CHAPTER-1

INTRODUCTION AND RESEARCH METHODOLOGY

1.1 INTRODUCTION:

Banking and financial systems have been the essence of growth and development of all of
mankind since hundreds of years. The robustness of the banking and financial system of a
country helps determine the production and consumption of goods and services within a
country. It is directly indicative of well-being and living standards of a country’s citizens.
Therefore, if banking system is plagiarized with high levels of non-performing assets on
balance sheets of banks, financial distress of borrower clients and inefficiencies in
transmission mechanisms then it is a cause of worry for the economy. Indian economy
suffers o a great extent from these problems and this served as a motivation for us to
carry out this detailed study of the Indian banking system from a 360 degree view. The
report talks about various regulations in place, issues faced by the Indian banking sector
with special emphasis on public sector banks (as most NPAs lie on the balance sheets of
these banks) and possible recommendations that can help mitigate these problems.

In recent years, instances of financial fraud have regularly been reported in India. Although
banking frauds in India have often been treated as cost of doing business, post liberalization
the frequency, complexity and cost of banking frauds have increased manifold resulting in
a very serious cause of concern for regulators, such as the Reserve Bank of India (RBI).
RBI, the regulator of banks in India, defines fraud as “A deliberate act of omission or
commission by any person, carried out in the course of a banking transaction or in the
books of accounts maintained manually or under computer system in banks, resulting into
wrongful gain to any person for a temporary period or otherwise, with or without any
monetary loss to the bank”.
In the last three years, public sector banks (PSBs) in India have lost a total of Rs. 22,743
crore, on account of various banking frauds. With various measures initiated by the RBI,
numbers of banking fraud cases have declined, but amount of money lost has increased in
these years.
Prima facie, an initial investigation in these cases has revealed involvement of not only
midlevel employees, but also of the senior most management as was reflected in the case

1
of Syndicate Bank and Indian Bank. This raises serious concern over the effectiveness of
corporate

governance at the highest echelons of these banks. In addition, there has been a rising trend
of non-performing assets (NPAs), especially for the PSBs, thereby severely impacting their
profitability. Several causes have been attributed to risky NPAs, including global and
domestic slowdown, but there is some evidence of a relationship between frauds and NPAs
as well.
The robustness of a country’s banking and financial system helps determine its production
and consumption of goods and services. It is a direct indicator of the well-being and living
standards of its citizens. Therefore, if the banking system is plagued with high levels of
NPAs then it is
a cause of worry, because it reflects financial distress of borrower clients, or inefficiencies
in transmission mechanisms. Indian economy suffers to a great extent from these problems,
and this served as the prime motivation for the authors to carry out this detailed study of
frauds in the Indian banking system and examining frauds from different angles.
This study takes into consideration, different aspects of Indian banking sector. Specifically
for this study, primary semi-structured interviews were conducted with bankers and
industry veterans to better understand sector dynamics. Finally, an attempt has been made
to give possible recommendations that can help mitigate these problems.
The rest of the paper is organized into three major sections. Section 2 is a review of existing
literature on the global and domestic banking sector. It talks of the evolution of the
regulatory landscape governing the banking system as well as a discussion of existing
literature on the issues of NPAs in banks and incidence of banking fraud. Section 3 provides
a detailed analysis of banking frauds in India. It broadly covers two categories of studies
carried out – secondary research from literature and case studies and primary research from
interviews spanning across all players involved in reporting of financial misconduct.
Section 4 provides a detailed set of recommendations for prevention and early detection of
frauds in banking system.
The study intends to fulfil the following two objectives – a) to understand and analyses
underlying causes contributing to increasing trend in frauds committed in Indian banking

2
sector; and b) to suggest appropriate and suitable measures that can help the system in
addressing these issues. A dual approach was undertaken to accomplish the above
mentioned objectives: a) Secondary sources: This was based on literature review and case
study approach.
It also relied heavily on trend analysis of frauds based on past data available with the RBI
and various other entities. Also, it seeks to uncover the broader trends within public sector
banks (PSBs) and private sector banks (PVBs) in India; b) Primary sources: A 360 degree
analysis was conducted by interviewing banking officials, retired bankers, practitioners,
policy makers, crime and compliance officers, and auditors.Banking sector frauds have
been in existence for centuries1, with the earliest known frauds pertaining to insider
trading, stock manipulation, accounting irregularity/ inflated assists etc. Over the years,
frauds in the sector have become more sophisticated and have extended to technology
based services offered to customers. The Indian banking sector too is experiencing the pain
due to increase in fraud incidents with 93 percent of our survey respondents indicating that
fraud has grown over the last decades. A majority of survey respondents indicated that they
have experienced more than 50 fraud incidents in the retail banking segment in the last two
years (average fraud loss of around INR 10 lakh per incident) and an average of 10 fraud
incidents in the non-retail segment (average loss amount close to INR 2 crore per incident).
This is a significant jump compared to the survey findings of the previous edition of the
Deloitte India Banking Fraud Survey report where only 40 percent of respondents claimed
such fraud losses. While most respondents have indicated an overall increase in frauds
incidents across all banking segments, it comes as no surprise that retail banking has been
identified as the major contributor to fraud, followed by corporate banking. As retail
banking is more process as well as volume-driven, increased fraud incidents in this area
should trigger a wider review of the process and controls to identify the root cause as these
incidents could be just the tip of the iceberg.
During the FY 2016, advances related frauds constituted nearly 92% of the total frauds
reported by all banks. This was more pronounced in case of PSU banks and less in case of
private and foreign banks. In almost all the cases, we observed that the exposure had got
seasoned as an NPA for 3 to 4 years before the borrower was declared as fraudulent. As a
consequence, the gap between the date of occurrence and detection has been widening.

