A term loan of Rs 5 crore is sanctioned for machinery procurement. The utilisation certificate says: Rs 5 crore applied to machinery. The machine exists on the factory floor. The loan file looks clean. The end-use has been verified, according to the credit file.
But the Money Trail Test asks the question that the utilisation certificate does not: what happened between the disbursement and the machine? The utilisation certificate confirms the first hop. The Money Trail traces every hop until the money reaches its final destination.
The Rs 5 crore was disbursed to the borrower’s current account on 15 March. On 16 March, Rs 2 crore was transferred to Company A, the legitimate machinery supplier, against a genuine purchase order for genuine equipment that was genuinely delivered and genuinely installed. This transfer is clean. The machine cost Rs 2 crore.
On the same day, Rs 3 crore was transferred to Company B, described in the bank narration as “advance for raw material procurement.” Company B is a private limited company incorporated eight months ago with paid-up capital of Rs 1 lakh, one director (who is the borrower’s promoter’s cousin) and a registered address that is a residential flat in a tier-2 city. Company B does not manufacture or trade raw materials. Company B has never filed GST returns except in months when it received payments from the borrower.
Company B transferred Rs 2.5 crore to Company C on 18 March. Company C is a partnership firm whose partners include the borrower’s promoter’s wife. Company C transferred Rs 2.3 crore to a personal savings account of the promoter’s brother on 20 March. The remaining Rs 50 lakh at each hop was retained (Rs 25 lakh by Company B, Rs 20 lakh by Company C, and Rs 5 lakh consumed in bank charges and tax deductions).
The machine was purchased for Rs 2 crore, not Rs 5 crore. The remaining Rs 3 crore was diverted through two intermediary entities to connected individuals. The utilisation certificate reported the full Rs 5 crore as applied to business purposes because the Rs 2 crore machinery payment and the Rs 3 crore “raw material advance” were both accompanied by documentation (PO, invoice, payment approval). The documentation at each step was complete. The diversion is invisible in any single bank statement. It becomes visible only when the trail is reconstructed across all entities.
The multi-hop tracing methodology
- ✓First hop (borrower to immediate recipient).: This is documented in the borrower’s bank statement and captured by the utilisation certificate. Most end-use reviews stop here. The first hop is the easiest to make look legitimate because the borrower controls the documentation.
- ✓Second hop (recipient to next entity).: This is visible only in the recipient’s bank statement. If the recipient is a genuine vendor, the money stays in the vendor’s account and is drawn down gradually for the vendor’s own operations: supplier payments, salaries, rent, utilities, tax deductions. The account shows diverse, regular, commercial activity. If the recipient is a conduit, the pattern is different: a large credit from the borrower followed within 48 to 72 hours by a large debit to another entity, with minimal commercial activity between the large transactions.
- ✓Third hop and beyond.: Each successive hop is traced through the respective entity’s bank statement until the money reaches a commercially explicable destination (a genuine supplier, a legitimate operating cost, a capital asset purchase with independent corroboration) or a non-commercial destination (a personal account, a property purchase unrelated to the borrower’s business, an investment in a venture the borrower did not disclose, or an entity controlled by the promoter’s family where the funds come to rest).
Counterparty substance testing at each hop
At each hop, the recipient entity is assessed for substance. The substance test is applied simultaneously with the fund tracing, not sequentially, because the two analyses reinforce each other.
A counterparty with substance (employees, premises, other customers, filed returns, operational activity) receiving and retaining funds for an explicable business purpose is clean. A counterparty without substance (recent incorporation, minimal capital, no employees, residential address, no other customers, intermittent GST filing) receiving funds and immediately forwarding them is a conduit. The combination of substance deficit and rapid onward transfer is the strongest indicator of diversion.
Quantification and reporting
The finding is expressed in rupees: the total amount that reached a destination inconsistent with the sanctioned purpose, expressed as an absolute amount and as a percentage of the facility. In the example above: Rs 3 crore diverted out of Rs 5 crore disbursed = 60% diversion rate.
The finding is also expressed as a chain diagram: Lender (Rs 5 Cr) → Borrower → Company A (Rs 2 Cr, genuine machinery, clean) + Company B (Rs 3 Cr, no substance, conduit) → Company C (Rs 2.5 Cr, promoter’s wife’s partnership) → Promoter’s brother personal account (Rs 2.3 Cr, final destination). The chain diagram is the centrepiece of the forensic report because it makes the diversion mechanism visible in a single page.
In Northrop’s forensic experience across PSU-bank-directed mandates, diversion in manufacturing borrowers is rarely a single dramatic transfer. It is sustained over months, with each individual transfer sized to avoid triggering internal review thresholds. The aggregate, visible only through systematic tracing across the full review period, commonly represents 20% to 40% of the facility.
Northrop applies this test in forensic audits and end-use verifications under lender directives. Business@NorthropIndia.com | +91 92899 25657.