PROJECT REPORT ON Frauds and Scams In Banking Sector In India Submitted to University of Mumbai In 2016-2017 Partial fulfillment of the requirement of the Degree of Bachelor of Banking and Insurance Under Guidance Of Ms. Khushboo Bhatia
K. M. AGRAWAL COLLEGE OF ARTS, COMMERCE & SCIENCE. GANDHARE, KALYAN (W)
BY-
Priyanka Raghuwanshi ROLL NO:22 EXAM SEAT NO:
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K.M.AGRAWAL COLLEGE OF ARTS, COMMERCE& SCIENCE , KALYAN (Conducted by HINDI BHASHI JANKALYAN SHIKSHAN SANSTHA KALYAN) (Affiliated by University of Mumbai)
Bachlor of Banking and Insurance
CERTIFICATE This is to certify that Miss. Priyanka Raghuwanshi, Roll no.22, Seat No. , has satisfactorily carried out the project work of the topic “Frauds and Scams in Banking sector in India” for the 5th semester of T.Y.B.B&I ,in the Academic year 2016-2017
PLACE: KALYAN DATE : _________
Principal (Mrs. Anita Manna)
Signature of Examiner
B&I Coordinator
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CERTIFICATE
I, Ms. Khushboo Bhatia here by certify that Miss. Priyanka Raghuwanshi , of T.Y.B.B&I (SemV), Roll No. has completed project on “Frauds and Scams in Banking sector in India” in the academic year 2016-2017. The information submitted is true and original to the best of my knowledge.
Place: Kalyan Date:
--------------------Signature of project Guide
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DECLARATION
I, Priyanka Raghuwanshi student of T.Y.B.B&I semester V (2016-2017) hereby declare that I have completed the project on “Frauds and Scams in Banking sector in India”I further declare that the information imparted is true and fair to the best of my knowledge.
SIGNATURE Priyanka Raghuwanshi Roll No.22
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. ACKNOWLEDGEMENT I hereby express my heartiest thanks to all sources who have contributed to the making of this project. I oblige thanks to all those who have supported, provided their valuable guidance and helped for the accomplishment of this project. I also extent my hearty thanks to my family, friends, our coordinator MR. SUJEET SINGH, college teachers and all the well-wishers. I also would specially like to thanks my project guide Ms. Khushboo Bhatia for his guidance and timely suggestion and the information provided by him on this particular topic. It is matter of outmost pleasure to express my indebt and deep sense of gratitude to various person who extended their maximum help to supply the necessary information for the present thesis, which became available on account of the most selfless cooperation. Above all its sincere thanks to the UNIVERSITY OF MUMBAI for which this project is given consideration and was done with outmost seriousness.
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INDEX S. No. 1 2 3
Chapters Name
Page. no
Introduction To Bank Fraud Literature Review Categories Of Bank Frauds And Scams
9-14 15-16
Frauds Done by Insider Frauds Done by Outsider 4 5 6 7 8 9
Types Of Bank Frauds And Scams Effects Of Banking Frauds Bank Rules Regarding Bank Frauds Responsibilities Of Banker Regulations Of Reserve Bank Of India Factors Of Banking Frauds
17-26 27-39 40-47 48-50 51 52-53 54-55
Internal Factors External Factors
56-62
10
Actions Taken By Banks
63-65
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Present New Fraud Prevention Challenges
66-68
12
Case Study
69-70
13
Conclusion
71
14
Webliography
72
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OBJECTIVES
To understand the meaning of banking frauds and scams.
To understand the various types of banking frauds and scams.
To ascertain the factors this encourages the fraudulent activities in banks.
To understand the categories of banking frauds and scams. I.e. Frauds and scams done by insiders and outsiders.
To determine the effects of banking frauds and scams on the society.
To suggest the measures and techniques for reducing the incidence of banking frauds and scams. To understand the Reserve Bank of India (RBI) rules to prevent banking fruds and scams and responsibility of bankers in banking frauds and scams.
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Primary Data:
RESEARCH METHODOLOGY
My primary data consists mainly from my visit to the THANE DUSTRICT CENTRAL CO. OP.BANK LTD. ULHASNAGAR-3
Secondary data: My secondary data consists of the information collected from various, Internet sites, newspapers.
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INTRODUCTION TO FRAUD
Fraud can be seen as the intentional misrepresentation, concealment, or omission of the truth for the purpose of deception or manipulation to the financial detriment of an individual or an organization (such as a bank) which also includes embezzlement, theft or any attempt to steal or unlawfully obtain, misuse or harm the asset of a bank. Fraud and its management have been the main factor. In the distress of banks, and as much as various measures have been taken to minimize the incidence of fraud, it still rises by the day because fraudsters always device strategic ways of committing fraud. This has become a point of great attention in the rural banking sector as well as every organization in Ghana. Although this phenomenon is not unique to the rural banking industry or peculiar to Ghana alone, the high incidence of fraud within the banking industry has become a problem to which solution must be provided in view of the large sums of money involved and its adverse implications on the economy. Fraud in its effects reduces the assets and increases the liability of any company. In the case of rural banks, this may result in the loss of potential customers or crisis of confidence of banking public and in the long run end up in another failed bank situation. It is instructive to know that many banking operatives have different reasons for joining various banks. Many have the intention of working for a short time in the banking industry (get whatever they could and find another job that is less demanding), some are in the industry because of their love for banking and all it stands for, while majority are there to enrich themselves by fraudulent means. Due to the upsurge of great viability in the rural banking sector, its dynamic and fast expanding level of activities, rural banks are faced with different kinds of challenges, among which is trying to prevent various fraudulent intentions of both staff and customers As it were frauds seem to have increased as new technology is born and more advanced techniques of enhancing business transactions have been developed. Fraudsters are constantly devising new plans, updating old methods and trying out new techniques of bypassing these electronic systems meant to ensure high security of banking operations. The introduction of automated systems that lose handwriting and fingerprint trails have not helped matters either. In view of the staggering sums lost to fraudsters by the Ghanaian financial sector, in these recent times and the rate at which fraudsters appear to have shifted their attention and directed their 9
energies to banks, devising all unimaginable tactics to exploit loopholes in the control measures and capitalize on carelessness of the staff and customers, fraud in the industry has prevented many banks from achieving their goals. Some banks were just seen in the physical as body and building whilst in reality they were already liquidated and many were already into distress. Taking a walk down memory lane. The banking sector plays a very significant role in the development of any economy. Banks in most economies are the principal
depositories of the public’s monetary savings, the nerve centre of the payment system, the vessel endowed with the ability of money creation and allocation of financial resources and conduit through which monetary and credit policies are implemented. The success of monetary policy, to a large extent, depends on the health of the banking institutions through which the policies are implemented. Whatever problems which militate against the proper functioning of the banking sector will invariably have multiplier effects on the other sectors of the economy. This is one of the reasons why it is essential to quickly diagnose any factor which may hamper the smooth functioning of the rural banking sector and urgently address such issues.
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MEANING OF FRAUD: The
progress of business depends upon expansion & diversification. The indicators of
growing economy are acceleration in per capita income, standard of living & national wealth, national income etc. In the growing economy some unethical practices has been observed. Nowadays
scams,
frauds
&
corruptions
etc.
has
entered
in
every
sector.
Fraudulent practice are like slow poisoning which destroy the system of faith , loyalty, & reliability confidence of the people & help to proceed towards under developed society. Fraud is any dishonest act and behavior by which one person gains or intends to gain advantage over another person. Fraud causes loss to the victim directly or indirectly. Fraud has not been described or discussed clearly in the Indian penal code but sections dealing with cheating. Concealment, forgery counterfeiting and breach of trust has been discusses which leads to the act of fraud. In contractual term as described in the Indian contract act, sec 17 suggests that a fraud means and includes any of the acts by a party to a contract or with his connivance or by his agents with the intention to deceive another party or his agent or to induce him to enter in to a contract. .
“ Deceit, trickery, sharp practices or breach of confidence , perpetrated for profit or gain some unfair or dishonest advantages”.
- Collins English dictionary.
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MEANING OF BANK FRAUD Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial institution. In many instances, bank fraud is a criminal offence. while the specific elements of particular banking fraud laws vary between jurisdictions, the term bank fraud applies to actions that employ a scheme or artifice, as opposed to bank robbery or theft. for this reason, bank fraud is sometimes considered a white-collar crime. Banking frauds constitute a considerable percentage of white-collar offences being probed by the police. unlike ordinary thefts and robberies, the amount misappropriated in these crimes runs into lakhs and crores of rupees. bank fraud is a federal crime in many countries, defined as planning to obtain property or money from any federally insured financial institution. it is sometimes considered a white collar crime.
