Types and Prevention

Fraud in the banking sector
INTRODUCTION:
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 depending on
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.
Rising volume of Bank frauds is swallowing all the economic development and is causing
financial indiscipline in the country. One big defaulter like Vijay Malya, Nirav Modi, Mehul
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Choksi usurps thousands of crores which not only adds to sharp increase in the quantum of
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Non-Performing Assets (NPAs) but takes out the sizable funds that could have otherwise been
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used for economic wellbeing of thousands of poors willing to become entrepreneurs with
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banks’ help and plan to start up their small businesses.
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TYPES OF BANK FRAUD:
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There are many different types of bank fraud. Some of the most common types of fraud tend
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to be check fraud, debit and credit card fraud, safe deposit box fraud, and ACH fraud, but
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there are many additional types of bank fraud both within and beyond these basic categories.
Here’s a closer look at some of the more unusual types of bank fraud faced.
1. ACCOUNTING FRAUD: Accounting fraud primarily affects business

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lending. Businesses who commit accounting fraud “cook the books” so they look
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more profitable on paper than they really are.

2. LOAN FRAUD: Accounting fraud can lead to loan fraud, but this type of fraud
isn’t just limited to businesses presenting fraudulent information on their loan
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3. WIRE TRANSFER FRAUD: Wire fraud includes all cases of fraud
involving wire transfers or the internet
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4.PHISHING FRAUD: Phishing is when a scam artist uses email, text, phone
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calls, or other methods to try to obtain a victim’s banking details
5. ROUGE TRADERS: If you run an investment bank, you likely have traders
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on staff, and in this situation, you need to ensure that you protect yourself from rogue
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traders.
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6. DEMAND DRAFT FRAUD: Like rogue trading, demand draft fraud

happens internally.
7.BILL DISCOUNTING FRAUD: Although this type of bank fraud is
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relatively rare, you should still understand the risk. Generally, with bill discounting
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fraud, the fraudster opens a business account at the bank

8.ATM FRAUD: ATM fraud includes everything from reprogramming the
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machine to installing a skimmer to steal card details

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9.MONEY LAUNDERING: Money laundering is when criminals deposit

fraudulently obtained sums of cash into a bank. They typically try to make the funds
look as though they have come from a legitimate source.
Biggest bank scams of India:
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1. Neerav Modi Bank scam: This bank scam is being called the biggest scam (Rs 11,400
crore) in the banking sector of India. The main accused of the scandal is billionaire jeweller
Nirav Modi and his uncle Mehul Surakshi (owner of Gitanjali James). Both of them had
received "Letter of Undertaking" from the consent of the employees of PNB’s Mumbai
branch and withdrawn the funds from the foreign banks on the guarantee of Punjab National
Bank. However, the Enforcement Directorate has seized assets of Nirav worth over Rs 5870
crore.
2. Bank Scam by Vijay Mallya: Mallya's Kingfisher Airlines had borrowed Rs 9,432 crore
from 13 banks till February 2018. The State Bank of India was the biggest lender with 1600
cr. followed by the PNB 800 crore, IDBI 650 crore and Bank of Baroda lend 550 cr.
Malya left India on March 2, 2016 and hiding in the London and the government of India is
fighting for his extradition till date.
3. Allahabad Bank Scam: Kolkata-based Allahabad Bank has said it has an exposure of
₹2,363 crore in the PNB fraud case.
However, Allahabad Bank stressed that it is sure about the recovery of the payment as the
exposure was fully secured by Letter of Undertaking (LoU) documents.
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“The bank, through our overseas branch at Hong Kong, has been taking exposure with Punjab
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National Bank as counter-party under various Letters of Undertakings issued through
authenticated SWIFT message”.
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4. R P Info Systems Bank Scam: The CBI has booked a computer manufacturer R P Info
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Systems and its directors for allegedly cheating a consortium of 9 banks with amount of Rs.
515.15 crore. This company has used fraud documents to take the loan. CBI had raided the
offices of the company in Kolkata and other places on February 28, 2018.
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5. Simbhaoli Sugar Mills Bank Scam: CBI has registered another bank fraud against one of
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India's largest sugar mills- Simbhaoli Sugars Ltd, amounting to Rs 200 crore. There are 10
people have been booked, including the chairman of Simbhaoli Sugar Mills Limited Gurmeet
Singh Mann, Deputy Managing Director Gurpal Singh and CEO GSC Rao.
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According to an estimate, in the last three years, the bank scams of around Rs. 23,000crore
have taken place in the country, due to which the country's banking system has suffered a lot.
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This is why the total NPA of the country's banks has crossed the mark of 10 lac crore in June
2018.
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REPORTING OF FRAUDS TO RBI :