3
Further, the gap between first bank and the last bank reporting the borrowal account as
fraud to RBI is also very long. What is the concern here? As you know ‘fraud’ is a criminal
offence and any delay on the part of the bankers in initially red flagging an exposure and
subsequently declaring it as a fraud will have far reaching implications on the employee
conduct and internal governance standard. Banks and bankers could be charged for abetting
the criminal offence. My call to you therefore, is to identify and declare the account as
fraud without wasting time.

1.2 HISTORY
‘A way of making money is to stop losing it.’
Despite the size and area of business that organizations operate in, they are constantly
exposed to bank fraud risk. Bank fraud is the loss resulting from inadequate or failed
internal processes, people and systems, or from external events. It is also the widest
category of risk, bounded only by subjects such as Murphy’s Law which states that
“anything that can go wrong will go wrong”, the imagination of fraudsters, and external
events completely beyond management’s control. Bank fraud is therefore the first type of
risk that any institution takes on. Managing and mitigating the bank fraud of an
organization is a significant challenge for senior managers. (Adam 2011).A vast amount of
resources, time and energy are used up in developing Corporate Governance Policies,
implementing internal control systems, risk management strategies and training employees
to adhere to these measures. Yet, some dishonest, intelligent people, commonly referred to
as fraudsters, still manage to find ways to override systems or dupe honest people in to
gaining access to organizations’ resources and assets.
For example, the China's banking sector has around 20 billion Yuan ($3.2bn, £1.8bn,
€2.4bn) of exposure to the companies at the centre a massive fraud probe in the eastern
port city of Qingdao. In Nigeria, The Central Bank of Nigeria (CBN) reported that cases
of attempted fraud and forgery in banks, as at half-year 2012 exceeded what was recorded
in the whole of 2011. For instance, the CBN half-year report for 2007, disclosed that a total
of 741 cases of attempted fraud and forgery, involving N5.4 billion (US $34.8 million),
were reported as at June, 2012. Whereas in 2006, the entire cases of fraud reported were
1,193, involving the sum of N4.8 billion (US $30.97). Fraudsters stole at least $9.4 million

4
from commercial banks in the first half of the year in schemes that exploited gaps in online
banking solutions and involved collusion with bank staff.Data from the Banking Fraud
Investigations Department (BFID), a division of the Central Bank of India, shows that 525
cases of fraud were leading to a loss of $8.5 million by various financial institutions in the
first quarter of 2014. Research shows that there is not a single financial organization that
is immune to fraud, and that the typical organization loses 5-7% of its annual revenues to
fraud. (Samociuk, Iye r& Doody
2010, 11).Developing preventative measures against fraud, identifying the methods
through which fraud is or can be committed, establishing effective control measures and
putting in
Although fraud is one of the focuses of the India Bankers Association (KBA), information
is still only thinly available. This research seeks to fill that gap by examining fraud in the
Indian banking industry and identifying ways in which the industry could improve its fraud
handling.
The Indian banking industry is regulated by the Central Bank of India (CBK), which
manages bank supervision and monetary policy in line with key economic objectives
within India (Central Bank of India, 2011). The Central Bank of India was established
following independence in 1966, and was re-established in 1997 with a higher 2 level of
autonomy to set monetary and fiscal policy; however, the bank is not as yet fully
independent. The bank’s core mandate for supervision includes review and revision of laws
and policies related to banking as well as licensing and oversight of financial services and
banking agencies operating within India, including commercial and retail banks,
microfinance agencies, mortgage agencies, insurance companies, and other companies
(Bank Supervision Report, 2008). As of Dec 2010 the total number of banks registered in
India included 43 commercial banks, 126 foreign exchange bureaus, two representative
offices of foreign banks, two microfinance institutions, and one mortgage finance company
(Bank Supervision Report, 2010).
Fraud in the banking industry is not formally tracked by the Central Bank, and thus there
is no information regarding how this affects bank profitability and operational capacity.
Although fraud is one of the focuses of the India Bankers Association (IBA), information
is still only thinly available. This research seeks to fill that gap by examining fraud in the

5
Indian banking industry and identifying ways in which the industry could improve its fraud
handling.
The research covers Standard Chartered Bank. This is because it has a heavy and long time
presence in India. Hence they will make a good reference and will represent other foreign
banks to an extent.Fraud in the banking industry is not formally tracked by the Central
Bank, and thus there is no information regarding how this affects bank profitability and
operational capacity. Although fraud is one of the focuses of the India Bankers Association
(IBA), information is still only thinly available. This research seeks to fill that gap by
examining fraud in the Indian banking industry and identifying ways in which the industry
could improve its fraud handling.

