Banking Frauds
Presented By: Raghav Srivastava (15956) Siddharth Mehta (16044) Mihir Upasani (16043) Dhruv Agarwal (16036)
Subject: Banking Law Teacher: Ms. Achint Arora
(BFIA 2) 1
TABLE
OF CONTENTS
INTROUDUCTION
3
FRAUDS
4
BANKING FRAUDS
4
FRAUD BY INSIDER
5
FRAUD BY OTHERS
9
FRAUD BY BANK EMPLOYEES EMPL OYEES
16
DIFFICULTY IN TACKLING FRAUDS
17
DETECTION OF FRAUDS
18
PREVENTION OF CHEQUE FRAUDS FRAUDS
19
PREVENTION PREVE NTION OF CREDIT CARD FRAUD
21
PREVENTION OF PHISHING & INTERNET FRAUD
23
ANNEXURE
2
INTRODUCTION Banking system occupies an important place in a nation's economy. A banking institution is indispensable in a modern society. It plays a pivotal role in economic development of a country & forms the core of the money market in an advanced country. Banking industry in India has traversed a long way w ay to assume its present stature. It has undergone a major structural transformation after the nationalization of 14 major commercial banks in 1969 & 6 more on 15 April 1980. The Indian banking system is unique & perhaps has no parallels in the banking history of any country in the world. Banks are the engines that drive the operations in the financial sector, which is vital for the economy. With the nationalization of banks in 1969, they also have emerged as engines for social change. After Independence, the banks have passed through three stages. They have moved from the character based lending to ideology based lending to today competitiveness based lending in the context of India's economic liberalization liberalization policies & the process of linking with the global economy. While the operations of the bank have become increasingly significant banking frauds in banks are also increasing & fraudsters are becoming more & more sophisticated sophisticated & ingenious. In a bid to keep pace with the changing times, the banking sector has diversified its business manifold. & the old philosophy of class banking has been replaced by mass banking. The challenge in management of social responsibility with economic viability has increased.
3
FRAUD Fraud is any dishonest act & 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 & breach of trust has been discusses which leads to the act of fraud. Fraud is defined u/s 421 of the Indian Penal Code & u/s 17 of the Indian Contract Act.
The essential elements of frauds are the following: 1. There must be a representation & assertion; 2. It must relate to a fact; 3. It must be with the knowledge that it is false or without belief in its truth; & 4. It must induce another to act upon the assertion in question or to do or not to do certain act.
BANKING FRAUDS Banking Frauds constitute a considerable percentage of white-collar offences being probed by the police. Unlike ordinary thefts & robberies, the amount misappropriated in these crimes runs into lakhs & 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 increasing substantially with the passage of time as all the major operational areas in banking represent a good opportunity for fraudsters with growing incidence being reported under deposit, loan & inter-branch accounting transactions, including remittances. With more educational qualifications, banking becoming impersonal & increase in banking sector have gave rise to this white collar crime. According to the data compiled by the Reserve Bank of India (RBI , the money lost to such scams has doubled in the past four years. In the current financial year, banks lost Rs 2,289 crore (till December), while the loss was Rs 1,057 crore in 2007-08.
As per our broad analysis the under mentioned four major elements are responsible for the commission of frauds in banks: 1. Active involvement of the staff-both supervisor & clerical either independent of external elements or in connivance with outsiders. 2. Failure on the part of the bank staff to follow meticulously laid down instructions & guidelines. 3. External elements perpetuating frauds on banks by forgeries or manipulations of cheques, drafts & other instruments. 4. There has been a growing collusion between business, top banks executives, civil servants & politicians in power to defraud the banks, by getting the rules bent, regulations flouted & banking norms thrown to the winds.
4
FRAUD BY INSIDERS Rogue traders A rogue trader is a trader who acts independently of others &, typically, recklessly usually to the detriment of both the clients & the institution that employs him or her. In other words 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 & 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. The following table shows some of the largest rogue trader losses in the world: Name
Loss
Institution
Nick
Leeson, 1995
£827 million
Barings Bank
John Rusnak, 2002
£691 million
Allied Irish Banks
foreign exchange options
7.5 years jail
Toshihide Iguchi, 1995
£557 million
Resona Holdings
U.S. Treasury bonds
4 years jail
Yasuo Hamanaka, 1996
$2.6 billion
Sumitomo Corporation
copper
8 years jail
Gianna Gray, David AU$360 Bullen, million Vince Facarra, Oct 03 - Jan 04
Market activity Nikkei
index futures
Sentence
6.5 years jail
foreign Australia Bank exchange options
16 months jail, 3 years & 8 months jail, 2 years & 4 months jail
China Aviation jet fuel futures Oil
4 years & 3 months jail
Jérôme $7.2 Kerviel, 2006 billion 2008
Société Générale
5 years prison of which 2 years are suspended may still appeal ruling
Boris PicanoNacci, Oct 2008
Investigation in Groupe Caisse Equity Derivatives d'Epargne progress
Chen Jiulin, 2005
$550 million
751 million
National
European stock index futures
5
Case
Shivraj Puri was an employee at Citibank Gurgaon for seven years. He duped investors for a sum of at least Rs.400 crore. He created 3 accounts in the name of Premnath, Sheila Premnath & Diskha Puri, his relatives, in Citibank Gurgaon apart from 15 other accounts in various other banks. By showing a forged Securities & Exchange Board of India (SEBI) letter offering high returns of 20-24% he conned high-net-worth investors to transfer their money to these accounts. He tried making money by investing these large sums in Nifty futures & options. His trading plan failed miserably as he had not hedged his positions on the Nifty derivatives. The Nifty was very volatil e during September to November 2010, showing a monthly gain of 11.6% in September & a fall of 10.2% in November. Puris trades were on the wrong side of the transaction each time, expiring as out-of-the-money trades. This led to heavy trading losses exceeding 400 crores. (Refer annexure 1)
Fraudulent loans 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 & the money is gone. The borrower may even be a non-existent entity & the loan merely an artifice to conceal a theft of a large sum of money from the bank . These loans are either taken under the name of a non-existent entity or the borrower declares bankruptcy or he vanishes. Loans can also be taken by hiding past credit history filled with financial problems.