The number
of bank frauds in india is substantial. it in increasing with the passage of time. all the major operational areas in banking represent a good opportunity for fraudsters with growing incidence being reported under deposit, loan and inter-branch accounting transactions, including remittances. Bank fraud is a big business in today’s world. with more educational qualifications, banking becoming impersonal and increase in banking sector have gave rise to this white collar crime. in a survey made till 1997 bank frauds in nationalised banks was of rs.497.60 crore. The occurrence of frauds in the banks is not a recent observable fact; infact the misdemeanor of forgery is perhaps as old as writing itself. Of the inestimable types of financial offences that our nation and all countries across the globe have had to eyewitness and undergo from, a major one is financial frauds caused in the banks popularly know as “bank frauds”. Any organisation which deals with money is always vulnerable to frauds and this is more so in the case of financial institutions like banks which are dealing only in money and that to as a business commodity. Bank frauds are on the augment. The graph of fraud money is mounting steeply. The reasons for increase in number of frauds in the post nationalization period is attributed to a numerous reasons, the most likely ones are the widespread branch network, lack of trained staff for the expanding network and a shift from the security oriented lending to the development oriented approach i.e. advances to the priority sectors. Frauds in Indian banks only prove that financial liberalization aggravates the inherent tendency of shallow markets to foster excessive speculation and worsens the systemic consequences of such speculative activity. Revelations of fraud, evidence of insider trading and a consequent collapse of investor interest have led to an almost unstoppable 12
downturn in Indian banks. Bank frauds concern all citizens. It has become a big business today. Bank frauds are the creation of professional criminals, desperate customers or of errant bankers or their collusion inter se. However the prima donna in the drama is the insider or the banker. He opens the purse. He is often the target and at times the tool. Occasionally, he is the victim of the temptations. Other contributory factors are incompetence, lethargy, negligence, connivance and ignorance. Situational pressures and permissive attitudes of the society promote them. High gains and low stakes encourage the incidence. The rising trend makes it more and more important that ways and means are found to combat the menace. Bank frauds can be explained through following diagram:
Bank fraud means obtaining money or property held by bank or customer of the bank in order to make more money. So generally there are two factors of frauds: Complexity of bank transactions and failure in observance or procedures and norms laid down in branch operations. Fraud is any dishonest act and behavior by which one person gains or intends to gain an advantage over other person. The gain may accrue to the person himself or to someone’s. Fraud causes loss to the victim, directly or indirectly. In earthly terms bank frauds include all sorts of misappropriations, embezzlements, manipulations of negotiable instruments (cheques, drafts, handiest, bills or statements of accounts, securities etc.). Also 13
included are misrepresentations, cheating, thefts, undue favors and irregularities. The frauds may be intentional or incidental and can be committed by (I) the bank employees themselves, (ii) the staff members of the banks in collusion or connivance with the customers or outsiders, and (iii) the customers or outsiders. The word “fraud” has been defined in the Indian contract act. In short fraud is dishonesty leading to loss to someone. Dishonesty is never accidental. Therefore there is always a swindler behind each bank fraud. The number of bank frauds in india is substantial. It is increasing with the passage of time. Bank frauds are due to the bunko and the bungler bankers, situational pressures and permissive attitudes. Fraud has not been defined in the Indian penal code directly. However sections dealing with cheating, concealment, forgery, counterfeiting, misappropriation and breach of trust cover the same adequately. Hence what this paper fundamentally tries to focus on is on the banker’s responsibility vis-à-vis the reach of deception therein, consequences of such incident and tries to look into the entire possible panacea to such a menace in the society.
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LITERATURE REVIEW In legal terms, fraud is seen as the act of depriving a person underhandedly of something, which such a person would or might be entitled to, but for the perpetration of fraud. In its lexical meaning, fraud is an act of trickery which is intentionally practiced in order to gain illegitimate advantage. Therefore, for any action to constitute a fraud there must be deceitful objective to benefit (on the part of the perpetrator) at the disadvantage of another person or group. Fraud typically requires stealing and manipulation of accounts, frequently accompanied by cover up of the theft. It also involves the translation of the stolen resources or property into own resources or property. Young, (2002) says that, ample evidence exists that individual integrity of those running the banks today has never been at a higher level. Never before have we seen attention to the actual steps; procedures and control of monetary transactions. Employees’ as well as firms in all industries engage in fraudulent practices all over the world. Although the existence of fraud in our banks is not an uncommon or unexpected behavior, its prevalence is what is worrying because of all the various problems confronting the most untraceable and Kindle. Frauds in banks lead to loss of monies that ordinarily belong to someone other than the banks. The loss results in some cases, in reducing the level of resources available for use in the operations of the banks. In very bad cases where frauds occur with crippling frequency and in wholesomeness, the bank may be forced to close down as a result. When the bank loses money and is wound up, the customers lose money. This leads to loss of confidence and eventually reduced patronage. Another reason for worrying in the banking industry is the vast variety of nature, character and methodology employed in fraud. Moreover, the control of identified specie seems to give birth to another that is invariably more sophisticated and complex. Thus each case can be said to be a variant of another and undoubtedly an instructive study in human negative use of ingenuity and endowment.
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There is a common agreement amongst criminologists that fraud is caused by three Elements:
Elements of Fraud Will
Opportunity
Exit
called “WOE” . For any fraud to take place there must be a Will, an Opportunity and Exit (escape route). A fraud will only come about if the perpetrators have the will to commit the fraud, if the occasion to commit the fraud is presented and if there is a way out or escape means from appropriate sanctions or institutions that are against fraud or related abnormal behavior .. Fraud is a global occurrence; it is not peculiar to the banking industry. With the collapse of foremost international corporations together with high level allegations and real cases of business fraud, a lot of organizations in their effort to advance their image have resorted to developing ethical guiding principles and codes of moral values. The whole essence of these is to guarantee that all organizational members irrespective of position or rank, complies with the least standard of ethical responsibility in order to encourage the reputation of such firms in their selected industry, earn the goodwill of clients and thus improve their competitive advantage. As logically anticipated, fraud is perpetrated in several forms and guises, and usually have insiders (staff) and outsiders conniving together to effectively execute the act.
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CATEGORIES OF BANKING FRAUDS Categories of frauds classified by Ghosh Committee:
Categories of Banking Frauds
Frauds Done by Insider
Frauds Done by Outsiders
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Frauds done by Insiders Rogue Trading
Fradulent Loans
Wire fraud
Demand draft fraud
Theft of identity
Forged or fraudulent documents
Uninsured deposits
1. Rogue Trading: A rogue trader is a highly placed insider nominally authorized to invest sizeable funds on behalf of the bank; this trader secretly makes progressively more aggressive and risky investments using the bank's money, when one investment goes bad, the rogue trader engages in further market speculation in the hope of a quick profit which would hide or cover the loss. Unfortunately, when one investment loss is piled onto another, the costs to the bank can reach into the hundreds of millions of rupees; there have even been cases in which a bank goes out of business due to market investment losses.
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2. Fraudulent loans:
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One way to remove money from a bank is to take out a loan, a practice bankers would be more than willing to encourage if they know that the money will be repaid in full with interest. A fraudulent loan, however, is one in which the borrower is a business entity controlled by a dishonest bank officer or an accomplice; the "borrower" then declares bankruptcy or vanishes and the money is gone. The borrower may even be a non-existent entity and the loan merely an artifice to conceal a theft of a large sum of money from the bank.
3. Wire fraud:
Wire transfer networks such as the international, interbank fund transfer system are tempting as targets as a transfer, once made, is difficult or impossible to reverse. As these networks are used by banks to settle accounts with each other, rapid or overnight wire transfer of large amounts of money are commonplace; while banks have put checks and balances in place, there is the risk that insiders may attempt to use fraudulent or forged documents which claim to request a bank depositor's money be wired to another bank, often an offshore account in some distant foreign country. Wire fraud is defined as attempting to defraud using electronic means, such as a computer or telephone. What must be proved is that the person knowingly and willfully devised or intended to devise a scheme to defraud. Since the advent of the internet, there are literally thousands of crimes that fall under the definition of wire fraud.
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Here we’re going to take a look at some of the more common forms of wire fraud, why they occur, and how you can protect yourself.
While security measures have certainly increased over the years, banks still fall victim to wire fraud, costing them millions of dollars or more every year. Since banks are constantly wiring extremely large sums of money back and forth between accounts, it may take them awhile to notice when a large sum of money goes missing. This type of fraud is usually perpetrated by insiders who forge documents a wire money to foreign accounts. Other common ways this can occur is via the internet, through fraudulent activity such as stolen identities, stolen credit card numbers, and hacked internet banking accounts
Wire Fraud on the Internet
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There are many other forms of wire fraud that may occur on the internet. A few common ones are:
Email Phishing: The practice of sending out fake emails that look legitimate, in order to steal information such as passwords, credit card numbers, or personal information.