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1. Frauds involving Rs. 1 lakh and above:

• Fraud including subsidiaries and affiliates/joint ventures perpetrated through
misrepresentation, breach of trust, manipulation of books of account, fraudulent encashment
of instruments like cheques, drafts and bills of exchange, unauthorised handling of securities
charged to the bank, misfeasance, embezzlement, misappropriation of funds, conversion of
property, cheating, shortages, irregularities, etc.
• Cases under criminal proceedings initiated by central investigating agencies suo motto
and/or where RBI has directed to treat as frauds.
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• For frauds involving Rs. 5 Lakh and above, banks are required to send Soft copy of the
reports (FMR-1/B) to the Central Office of the Department of Banking Supervision (DBS)
within three weeks of detection of fraud, etc.
2.Frauds involving Rs. 100.00 lakh and above:

• Banks are required to report frauds involving Rs. 100 Lakh and above to Central Office, RBI, by
way of D.O. letter giving the details such as amount involved, nature of fraud, modus operandi in
brief, name of the branch/office, parties involved, etc. within a week of notice of the fraud at the
bank’s H.O. duly marking copy to R.O., RBI under whose jurisdiction the bank’s branch, where the
fraud has been perpetrated, is functioning.
3.Cases of attempted fraud:

• Banks are required to report the cases of attempted fraud involving likely loss which would have
been Rs. 1.00 crore or more had the fraud taken place to the Central Office, RBI giving the full details
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including the modus operandi within 2 weeks of the bank coming to know that the attempt to fraud
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has failed or foiled.
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Bank Frauds: Adverse Impact on System and
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Society:
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 There is difference between wilful defaulter and the defaulter due to compulsion
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without much of his mistake. Wilful defaulter is a criminal to the society as a whole and
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should not be spared.

 A loan can be recovered by infusing more capital in case a business decision has gone
wrong because that particular firm failed in the market and the loan has become NPA. But in
the case of a loan fraud, it is criminal intention as in the Nirav Modi case.
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 These perpetrators of Bank Frauds misuse the banking system and disturb financial
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discipline making banking system vulnerable and insecure for common people dealing with
banks
 When farmers don't repay their loans, they commit suicide. If the middle class fails to
pay their EMI, their homes and cars get confiscated. But the big defaulters like the corporate
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groups take huge loans do not repay and banks turn them into NPAs or loss assets. This is the
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loss of huge public money

 These big defaulters run out of country due to timely action and arrest of them.
Although, many people should have been arrested, but not a single person of the corporate
group has been arrested giving wrong signals in the society
 The Banking sector is already under stress and is approaching every now and then to
the Government for re-capitalization, but these loan frauds throw cold water to all the efforts
 Banks' financial balance sheets are stressed because of the massive build up of NPAs
and the frauds are adding to their woes.
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Prevention of Bank Frauds:
 Most of the big corporates who have committed fraud to the tune of thousands of
crores are shying away from coming back and to repay the money as they are aware that the
punishment by law will still be there even if they repay. Indian Law or the Indian
Government has no way to award softer punishment even if these defaulters repay the amount
in full. Accordingly, it is more important to prevent a bank fraud than to run after it when it is
done.
 With the existing rules and laid down procedures most of banking frauds can be
prevented, in case they are meticulously followed and bank staff is not pressurised to sanction
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the loan.
Former RBI governor Raghuram Rajan writes in his book, I Do What I Do: “Today, a
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variety of authorities…monitor the performance of public sector banks… It is important that
we streamline and reduce the overlaps between the jurisdictions of the authorities, and
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specify clear triggers or situations where one authority’s oversight is invoked.”
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RBI is tasked with detecting infirmities, but has no authority to enforce its own
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orders, administer remedial measures or even deliver swift punitive action. The central
investigative agencies are tasked with following up on investigations and pursuing legal
recourse. The political pulls and pressures on these agencies, as well as the Indian legal
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system’s long-drawn processes, provides swindlers with enough escape routes and is never a
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deterrent. It should be looked into.

