Make money but don't expose yourself to frauds | Value Research As the Citibank case shows, this is a dangerous practice open to abuse

Make money but don't expose yourself to frauds

As the Citibank case shows, this is a dangerous practice open to abuse

Following the Citibank scam, India’s wealth management business is under siege. The financial industry’s grapevine is buzzing with talk of customers redeeming their investments, insisting on recordings of conversations, pulling out blank signed documents they had handed over, and generally acting as if there trust level has dropped to zero. And so it should. Even though there’s no shortage of people trying hard to spin Shivraj Puri’s actions as an isolated case of fraud, it’s clear that this was something that was waiting to happen.

The modus operandi of the service is heavily dependant on individual being trustworthy. Far too big a role is played by word of mouth and by pre-signed blank cheques and documents. This is not a critique of wealth management itself (which is a separate story by itself), but of its general method of operation.

This system that has the deliberate impersonation of customers built into it. In the financial and legal system, your signature is taken as proof of your approval of an action. If a document has your signature, then it is understood that you signed it with full knowledge of what it contained and are in full concurrence with that document’s intent.

However, the officially-sanctioned operating procedures of Citibank, and of other wealth managers, are designed to fake this process. Getting blank documents signed from customers is standard operating procedure for banks, brokers and other entities. Curiously, lawyers will tell you that the sanctity of a pre-signed document is not the same as that of a properly signed one but this legal point doesn’t appear to have been challenged in such cases.

To all appearances, the RBI and SEBI are okay with this practice of routinely undermining the sanctity of the signature. As the Citibank case shows, this is a dangerous practice that is open to abuse. Using the old principle of there never being just one cockroach in a kitchen, there could have been any number of cases where this sort of abuse has already happened and has been settled quietly or otherwise hushed up.

Whether your wealth manager is making good investments or not comes later. The least you can do is to make sure that is that you are not leaving yourself open to obvious frauds.

This column first appeared in The Economic Times on January 10, 2011

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