The research covers Standard Chartered Bank. This is because it has a heavy and long time
presence in India. Hence they will make a good reference and will represent other foreign
banks to an extent.
1.3 Importance to Policy Makers
The government will need this information to put in place regulations to either protect
customers or control the banking sector by ensuring strict buffer. Banking is one of the
major supports of most economies and as such when the field is changing so do the rules
that govern this sector to keep up with the changes. The banking crises of 2000s have only
made it imperative for greater control measures to be put in place and this research will
help in this. The management of the banks can also use this research to come up with policy
that mitigate against fraud.
1.4 Importance to banking industry
As the main research participants the information will help in understanding the causes,
risks and the strategies that can be used to combat fraud. The banks will be able to see the
how this affects their overall profitability and can use this information in regards to any
new regulations that might be required in banking as a result of technology and innovation.
1.5 Importance to Potential Investors
This research will shed light on the possible types of bank frauds and will help them in
understanding and therefore enlighten them on how to avoid falling victim. This will ensure
that they do not face huge losses.

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 RESEARCH METHODOLOGY

Research Methodology includes the assumptions and values, which is useful for
interpreting data and reaching to conclusions.
The present analytical study is an attempt to study the productivity measurement for
selected unit of Public Sector Banks and Private Sector Banks for particular period. The
purpose of this analytical study is, thus to make an in-depth study of what the Public Sector
Banks and Private Sector Banks in India have done during the period of last five years The
information required for the study was collected through a structured questionnaire which
had the study research questions as the basis on which the questionnaire was formed.
Respondents were requested to provide specific information through the questionnaire
which had both open ended and close ended questions. There was use of the likert scale,
short responses, yes or no and check boxes accordingly. There was four parts in the
questionnaire: the first part was for the respondents background information, the second
part was based on the first research question, the third part was based on the second
research question and finally the fourth part was based on the third research question.
In order to enhance the response rate, respondents were assured of strict confidentiality of
the information they share with the researcher and that the information was to be used
solely for research purposes.
1. Collection Of Data
1.1 Primary Data
Structured Questionnaire
1.2 Secondary Data
a. Books
b. Articles, Research Papers
c. Internet
1.6 Population and Sampling Design
1. Population
According to Denzin and Lincoln (2014), the population in a study is the collection of
people or elements onto which a measure is subjected in order to make inferences. The
population will be focused on 60 respondents within the bank.
Sampling Design

7
 The sample design is the method by which the selection of primary elements of study and
analysis are determined in order to respond to the research questions (Gaylord and Galliher,
2012).
c) Sampling Frame
According to Cooper and Schindler(2014),the sampling frame is the list of elements
representing the population from which the sample is drawn Often times, a researcher may not
get direct access to the entire population of interest thus they rely on the sampling frame to
represent the entire population.

(2) Sampling Technique

The sampling technique is the process of selecting the specific methodology to use in
deciding the entities in the study (Elliot &Willingham ,2010). Simple random sampling is
the key to obtaining a representative sample since every sample of a given size in the
accessible population has an equal chance of being sampled. The technique will allow the
researcher to get a higher response rate as respondents are easily available in the foreign
banks.
(3) Sample Size
Sample size is the number of observations in a sample (Bolton &Hand 2012). It is
commonly denoted or .A sample size of 60 has been selected for the purpose of data
collection.
The following formula has been recommended by Yamane (1973):
n = 1+  2
Where:
n is the sample required
N is the total population
e2 is the probability error
This study assumes a confidence interval of 95% which means the allowed error is 5%.
1.7 Objective Of The Study
The society expects accountability, fairness, transparency and effective intermediation
from banks. Ensuring that they carry out their responsibilities with sincerity of purpose and
devoid of fraud is an important ingredient for gaining public trust and goodwill. The study

8
will cover the cases of frauds, map a typological trend strategy to be adopted as prevention
and implementation strategies and present the same for implementation with ownership.
Therefore, the objective of is case study is to :
1. To study the fraud cases that has happened with ABC bank, the fraud type, fraud
detection time persons who are associated with the identification of the fraud along with
the fraud descriptions.
2. To identify the thrust areas for fraud management
3.To provide a model of fraud management for the Indian banks Reasons of Banking Fraud
– A Case of Indian Public Sector Banks 17 www.tjprc.org editor@tjprc.org
4. To Study The Frame Work Related To Frauds In Banking Products.
5. To Study The Types Of Frauds In Banking.
6. To Study The Fraud Identification In Banking.
7. To Study The Internal Control System To Reduce The Frauds In Internal System Of
Bank.
8. To Study The External Control System To Reduce The Frauds.
1.8 LIMITATIONS & DIRECTIONS FOR FUTURE STUDY
Every research has its limitations. In designing the study the researcher attempted to be as
scientific possible, the present study nevertheless has some limitations. First, the limitation
concerns the nature of the measures used. The measures included in this research were
all based upon the literature review of technology enabled service quality participating
different
mobile banking customers from public and private banks. Therefore, the potential for data
inaccuracies due to item misinterpretation or predisposition to certain responses on the part
of the participant does exist. Second, this study has covered the mobile banking customers
of public and private banks but the foreign banks were excluded from the study. Future
research work can be extended by comparing mobile banking services provided by the
foreign banks also. Third, the current study has chosen the sample size of 300 customers
on the basis of random sampling. Future research may use a bigger sample size to find
out more accurate results about mobile banking services and customer satisfaction. Forth,
apart from effectiveness of services and customer satisfaction there are number of other
variables which may be considered in future research such as; IT, customer loyalty, trust,