Identity Theft: Usually perpetrated by people who set up legitimate looking websites designed to trick users into submitting personal information, similar to a loan or insurance application.. Other methods may include hacking databases containing business information, or accessing a personal hard drive illegally to steal personal information.
Fraudulent Business Sales: This is a common scam targeting webmasters and potential investors. When valuing an internet business, revenue, traffic, and the future potential value of the website are used to estimate the value. By faking revenue and traffic proof, a con artist can inflate perceived value of the website, sometimes scamming victims out of thousands of dollars. Wire Fraud On The Phone Wire fraud commonly occurs over the telephone as well. A con artist will call your house, and try to talk you out of personal information. Common scams involve criminals posing as salesmen, loan officers, and other business professionals in order to collect personal information such as credit card numbers or social security numbers.
Measures from protecting the Wire frauds Wire fraud is a very real threat in the world today. By using a little bit of common sense, you can avoid becoming a victim yourself. Don’t give out personal information over the telephone to unsolicited callers without doing an extensive check on their background. Be careful what kind of websites you use to conduct financial transactions. There are many legitimate websites where doing credit card transactions, or even loan applications is extremely secure. Be wary of any unknown websites. Bottom line, don’t give out your
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personal information to strangers. With just a little bit of common sense you can avoid becoming a victim of wire fraud yourself.
4. Demand draft fraud:
DD fraud is usually done by one or more dishonest bank employees that is the Bunko Banker. They remove few DD leaves or DD books from stock and write them like a regular DD. Since they are insiders, they know the coding, punching of a demand draft. These Demand drafts will be issued payable at distant town/city without debiting an account. Then it will be cashed at the payable branch. For the paying branch it is just another DD. This kind of fraud will be discovered only when the head office does the branch-wise reconciliation, which normally will take 6 months. By that time the money is unrecoverable.
5. Theft of identity:
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Dishonest bank personnel have been known to disclose depositors' personal information for use in theft of identity frauds. The perpetrators then use the information to obtain identity cards and credit cards using the victim's name and personal information.
Impact of Identity Fraud The growth in identity fraud victimization rates over the past year is harmful not only because of the dollar losses caused from identity fraud, but also because of the emotional impact on the victims. Identity Fraud victimization and the accompanying fear it generates lowers faith in the safety of the system and causes secondary effects, which are demonstrated by changes of behavior, such as avoidance of certain merchants, altered usage of payment types and channels, and severed relationships with primary card companies and banks. The increased fraud incidence is being driven by the poor economy coupled with an increasingly global, hierarchal and sophisticated criminal enterprise that specializes in developing new weapons of attack. Meanwhile the consumer costs, the dollar amounts the victim pays on average out-of-pocket, reached an all time low.
The relation of identity fraud is explained through following the following diagram:
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6. Forged or fraudulent documents:
Forged documents are often used to conceal other thefts; banks tend to count their money meticulously so every penny must be accounted for. A document claiming that a sum of money has been borrowed as a loan, withdrawn by an individual depositor or transferred or invested can therefore be valuable to a thief who wishes to conceal the minor detail that the bank's money has in fact been stolen and is now gone.
7. Uninsured deposits:
There are a number of cases each year where the bank itself turns out to be uninsured or not licensed to operate at all. The objective is usually to solicit for deposits to this uninsured "bank", although some may also sell stock representing ownership of the "bank". Sometimes the names appear very official or very similar to those of legitimate banks. For instance, some banks with no license and no affiliation to its seemingly apparent namesake; the real Chase Manhattan bank, New York. There is a very high risk of fraud when dealing with unknown or
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uninsured institutions. The structure of uninsured deposits
is given as follows:
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Frauds done by Outsiders Bill Discounting Fraud
Booster Cheques Stolen Cheques
Credit Card Fraud
Accounting Fraud
Cheque Kiting
Stolen Payment Cards
Duplication Or Skimming Of Card Information
Impersonation And Theft Of Identity
Fraudulent Loan Applications
Phishing And Internet Fraud
Money Laundering
Forged Currency Notes
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Advance Fee Fraud
Fund Diversion
Account Opening Fraud
Counterfeit Securities
Money Transfer Fraud
Letter of Credit Fraud
Computer Fraud
Clearing Fraud
Unofficial Borrowing
Voucher Manipulation
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1.Bill discounting fraud:
Essentially a confidence trick, a fraudster uses a company at their disposal to gain confidence with a bank, by appearing as a genuine, profitable customer. To give the illusion ofs being a desired customer, the company regularly and repeatedly uses the bank to get payment from one or more of its customers. These payments are always made, as the customers in question are part of the fraud, actively paying any and all bills raised by the bank. After certain time, after the bank is happy with the company, the company requests that the bank settles its balance with the company before billing the customer. Again, business continues as normal for the fraudulent company, its fraudulent customers, and the unwitting bank. Only when the outstanding balance between the bank and the company is sufficiently large, the company takes the payment from the bank, and the company and its customers disappear, leaving noone to pay the bills issued by the bank.
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2. Forgery and altered cheques:
Thieves have altered cheques to change the name (in order to deposit cheques intended for payment to someone else) or the amount on the face of a cheque (a few strokes of a pen can change 100.00 into 100,000.00, although such a large figure may raise some eyebrows). Instead of tampering with a real cheque, some fraudsters will attempt to forge a depositor's signature on a blank cheque or even print their own cheques drawn on accounts owned by others, non-existent accounts or even alleged accounts owned by non-existent depositors. The cheque will then be deposited to another bank and the money withdrawn before the cheque can be returned as invalid or for non-sufficient funds.
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3. Booster cheques:
A booster cheque is a fraudulent or bad cheque used to make a payment to a credit card account in order to "bust out" or raise the amount of available credit on otherwise-legitimate credit cards. The amount of the cheque is credited to the card account by the bank as soon as the payment is made, even though the cheque has not yet cleared. Before the bad cheque is discovered, the perpetrator goes on a spending spree or obtains cash advances until the newly-"raised" available limit on the card is reached. The original cheque then bounces, but by then it is already too late.
4. Stolen cheques:
Some fraudsters obtain access to facilities handling large amounts of cheques, such as a mailroom or post office or the offices of a tax authority (receiving many cheques) or a corporate payroll or a social or veterans' benefit office (issuing many cheques). A few 31
cheques go missing; accounts are then opened under assumed names and the cheques (often tampered or altered in some way) deposited so that the money can then be withdrawn by thieves. Stolen blank cheque books are also of value to forgers who then sign as if they were the depositor.
5. Credit card fraud:
Credit card fraud is widespread as a means of stealing from banks, merchants and clients. A credit card is made of three plastic sheet of polyvinyl chloride. The central sheet of the card is known as the core stock. These cards are of a particular size and many data are embossed over it. But credit cards fraud manifest in a number of ways. They are: „« Genuine cards are manipulated. „« Genuine cards are altered. „« Counterfeit cards are created. „« Fraudulent telemarketing is done with credit cards. „« Genuine cards are obtained on fraudulent applications in the names/addresses of other persons and used. It is feared that with the expansion of E-Commerce, M-Commerce and Internet facilities being available on massive scale the fraudulent fund freaking via credit cards will increase tremendously.
6. Accounting fraud: 32
In order to hide serious financial problems, some businesses have been known to use fraudulent bookkeeping to overstate sales and income, inflate the worth of the company's assets or state a profit when the company is operating at a loss. These tampered records are then used to seek investment in the company's bond or security issues or to make fraudulent loan applications in a final attempt to obtain more money to delay the inevitable collapse of an unprofitable or mismanaged firm.
7. Cheque kiting: Cheque Kiting exploits a system in which, when a cheque is deposited to a bank account, the money is made available immediately even though it is not removed from the account on which the cheque is drawn until the cheque actually clears. Deposit 1000 in one bank, write a cheque on that amount and deposit it to your account in another bank; you now have 2000 until the cheque clears. In-transit or non-existent cash is briefly recorded in multiple accounts. A cheque is cashed and, before the bank receives any money by clearing the cheque, the money is deposited into some other account or withdrawn by writing more cheques. In many cases, the original deposited cheque turns out to be a forged cheque. Some perpetrators have swapped checks between various banks on a daily basis, using each to cover the shortfall for a previous cheque. What they were actually doing was check kiting; like a kite in the wind, it flies briefly but eventually has to come back down to the ground.
8. Stolen payment cards:
Often, the first indication that a victim's wallet has been stolen is a 'phone call from a credit card issuer asking if the person has gone on a spending spree; the simplest form of this theft involves stealing the card itself and charging a number of high-ticket items to it in the first few minutes or hours before it is reported as stolen. A variant of this is to copy just the credit card numbers (instead of drawing attention by stealing the card itself) in order to use the numbers in online frauds.