6
Wi re
fraud
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 & 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. 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 & 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 .
Case Terrance J. Holmes of Ohio was convicted on January 3, 2007 for his involvement in a wire fraud. Between Jan 2001 & Feb 2002 Holmes owned & operated a company, GPS Computer Services from Ohio & offered various brands of laptops & notebook computers for sale via an internet website maintained by GPS computer service & by means of E-Bay, an internet auction website. The websites advertised the computers at highly discounted prices of $400 to $700 whereas the retail price quoted by the manufacturer ranged from $1100 to $1600. The company got orders from at least 1187 customers totaling approximately $964,560. Holmes & his company failed to deliver or supply the computers as promised. The employees of GPS Computer Services were instructed by Holmes to give various excuses to customers in order to delay any remedial action they might have taken. On January 3, 2007, Terrance J. Holmes finally pleaded guilty.
(Refer annexure 3)
7
Uni nsured Depos i ts 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, the "Chase Trust Bank" of Washington DC appeared in 2002 with no license & 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 uninsured institutions .
Demand Draft fraud DD fraud is usually done by one or more dishonest bank employees that are the Bunko Banker. They remove few DD leaves or DD books from stock & 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 CASE In State of Kerala Vs A.Pareed Pillai [AIR 1973 S.C.326 - 1972 SCC (Cr 705)] The allegation was that the accused persons cheated the Bank in as much as they had induced the Bank authorities to credit the Demand Draft amounts in the account of the firm by falsely representing that Oil Tins covered by those Demand Drafts have been consigned to the Railways. It was contended on behalf of the Appellant - State that the accused Respondents cheated the Bank in as much as they induced the Bank authorities to credit the amounts of Demand Drafts in the account of firm by representing that the Oil Tins relating to those demand drafts had been consigned to the Railways. The practice followed by the Bank in the case of the firm of the accused respondent was to give credit to the firm for the amounts of Demand Drafts without production of Railway Receipts. There was no cogent evidence to show that at the time when the accused sent the Demand Drafts they did not have the intention to send subsequently the Railway Receipts in respect of Oil Tins which were actually delivered to the Railways. The Supreme Court held that it may be that the accused could not keep up the delivery of Oil Tins to the Railways & no tins could be dispatched in respect of the said 13 Railway Receipts but that fact can give rise only to a civil liability of the accused. It is not sufficient to fasten a criminal liability on them. To hold a person guilty of the offence of cheating, it has to be shown that his intention was dishonest at the time of making the promise. Such a dishonest intention cannot be inferred from the mere fact that he could not subsequently fulfilled the promise.
8
FRAUD BY OTHERS Cheques
Related Frauds
Forgery & altered c heque A cheque or any other negotiable instrument that has been materially & maliciously altered to affect a fraud. Usually either the name of the payee or the amount of the check is changed. Fraudsters usually alter cheques by changing 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). Sometimes, 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 & the money withdrawn before the cheque can be returned as invalid or for non-sufficient funds.
B ooster c h eques 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 otherwiselegitimate 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. g Cheque k i t in 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 & 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 &, 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. This practice is commonly known as kite flying.
9
Case
Disappearing ink has been used to commit cheque frauds. In such cases the ink is altered in such a way that it disappears in several hours or days. For example, an individual writes a cheque to himself using Bank As account for say Rs.5100. He writes the digit 5 with the disappearing ink & the remaining digits in normal ink. The cheque is then deposited in Bank Bs account where Rs.5100 is added, but by the time it reaches Bank A for clearance the cheque will only read Rs.100, & only Rs.100 will be debited from the account. Cheque Washing means theft of a cheque in transit, followed by the use of chemicals to remove the ink removing all the parts other than the signature & filling it to his/her advantage. Cheque fraud may come from an employee itself. An employee on Banner Bank was convicted for writing 5 corporate cheques to her own birth name from her desk as a loan servicing agent.
10
B il l
d i scount in g 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 of being a desired customer, the company regularly & 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 & 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, & the unwitting bank. Only when the out standing balance between the bank & the company is sufficiently large, the company takes the payment from the bank, & the company & its customers disappear, leaving no-one to pay the bills issued by the bank.
11
C red it
card fraud
Credit card fraud is widespread as a means of stealing from banks, merchants & 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 & many data are embossed over it. Credit card frauds are the cases where one uses other's credit cards to purchase goods or services using the funds of other accounts, without their authorization. It's a sort of identity theft. According to RCMP, around 23% of credit card frauds happen by the way of theft & 37% of the credit card frauds happen due to counterfeit card use. Criminals often make use of the latest technologies to skim the data stored on the credit card's magnetic strip. 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 & used.
