trying to work out a deal, the British bank offered information on the multiyear scheme with Deutsche Bank, HSBC, Société Générale and Crédit Agricole, according to government and bank officials. Also, a senior trader at Barclays tried to manipulate the Euro interbank offered rate, or Euribor.

Other cases are expected to follow. The Justice Department is aiming to file criminal actions against two banks before the end of the year and is preparing to arrest former traders at Barclays and other banks, according to government officials. In addition, state attorneys general and local district attorneys have approached the Justice Department in recent weeks, seeking a role in the case.

Since the Barclays settlement, banks have been reassessing their defense strategies and reaching out to authorities. Officials warn that all talks with the banks are preliminary, and no settlement deals are imminent.
After targeting Barclays for rate manipulation four years ago, regulators gradually turned their attention to a wide swath of banks.

In a 2010 letter, the Commodity Futures Trading Commission contacted a small group of banks, including UBS. The regulator quickly expanded the list, sending a memo to all 16 institutions that helped set Libor rates at the time. The agency ordered the firms to hire outside attorneys to conduct an investigation into suspected rate manipulation, according to bank and regulatory officials.

After examining the extent of its wrongdoing, UBS moved swiftly to strike an immunity deal with government authorities. In its inquiry, the Swiss bank uncovered that one of its former traders, Thomas Hayes, had apparently worked with employees at Deutsche Bank, HSBC and the Royal Bank of Scotland to influence rates and make profits, according to bank officials and court documents. At times, the traders communicated via instant messages on Bloomberg machines, the court documents show.

UBS was eager to cooperate in part because the government typically only grants immunity to the first party to step forward in a case. The Swiss bank also wanted to avoid the harsh spotlight of a prosecution or a settlement, according to a bank official. The bank has been at the center of several financial scandals, including a rogue trader and an illegal tax shelter scheme.

Citigroup has been forthcoming with regulators, as well. After leaving UBS, Hayes moved to Citigroup where the problems continued, according to bank officials with knowledge of the case. The bank has handed over documents on that rate-rigging group.

Citigroup is emphasising to authorities that the wrongdoing did not reach the upper levels of management, as it did at Barclays. Based on its internal investigation, the bank told regulators and its audit committee that neither its chief executive, Vikram S Pandit, nor its chief financial officer, John Gerspach, was implicated, according to a bank official and a lawyer with knowledge of the matter. The bank’s investigation showed that its wrongdoing is mainly centered on another key benchmark, the Tokyo interbank offered rate.

In contrast, Deutsche Bank is facing heavier scrutiny in the United States. The German institution has been named in the rate conspiracies outlined by Barclays and UBS, as has HSBC. In working with regulators, HSBC is making employees available to government investigators and turning over emails and other information, according to one person with knowledge of the matter.

Following is the copy of Email received from Sri Sandeep Kappor which is eye opener for regulating agencies who are responsible to prevent, monitor and take punitive action against perpetrators of fraud or who by concealing fraud try to save fraud masters.

Chief General Manager 
Reserve Bank of India 
Fraud Monitoring Cell
Department of Banking Supervision,
Third Floor, World Trade Centre, Centre 1
Cuffe Parade, Mumbai - 400 005

Subject: Complaint of Rs 200 Crore Banking Fraud

Dear Sir, 

I hereby report a case of 'willful fraudulent bank defaults' by Athena Financial Services Limited, Pune (erstwhile Kinetic Finance Limited).

Company Borrowed 200 Crores from 25 Banks/FIs/MFs:
On 20th December 2001 a consortium of 21 banks led by State Bank of India signed a working capital loan agreement with Kinetic Finance Limited Pune for a sum of 144.56 Crores. Subsequently some more banks joined in by signing supplementary agreements.

On 7th January 2003 Kinetic Finance Limited borrowed Rs 30.00 Crore by issuing fully secured NCDs (redeemable on 7/9/2003), issued to Canara Bank MF, BOB MF & UTI Bank.

On 10th July 2003 Kinetic Finance Ltd. borrowed another Rs 20.00 Crore by issuing fully secured NCDs (redeemable on 9/7/2004), issued to  UTI MF (ULIP & CRTS)

The default

On 30th Jun2003 the company shows a loss of 8.98 Cr (Apr-Jun Quarter of 2003-04).

On 30th November 2002 a stock audit report conducted by SBI  indicated inflated stock position by inclusion of NPAs and overdue account by Kinetic Finance. Audit also revealed that hire purchase agreements were not signed by the authorized signatory on behalf of the company & proposal forms & other documents were not filled properly.

By August 2003 the company started defaulting on regular payments of debts & evading submission of monthly stock statements.

On 29th November  2003  in the 13th Annual General Meeting held on 29th Nov 2003 the resolution was approved by the members of the Company to change the name of the Company from Kinetic Finance Ltd to Athena Financial Services Ltd.

Subsequent to this Promoter Directors (Mr Arun H Firodia & Ms. Sulajja Firodia Motwani) resigned from the company & 6 dummy directors appointed from within the Kinetic group who were long term loyalists of Firodias. 