9
 experimentation, etc. on which banking sector rests. 188 Fifth, due to rapidly changing
technology every time there is need to incorporate new paradigms so it is difficult for
the researcher to concentrate on dynamic nature of the findings and results. Sixth, as this
study has some financial restrictions for carrying this concrete result to be heighted and
also for giving the practical shape, it needs some funds to be formulated for the study.
Seventh, this study started 4-5 years back from now so there may be some significant
change in the technology which needs to be integrated in the future research. Eighth, this
study has left some scope for other researchers for exploring new concepts on IT services
in various sectors. Ninth, due to restrictions of time, money, it is not possible to cover all
the parts of India so sample has taken from the M.P region.
1.9 Scope Of The Study
The Scope Of The Study Has Been Divided Into Three Groups
1. Geographical: Talking About The Scope Of The Study The Project Applicable To Whole
Maharashtra Means Applicable To Every Bank In Maharashtra.
2. Temporal: The Study Has Converted The Analysis And Interpretaion Of Data For the
Period Of Last 2-3 Years.
3. Theoretical: This Topic Is Focusing On Detection & Preventions , Policies To Stop The
Frauds In Banking Sector.

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 CHAPTER 2

LITERATURE REVIEW
Introduction

The last few years have seen a spate in delivery channels replacing the traditional brick-
and-mortar branches. This has led to reduction in dependency on branches and lowering of
fixed costs and other overhead costs. Automated transaction processing, streamlining
operations and fewer errors on account of human intervention are the hall marks of
information technology implementation. With focused and seamless integration of multiple
channels, banks aim at higher standards of customer service and enhanced productivity and
profitability. The constant pressure from the central regulator, the Reserve Bank of India,
has not only encouraged and motivated banks to implement more and more IT but has at
times pressurized banks into accepting change. The present study deals with impact of
information technology in general and electronic delivery channels in particular, on
customer services and profitability of banks and therefore, the extant of literature in Indian
as well as International context has been reviewed and presented in five parts pertaining to
(A) Automated Teller Machine (B) Mobile Banking (C) Internet Banking (D) Impact of
Information Technology on profitability and customer services of banks (E) Multiple
delivery channels.

2.1 Part – A : Review of literature on Automated Teller Machine (ATM)

1. R. Renuka et al (2014), in the study “Customers satisfaction towards ATM” focuses on

customer satisfaction towards ATM services offered by the banks and tries to suggest ways
to improve services. Amongst other suggestions, the authors have suggested increasing
awareness about various facilities and enhancing the withdrawal limit of cash per day. 24
67 hours access got the first rank while quality of receipt got the second rank for level of
satisfaction. To find out the level of satisfaction respondents were provided a list of
fourteen factors which were to be ranked. Likert scale was used for the purpose. The study
considers only customer perceptions towards ATMs. However, staff perceptions have not
been considered.

2. Sisat S. et al (2014), in the paper “Secured Automatic Teller Machine (ATM) and Cash
Deposit machine (CDM)” has segmented ATM threats into three types of attacks : card
and currency fraud, logical attacks and physical attacks. The paper gives an idea about the
basic ATM and its major security issues and basic requirements. Since, ATMs deal with
currency notes, focus should be on note security while designing ATM. This paper is more
theoretical in nature and is not backed by primary data.

11
3. Dr. Giridhar et al (2013), in their research paper “A study on customer satisfaction
towards services provided through ATMs in Malnad rural regions of Shimoga District with
special reference to SBM”, have collected primary data of customers from only one PSB
i.e. State bank of Mysore in Tirthalli Taluka of Shimoga District. Though this study is
based on collection of primary data, it does not consider the perceptions of bank staff. The
study does not focus on different types of problems faced by customers while using ATMs.
The study concludes that “Despite the drawbacks in ATMs, it is still preferred as it benefits
bank, employees and customers”. Unlike the present study, this study considers only one
PSB bank but has not considered private sector banks, cooperative banks.

4. R.Melba Kani et al (2013), in their research paper “Issues and challenges faced by
ATM customers of State Bank of India in South Tamil Nadu” mention that increasing use
of ATMs prompted the authors 68 to study the issues and challenges towards use of ATM
services in South Tamil Nadu. The objectives of the study was to examine the awareness
level of ATM services at South Tamil Nadu, to study the level of customer satisfaction on
various aspects of ATM services in South Tamil Nadu, to identify customer problems while
using ATM services and to offer suggestions to overcome the problems in ATM services
in the near future. Primary data was collected from customers of State Bank of India in
South Tamil Nadu which included three districts Kanyakumari, Trinevelli and
Thothukody. The study concludes that young people are drivers of emerging technology in
developing areas and that SBI has been successful in the arena of ATM cards. This study
has used statistical tools such as chi-square test and weighted average score. However, this
study pertains only to the public sector banks and is not a comparative study. While trying
to find out the problems faced by customers the study does not consider the cost
effectiveness aspect.