It is feared that with the expansion of E-Commerce, M-Commerce & Internet facilities
being available on massive scale the fraudulent fund freaking via credit cards will increase tremendously. Counterfeit credit cards are known as white plastics. Case Mukul Garg & his fiancée, Alisha Sharma of Delhi cloned old credit cards & used them to purchase designer clothes. Javed Chauhan, an Assistant Manager with Standard Chartered Bank, claimed that a fraudulent transaction was made using his credit card. The bank blocked his card. On further enquiry it was found that the card is being used at one of the designer stores in a mall. They had been repeatedly visiting the mall & were caught the next day when they turned up at the same store again to make a purchase.
(Refer annexure 5)
12
I mpersonat io n
and t heft of i dent it y
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 & credit in that person's name. Often little more than name, parents' name, date & 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. Governmentissued standard identification numbers such as "Social security numbers, PA N numbers" are also valuable to the identity thief. Unfortunately for the banks, identity thieves have been known to take out loans & disappear with the cash, quite content to see the wrong persons blamed when the debts go bad.
Fraudulent loan appl ic at i ons These take a number of forms varying from individuals using false information to hide a credit history filled with financial problems & 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 & 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 Parmalat, leaving banks exposed to massive losses from bad loans.
Case
Two brothers Sardainis, both from Sylmar bilked out $5 million from lenders by pledging as collateral properties which they did not own & also forging & fabricating a lot of documents to keep their false claim. The brothers allegedly fabricated fraudulent reconveyances to create the false impression that the other loans on the properties had been paid off & that there was sufficient equity to secure the loans. (Refer annexure 2)
13
P hi shi ng
and I nternet fraud
Phishing is a way of attempting to acquire sensitive information such as usernames, passwords & credit card details by masquerading as a trustworthy entity in an electronic communication. Communications purporting to be from popular social web sites, auction sites, online payment processors or IT administrators are commonly used to lure the unsuspecting public. Phishing is typically carried out by e-mail or instant messaging, & it often directs users to enter details at a fake website whose look & feel are almost identical to the legitimate one. Phishing is an example of social engineering techniques used to fool users, & exploits the poor usability of current web security technologies. Attempts to deal with the growing number of reported phishing incidents include legislation, user training, public awareness, & technical security measures. 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.
Case In a recent case, Safura Mokhtar a travel agent in Malasia was victimized with a phishing
campaign at the time an email came to her in November 2010. The mail asserted it was from HSBC bank. It required her to instantly log-in & update her contact information due to security reasons. She filled in her information and hit the link given in the mail. After some time she was informed by HSBC about a money-transfer from her account. The bank did not refund her & passed on the case to Financial Meditation Bureau (FMB). Many such phishing cases happen all around the world. Precautionary Measures: Customers should know that banks don't dispatch e-mails to clients asking for confirming their account details. They shouldnt follow a web-link included in any dubious e -mail. If any such e-mail is received, the customer should confirm with his/her bank before taking any action. (Refer Annexure 6)
14
M oney
launder in g
Money laundering is generally regarded as the practice of engaging in financial transactions to conceal the identity, source, and/or destination of illegally gained money by which the proceeds of crime are converted into assets which appear to have a legitimate origin. In the Indian Penal Code the statutory definition is wider. It is common to refer to money legally obtained as clean, & money illegally obtained as dirty. Money laundering occurs over a period of three steps:
Placement In the beginning the criminal inserts the money into a financial institution, usually in the form of cash deposits. This is the toughest part of the process because large amounts of cash can raise lots of eyebrows at a bank & they are required by law to report unusually large transactions. Layering This is done to make the money hard to follow. It's deposited in many different accounts in countries around the world & the frequency of the withdrawals/deposits is often changed to throw the police off the track. Expensive items like cars, homes, & diamonds are bought to make it even more difficult to determine exactly where the money came from in the first place. Integration The money re-enters the mainstream economy & it appears as though it came from a legal business. For example, ordinary goods may be sold at a particular price but the invoice will value them much higher. The money obtained from that sale would be put into an account with the dirty money & the fake invoice would account for both the legal & illegal funds.
In the banking sector these operations work in various forms. One variant involved
buying securities (stocks & bonds) for cash; the securities were then placed for safe deposit in one bank & 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.
15
FRAUDS BY BANK EMPLOYEES A Bank employee gains the confidence of his superiors by voluntary helping them in making entries in ledgers & other records & gains their confidence. After sometime, the employee opens an account in another Bank in his name. Later, he issues a cheque on his account in the Bank in which he is working & deposits the cheque in his account in other Bank. When the other Bank sends a cheque to his own Bank for clearance, he quietly removes the cheque & destroys it. When the other Bank does not receive back the cheque, it credits the amount in his account. At the time of reconciliation, the other Bank raises a credit on his own Bank. As the cheque is not traced, the amount is kept in suspense account. When Head Office writes to the branch for reconciliation, he destroys that letter also. Another modus operandi is that the Bank employee makes false credit entries in his account & withdraws large amounts from the same. He himself posts entries in the ledger & checks the books at the end of the day & balances the same. Often illiterate & ignorant villagers, widows and women folk approach Bank employees to assist them in effecting transactions. When they wish to deposit cash, the Bank employee prepares the pay-in-slips, keeps the pass book in his possession & does not deposit the amount & misappropriates the same. For this purpose, he chooses an account in which there are mostly deposits & very few withdrawals. Some of the other common examples of such kinds of frauds by the bank employees are Lower level employees who help the cashier at the counter often commit theft of small amounts from the cashier's box. Often, regular customers approach peons & attendees during rush time for help & assistance. They often hand over the cash along with the cashbook to the peon, who goes inside the counter & pays the amount to the clerk & returns the pay-in-slip duly stamped. After a few genuine transactions & gaining the trust of the client, he pockets the amount, forges the signature of the official on pay -inslip, puts the stamp on it & returns to the party. Employee commits theft of DD forms & hands them over to an outsider. He also provides the branch code numbers & specimen signature of the Bank officers to the criminal. Employee operates a dormant account by withdrawing the amount by forging signatures of the client. Employee obtains the signatures of a party on a blank cheque or a withdrawal form assuring him that he will fill in the details later & draws the higher amount. A fraudulent credit entry is interpolated in the account & the amount is withdrawn.
