Cheque this out

The acceptance of third-party cheques for investments leave investors vulnerable to fraud

Last week, there was a news report of an employee of a mutual fund distributor embezzling a large sum of money from a mutual fund investor. From what we understand of the procedure for investing in a fund, this should not have been possible. All fund investments are made through cheques (or bank transfer) by the investor directly into the account of the fund scheme, where the money is supposed to be invested. However, this person (the employee of the fund distributor) exploited the fact that the accompanying investment form can be forged. Instead of submitting the form filled by the investor, he filled in a form in his own name. Soon after investing, he redeemed the money and made off with it.

Luckily, as fund redemptions are compulsorily made through a bank account, this particular case is likely to be resolved and the perpetrator traced. However, it does raise the question as to why rules allow third party investments to be made at all. Not just in mutual funds, but also in other investments (including bank fixed deposits), a cheque written by one party can be used to make an investment in another party’s name. This facility is used to gift investments and make investments in minors’ name. However, it clearly leaves a loophole that can be exploited. In the past, there had been cases of fraudulently depositing other’s cash in one’s own account, but this is the first time I have heard of a something like this being done on transactions through cheques.

However, as there is never just one cockroach in a kitchen, one can safely assume that such crimes must be taking place at a certain rate on all types of deposits and investments where they are possible. Perhaps there was just something about this particular case that it got picked up by the media and has been noticed widely. In India, there is an enormous number of people vulnerable to such embezzlements of their hard-earned earnings that plugging such an obvious loophole is an imperative.

Fortunately, what has to be done is quite straightforward. Fund companies, banks, insurance companies and anyone else who accepts a third-party cheque for any kind of investment or deposit should immediately stop doing so. The ultimate beneficiary must be the same party whose bank account the cheque was drawn upon. For legitimate third-party investments for gifts and those in the names of minors, they should require a separate written permission. This is the only solution that will work. After the above case came to light, there were a number of suggestions that third-party investments should be permitted but the name of the investor should just be put on the back of the cheque. However, this won’t work. Put yourself in the shoes of the criminal.

You are an unscrupulous agent who is approaching an old lady who knows nothing about how things work. Why would you even tell her that her name is supposed to be on the back of the cheque? You would simply tell her that the rules require a signature on the back also and later, you would just add your own name above that signature.

Making investments and creating savings and related paperwork may look easy to many of us, but for a vast majority of Indians, it is a difficult exercise which they can’t accomplish without the help of someone they trust. Therefore, it is very important that we make it as difficult as possible to prevent that trust from being abused.

-- Dhirendra Kumar

-- Value Research