In Jan 2004  Consortium of banks conducts 'Special Investigation Audit' in the operations & accounts of Kinetic Finance Ltd.

On 20th February 2004  the report of 'Special Investigation Audit' was submitted & consortium asked for explanation by the company.

On 23rd March 2004 the company issued a letter to consortium giving explanations of observations made in the 'Special Investigation Audit' by the consortium. This letter showed that the Company had fraudulently violated the terms and conditions of all the loan agreements jointly and severally with the intention to defraud the Consortium bank members. The acts and omissions of the Company brought out in the said audit report clearly revealed the dishonest intentions of the Company through its Directors.

On 15th April 2004 the Company name was formally changed from Kinetic Finance Ltd to Athena Financial Services Ltd

Findings of the 'Special Investigation Audit' are given below 
  1. Kinetic Finance Limited was fraudulently showing and projecting good profits by alllegedly manipulated profits in the balance sheet to avail loans. 
  2. Kinetic Finance Limited default in regular repayment of the debts & evasion of submission of monthly stock statements.
  3. A stock audit conducted by SBI on 30.11.2002 showed inflated stock position by inclusion of non-performing assets and overdue account.
  4. The hire purchase agreements of Kinetic Finance Limited were not signed by the authorized signatory on behalf of the company.
  5. Hire Purchase proposal forms and other documents were not filled up completely.
  6. Non-deposit of proportionate amount in the account of the Banks in the form of installments received from the hirers  on the hypotheticated vehicles.
  7. Company  mooted the CDR (Corporate Debt Restructuring) proposal to distract the consortium member banks and to hide the acts of cheating and fraud in the accounts to defer & inordinately delay in repayment of the existing liabilities.
  8. Shift the focus from "fund based business" to "fee based business" by forming JV with Citigroup thus breaching the terms of agreement which showed the dishonest intention of the accused to divert the funds acquired from the Banks and NBFCs to  the benefit of the accused thus committed fraud and cheating under Section 415 and punishable under Section 420 of IPC.
  9. Company on 6/12/2003 had disclosed a projected write off of Rs.100 crores of its existing receivables, without  the consent of the lender Banks. It was the write off of assets generated out of the Banks money. Misappropriation of funds generated by  the Banks money, amounted to offenses under Sections 403 and 405 of IPC.
  10. The company had fraudulently violated the terms and conditions of all the loan agreements jointly and severally with the  intention to defraud the Consortium bank members. 
  11. Acts and omissions of company revealed the dishonest intentions through its Directors actions and decisions by entering into a joint venture agreement with the Citibank to finance the two wheelers, four wheelers and other consumer goods breaching the agreement with the lending banks consortium.        
  12. Company has made a payment to the extent of Rs.25.76 Crore to Kinetic Engineering Ltd. since April 2003 against the suppliers’ credit by the promoters of M/s. Kinetic Engineering Ltd.
  13. These acts showed the dishonest and fraudulent intention and the acts of the company also amounted to offenses under Sections  421 to 424 of IPC.
  14. Kinetic Finance Ltd. had a current account with Centurion Bank much prior to the execution of Working Capital Consortium Agreement. The total collection for the period from October to December 2003 at Pimpri Branch of the Centurion Bank was shown  in the audit report as under :        Oct' 2003 - Rs.111.03 lakhs, Nov' 2003 - Rs.124.88 lakhs, Dec' 2003 - Rs.106.76 lakhs
  15. Consortium members asked the Company to stop its account with Centurion Bank, the Company refused to do so with the ulterior motive to misappropriate the funds.
  16. The said acts committed by the Company amounted to criminal breach of trust,  cheating and criminal misappropriation of the dues belonging to the consortium members and the same are  offenses under Sections  403, 405, 415 and 421 to 424 of IPC and punishable accordingly.
  17. Company had misrepresented and fraudulently concealed the material facts from the Banks right from the beginning and  obtained the loans fraudulently.
  18. In 2002-03 the Company disposed of a hypothecated Wind Mill valued at Rs. 3,21,15,000.00 without the permission of the  Banks Consortium and dishonestly and fraudulently disposed off the hypothecated properties with a malafide intention to  prevent the consortium members from realizing their dues.
  19. The said acts of the Company constitute serious offense under Section 421 read with Section 34 of IPC and are punishable  accordingly.
  20. The changing of the accused Company’s name from Kinetic Finance Limited to Athena Financial Services Ltd. showed  their malafide intention as they wanted to crawl out of their responsibility and disassociate the Company from the Kinetic Group and save the Kinetic Group from defamation in the eyes of  the public so the business activities of the other Group companies will not be adversely affected and also no burden would be cast on them, of  the financial liabilities accruing from Athena Financial Services Ltd.
  21. The Promoter Directors resigned from the board of the company. The resignation of the promoters from the Company made the Consortium members aware that  Consortium  members would not have advanced any credit facilities and parted with huge sum, if they knew in advance that the promoters will resign.
  22. The willful omissions deliberately done to  cheat the Consortium members and these acts of the Company have also caused harm and damages to the property of the Consortium members and it is fraud on the Consortium members, thus amounting to the offense under Section 415 punishable under Section 420 of IPC
  23. The other Company Directors by giving consent to the activities and by participating in the fraudulent, dishonest acts of  theirs, have abetted in all the criminal acts and have misused the power and authority and, therefore, they are also responsible for all the offenses mentioned  above.