16
DIFFICULTIES IN TACKLING BANKS FRAUD It is difficult to investigate banking frauds for the following reasons:
Hi-tech crime The information technology is changing very fast. The normal investigator does not have the proper background & knowledge .special investigators have to be created to carry out the investigations. The FBI of USA have a cell, even in latest scenario there has been cells operating in the Maharashtra police department to counter cyber crimes. C.B.I also have been asked to create special team for fighting cyber crimes. International crime A computer crime may be committed in one country & the result can be in another country. There has been lot of jurisdictional problem a though the Interpol does help but it too has certain limitations. the different treaties & conventions have created obstructions in relation to tracking of cyber criminals hiding or operation in other nations No-scene crime: The computer satellite computer link can be placed or located anywhere. The usual crime scene is the cyber space. The terminal may be anywhere & the criminal need not indicate the place. The only evidence a criminal leaves behind is the loss to the crime. Faceless crime: The major advantage criminal has in instituting a computer crime is that there is no personal exposure, no written documents, no signatures, no fingerprints or voice recognition. The criminal is truly & in strict sense faceless. There are certain spy softwares which is utilized to find out passwords & other vital entry information to a computer system. The entry is gained through a spam or bulk mail.
17
DETECTION OF FRAUDS Despite all care & vigilance there may still be some frauds, though their number, periodicity & intensity may be considerably reduced. The following procedure would be very helpful if taken into consideration:
All relevant data-papers, documents etc. Should be promptly collected. Original vouchers or other papers forming the basis of the investigation should be kept under lock & key. All persons in the bank who may be knowing something about the time, place a modus operandi of the fraud should be examined & their statements should be recorded. The probable order of events should thereafter be reconstructed by the officer, in his own mind. It is advisable to keep the central office informed about the fraud & further developments in regard thereto.
The Reserve Bank of India had set-up a high level committee in 1992 which was headed by Mr. A Ghosh, the then Dy. Governor Reserve Bank of India to inquire into various aspects relating to frauds malpractice in banks. The committee had noticed/observed three major causes for perpetration of fraud as given hereunder:
Laxity in observance of the laid down system & procedures by operational & supervising staff. Over confidence reposed in the clients who indulged in breach of trust. Unscrupulous clients by taking advantages of the laxity in observance of established, time tested safeguards also committed frauds. In order to have uniformity in reporting cases of frauds, RBI considered the question of classification of bank frauds on the basis of the provisions of the IPC. Given below are the Provisions & their Remedial measures that can be taken.
18
PREVENTION OF CHEQUE FRAUD Cheque fraud is one of the largest challenges facing businesses & financial institutions today. With the advancement of computer technology it increasingly easy for criminals, either independently or in organized gangs, to manipulate cheques in such a way as to deceive innocent victims expecting value in exchange for their money. A significant amount of cheque fraud is due to counterfeiting through desktop publishing & copying to create or duplicate an actual financial document, as well as chemical alteration, which consists of removing some or all of the information & manipulating it to the benefit of the criminal. Victims include financial institutions, businesses that accept & issue cheques, & the consumer. In most cases, these crimes begin with the theft of a financial document. It can be perpetrated as easily as some one stealing a blank cheque from your home or vehicle during a burglary, searching for a canceled or old cheque in the garbage, or removing a cheque you have mailed to pay a bill from the mailbox. Types of Cheque Fraud:
Forgery y
For a business, forgery typically takes place when an employee issues a cheque
without proper authorization. Criminals will also steal a cheque, endorse it & present for payment at a retail location or at the bank teller window, probably using bogus personal identification. Counterfeiting & Alteration y
y
Counterfeiting can either mean wholly fabricating a cheque --using readily available desktop publishing equipment consisting of a personal computer, scanner, sophisticated software & high-grade laser printer -- or simply duplicating a cheque with advanced color photocopiers. Alteration primarily refers to using chemicals & solvents such as acetone, brake fluid & bleach to remove or modify handwriting & information on the cheque. When performed on specific locations on the cheque such as the payee's name or amount, it is called-spot alteration;
Paperhanging y
This problem primarily has to do with people purposely writing cheques on closed accounts (their own or others), as well as reordering cheques on closed accounts (their own or others).