9. Duplication or skimming of card information: This takes a number of forms, ranging from a dishonest merchant copying clients' credit card numbers for later misuse (or a thief using carbon copies from old mechanical card imprint machines to steal the info) to the use of tampered credit or debit card readers to copy the magnetic stripe from a payment card while a hidden camera captures the numbers on the face 33
of the card. Some thieves have surreptitiously added equipment to publicly accessible automatic teller machines; a fraudulent card stripe reader would capture the contents of the magnetic stripe while a hidden camera would sneak a peek at the user's PIN. The fraudulent equipment would then be removed and the data used to produce duplicate cards that could then be used to make ATM withdrawals from the victims' accounts.
10.Impersonation and theft of identity: Theft of identity has become an increasing problem; the scam operates by obtaining information about a victim, then using the information to apply for identity cards, accounts and credit in that person's name. Often little more than name, parents' name, date and place of birth are sufficient to obtain a birth certificate; each document obtained then is used as identification in order to obtain more identity documents. Government-issued standard identification numbers such as "Social security numbers, PAN numbers" are also valuable to the identity thief. Unfortunately for the banks, identity thieves have been known to take out loans and disappear with the cash, quite content to see the wrong persons blamed when the debts go bad.
11. Fraudulent loan applications: These take a number of forms varying from individuals using false information to hide a credit history filled with financial problems and unpaid loans to corporations using accounting fraud to overstate profits in order to make a risky loan appear to be a sound investment for the bank. Some corporations have engaged in over-expansion, using borrowed money to finance costly mergers and acquisitions and overstating assets, sales or income to appear solvent even after becoming seriously financially overextended. The resulting debt load has ruined entire large companies, such as Italian dairy conglomerate Parma at, leaving banks exposed to massive losses from bad loans.
12. Phishing and Internet fraud:
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Phishing operates by sending forged e-mail, impersonating an online bank, auction or payment site; the e-mail directs the user to a forged web site which is designed to look like the login to the legitimate site but which claims that the user must update personal info. The information thus stolen is then used in other frauds, such as theft of identity or online auction fraud. A number of malicious "Trojan horse" programmers have also been used to snoop on Internet users while online, capturing keystrokes or confidential data in order to send it to outside sites.
13. Money laundering:
The term "money laundering" dates back to the days of Al Capone Money laundering has since been used to describe any scheme by which the true origin of funds is hidden or concealed. The operations work in various forms. One variant involved buying securities (stocks and bonds) for cash; the securities were then placed for safe deposit in one bank and a claim on those assets used as collateral for a loan at another bank. The borrower would then default on the loan. The securities, however, would still be worth their full amount. The transaction served only to disguise the original source of the funds.
14. Forged currency notes
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Paper currency is the usual mode of exchange of money at the personal level, though in business, cheques and drafts are also used considerably. Bank note has been defined in Section 489A.If forgery of currency notes could be done successfully then it could on one hand made the forger millionaire and the other hand destroy the economy of the nation. A currency note is made out of a special paper with a coating of plastic laminated on both sides of each note to protect the ink and the anti forgery device from damage. More over these notes have security threads, water marks. But these things are not known to the majority of the population. Forged currency notes are in full circulation and its very difficult to catch hold of such forgers as once such notes are circulated its very difficult to track its origin. But the latest fraud which is considered as the safest method of crime without making physical injury is the Computer Frauds in Banks. Computerization of banks had started since 1994 in India and till 2000 4000 banks were completely and 9000 branches have been partially computerized. About 1000 branches had the facilities for International bank Transaction. Reserve Bank Of India has evolved working pattern for Local area Network and wide area Network by instituting different microwave stations so that money transactions could be carried out quickly and safely. The main banking tasks which computers perform are maintaining debit-credit records of accounts, operating automated teller machines, and carry out electronic fund transfer, print out statements of accounts create periodic balance sheets etc. Internet facilities of computer have revolutionized international banking for fund transfer and for exchanging data of interest relating to banking and to carry out other banking functions and provides certain security to the customers by assigning different pin numbers and passwords.
15. Advance Fee Fraud This may involve an agent approaching a bank, a company or individual with another to access large funds at below market interest rates often for long term. This purported source of funds is not specifically identified as the only way to have access to it through the agent who must receive a commission “in advance”. As soon as the agent collects the especially distressed banks and banks needing large funds to bid for foreign exchange can easily fall victim of this type of fraud. When the deal fails and the fees paid in advance are lost, these victims are not likely to report the losses to the police or to the authorities. 36
16. Fund Diversion In this case, bank staff sometimes diverts customers’ deposits and loan repayment for personal use. Another case of this is the tapping of funds from interest in suspense accounts in banks.
17. Account Opening Fraud This involves the deposit and subsequent cashing of fraudulent cheques. It usually starts when a person not known to the bank asks to open a transaction account such as current and savings account with false identification but unknown to the bank.
18. Counterfeit Securities Counterfeiting of commercial financial instruments is one of the oldest forms of crime. Modern photographic and printing equipment has greatly aided criminals in reproducing good quality forged instruments. The documents may be total counterfeit or may be genuine documents that are copied, forged or altered as to amount, payout date, pay or terms of payment. A common fraud is to present the counterfeit stocks or bonds as collateral for loan. The presenter would draw out the proceeds and disappear before the financial instruments are found to be counterfeit.
19. Money Transfer Fraud Money transfer services are means of moving to or from a bank to beneficiary account at any bank point worldwide in accordance with the instructions from the banks’ customers. Some common means of money transfer are mail, telephone, over-the-counter, electronic process and telex. Fraudulent money transfer may result from a request created solely for the purpose of committing a fraud or altered by changing the beneficiary’s name or account number or changing the amount of the transfer.
20. Letter of Credit Fraud This generally arises out of international trade and commerce. They stimulate trade across national borders providing a vehicle for ensuring prompt payment by financially sound 37
institutions. Overseas suppliers continue to receive spurious letters of credit, which are usually accompanied by spurious bank drafts with fake endorsements which guarantee payments.
21. Computer Fraud Computer Frauds involves the deceptive manipulation of the banks’ computer, either at the data collection stage, the input processing stage or even the data dissemination stage. Computer frauds could also occur due to improper input system, virus, program manipulations, transaction manipulations and cyber thefts. It can also take the form of corruption of the programmed or application packages and even breaking into the system through remote sensors. A banks’ data can also be tampered with at the data centre to gain access to unauthorized areas or even give credit to accounts for which the funds were not originally intended. This kind of fraud can remain undetected for a long time. In this epoch of enormous deployment of automated teller machines (ATMs) and online real time e-banking and commerce; computer frauds arising from cyber thefts and crimes has assumed a very threatening dimension . No bank seems to be invulnerable to it, and a considerable percentage of the enormous amount of money spent annually in the banking sector to help reduce fraud usually are channeled towards fighting computer frauds and cyber crimes and theft.
22. Clearing Fraud Most clearing frauds hinge on suppression of an instrument so that at the expiration of the clearing period application to the instrument, the collecting bank will give value as though the paying bank had confirmed the instrument good for payment. Clearing cheques can also be substituted to enable the fraudster divert the fund to a wrong beneficiary. Misrouting of clearing cheques can also assist fraudsters to complete a clearing fraud. Askew, a local clearing item can be routed to an up country branch; the delay entailed will give the collecting bank the impression that the paying bank had paid the instrument.
23. Unofficial Borrowing This occurs when bank employees borrow from the vaults and teller tills off the record. Such unauthorized borrowings are done in exchange of the staff post-dated cheque or nothing. These borrowings are more rampant on weekends and during the end of the month when salaries have not been paid. Some of the unauthorized borrowings from the vault, which 38
could run into thousands of cedes, are used for fast businesses lasting a few hours or days after which the resources are replaced without any substantiation in place that they were taken in the first place. Such a practice when done recurrently and with no official records, soon very easily becomes prone to manipulations, whereby they resort to other means of balancing the cash in the bank’s vault without ever having to replace the sums of money collected.
24. Voucher Manipulation Manipulation of Vouchers involves the replacement or alteration of entries of one account to another account being used to commit the fraud. This account would obviously be a fabricated account into which the funds of unsuspecting clients of the banks are transferred. The amounts taken are usually in small amounts so that it will not easily be noticed by top management or other unsuspicious staff of the bank. Manipulation of vouchers can thrive in a banking system saddled with inadequate checks and balances such as poor job segregation and lack of detailed daily examination of vouchers and all bank records.
39
TYPES OF BANKING FRAUDS
Types of Banking Frauds
Credit / Debit Card Frauds Fictitious entries made in book/ manipulation of record
Purchased Bill Frauds
Hypothecation Frauds
Identity Frauds
Type of Banking Frauds
ATM Frauds
Loan Frauds
Cheque Frauds
Deposit Account Frauds
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As a customer you may be seen as a potential target for fraudulent activities. However by arming yourself with information and tools you can protect yourself from becoming a victim of fraud. Do you know the four biggest fraud threats you face Credit card and debit card fraud is a crime whereby your credit or debit card can be reproduced in order to use the credit balance to obtain a financial advantage. The creation and/or alteration of a credit/debit card occurs when the information contained on the magnetic strip is reproduced. This type of crime is known as ‘skimming’. Credit or debit card fraud can also occur when your card is lost or stolen and used by a third party to purchase goods with those cards or to remove cash from the cards. Credit or debit cards can also be intercepted in transit while being sent to you. Your cards can also be compromised by a dishonest merchant who undertakes unauthorized duplicate transactions on your card.