5. Bishnoi (2013), in the research paper “An empirical study of customers perception
regarding Automated Teller Machine in Delhi and NCR” attempts to find out the
perceptions of customers of various banks regarding various issues related to ATM/Debit
cards. The study concludes that ATM is a very convenient mode of electronic banking as
a result its usage is increasing day by day. The authors have made a sincere attempt to
ascertain customer perceptions about use of ATM services, perception about ATM services
and the problems while using ATM/Debit cards. However, the author has not been able to
other collect factors regarding customer perceptions other than those supplied to the
respondents.

12
6. Tuli et al (2012), in the research paper “A comparative study of customer attitude
towards ATM of SBI and ICICI bank” the authors have made sincere efforts to compare
the attitude of people towards ATM of SBI 69 and ICICI Bank. The study aimed at finding
out the factors influencing the use of ATMs and the problems faced by customers.
Customers of both banks used ATM as it was convenient, availability of machines easily
and due to security aspects. The problem faced by SBI customers was that ATMs dispensed
old currency notes while that of ICICI bank customers was that ATM was out of cash. This
study provides a comparison between public sector banks and private banks. However, Co-
operative banks have not been considered in this study. Also, staff perceptions about ATM
has not been considered.

7. Ramola Premlatha J. et al (2012), the objective of this paper “Analysis of customer

satisfaction with reference to ATM services in Vellore District”, was to understand the
socio-demographic variables of customers, to analyse the satisfaction level of customers
towards ATM services in Vellore district, to study the convenience of using ATM and also
to find out customer attitude towards safety, assurance & flexibility of using ATM service.
Five point Likert scale was used to collect customer perceptions. Significant relationship
between age and convenience and safety was found to exist. Important relationship
between gender and tangibility, convenience and responsiveness was found to exist. There
was no crucial difference among occupation of respondent with regard to satisfaction level.
The researcher has suggested that bankers in order to retain the customer, must provide
safety, accurate information and make for using ATM services. The research is based on
customers belonging to various banks but the author has not presented data and results
based on types of sample bank.

8. Dr. Pahwa et al (2011), in their study “Analytical study of customer satisfaction at

ICICI Bank with special reference to ATMs” aims at analyzing the satisfaction levels of
customers of ICICI Bank having ATM cards in city of Udaipur. Some aspects of service
quality include 70 ATM personnel, location, sufficient number of ATMs in the city,
regularity in working of ATMs, their impact on overall performance and their opinions on
various other related issues. The aim of the study was to analyse the average level of
satisfaction ICICI bank customers using ATM. The findings include average level of
satisfaction of ATM customers with respect to all aspects except sufficiency of number of
ATMs in the city, location aspect, availability of power backup and complaint book at
ATM booth, which need more attention by the Bank as the rank was below the neutral
state. Though the study has been done on the basis of primary field research, the co-
operative sector and Public sector have not been considered. Researchers have taken into
account on customer perceptions but not considered staff perceptions of delivery channels
which are equally important.

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2.2 Part – 2 : Review of literature on Mobile Banking

1. Nayak et al (2014), in the study “A study of adoption behaivour of mobile banking

services by Indian consumers”, aims to analyse the factors that influence the adoption
behaivour of mobile banking services by Indian consumers. Through the literature
reviewed, the authors highlight that banks should create awareness about mobile banking
in different media and methods, trust-security and privacy are points of concern. Similarly,
perceived cost and ease of use are important factors in the adoption of mobile banking.
Although an effort has been made by the authors based on theoretical inputs to explain
various models that help in study of adoption behaivour of mobile banking services, the
study is not supported by primary data.

2. Niti Kiran (2013) in the article “Mobile banking on the rise in India” highlights that
SBI group dominates the space in terms of volume with an overall share of 67.4 % in total
volumes in Nov 2012. Private and foreign banks followed with an overall share of 30.1%
and PSBs and Cooperative banks accounted for only 2.5% in November 2012. The article
76 also sheds light on the fact that mobile recharges, DTH recharges, ticket bookings
(movies / travel) were among the fast growing transactions in mobile banking.

3. Dr. Garima Malik et al (2013), in the paper entitled “A exploratory Study on Adoption
and Use of SMS/Mobile Banking in India with Special reference to Public Sector Banks”,
seeks to investigate the perceptions of banks and customers regarding the adoption of
technology. For this purpose, an exploratory research was conducted in NCR (Northern
Capital region) in 2012. Two public sector banks viz. State bank of India and Punjab
National Bank were chosen to interview 200 bank customers using mobile phone for six
months. The data was analysed using descriptive analysis like factor analysis and ANOVA.
Research objectives include a. to gain an insight into SMS/Mobile banking users and non-
users perceptions, requirements and problems, to find out the factors influencing the use of
SMS/mobile banking and b. to help banks in making SMS/Mobile transactions user
friendly and satisfactory. The research finding was that there is significant difference in
acceptability of mobile banking services among customers of both the banks. The study
concluded that “SMS/Mobile Banking services are gaining popularity among the users day
by day but still banks have the potential of increasing its usage for customers. However,
lack of Regulations for Electronic Banking in India remains a setback for mobile banking
which needs to be addressed to ensure customer trust and to make it more effective in the
times to come”. In this paper the authors have very rightly concluded that SMS/Mobile
banking is gaining popularity among customers. Though the study is field based, it has
studied only two PSU banks and one delivery channel. The study is not comparative study
of different types of banks and delivery channels.