19
Signs for bad cheque:
Below are several signs which may indicate a bad cheque. While one sign on its own does not guarantee a cheque to be counterfeit, the greater the number of signs, the greater the possibility that the cheque is bad. 1. The cheque lacks perforations. 2. The cheque number is either missing or does not change. 3. The type of font used to print the customer's name looks visibly different from the font used to print the address. 4. Additions to the cheque (i.e. phone numbers) have been written by h and. 5. There are stains or discolorations on the cheque possibly caused by erasures or alterations. 6. The numbers printed along the bottoms of the cheque (called Magnetic Ink Character Recognition, or MICR, coding) is shiny. Real magnetic ink is dull & non glossy in appearance. 7. The MICR encoding at the bottom of the cheque does not match the cheque number. 8. The MICR numbers are missing. 9. The name of the payee appears to have been printed by a typewriter. Most payroll, expenses, & dividend cheques are printed via computer. 10. The word VOID appears across the cheque. Cheque Fraud Tips for the Consumer Fraud professionals have become increasingly skilled & sophisticated, thanks to
advances in readily available technology such as personal computers, scanners & color photocopiers. Criminals today can defraud you & your financial institution quite easily with a blank cheque taken from your cheque book, a canceled cheque found in your garbage, or a cheque you mailed to pay a bill. Therefore, it is important to follow a common-sense, logical approach with the way you use & store your cheques. 1. Make sure your cheques are endorsed by your financial institution & incorporate security features that help combat counterfeiting & alteration. 2. Store your cheques, deposit slips, bank statements & canceled cheques in a secure & locked location. Never leave your chequebook in your vehicle or in the open. 3. Reconcile your bank statement within 30 days of receipt in order to detect any irregularities. Otherwise, you may become liable for any losses due to cheque fraud. 4. Unless needed for tax purpose, destroy old canceled cheques, account statements, deposit tickets, ATM receipts (they also frequently have your account number & worse yet, your account balance). The personal information on it may help someone impersonate you & take money from your account. 5. If your home is burglarized, cheque your supply of cheques to determine if any have been stolen. Look closely, because thieves will sometimes take only one or two cheques from the middle or back of the book. The longer it takes to detect any of your cheques have been taken, the more time the criminal has to use them successfully. 6. If someone pays you with a cashier's cheque, have them accompany you to the bank to cash it. If at all possible, only accept a cheque during normal business hours so you can verify whether it is legitimate. Make sure you obtain identification information from the individual
20
7. Use your own pre-printed deposit slips, & make sure the account number on your slip is correct. Thieves occasionally alter deposit slips in the hope you won't notice & the money goes into their account. 8. Never endorse a cheque until you are ready to cash or deposit it. The information can be altered if it is lost or stolen.
Tips for Detecting Counterfeit Cheques:
1. COLOR - By fanning through a group of returned cheques, a counterfeit may stand out as having a slightly different color than the rest of the cheques in th e batch. 2. PERFORATION - Most cheques produced by a legitimate printer are perforated & have at least one rough edge. However, many companies are now using inhouse laser printers with MICR capabilities to generate their own cheques from blank stock. These cheques may have a micro-perforated edge that is difficult to detect. 3. MICR LINE INK - Most, but not all, forgers lack the ability to encode with magnetic ink the bank & customer account information on the bottom of a cheque. They will often substitute regular toner or ink for magnetic ink, which is dull & non-reflective. Real magnetic ink applied by laser printers is the exception & may have a shine or gloss. If a counterfeits MICR line is printed or altered with non-magnetic ink, the banks sorting equipment will be unable to read the M ICR line, thus causing a reject
item. Unfortunately, the bank will normally apply a new magnetic strip & process the cheque. But banks cannot treat every non-M ICR cheque as a fraudulent item because millions of legitimate cheques are rejected each day due to unreadable MICR lines. 4. ROUTING NUMBERS - The nine-digit number between the colon brackets on the bottom of a cheque is the routing number of the bank on which the cheque is drawn. The first two digits indicate in which of the 12 Federal Reserve Districts the bank is located. It is important that these digits be compared to the location of the bank because a forger will sometimes change the routing number on the cheque to an incorrect Federal Reserve Bank to buy more time.
PREVENTION OF CREDIT CARD FRAUD Credit card fraud is bad business. In 2004, credit card fraud cost US merchants 2,664.9 million dollars (Celent Communications). Credit card fraud is a significant problem in Canada, too. The credit card loss total for 2007 was $ 304,255,215, according to the RCMP. And while 'no-card' fraud is growing, most credit card frauds are still being committed using lost, stolen or counterfeit cards. Whether you have a brick-&-mortar business or an online one, credit card fraud is costing you money. So what can your business do to prevent credit card fraud?
21
1. Keep your credit cards safe. Keep your credit cards in a purse or wallet close to your body where it can't easily be snatched away. Ladies, make sure your purse is zipped. If you're shopping in a high traffic area, carry a smaller purse. Thieves can take pictures of your credit card with a camera or cell phone, so don't leave your credit card exposed any longer than necessary.
After you make a purchase put your credit card away immediately. Confirm you have your credit card back in your possession before you leave the store or restaurant. 2. Shred anything with your credit card number on it. Rather than toss your credit card billing statements directly into the trash, shred them to keep dumpster divers from getting their hands on your credit card number. The same thing applies to old credit cards that have expired or been cancelled. You might even put the shredded pieces in different trash bags to thwart clever thieves who can put shredded pages back together. 3. Don't sign blank credit card receipts. To avoid credit card fraud, always verify the amount on your credit card receipt before signing it. If you get a credit card receipt that has blank spaces in it, write $0 in those spaces or draw through them before putting your signature on the card. Otherwise, the cashier could write in an amount & send the purchase to your credit card issuer. 4. Avoid giving out your credit card information. Only give out your credit card number or other sensitive information on calls you initiate to customer service using the number on the back of your credit card. Don't return calls to a phone number left on your answering machine & don't give your credit card number to anyone who calls you requesting the number. Credit card thieves have been known to pose as credit card issuers & other businesses to trick you into giving out your credit card number. 5. Be safe with your credit card online. Don't click on email links from anyone pretending to be your bank, credit card company, or other business that uses your personal information, even if the email looks legitimate. These links are often phishing scams & want to trick you into entering your login information on their fake website.
