Telecom fraud is the single biggest cause of

revenue loss
Deepankar Sanwalka
Posted: Wednesday, Apr 07, 2010 at 2019 hrs IST
Updated: Wednesday, Apr 07, 2010 at 2019 hrs IST

Over the last few years, India has witnessed enviable growth in its economy, even in the face of the global
slowdown. The telecom industry specifically has had a big role to play in the progress that has been made
by the country. The Indian telecom sector has been one of the fastest growing in the world. With the total
telephone subscriber base reaching 601 million at the end of February 2010 from 582 million in January
2010, thereby reaching a growth rate of 3.22%, India is projected to become the second largest telecom
market globally.

With the telecom sector is able to boast the fastest growth trajectories with changing economic conditions
worldwide and an evolving technological environment, the complexity of the telecommunications
industry and challenges for growth are under scrutiny.

Telecom companies have a high number of external touch points like subscribers, channel partners,
service providers and regulators. Simultaneously, they have to deal with acute competition, the demands
of rapid growth and consistently maintaining high levels of customer satisfaction. In this context, the
industry is subject to a number of fraud risks such as a subscriber (documentation) frauds, unauthorized
use of its network, leakage of sensitive information, accounting and reporting irregularities, lack of
oversight and challenges associated with internal or external misconduct investigations.

Telecom fraud has been identified as the single biggest cause of revenue loss for telecommunication
providers with figures averaging between 1% and 3% of operator’s annual revenues. The top three
sources of leakages have been identified as configuration changes in any of the network elements, new
product development, and tariff configuration, and poor system integration from MSC-IN-mediation-
billing systems. Telecommunication fraud is set to rise further with the advent of new services such as 3G
and Voice over Internet protocol (VoIP).

Leakage (including fraud-related) across the revenue chain remains a challenge for operators. While
operators in developing markets face a wide range of issues including the upfront challenges of high
revenue leakages, operators in developed markets are faced with insufficient data to accurately identify
and recover most of the estimated leakages. A common perception across the industry is that developing
markets face higher revenue leakage than developed markets due to rapid growth and the fast pace of
technological changes.

Telecommunications fraud is growing problem all over the world and the one need to be extremely
watchful since these can be found in all types of the voice networks. The motivation
: in most cases is to gain access to services without paying the relevant cost or to get money (call
selling—subscription fraud) by providing services to other people using infrastructures with
wrong identification (identity theft).

Tracking fraud is critical—the telecom value chain has numerous fraud vulnerabilities, both
internal and external. Employees at times provide additional services directly in the network,
thereby avoiding billing or selling confidential information (internal fraud). Most of the frauds
are always focused on avoiding payments in some way—obtaining fraudulent credits, bypassing
international gateway by using VoIP resulting in theft as well, call back fraud which deprives the
operator of revenue from outgoing international calls, etc.

External factors such as dealer frauds—where connections are sold to customers to reach targets
and obtain higher commissions, manipulation of network elements or simple frauds such as
manual topups to the customer balance are situations that are extremely common.

In the telecom industry, products usually offered by companies can be categorized as phone-
related or Internet related. An emerging trend is for companies to ‘bundle’ cable, television and
Internet and wireless services in one contract, ie. ‘bundled Contract’. Telecom companies could
bundle services together and sell them to a customer—for instance, Internet TV with a
broadband connection. This allows companies to inflate their sales by including fictitious
components in a bundled sale contract whereas actual sale of some of the products that are
shown as part of a bundled contract have not taken place or will not take place. One way to
prevent such a situation is to implement proper controls pertaining to the timing of recognition of
revenue based on delivery of services.

Telecom companies find several ways to boost their sales volume as companies exchange the
indefeasible rights of use on their fiber-optic networks to other telecommunication companies
(this practice is known in the industry as ‘capacity swaps’). These transactions are sometimes
booked as income, even though the swaps generate no net cash for either company.

It has become imperative for auditors to look for transactions with any other telecom player
which has been recorded in the books of account. These could be potential round tripping
transactions, especially if such transactions are entered with related parties. Due to the intricacy
involved in the telecom space, the general recommendation for telecom companies is to employ
independent valuers or consultants as well as conduct regular independent special reviews to
assess and test...: all factors.

Thus, as one can see, the world has seen the tremendous success of the Indian
telecommunication industry, but there is another side to it where companies find several ways to
‘workaround’ policies. There is no doubt, however, that this sector has displayed enormous
potential and will continue to play an important role in developing the country’s economy. But
for the country to benefit, some discrepancies need to be corrected.

The writer is the head, forensic services, KPMG in India.