14
4. Dr. Vinod Kumar Gupta et al (2013), highlights in the paper “Mobile banking services
as adoption and challenges : A case of M-banking in India (Positive and Negative impacts,
mobile growth in India, adoption models and mobile technology)”, that mobile banking
scores over 77 internet banking as the former permits anywhere, anytime banking without
the need for a computer terminal to access their bank accounts. The paper discusses the
positive and negative effects of mobile banking. The positive impact of Mobile Banking
includes cost reduction for services provided by banks, to control fraud it is a very effective
way of improving customer service could be to inform customers in better manner.
Reminder facility aids bank to send reminders to customers of outstanding loan repayment
dates for the payment of monthly installments, easy to avail mobile services where the
geographical boundaries do not matter anymore, security features like customers mobile
receives only SMS alerts and last few digits of account number and type of account are
sent to customer. On the other hand negative impact of mobile banking is primarily with
respect to mobile banking not being available on any device. If the customer does not have
a smart phone the types of mobile banking are limited. Cost of network charges, mobile
banking charges may add up to quite a significant amount especially if customers accesses
mobile banking frequently. Security especially with reference to “Smishing” which is a
security threat on mobiles. The paper is good but theoretical in nature and would have been
more effective if it had been supported by primary data.

5. Sunil Kumar Mishra et al (2013), in the paper “Mobile banking adoption and benefits
towards customers service”, aim to find out the facilities provided by mobile banking, to
study the advantages and disadvantages of mobile banking and to study the mobile banking
services used worldwide. The study concludes “Evidently, mobile banking is considered
as a new era in banking, in which banks are spending considerable amount of money to
have it available to their customers and to cut their cost of operations. Unfortunately,
evidences have shown that a large number of customers do not use mobile banking for
various reasons, despite its benefits”. This is a descriptive research paper based on
secondary data collected from different sources like 78 websites, research papers,
magazines and would have been more effective if supported by primary data.

6. Neha S. Shukla et al (2012), in the research paper “Understanding the Adaptation of

Mobile Banking among customers : An empirical evidence”, highlights on the adoption of
mobile banking services by consumers and identifies different factors that influence the
adoption and use of mobile banking in North Gujarat region of India. Mean rank was used
to find out the reasons for not using mobile banking. The analysis revealed that less
knowledge about the operations of mobile banking facility was the major reason for not
using mobile banking. The second reason was because respondents felt that mobile banking

15
was too complex to use and also respondents felt that it was too risky. Mean rank was used
to find out which services were usedthe most. Enquiry and bill payments were most
important reasons to use mobile banking. The services of top-up, cheques request and
payment was more or less used similarly. The least used services of mobile banking is fund
transfer. Satisfaction level of respondents with respect to different aspects shows that all
time availability was the reason why maximum respondents were satisfied. The other
reasons in order of respondent’s preference were easy to operate, easy access, cost
effectiveness, less time consuming, trust & privacy. The study takes into consideration only
customer perceptions, leaving out staff perceptions.

2.3 Part – C : Review of literature on Internet Banking

1. Shilpan Vyas (2012), in the paper “Impact of E-banking on traditional banking

services”, attempts to introduce terms like e-banking by giving its meaning, functions,
types, advantages and limitations. More importantly it attempts to show the impact of e-
banking on traditional services and finally documents the results. The researcher discusses
the impact of e-banking on traditional services by focusing on the fact that e-banking
transactions are much cheaper than branch or even phone transactions. This in turn could
turn yesterday’s advantage of a large branch network into a comparative disadvantage
allowing e-banks to undercut brick and mortar banks. This is called the “beached dinosaur”
theory. The paper is based only on secondary data. Use of primary data would have added
to the effectiveness of the paper.

2. Geetha K.T. et al (2012), in the study “Acceptance of e-banking among customers (An
empirical investigation in India)”, have collected primary data from commercial banks in
Coimbatore. The study found that customers had weak understanding of internet banking,
although they are aware about risk. Customers were reluctant to join new technologies or
methods that might contain little risk. The researchers suggest that banks should design
their websites to address security and trust issues. In order to enhance the level of security
and trust, banks should ensure that online banking is safe and secure for financial
transactions like traditional banking. Banks need to organize seminars & conferences to
educate the customers regarding uses of online banking as well as security and privacy of
their accounts. Customers are not using internet banking due to lack of computer literacy,
should be educated with basic skills required to use internet banking. Banks must
emphasize the aspect pertaining to saving in costs by using internet banking. The research
work considers only commercial banks leaving out co-operative banks. If the researcher
had presented a comparative analysis of findings 83 pertaining to PSBs and Private sector
banks, the study would have been richer and more useful.