Protect your credit / debit card:
Memories your personal identification number (PIN). Don't use the same PIN for all your cards, and don't choose your birth date or other easily identifiable numbers that might be on something else in your wallet. Check statements and call your credit card issuer immediately if you see anything suspicious on your bill. You could help the company uncover fraud—and save yourself from paying unauthorized charges. Do not let your credit card out of your sight at anytime for example, at a restaurant go with the card. Card fraud is not applicable in Australia only be just as vigilant when travelling overseas, credit card skimming is an international crime. Always sign your card in ink as soon as you receive it. Keep track of when new and reissued cards should arrive, and call the credit card issuer if they don't come on time.
2.Cheque Fraud: Cheque fraud is the use of a cheque to get financial advantage by: altering the cheque (payee/amount) without authority theft of legitimate cheques and then altering them duplication or counterfeiting of cheques using false invoices to get legitimate cheques depositing a cheque into a third party account without authority depositing a cheque for payment knowing that insufficient funds are in the account to cover the deposited cheque.
How to protect yourself from cheque fraud: 41
1. Reconcile your accounts promptly and regularly. 2. Never sign blank cheques, and only sign cheques after all details have been completed. 3. Limit the number of signatures to your account to ensure control. 4. Ensure that your signature is not with documents that can be accessed by the general public. 5. Keep all cheques secure when not in use to deter theft. 6. Don’t leave any gaps in the completion of the payee name, amount in words and in figures. 7. If cheques are lost or stolen contact ANZ immediately and ask them to stop payment on the cheque.
3. ATM FRAUD
Has your ATM got the 'Jitters'. More anz ATMs now have in-built skimming prevention software. You may have noticed that your card enters and exits the card reader slowly, or jumps like it has the 'jitters'. That's a sign that the ATM is helping to protect you against card skimming.
Card skimming: Card skimming is the illegal copying of a card's magnetic strip that can later be used to access
your
account
and
make
unauthorized
purchases
using
those
details.
In the case of ATMs, this typically occurs when the would-be thief places a device over the card entry point that scans the cards as they enter and exit the ATM, combined with a hidden 42
camera to record you while you enter your PIN. The scanning device and camera can be cleverly disguised so that you don't even notice the ATM has been modified.
What we are doing To help prevent card skimming, more ANZ ATMs have been fitted with skimming prevention software that 'shakes' the card as it enters and exits the ATM. The shaking interrupts the scanning process and renders any skimming attempt ineffective All ANZ ATMs across Australia have skimming prevention software. You will notice on our newer ATMs there is either a green or blue plastic cover where you insert your card. This device is installed to alter the shape of the card reader and making it difficult for the would-be thief to install a skimming device on the ATM. ANZ are constantly looking at new technology for ensuring
that
customer
information
and
cash
are
secure
at
all
times.
Along with the skimming prevention software, ANZ ATMs include the use of ink-staining technology to deter theft.
4. Identity Fraud Identity fraud can occur in many ways—from somebody using your credit card details illegally to make purchases to having your entire identity assumed by another person to open bank accounts, take out loans and conduct illegal business under your name.
How to protect yourself from identity theft:
Never send money or give personal details to people you don’t know and trust.
If you receive a call from your bank or any other organization, don’t provide your personal details—instead ask for their name and a contact number. Check with the organization in question before calling back.
Never rely on a number provided in an email or click on the provided link—instead find the contact number through an internet search or check the back of your ATM card.
Regularly check your credit card and/or bank statements to ensure that suspicious transactions are detected.
Shred all documents containing personal information, such as credit card applications and bank statements.
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Log directly onto websites you are interested in rather than clicking on links provided in an email.
Always get independent advice if you are unsure whether an offer or request is genuine.
Lock your letterbox securely to avoid your mail being stolen.
Ensure you choose passwords that are not easy for someone to guess, such as your date of birth, pet’s name etc.
Signs of identity fraud These can vary, but some typical signs that your identity is being used unlawfully are:
A financial institution informs you they have received an application for credit that you have not applied for.
You receive phone calls or letters advising that you have been denied credit that you have not applied for.
You receive bank, mobile phone or credit card statements or notices in your name, of which you have no knowledge.
You notice that you no longer receive your bank or credit card statement or you notice that not all your mail is being delivered.
What can you You should also advise any other financial institution that you bank with so they are aware of the situation. Any instance of identity fraud should also be immediately reported to your local police. It is also a good idea to advise close family and friends as identity theft rings will often target more than one member of a household. In addition, consider contacting Veda Advantage, a credit agency, to obtain your credit history report so that you are kept fully informed of any unauthorized activity on your own file.
5. Deposit Account Frauds: A Accounts opened without introduction or with improper introduction, frauds under this head are generally attempted t the time of opening of new branch when such emphasis is not paid on abstention of introduction. Once the account is opened, the miscreant deposits, stolen/materially altered cheques for collection/payment etchant dormant account is fraudulently operated by a forger on forged signatures. Specimen signature card or signatures on letters are utilized as models: 44
1. Joint accounts are operated by one of the signatories (forger) by forging the signatures of others. 2. Mini deposit collections are not deposited by the collecting banker. 3. The banker becomes joint account holder and withdraws the money.
4. The banker manipulates the depositor’ Pass Book. 6. Purchased Bill Frauds: the frauds in this area are often costly. They can take the following forms: 1. Bogus or stolen railway receipts and motor transport receipts accompanied by counterfeit bills are discounted. 2. Fake bills with inflated value, drawn on sister concerns, for discounts. 3. Genuine bills and railway are presented and got discounted from the bank but the material is got released from the railways on indemnity bond.
4. Bogus bills for worthless goods are discounted on the strength of dispatch papers 7. Hypothecation Frauds: Cash advances, against pledged goods, as security are fertile fields for frauds. 1. Stocks or part thereof, are removed unauthorized from the god owns. 2. Advance against pledge/hypothecation of securities, pledging inferior quality of goods, overvaluation of stocks.
8. Loan Fraud: The general policy of the government is to encourage loans to agriculturists or to small artisans and businessmen. Infact, certain targets for these purposes are fixed for the banks. In the initial stages, it resulted in losses to the banks due to lack of expertise in the field. The following types of fraud were perpetrated. 1. Loans are taken by different persons on the same time. 2. Nomadic artisans obtain loans and vanish from the scene. 3. False firms appear everywhere and obtain loans. 4. Loans taken for agricultural development were later used as marriage celebrations. 45
5. In connivance with the suppliers, farm machinery bills were inflated for accessories which wee never supplied and included in the bills. 6. Farm machinery purchased with loans and hypothecated to banks is sold without informing the banks or returning the loans.
9. Fictitious entries made in book/ manipulation of record: These frauds normally take place with the active involvement of staff or where the books are exposed to the members of public. In such cases, subsequently the record is destroyed.
Cash shortages:
I.
Cash the most sensitive asset of the bank is prone to fraud. The shortages of fraud there is generally due to carelessness/negligence of the concerned staff who are the joint custodians of cash.
I.
Frauds in Borrower Accounts:
1. Advance against clean/documentary bills purchased/discounted. The borrower committed frauds by tendering fake bills/accommodation bills/cheques for discounting. Later when the bills/cheques are received unpaid, the banks find it difficult to recover the amount. 2. Advance under some priority sector schemes. 3. Advance granted in haste or at the behest of top management or any pressure or some consideration. 4. Incomplete credit information. 5. Lack of post disimbursement supervision. 6. Miss-use
of
discretionary powers
or
exceeding discretionary powers
by
Managers/Officers.
II.
Frauds in Investment Portfolios:
Investment portfolio which constitutes a big chunk of the total assets of a bank is another fraud prone area. The dealer in securities in the absence of proper policy, direction and adequate system of checks and balances may misuse the position for his personal gains to
46
the detriment of Banka€™s interest by putting through deals for passing on business to the brokers which are otherwise not warranted by business considerations. III.
Frauds in Foreign Exchange Areas: 1. Frauds in this area are perpetrated in the dealing room operations, documentary credits, export-import transactions, packing credit etc.
2. Some of the dealers have been put through fictitious deals with the help of brokers due to lack of back-up functions.
IV.