Only enter your credit card number on secure websites that you can be 100% sure are legitimate. To be sure a website is secure, look for a lock in the lower right corner of your internet browser. 6. Report lost or stolen credit cards immediately. The sooner you report a missing credit card the less likely it is that you'll have to pay for any fraudulent charges made on your credit card. Write down your credit card companies' customer service number now so you'll have it if your credit card is ever missing. 7. Review your billing statements each month. Unauthorized charges on your credit card are the first indicator of credit card fraud. If you notice a charge you didn't make, no matter how small, report the charge to your credit card issuer immediately. Your credit card issuer will tell you whether you should close your account to avoid credit card fraud.
22
PREVENTION OF PHISHING & INTERNET FRAUD
y
y
y
y
y
y
y
Watch out for phishy emails. The most common form of phishing is emails pretending to be from a legitimate retailer, bank, organization, or government agency. The sender asks to confirm your personal information for some made-up reason: your account is about to be closed an order for something has been placed in your name, or your information has been lost because of a computer problem. Another tactic phishers use is to say theyre from the fraud departments of well known companies & ask to verify your information because they suspect you may be a victim of identity theft! In one case, a phisher claimed to be from a state lottery commission & requested peoples banking information to deposit their winnings in their accounts. Dont click on links within emails that ask for your perso nal information. Fraudsters use these links to lure people to phony Web sites that looks just like the real sites of the company, organization, or agency theyre impersonating. If you follow the instructions & enter your personal information on the Web site, youll deliver it directly into the hands of identity thieves. To check whether the message is really from the company or agency, call it directly or go to its Web site (use a search engine to find it). Beware of pharming. In this latest version of online ID theft, a virus or malicious program is secretly planted in your computer & hijacks your Web browser. When you type in the address of a legitimate Web site, youre taken to a fake copy of the site without realizing it. Any personal information you provide at the phony site, such as your password or account number, can be stolen & fraudulently used. Protect your computer with spam filters, anti-virus & anti-spyware software, & a firewall, & keep them up to date. A spam filter can help reduce the number of phishing emails you get. Anti-virus software, which scans incoming messages for troublesome files, & anti-spyware software, which looks for programs that have been installed on your computer & track your online activities without your knowledge, can protect you against pharming & other techniques that phishers use. Look for programs that offer automatic updates & take advantage of free patches that manufacturers offer to fix newly discovered problems. Only open email attachments if youre expecting them & know what they contain. Even if the messages look like they came from people you know, they could be from scammers & contain programs that will steal your personal information. Know that phishing can also happen by ph one. You may get a call from someone pretending to be from a company or government agency, making the same kinds of false claims & asking for your personal information. If someone contacts you & says youve been a victim of fraud, verify the persons identity before you provide any personal information. Legitimate credit card issuers & other companies may contact you if there is an unusual pattern indicating that someone else might be using one of your accounts. But usually they only ask if you made particular transactions; they dont request your account number or other personal information. Law enforcement agencies might also contact you if youve been the victim of fraud. To be on the safe side, ask for the persons name, the name of the agency or company, the telephone number, & the address. Get the main number from the phone book, the Internet, or directory assistance, then call to find out if the person is legitimate.
23
y
y
y
Job seekers should also be careful. Some phishers target people who list themselves on job search sites. Pretending to be potential employers, they ask for your social security number & other personal information. Follow the advice above & verify the persons identity before providing any personal information. Be suspicious if someone contacts you unexpectedly & asks for your personal information. Its hard to tell whether something is legitimate by looking at an email or a Web site, or talking to someone on the phone. But if youre contacted out of the blue & asked for your personal information, its a warning sign that something is phishy. Legitimate companies & agencies dont operate that way. Report phishing, whether youre a victim or not. Tell the company or agency that the phisher was impersonating.