3. Sabita Paul (2013), conducted the research study “The Adoption of electronic banking
(e-banking) in Odisha” with the main objective to find whether the younger generation is
more computer savvy so they are more willing to adopt e-banking and the higher the

16
respondent is literate and particularly PC-literate, is more likely to adopt e-banking, and to
determine some important factors that influence the adoption of Ebanking in Orissa. Data
was collected from customers of commercial banks and in some cases from bank managers
and IT Officers of different commercial banks. The study found that ATM was the most
popular electronic channel used by the people separately or jointly with the traditional
banking. Though a large no of respondents are using internet, more than 50 percent
customers prefer traditional banking rather than Ebanking. Mostly these respondents
belong to the old generation. Traditional banking is popular among the old generation
people who don‘t have any computer knowledge and lacks some interest as they feel it
somewhat insecure, sometimes due to lack of interest for internet hacking. The researcher
should have also dwelt on issues like customer perceptions on problems faced in e-banking,
e-banking services used, suggestions etc. to add more value to the research work. Though
data has been collected from managers of banks, findings have not been depicted.

4. Selvam V. et al (2011), in the paper “Customers Awareness and satisfaction about e-

banking : A study with reference to ICICI Bank, Gobichettipalayam Town” aim to study
whether the customers of ICICI bank have awareness about e-banking facility and the level
of satisfaction of customers about e-banking facility provided by ICICI bank. The
researcher concludes that though awareness level of students is very high about e-banking,
the bank should take necessary steps to create awareness about e-banking to all types of
customers. The bank should 84 take steps to create awareness among all income group
customers and take steps to satisfy all types of customers. This study could have been more
useful if the researcher had revealed details regarding usage patterns and also identified the
services used and problems encountered in the use of internet banking.

2.4 Part - D : Review of literature on impact of Information Technology on

profitability and customer services

1. Taneesha Kulashretha (2012), in the article “The M-Banking Leader”, discusses the
popularity of m-banking amongst Public Sector Banks and Private Sector Banks. The
article concludes that “M-banking costs a tenth of what a bank spends at a branch for a
similar transaction”. As a result banks are trying to push corporate customers to use mobile
banking following the removal of Rs. 50,000 per day cap on m-banking transactions by the
RBI.

2. B. Muniraja Shekhar et al (2012), “It would be obviously difficult for laggard Co-
operative banks to attract new young customers if they do not increase their investments
on IT in the right direction with cautious approach”. Though the author has discussed about
UCBs in detail but the findings are not backed by primary study. Thus, the research is
theoretical in nature.

17
3. Dr. Seema Sant et al (2012), the paper “A study of the profitability of Urban Co-
operative Banks (in Greater Mumbai and Andjalgaon for 5 years)”, evaluates the
performance of urban Co-operative Banks for the period 2004-2009. Financial ratios to
measure the profitability, liquidity and credit quality performance of top 10 urban co-
operative banks from Jalgaon and Greater Mumbai, have been used. The study concludes
that the technological changes have significantly improved the productivity and
profitability margins of the banks. The statistics indicate that the performance of UCBs in
Greater Mumbai is significantly better than performance of UCBs in Jalgaon. Moreover,
with the advancement of communication technology the UCBs have been successful in
reducing the burden and credit-deposit ratio. Although the study evaluates performance of
only urban co-operative banks, it does not consider public sector banks and private sector
banks.

2.5 Part – E : Multi-delivery channels

1. Dr. Uppal R.K (2012), the objectives of the study include analysis of customers
perceptions regarding e-banking services, problems faced by bank customers while using
e-channels and to prepare some strategies to enhance e-channel service on the basis of
empirical study. Public sector banks, Private sector banks and foreign banks operating in
Ludhiana district of Punjab were considered for the study. The study found that ATM was
the most popular delivery channel followed by online banking, e-payments, m-banking and
tele banking in order of preference. Problems faced by bank customers while using e-
channels were in order 89 of rank as inadequate knowledge, poor network, lack of infra-
structure, lack of knowledge regarding IT, poor response to employees, unsuitable location,
time consuming, lack of cash of big amount, lack of online shopping facility, misuse of
ATM cards, and difficulty in opening account. The study concludes that “all banks whether
it is public sector, private sector or foreign banks are providing e-banking services. Also
customers have become more demanding with the passage of time”. The study considered
only the commercial banks but left out the Co-operative banks. A comparison with co-
operative banks would have added more value to the present research.

2. Dr. B.S. Sawant (2011), in the paper “Technological developments in Indian banking
sector”, discusses the technological developments in the area of payment systems. The
paper concludes that banks in India use IT not only to improve their own internal usage but
also to provide more facilities and services to their customers. The author has made sincere
efforts to present the technological developments based on secondary data but the paper
would have been more useful if it had been backed up by primary data.

3. Vijesh R. et al (2011), in the study “Technology management in bank –risk on alternate

channels – A global study”, has discussed several alternate channels. Data was collected
from top level managers of 10 banks from five countries. The study concludes that
“technology is very significant factor for launching a new product, further promotion,

18
growth strategies execution, risk eradication and advancements in regular activities of
banking sector among the tight competition”. The study does not consider views of staff at
different levels nor does it consider views of customers.