Frauds in computerized environment: Hardware errors disable the working of any of the component of hardware with a view to creating/temporary/permanent malfunction to either destroy the data or present its disclosure for security. Pregame errors are created by miscreants to cripple the system or to siphoned off the funds to unauthorized accounts or to prevent/reduce charges to select accounts. Data entry errors are created by staff to give undue gain to interested accounts. Errors are made to give a wrong picture of sanative data such as balances, classification of advances, outstanding dues, interest rate applied etc.
VI. Frauds in inter branch and inter bank accounts: 1. Debiting bank accounts without remitting cash. 2. Debiting branch adjusting account without remitting cash. 3. Adjusting branch books-clean cash. 4. Fraudulently debiting/crediting Head office account. 5. Debiting/Crediting various deposit accounts without authority.
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EFFECTS OF BANK FRAUDS ON BANKS
EFFECTS OF FRAUDS ON BANKS
Loss of Public Confidence in Banks Loss of Money Increased Operating Cost Low Asset Quality Reduced the amount of profit Unattended
Creditability 1. Loss of Public Confidence in Banks 48
Fraud is perhaps the most fatal of all the risks confronting banks. The enormity of bank frauds in Ghana can be inferred from its value, volume and actual loss. A good number of banks’ frauds never get reported to the appropriate authorities, rather they are suppressed partly because of the personalities involved or because of concern over the negative image effect that disclosure may cause if information is leaked to the banking public The banks’ customers may lose confidence in the bank and this could cause a setback in the growth of the bank in particular.
2. Loss of Money Fraud leads to loss of money, which belong to either the bank or customers. Such losses may be absorbed by the profits for the affected trading period and this consequently reduces the amount of profit, which would have been available for distribution to shareholders. Losses from fraud which are absorbed to equity capital of the bank impairs the bank’s financial health and constraints its ability to extend loans and advances for profitable operations. In extreme cases rampant and large incidents of fraud could lead to a bank’s failure.
3. Increased Operating Cost Fraud can increase the operating cost of a bank because of the added cost of installing the necessary machinery for its prevention, detection and protection of assets. Moreover, devoting valuable time to safeguarding its asset from fraudulent men distracts management. Overall, this unproductive diversion of resources always reduces outputs and low profits which in turn could retard the growth of the bank.
4. Low Asset Quality It also leads to a diminishing effect on the asset quality of banks. The problem is more dangerous when compounded by insider loan abuses. Indeed, the first generation of liquidated banks (Co-operative Bank and Bank for Housing and Construction) by the Bank of Ghana was largely a consequence of frauds perpetrated through insider loan abuses. If this problem is not adequately handled, it could lead to distress and bank failure.
5.Reduced the amount of profit
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Banking frauds reduce the profit of banks. Because of the frauds there in decrease in the profit of the banks. If there is no frauds in banks so bank is able to give maximum return on the investment of the customers. Fraud leads to loss of money, which belong to either the bank or customers, so there is decrease in the profit margin of the company.
6. Unattended There are instances of fraud that adversely impact banks on a regular basis and go unnoticed or unattended. All these cases of fraud result in sizeable monitory losses for the banks once they go undetected.
7. Creditability Fraud events raise questions around the credibility of the fraud deterrent processes and the technological capabilities of the institution.
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BANK RULES REGARDING BANKING FRAUDS AND SCAMS
After receiving Xerox papers (which were actually forged by the offenders) of the property, the bank passed the same on to the legal section. After scrutiny, the legal consultant told the bank that the Xerox documents were `perfect' and to release loan after execution of sale deed. The bank rules state that loan applications can be examined "even with Xerox copies of documents. The alleged greediness of employees to give their salary slips and other documents on payment of some money made the job of the cheats easier. The police opine that unless bankers evolve a foolproof system, the offenders continue to take advantage of the lapses. Though computer based banking crimes are yet limited but it is increasing with a huge pace. Their investigation is highly intricate and daunting. Prevention is the best alternative. It is comparatively easier, though even with the best laws, efficient investigation team the successful conclusion of most cyber crimes will remain a remote possibility .Therefore emphasis is more on prevention. In bank administration, one feels that not much attention is paid to preventive measures. Bank managements must direct their orientation towards preventive rather than detective or punitive measures. Preventive vigilance must be the prime agenda to bring down the occurrence of fraud in banks.
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RESPONSIBILITY OF BANKERS IN A BANK FRAUD
Bank frauds crop up in all spheres of banking dealing, like: Cheque frauds, Deposit account frauds, Purchased bill frauds, Hypothecation frauds, Loan frauds etc. A dishonest banker can play havoc with the banks money. The bank has therefore to sentinel itself and its customer against the deceitful employee. The vicinity of business of the banker is extensive. The following operational avenues have been noticed time and again. Manipulation of cash by those handling cash, misappropriation of customer deposit accounts, misappropriation of money in telegraphic transfers, clearing forged cheques and other instruments, fraudulently while working in clearing departments, creaming of the sundry accounts, tinkering with the central accounts, accepting counterfeit currency for a consideration, helping the bank robber, by giving information etc. An analysis of frauds reported by banks to RBI broadly indicated that frauds perpetrated on banks could be classified into the following categories:1· Misappropriation of cash tendered by the banks constituents and misappropriations of cash remittance. 2· Withdrawal from deposit accounts through forged documents/instruments. 3· Fraudulent encashment of negotiable instruments by opening an account in fake/fictitious name.
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4· Perpetration of frauds through clearing transactions. 5. Misutilisation/overstepping of lending/discretionary powers, non-observance of prescribed norms/ procedures in credit dispensation etc. 6. Opening/Issue of Letters of Credit, Banks Guarantees Co-acceptance of bills without proper authority and consideration.
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REGULATIONS RESERVE BANK OF INDIA (RBI) Reserve Bank of India (RBI) rules to prevent Bank frauds
The Reserve Bank of India (RBI) has drawn up new rules for banks aimed at preventing fraud and irregularities which is given as follows:
The
regulator has asked banks to immediately frame staff rotation and mandatory
leave policies for employees in sensitive areas such as treasury and for relationship managers handling high-value clients.
Staff
rotations and leave are international practices that help banks keep track of
decisions and businesses handled by a particular employee.
Reserve Bank of India has introduced the rules following forensic studies at certain banks due to the “occurrence of large value frauds or sharp increase in number of frauds at such banks”.
In another notification, RBI directed private and foreign banks to appoint chief of internal vigilance (CIV) officers, with responsibilities similar to those of chief vigilance officers in public sector banks.
It was observed that the practices vary widely among banks. It has, therefore, been decided to lay down detailed guidelines for private sector and foreign banks on similar lines so that all issues arising out of lapses in the functioning of the private sector and foreign banks, especially relating to corruption, malpractices, frauds, etc., can be addressed uniformly by the banks for timely and appropriate action.”
54
Banks need to implement an internal vigilance system by
and submit a compliance
report.
RBI’s directive on staff rotation and mandatory leave comes a few months after a multi crore fraud involving a relationship manager at the Gorgon branch of Citibank India came to light.
To prevent frauds, banks should have prescribed procedures and criteria to analyze and assess irregularities, RBI said. Banks should be able to understand the nature of an irregularity or fraud. For instance, whether it has taken place because of negligence in duty as a result of a “collusion” by employees.
“Any action taken in collusion to derive undue/unjust benefit or advantage should be termed as fraud,” RBI said.
It has asked banks to examine the “intent to defraud, irrespective of whether or not actual loss takes place.
If an irregularity is detected, banks should immediately assess if it was a result of human or system failure.
This exercise is the first critical step towards corrective action in the sense that it would lead to expeditious filing of police complaints, blocking/freezing of accounts and salvaging funds from the blocked/frozen accounts in due course.
Banks asked to frame a “fit and proper” criteria for posting employees in critical positions such as in dealing rooms and treasury, or as relationship managers for highvalue customers and heads of specialized branches.
RBI has allowed banks a free hand in appointing CIVs, but has fixed the initial tenure at a maximum of six years.
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FACTORS OF FRAUDS
INTERNAL FACTORS Poor Management
Inexperienced Personnel
Overstretching
Job Rotation
Poor Remuneration
Frustration
Inadequate Training and Re-Training
Poor Book-keeping
Weak Accounting 56
The institutional factors or causes are those that can be traced to the in-house environment of an banks. They are to a great extent factors within the control of the management of the bank. Major institutional causes fraud can be categorized as follows:
1. Poor Management This comes in a form of inadequate supervision. A junior staff with fraudulent tendencies that is not adequately supervised would get the impression that the environment is safe for the perpetration of fraud. Poor management would also manifest in ineffective policies and procedures, which a fraudulent minded operator in the system will capitalize on. Even where there are effective policies and procedures in place, fraud could still occur with sometimes deliberate skipping of these tested policies and procedures.
2. Inexperienced Personnel Inexperienced personnel are susceptible to committing unintentional fraud by falling for numerous tricks of fraudsters. Inexperienced personnel are unlikely to notice any fraud attempts and take necessary precautionary measures to checkmate the fraudster or set the detection process in motion.