ANNEXURE 1. Rogue Trader (Citi Bank Shivraj Puri)
24
NEW DELHI: Shivraj Puri was a vain trader, with incompetence to match, said executives
at brokerage houses that dealt with the Citibank employee arrested for duping investors of at least 400 crore. Puri, who was based in the Gurgaon branch, made large, unhedged bets on Nifty futures & options & obsessively stuck to his doomed trading plan despite being warned to change course, three people connected with transactions by the disgraced trader said. He was a novice with no clear strategy, said a derivative analyst who pored through Puris trades to understand how the losses totalled up. He was trading in volatility without the right amount of hedges & got hammered when the Nifty moved against him. Puri started out with a bad premise, & as most rogue traders do, he met his nemesis thinking that he could beat the market. It was foolish. Puri was arrested last week for peddling fake investment schemes that promised assured returns of 20-24 % to wealthy clients & companies such as Hero Corporate Services Ltd. Since ET NOW broke the story on December 28, market regulator Sebi, stock exchanges & other regulatory agencies have been investigating how the scam was perpetrated & the role of the brokerages he dealt with. Puris trades unraveled during September & November when the Nifty & its underlying volatility was huge. The 50-share index movement between its highest & lowest levels was 723 points in September , when it closed at 6,030, gaining 11.6%, its best monthly gain since May 2009. Volatility in the index, which whipsawed, was much worse. The Nifty reversed in November, when it fell just 2.6%, but still showed an intra -month movement of 648 points, or 10.2%. Puris short gamma trades were on the wrong side each time, the people said. Such a trade involves writing call or put options. While a trader earns a fee for selling the option, his downside, if not hedged, remains unprotected if the index moves in the opposite direction. In Puris case, he faced huge margin calls on his derivative positions, the people said. In many other transactions, a vast majority of Puris index options expired as out-of-the-money trades, thereby reducing his premium paid to zero, they added. Puri never traded in cash markets or took deliveries. He was heavily leveraged, one relationship manager at a brokerage said. 60% of the time his margin positions were so critical that we had to call him repeatedly to fund them. On act ive days, & there were many, turnover from Puris leveraged transactions touched 1,000 crore, trading logs shown to ET NOW reveal. That is equivalent to the turnover of a mid -sized brokerage on Dalal Street. Puri held accounts in at least three brokerages, among them Religare Securities, IIFL & Bonanza Portfolio. The first two declined to comment for this story. Bonanza Portfolio Chief Executive Shiv Kumar Goel did not respond to phone calls. Puris trading losses exceeded Rs 100 crore with a Delhi-based broker-age, where he had two demat-cum-trading accounts. Once the losses exceeded Rs 70 crore, senior brokerage officials tried to dissuade Puri from taking further positions, or at least revisit his strategies, people with the knowledge of the conversations said. Puris response was typical of a trader who refuses to believe the market has moved against him. Paise aapke hain ya mere? he retorted. It is none of your business; let the losses happen. The trading & the losses continued after the brokerage ensured that the money for the
25
transactions was coming from Puris own accounts, the people said. The three brokerage houses have said they adhered to rules requiring them to verify the antecedents of investors. Religare said it informed regulators when daily transactions exceeded prescribed limits. By all accounts, Puri was a valuable client at a time when the fee on options trading was wafer thin. One of the brokerages earned Rs 12 crore in less than a year dealing with him. Such was the pace & ferocity of trading that Puri shelled out Rs 810 lakh each day in the last three months as broking fee.
2. Fraudulent Loans by an insider
LOS ANGELESTwo brothers were taken into federal custody this morning on charges that they bilked private lenders out of more than $5 million by pledging as collateral properties they did not own & fabricating numerous documents to support their false claims. Henrik Sardariani, 42, & his brother, Hamlet Sardariani, 40, both of Sylmar, were arrested without incident at the Coral Tree restaurant in the Brentwood section of Los Angeles this morning by special agents with the Federal Bureau of Investigation & IRS Criminal Investigation. The Sardarianis are expected to make their initial court appearances this afternoon in United States District Court. A federal grand jury indicted the Sardarianis on Friday, charging them with conspiracy, three counts of wire fraud, six counts of unlawful monetary transactions, & five counts of identity theft. According to the indictment, which was unsealed after their arrests this morning, the Sardarianis used their fraudulent scheme to obtain well over $5 million from the victim lenders in under eight months. The indictment alleges that, to obtain the loans on several properties, the Sardarianis created fraudulent deeds of trust, corporate records & other documents to make it appear that they held title to the properties. The brothers allegedly fabricat ed fraudulent reconveyances to create the false impression that the other loans on the properties had been paid off & that there was sufficient equity to secure the loans. The fraudulent reconveyances bore forged signatures & fraudulent stamps of notaries public, according to the indictment which further alleges that the Sardariani brothers & a co-conspirator presented these fraudulent reconveyances to title companies & victim lenders. In order to obtain one of the loans, Henrik Sardariani allegedly falsely represented that
the loan was needed for less than one month so he could extend a pre-existing escrow & that the money would be returned to the lender at the close of the pre-existing escrow. Sardariani allegedly promised that the money would never leave escrow & that the victim would receive a substantial payment when the loan proceeds were deposited into the pre-existing escrow. However, according to the indictment, after the victim wired $2.5 million to the escrow account, Henrik Sardariani arranged for $1.9 million of the money to be wired to an account in Hong Kong. An indictment contains allegations that a defendant has committed a crime. Every defendant is presumed to be innocent until proven guilty in court.
26
If convicted of all of the charges in the indictment, each of the Sardariani brothers would
face a maximum statutory penalty of 115 years in federal prison, plus at least two additional years for the aggravated identity theft charges. The case against the Sardarianis was investigated by the Federal Bureau of Investigation & IRS - Criminal Investigation. 3.