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 As a cautious bank customer, you should register your working mobile number with
your bank so as to receive SMS/Email alerts regarding transactions.
 Check the emails and messages received from the bank, regularly. In case you find
any suspicious or unapproved transaction that you can't place, consult and report to the bank,
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immediately.
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 Never share your banking User Id, Password or OTP (One Time Password) with
anyone. No bank official will ever call you for these details.
 Never share your Debit Card/ Credit Card Number or the numbers displayed at their
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back with anyone as you may end up losing money and be held responsible at the same time.
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Steps, Banks should Take:

 Banks should review their systems and procedures regularly. Ethical banking
practices should be preferred. Disclosures to RBI, SEBI and other regulators should be made
with consistent periodicity.
 Only trained bank staff is suitable for the role should be posted undertaken for the
skilled job.
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 Use of technology for preventing fraud should be encouraged within banking
ecosystem.
 New technology like blockchain can be used to record all banking transactions.
 Once a fraud is detected, it should be immediately flagged by the bank and concerned
agencies roped in for probe
CONCLUSION:
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A very essential challenge for the life banking industry is due to the “fraud risk”. Bankers are
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aware of the need to deal with this risk, but the problem is lack of an integrated approach to
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fraud risk management. The increasing cases of frauds and the growing level of risk insist
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that bankers regularly evaluate their policies, conduct checks and adopt advanced techniques
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to curtail such issues. However, no system can clean out such frauds, but a proactive
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approach can make a company ready to oppose fraudsters and gain a frame over its
competitors. As India’s banking industry matures, fraud risk management is going to be a
major concern for bankers and business leaders. Bankers will need to constantly reassess their
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processes and guidelines to manage and alleviate the risk of fraud. Fraud risk in the banking
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can originate from internal and external factors. Internal risk means the risk of employees‟
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misappropriating confidential information and conspire with fraudsters is on the rise and
therefore they need to put in place internal checks. External fraud risk can occur at various
stages, e.g., registration of clients, reinsurance, underwriting, and the claims process. India is
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one of the fastest growing economies and so is the case with the country’s banking sector.
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Banking Fraud Survey is conducted to assess the fraud scenario, the probable risk exposure
and the industry practices to counter fraud risk. The significant role that life banking fraud
plays is negatively affecting the banking industry is often underreported or discounted. Fraud
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risk in life banking is a complex matter, which influence both the parties — bankers as well
as policyholders. Life banking frauds increase the cost of insurance, resulting in
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policyholders paying higher amount of premiums and at the same time bankers losing to their
competitors.
BIBLIOGRAPHY
http://www.sqnbankingsystems.com/types-of-bank-fraud
http://www.businessworld.in/quickbytes/5-Recent-Banking-Frauds-In-
India/316/1518699851_iZvJNz_BOM.jpg-3421/
http://www.iibf.org.in
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www.indiatoday.in
https://www.indiatoday.in/business/story/rbi-report-economic-situation-grim-banking-
fraud-amount-rises-1593248-2019-08-29
https://economictimes.indiatimes.com/industry/banking/finance/banking/indian-banks-
have-been-under-reporting-frauds-rbi/articleshow/69978271.cms
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Types and Prevention

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Fraud in the banking sector

1. ACCOUNTING FRAUD: Accounting fraud primarily affects business

more profitable on paper than they really are.

6. DEMAND DRAFT FRAUD: Like rogue trading, demand draft fraud

fraud, the fraudster opens a business account at the bank

machine to installing a skimmer to steal card details

9.MONEY LAUNDERING: Money laundering is when criminals deposit

look as though they have come from a legitimate source.

Biggest bank scams of India:

REPORTING OF FRAUDS TO RBI :

1. Frauds involving Rs. 1 lakh and above:

2.Frauds involving Rs. 100.00 lakh and above:

3.Cases of attempted fraud:

should not be spared.

loss of huge public money

deterrent. It should be looked into.

Steps, Banks should Take:

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