3. Overstretching Overstretching is another reflection of poor management. This can aid perpetration of fraud to a large extent. A staff who is overstretched is not likely to perform at optimum level of efficiency.
4. Job Rotation Ordinarily, the longer a man stays on a job, the more proficient he is likely to be. An operator who has spent so long on a particular job may be encouraged to think that no one else can uncover his fraud. The existence of this kind of situation in a bank is clear evidence of poor management and such situations encourage fraudulent practices.
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5. Poor Remuneration Poor salaries and poor conditions of service can also cause and encourage fraud. Employees that are poorly paid are often tempted to fraudulently convert some of the employers’ monies to their own use in order to meet their personal and social needs. This temptation is even stronger on bank employees who on daily basis have to deal with cash and near cash instruments. In our society, it is argued that greed rather than poor working conditions or poor salaries is what lures most people into fraudulent acts. This explains why fraud would still exist in the banking sector, which is reputed to be one of the highest paying sectors. Some people have an insatiable appetite to accumulate wealth and would therefore steal irrespective of how good their earnings are.
6. Frustration Frustration could also lead to fraud. Where a staff feels short-changed in terms of promotion and other financial rewards, they become frustrated and such frustration could lead to fraud as such employee would attempt to compensate himself in his own way.
7. Inadequate Training and Re-Training Lack of adequate training and retraining of human resources both on the practical and theoretical aspects of banking activities and operations more often than not leads to poor performance. Such inefficient performance creates a loophole which can very easily be exploited by fraudsters.
8. Poor Book-keeping Inability to maintain appropriate books of accounts together with failure to reconcile the various accounts of the bank on daily, weekly or monthly basis more often than not will attract fraud. This loophole can very easily be exploited by bank staff that is fraudulent. The prevalence of fraud and forgeries are an indication of weakness in a bank’s internal control systems. Aside the above-mentioned causes of fraud, the following factors greatly contribute to fraud:
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Inadequate compensation, salaries and
fringe benefits which are accruable to bank
staff.
Refusal to comply with laid-down procedures without any penalty or sanction. Conspiracy between interacting agents charged with the responsibility of protecting the assets and other interest of the bank;
Poor working conditions; Poverty and infidelity of employees. 9. Weak Accounting The weak accounting is one of the important internal factor which causes to the banking frauds and scams.
2. EXTERNAL FACTORS Environmental factors are those that can be traced to the banks immediate and remote environment. If the whole society of which the bank is a part is morally bankrupt it will be difficult if not impossible to expect the banks to be insulated from the effects of such moral bankruptcy. The banking industry is not immune from the going on in its external environment. Our present society is morally bankrupt. Little or no premium is put on things like honesty, integrity and good character. The society does not question the source of wealth. Any person who stumbles into wealth is instantly recognized and honored. It is a fact of our time that fraud has its root firmly entrenched in the social setting where wealth is honored without questions. Ours is a materialistic society which to a large extent encourages fraud. The desire to be with the high and mighty caliber of the society, extreme want that is often characterized by need, cultural demands or the cultivation of a life too expensive for the legitimate income of the individual. Our societies have debased the entire old moral standards and appear to be unconcerned with probity, honesty, integrity and “good name”. The family friends, the religious houses and society at large seem not to care how you come about your riches but accept, accommodate and even respect you for your wealth, however, dishonestly it has been acquired. All these encourage fraud as the end seems to justify the means, and no means seems to be morally unacceptable. With reference to fraud, criminal motivation is said to be pathological when the state of mind of the criminal disposes and impels him to commit 59
fraud even though he is not in dire need of the resources. Bank frauds seriously endanger the organizational growth of a bank as it leads to bank distress. This is because fraud reduces the deposits of depositors and ultimately leads to the erosion of the capital base of banks. The cost of fraud is also usually difficult to estimate because not all frauds are discovered or even reported since most banks have a propensity to cover up the frauds emanating from their banks, all in a bid to continue to gain customers goodwill and stimulate their clients’ confidence all the time.
EXTERNAL FACTORS Slow and Tortuous Legal Process
Poverty
Widening Gap between the Rich and the Poor
Job Insecurity
Peer Group Pressure
Increased financial burden on Individuals
Lack of Proper Training
Lack of Sufficient Staff
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1. Slow and Tortuous Legal Process In Banks there is a slow legal process which is one of the reason for occurring the frauds. If in every bank there is a strong measures and fast legal process to deal with the frauds then chances of will be less or minimize. So every bank there should be a strong procedures to handling this type of baking frauds.
2. Poverty The another reason for banking frauds is poverty. In India there is so much poverty so that people are makes the frauds for removing there poverty because some peoples wants the all type of facilities in their life and wants to improve their standard of living. So they started the illegal activities for earning money. So poverty is also leads to banking frauds.
3. Widening Gap between the Rich and the Poor In India there is so much gap between the rich and poor people. Because of money some peoples are behaving different .In most of sectors there is a partiality between the rich and poor peoples. So this gap is increasing by day –to day and this leads to the banking frauds and scams.
4. Job Insecurity: Nowadays job insecurity is one of the serious problem that leads to banking frauds. Permanent jobs are very less . So for living the money is so much important. The needs and wants of the people are increasing so money is become necessary to satisfied that needs and wants. Because of the job insecurity some peoples want to reserve money that in future they can use. So for satisfying the future needs and wants he is undertake the baking frauds.
5.Peer Group Pressure: The another reason for happening the frauds is that there is peer group pressure in some of the banks. So because of that people are doing this illegal activities which are very harmful to all the society. 61
6.Increased financial burden on Individuals: There is so much financial burden on each and every individuals so because of that financial burden people are stated to earning from doing the bank frauds
7.Lack of Proper Training There is lack of properly trained and experienced person. There is a sudden and tremendous increase in banking business. The sudden expansive explosion has created a vacuum of personnel. New recruits often do not have adequate training or experience before they are put in responsible positions. The findings reveal that 68.77% of respondents have not undergone any formal training in prevention of bank frauds.
8.Lack of Sufficient Staff Moreover bank staff feels overburdened. The life has become too fast. The banker does not have enough time to scrutinize documents thoroughly. About two thirds of the respondents feel that they do not have sufficient staff to carry out the work meticulously. The overburdened staff was given the highest weight age as the reason responsible for bank frauds.
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ACTIONS TAKEN BY BANK TO MINIMIZE THE BANK FRAUDS
Banks should adopt the following actions for minimize the bank frauds:
ACTIONS TAKEN BY BANK Assess Fraud Implictions of Bank’s Strategy
Model Customer Behaviors and Situations
Develop Dynamic Analytical Models
Develop Pan-Channel Customer Authentication
Develop the IT Strategy for Holistic Decisioning
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1. Assess fraud implication of banks Strategy The fraud function has an opportunity to transform its role and status by thinking and acting more like a stakeholder in the business. This involves assessing the risk factors and their relative volatility, adopting a more commercial and customer-focused approach and using technology innovation to provide customer-centric solutions. Understanding the risks will enable capability or knowledge gaps to be identified and mitigating actions to be taken. Our research has found that the innovation agenda is central to banks strategic growth plans and therefore will open up new risks for banks in the areas of fraud management and IT security. Experience also shows that business units in many organizations elect for point solutions. When this occurs, there is a clear risk that a lack of coordination and integration will seriously undermine the effectiveness and efficiency of enterprise-wide fraud management.
2. Model customer behaviors and situations Fraud solutions and offerings should be developed and refined to address the risks of individual customers or customer segments. Fraud interventions which impact the customers should be based on individual customer behavior and circumstance. This positions the fraud management function as an insightful guide to the business, enabling the design and implementation of robust fraud mitigation as part of the overall customer offering. For example, gaining a better understanding of current and future customer demographics provides the opportunity to predict future vulnerabilities thereby turning fraud management into a competitive advantage by developing products and services that meet the needs of customers.
3. Develop Dynamic Analytical models Our experience is that banks have historically deployed anti-fraud and anti- AML solutions without the appropriate capabilities for dynamic optimization. Fraud management must be highly responsive, as criminals are more sophisticated and increased processing power is available through cloud technologies. Organizations that fail to maintain and optimize their systems are likely to be targets for fraudsters. Typically, to optimize analytical models, banks need to interact more closely both with internal and external analytical resources and with software suppliers. Fraud teams need to be equipped with the skills and processes to manage this. Governance of models, analytics and rules changes is coming under increasing 64
regulatory interest and therefore, as part of developing this capability, proper governance should also be established. In the past, fraud managers would have a hypothesis which they would test with analytics (often calling on credit risk resources to perform the analysis). Going forward, fraud managers will start with a business outcome or goal rather than a hypothesis. They will use analytics to gather historical data that will help them find the answer. They will then reuse analytics to create statistical or machine-learning models of the data to answer their question. This will create an increasing need to bring various data sources together, particularly if an organization has deployed a number of non-integrated point fraud solutions.