Wire Fraud Case
Gregory A. White, United States Attorney for the Northern District of Ohio, announced that Terrance J. Holmes, age 42, or 330 Yorktown Place, Vermilion, Ohio, was sentenced today in U.S. District Court in Youngstown, Ohio, in connection with his recent conviction for Wire Fraud. Holmes was sentenced to 37 months in the custody of the Bureau of Prisons, to be followed by 3 years of supervised release. Holmes was also ordered to pay restitution in the amount of $867, 340.09, & a $100 special assessment to the Crime Victims Fund. On December 14, 2006, an Information was filed charging Holmes with one count of Wire Fraud. Holmes entered a guilty plea to the charge on January 3, 2007. The Information charged that between January 2001 & February 2002, Holmes having devised & attempted to devise a separate scheme & artifice to obtain money, funds & other property by means of false & fraudulent pretences, representations & promises knowingly transmitted & caused to be transmitted by means of interstate wire or other electronic communication, certain Internet advertisements & Internet e-mail communications, in violation of Title 18, United States Code Section 1 343. Specifically, between January 2001 & February 2002, Holmes owned & operated GPS Computer Services in Vermilion, Ohio, & offered various brands of laptop & notebook computers for sale to the public by means of an Internet website maintained by GPS Computer Services & via E-Bay, an Internet on-line auction website. Holmes & GPS Computer Services advertised the computers at deeply discounted prices of $400 to $700, when the manufacturers suggested retail price for the computers ranged from $1,100 to $1,600 each. Holmes & GPS Computer Services accepted orders for laptop & notebook computers totalling approximately $964,559.86 from at least 1,187 customers via the Internet, by telephone, by mail & in person at the retail location in Vermilion, Ohio, but failed to deliver or supply the computers as promised. Holmes instructed GPS Computer Services employees to give various excuses to customers to stall any remedial actions the customers might have taken against GPS Computer Services. This case was prosecuted by Assistant U.S. Attorney Robert W. Kern of the Clevel and U.S. Attorneys Office, following an investigation by the Elyria Office of the Federal Bureau of Investigation, & the Ohio Attorney Generals Office
4. Unusual cheque fraudulent cases
27
For example, disappearing ink has been used to commit a rare form of fraud. In such
cases, the perpetrator chemically alters the substance so that it disappears in several hours or days rather than a few minutes. The individual then writes a cheque to him/herself (or a partner in the scheme) using Bank A's account for a specified amount, say, $5100. In this amount, the digit 5 is written with the disappearing ink, & the remainder of the amount in regular ink. The cheque will be deposited in Bank B's account, where $5100 will be added, but by the time it reaches Bank A for clearance, the cheque will then read $100, & only $100 will be debited from that account. "Cheque washing" involves the theft of a cheque in transit between the writer & recipient, followed by the use of chemicals to remove the ink representing all parts other than the signature. The perpetrator then fills in the blanks to his or her advantage. Sometimes the cheque fraud comes from an employee of the bank itself, as was the case with Suzette A. Brock, who was convicted of theft for writing five corporate cheques to her own birth name from her desk as a loan servicing agent for Banner Bank of Walla Walla, WA.
5. Credit Card Fraud
Mukul Garg (24) & his fiancé Alisha Sharma (2 3) were apprehended from a mall in Saket recently following a tip off, H G S Dhaliwal, Deputy Commissioner of Police (South), said, adding four Nigerians, who were also part of their gang, were on the run. The arrest came following investigations into a complaint filed by Javed Chauhan, an Assistant Manager with Standard Chartered Bank, who claimed that a fraudulent transaction was made using his credit card. "On his request the bank blocked the card. On further enquiry it was found that the card is being used at one of the designer stores in a mall situated in Saket. The customer promptly visited the store where the imposters were caught by the security staff. "We found that the two had been visiting the store for the last few days. Police were informed & they were interrogated thoroughly. They couple said that they had come to the mall with the intention of purchasing high end designer products with the use of cloned credit cards," he said. Some cloned cards with receipts of purchase & designer clothes & mobile phones were recovered from the couple. A case of cheating, impersonation & forgery has been registered against them. The couple hails from Ludhiana & had studied together in one of the prestigious colleges where they become close friends. Both of them are Commerce Graduates & are pursuing
28
further studies. Mukul has also been to London to where he completed his management studies in University of Bedfordshire. Simultaneously he completed his master's degree in International Business Management from University of Middlesex.
Alisha is presently pursuing her MBA degree from one of the renowned institutes of South Delhi. Both of them belonged to upper middle class families. Mukul's father is a well-known iron tools trader in Ludhiana whereas Alisha's father is a senior officer in Northern Railways & Commonwealth Games gold medallist in Weightlifting. She is in Delhi since last year & met one Nigerian National Kelley & his friends in one of the malls in Saket. The Nigerian group asked her to do some shopping for their girlfriends. She happily agreed & persuaded his friend Mukul to join them. The Nigerian group prepared cloned cards & fake IDs & used them for shopping in various malls
6. Phishing Case
The HSBC Bank Malaysia Berhad has reported that there's a growing number of Malaysians adopting Internet banking, nevertheless, owing to this, there's also a growing number of Internet frauds like phishing in the country. Thestar.com.my reported this on February 19, 2011. In one case, 41-year-old Safura Mokhtar a Travel Agent recently was victimized with a
phishing campaign at the time an email came to her in November 2010 asserting that it was from HSBC Bank. The e-mail, according to Safura, said that she required logging in instantly for making her contact information up-to-date owing to security reasons. There was also a web-link in the e-mail that Safura unwittingly hit. She added that since she hadn't conducted online banking before, she didn't know about the existence of such scams. Thestar.com.my reported this. Safura, after some time, got intimation from HSBC that there'd been a money-transfer from her account. & though she fast reported the episode to the bank, the latter dismissed the idea of refunding her. But, the bank passed her case to FMB (Financial Mediation Bureau), a body working independently towards assisting resolve disputes amongst end-users, similar to Mokhtar in the current instance, & the suppliers of financial services from whom they
29