Banks completely ignored RBI guidelines on 'Fraud Reporting' and 'Initiation of Criminal Action'

As per Reserve Bank of India guidelines, since fraud was detected in the Special Investigation Audit & amount involved was more than 100 Lakhs for each bank and there were 23 Banks which were members of the Consortium, all 23 Banks should have reported the fraud to CBI and initialted criminal action against the defaulters. However it did not happen for the reasons best known to the concerned Bank officials.  

1.     Public Sector Banks did not initiate criminal action despite detection of fraud

Only 5 Private Sector Banks initiated criminal action
Lord Krishna Bank (10.00 Cr),
Bank of Rajasthan (4.00 Cr),
DCB Bank (12.55 Cr),
ING Vysya Bank (5.00 Cr)
J&K Bank (6.18 Cr)

(as per CIBIL & index of charges on MCA website) 

2.    Despite detection of fraud, following banks did not report the default in 'Willful default > 25 L' category

UTI Bank Pune (17.09 Cr),
Allahabad Bank (1.21 Cr),
Corporation Bank (1.62 Cr),
Canara Bank (IFC) Pune (9.79 Cr),
Canara Bank Pimpri (1.90 Cr),
Punjab National Bank Pune (4.65 Cr),
State Bank of India (17.21 Cr),
Bank of Baroda Mumbai (4.36 Cr),
ICICI Bank Pune (2.45 Cr),
IDBI Bank Ltd Pune (9.27 Cr),
Bank of Maharashtra Pimpri Pune (26.84 Cr)

(as per CIBIL website) 

3.    Some banks initiated criminal action but did not report the default in 'Willful default > 25 L' category

ING Vysya Bank (5.00 Cr),
Lord Krishna Bank (10.00 Cr)

(as per index of charges on MCA website)

4.    None of the banks alerted CBI upon detection fraud in the audit report

Apparent Conclusion

All this is indicating that the Company had premeditated this big default in such a short span which is impossible without the active participation and connivance of some corrupt Public Sector Bank Officials. The funds that were Willfully defaulted upon by the Company are nothing but the 'Borrowed Public Money' and Public Sector Banks and Mutual Funds are the 'Trustees of the Public Money'. The alleged acts of fraud, dishonesty and cheating etc. cannot terminate or extinguish on the out of court OTS (one time settlements) / agreements or liquidation of the company under Civil or Company Law. 

Such complaints of criminal acts must be allowed to be taken to their logical conclusions.


It would not be, therefore, in public interest to let the defrauding Promoter Directors & the Erring Bankers go scot free. They should be subjected to a trial by a Competent CBI Court and / or SFIO so that the corporate decisions makers who are dealing with the 'borrowed public money' can understand the distinction between 'fraudulent' and faulty decision making.

Insult to injury 

Despite the name of Mr Arun Firodia being continuously reported as a 'willful defaulter' from March 2005 to March 2012, he has been awarded Padma Shri in 2012. A prominent online financial journal MONEYLIFE has already reported this default 

It raises serious questions on the intentions of the Govt. in curbing the NPAs created by fraudulent defaulters. 

The complainant is having full evidence to support the contents of this complaint. 

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31 Mar 2012 Willful Default 1.JPG31 Mar 2012 Willful Default 1.JPG
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31 Mar 2012 Willful Default 2.JPG31 Mar 2012 Willful Default 2.JPG
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HC Dismisses Arun Firodias Plea Screenshot.JPGHC Dismisses Arun Firodias Plea Screenshot.JPG
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SLP (Criminal) 1474 of 2010 Supreme Court Arun Firodia vs State of Maha & Ors.JPGSLP (Criminal) 1474 of 2010 Supreme Court Arun Firodia vs State of Maha & Ors.JPG
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Supreme Court of India - Special Leave Application Criminal No 1474 of 2010 - Order on 26.2.10.txtSupreme Court of India - Special Leave Application Criminal No 1474 of 2010 - Order on 26.2.10.txt
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Athena Willful Defaults above 25 Lakhs.xlsxAthena Willful Defaults above 25 Lakhs.xlsx
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Criminal Writ Petition No. 2851 2005 Bombay High Court Justice BH Marlapalle Order date 9.10.07.pdfCriminal Writ Petition No. 2851 2005 Bombay High Court Justice BH Marlapalle Order date 9.10.07.pdf
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Athena Defaults above 1 Cr.xlsxAthena Defaults above 1 Cr.xlsx
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From:     Sandeep Kapoor
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1 comment:

Mark said...

Dear Sir,

Public Interest Litigation is being filed very soon against the perpetrators of fraud and corrupt bank officials, who by concealing fraud tried to save fraud masters.