4. Develop Pan-Channel Customer Authentications
Customer on-boarding and ongoing authentication policy are no longer the preserves of the compliance function or of the individual channel owner. These are essential elements of the customer’s experience and therefore key to business growth and customer retention. The fraud management team, as trusted advisor, needs to work with the business to develop a panchannel, customer-centric authentication strategy that provides consistency of customer experience and reduced cost for deployment while managing risk. The authentication strategy will shape the IT strategy, and the development of strategy should cover the following four key elements to optimize the business value derived: first, define authentication; second, develop the authentication solutions; third, mobilize the change, and fourth, communicate the strategy.
5. Develop the IT Strategy for Holistic Decisioning : The first step revising the IT strategy to incorporate Customer Authentication Strategy and Analytical Capability Requirements is considered very important. Second, banks should consider what changes would need to be made to effect decisions based on a holistic overview of the many different aspects of a transaction, whether such aspects involve a customer, member of staff, retailer, device or anything else.
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PRESENT NEW FRAUD PREVENTION CHALLENGES
Present new fraud prevention challenges Changing customer demographics
Market expansion
Adoption of new technologies and channels
1. Changing customer demographics Populations are aging, creating a large group that has assets but is vulnerable to attack. Whilst some financial crime committed against the elderly is committed by strangers, this group can also be vulnerable to exploitation by relatives and caregivers. And 2.5 million of those people were fraud victims. It is found that many victims are unlikely to tell anyone about it, and that there is still a feeling of embarrassment related to being scammed. Only 8% went to the police, 9% got advice from organizations such as the Citizens Advice Bureau, and 72% did not tell friends or family about it. The research also found that the most common type of scam people fell for was online fraud, with 34% of scams occurring via the internet. As the numbers of people using family or other caregivers to help them manage their finances rises, banks may
want to re-think their approach to how customers identify
themselves as the customer’s “team” will require access to funds in this environment. To do this successfully, Banks would have to look at each customer as an individual and, by extension, look at each individual transaction holistically.
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2. Market expansion Banks’ expansion into emerging markets is likely to continue as they represent circa 50 of GDP and only 30% of the global consumer banking revenue pool.
However, fraud
management and prevention techniques in emerging markets are not fully mature and a rush to expand into these markets could lead to significant fraud losses. Know Your Customer (KYC) data in emerging markets pose specific problems for banks seeking to limit fraud losses. In addition, international cyber-criminals will be tempted to operate in markets where they feel fraud controls are less sophisticated and local criminals may migrate to bank fraud from other crimes. Rapid urbanization accelerates the trend toward increased fraud, putting criminals in closer proximity to each other and encouraging the sharing of information as well as the recruitment of allies and accomplices. Among the top 150 cities worldwide, 116 are in emerging markets. The volume of international payments traffic will also increase in line with growth in emerging markets, which makes it easier for perpetrators of fraud to conceal their activities. This creates the risk of volumes overwhelming existing (often manual) fraud controls. Large migrant communities may need transfer and payment systems to support the flow of remittances to home countries. Indeed, remittances sent home from migrant workers are estimated to be three times the flow of aid sent from rich countries to poorer countries. While much of this money is used for immediate family needs, there is a significant portion available for savings and investment and banks have targeted this market with new products and offerings. 3. Adoption of new technologies and channels
Broad adoption of new technologies such as social media and mobile internet has created new channels for transfers and purchases, along with numerous new opportunities for fraud. Social networks can be used by fraudsters to secure customer data, share methodologies and recruit new accomplices. Over 600 million individuals were on Face book by early 2011, and nearly 3 billion consumers worldwide will be global 3G subscribers by 2014. New payment channels such as mobile phones create technical risks for the banking sector to manage. Remote banking access, presenting low personal risk, is attractive to criminals, and attacks on remote access points are likely to continue to grow in value, speed and sophistication. The opportunities to do so, will also grow as more people become comfortable with the digital 67
environment and bank online; for example, said they preferred to bank online in a recent survey, including 57% of those over the age of 55. As the customer experience is transformed, banks should consider combining two previously distinct functions—IT Security and Fraud Management—to address the increasingly technical nature of fraud attacks. Clients across geographies leads us to believe that direct channels to the consumer will see continued large-scale attacks, with criminals sharing and even jointly developing new methodologies. Banks that are slow to adapt new protective measures may find themselves ruthlessly attacked. Customers typically prefer to interact with their bank through their chosen channel with simple and convenient on-boarding and ongoing identity and verification procedures. The growth of new markets and the proliferation of channels, means that banks must explore innovations in , including biometrics, to secure both themselves and their customers from identity and verification procedures new kinds of attack.
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CASE STUDIES 1. STATE BANK OF BIKANER AND JAIPUR
Date of occurrence : 26.06.2013 Date of detection : 22.01.2014 Place of occurrence : Jaipur Name of the principal party/account : shri RKB Area of operation where the fraud has occurred : term loan Nature of fraud : C.F. Amount of involved (Rs. In lakh ) : 2.46 Total recovery in lacs : 2.46 Modus operanty : shri RKB (state govt. employee) was sanctioned a personal loan for Rs. 2.50 lacs on 26.06.2013 . branch obtained KYC documents, form-16, salary certificate & irrecoverable authority letter issued by respective govt. department and post dated cheques (PDCS) of salary saving a/c of borrower with branch pre-sanction inspection of office & resident of borrower was conducted by the branch officials, at the time of sanction. Recovery in the loan a/c was not for incoming & a/c stood overdue, due to non credit of salary in saving a/c of borrower with branch on taking up the issue with employer it was found that letter of authority was fake. Besides, the details of salary provided to the branch did not tally with the detail of salary records with department. It is also reported that the employee is absent since, july 2013 & no salary is being paid by the department.
2. CENTRAL BANK OF INDIA
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Date of occurrence : 13.08.2010 Date of detection : 06.11.2013 Place of occurrence : Ahmadabad Name of the principal account : Advance Area of operation where fraud has occurred : export credit Nature of fraud : C & F Total amount involved : Rs. 38525.74 lac Amount recovered : Nil Brief history (modus operandi) : M/S ‘E’, a company was enjoying credit facilities with consortium of bank’s . the company approach education our bank for credit facilities outside purview of consortium arrangement for executive of project in Tonzonic. The credit facilities were sanctioned to the company as under. 1. Export packing credit (270 day’s) backed by confirmed order/ LC cum EBP/ EBD – 330.00 crore. 2. Short term loons (unsecured) for 90 days – 50.00 crore 3. Letter of credit (DA/DP) inland/ import/ 100 crore stand by LC buyer’s credit & usance in 90 days inland 180 day import. The account was classified as NPA on investigation it was observed that, funds were directed to company’s a/c’s with other bank’s & not utilized for the purpose for which it was financed thus, the has misrepresented the fact’s & cheted the bank. company Complaint lodges : FIR lodges with the police on 03.01.2014
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CONCLUSION Bank frauds are done to make money by cheating the banks. There are several loopholes in banking system that has been used by fraudsters. The number of bank frauds has been increasing year on year along with that,RBI also engaged in making the banking system accurate and secure. IT in banking sector is much more advanced than the traditional banking. Online transactions are widely used than the manual transactions. Due to the frauds the profit of the company is getting affected. Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial institution. Bank frauds concern all citizens. It has become a big business today. Bank frauds are the creation of professional criminals, desperate customers or of errant bankers or their collusion inter se. However the prima donna in the drama is the insider or the banker. He opens the purse. He is often the target and at times the tool. Occasionally, he is the victim of the temptations. There are internal factors and external factors which are responsible for banking frauds and scams. There are two categories of banking frauds i.e. Banking frauds done insiders and frauds done outsiders. There are some effects of these frauds on banks like public loss confidence in banks, loss of bank money, it helps to increase the operating cost of banks, low asset quality, reduced the amount of profit, creditability etc. But there are also bank rules to prevent the banking frauds and scams. The Reserve Bank of
India (RBI) has drawn up new rules for banks aimed at preventing
fraudsand irregularities. Banks take actions to minimize these bank frauds. There are always new challenges in banking sector but they are competent to deals with that challenges.
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WIBILIOGRAPHY
http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=644b29ed-fee84c25-ac71-a50a65db78bc&txtsearch=Subject:%20Finance/Banking http://www.slideshare.net/akshayvirkar/frauds-scams-in-banks https://www.anz.com/personal/ways-bank/security/online-security/threats-bankingsafety/fraud-types/ http://in.ask.com/wiki/Bank_fraud?lang=en http://www.ehow.com/about_6396210_online-banking-fraud_.html http://www.wisegeek.com/what-is-bank-fraud.htm
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