19
 CHAPTER-3
MAIN TEXT/TOPIC/COMPANY PROFILE

3.1 Introduction
The aftermath of the great depression in 1930s in the USA saw enforcement of Glass-
Steagall act (GSA) with an objective to reduce risks to financial system and tackle conflict
of interests that exist in banking, by separating commercial banking functions from ‘risky’
investment banking functions. However over time, a series of dilutions gradually rendered
GSA ineffective which was finally repealed in 1999.
With globalization, Kohler (2002) in his speech at a conference on humanizing the global
economy stressed the need to increase transparency of financial structures as well as to
raise the surveillance of international capital markets. In mi -1990’s, World Bank laid out
a well-defined strategy to combat different types of frauds and corruption, and jointly with
the IMF created financial sector assessment program (FSAP), to assess, diagnose and
address potential financial vulnerabilities. FSAP has undergone several transformations
and wider acceptance over the years, since its inception in 1999.
Mergers of giants in the banking industry gave birth to the concept of “too big to fail”,
which eventually led to highly risky financial objectives and financial crisis of 2008. In
response to the 2008 crisis, Dodd-Frank wall-street reform and consumer protection act
(DFA) was enacted in 2010. DFA gave birth to various new agencies to help monitor and
prevent fraudulent practices. Volcker rule, a part of DFA, banned banks from engaging in
proprietary trading operations for profit.
Post crisis, IMF has worked towards making risk and vulnerabilities assessment framework
effective, by advocating greater transparency and information sharing, along with
empowered supervisory and regulatory bodies, as well as greater international
collaboration towards regulation and supervision of financial institutions. Gaps were
identified under financial surveillance as well as on the frequency of such surveillance
especially in economies with truly systemic financial sectors, whose failure might trigger
a financial crisis. According to literature, approximately one in three banking crises

20
followed a credit boom, which shows a correlation between relaxed credit expansion
policies by banks and crises.
Another major sector distraught with fraudulent practices is the credit card market.
However, given that credit card usage in India is predominantly for transactional purposes,
the macroeconomic impact of fraudulent practices is less significant and is not considered
further in this study.
Indian banking system has remained plagued with growth in NPAs during recent years,
which resulted in a vicious cycle affecting its sustainability. Chakrabarty (2013) noted in
his speech that, while most numbers of frauds have been attributed to private and foreign
banks, public sector banks have made the highest contribution towards the amount
involved.
Key findings in RBI (2014b) included the stress of asset quality and marginal capitalization
faced by public sector banks, and various recommendations to address these issues. Rajan
(2014) stressed on good governance and more autonomy to be conferred to public sector
banks to increase their competitiveness and to be able to raise money from markets easily.
In response to the common perception that increasingly strict regulations will make
business opportunities take a hit, Raju (2014) stated that, regulations do not seem to be a
bar in functioning of banks after the crisis. Subbarao (2009) was of the opinion that without
broad-based trust and presumption of honest behaviour, there wouldn’t be a financial sector
of the current scale and size. He called the emergence of a moral hazard problem in the
banking system as privatization of profit and socialization of costs.
To maintain uniformity in fraud reporting, frauds have been classified by RBI based on
their types and provisions of the Indian penal code, and reporting guidelines have been set
for those according to RBI (2014a and 2015a). Towards monitoring of frauds by the board
of directors, a circular was issued as per RBI (2015b) to cooperative banks to set up a
committee to oversee internal inspection and auditing, and plan on appropriate preventive
actions, followed by review of efficacy of those actions. Impartial policy guidelines and
whistle-blower policy are vital to empower employees to handle frauds. RBI also issued a
circular and introduced the concept of red flagged account (RFA), based on the presence
of early warning signals (EWS), into the current framework, for early detection and
prevention of frauds. Gandhi (2014) discussed the prime causes of growing NPAs and

21
recognised the absence of robust credit appraisal system, inefficient supervision post credit
disbursal, and ineffective recovery mechanism as key barriers addressing those aspects.
Gandhi (2015) stressed on the basic principles that can go a long way in preventing fraud,
namely the principles of knowing the customer and employees as well as partners. He also
pointed out the significance of a robust appraisal mechanism and continuous monitoring.
Lokare (2014) reveals that the share of retail loan segment in total NPAs continues to stay
high, of which credit card loans (2.2 percent) have the third-highest contribution after
personal and housing loans. Livshits, MacGee, Tertilt (2015) empirically suggest that the
rise in consumer bankruptcy can largely be accounted by the extensive margin and lower
stigma associated with it. It also suggests that financial innovations have led to higher
aggregate borrowings, which has resulted in higher defaults. A study by Assocham (2014)
finds strong correlation between sustainable credit growth, leading to healthy asset
creation, and GDP growth. It emphasizes robust credit assessment and use of early warning
systems to monitor asset quality of institutions.
3.2. Bank Frauds
What is Fraud?
The term “fraud” as such has not been defined in the Indian Penal Code (In short, IPC). But
IPC defines and prescribes punishment for various acts that may lead to commission of fraud.
According to Tomlin’s Law Dictionary, Fraud is deceit in grants and conveyances of land,
bargains and sale of goods etc. to the damage of another person, which may be either by the
suppression of the truth or suggestion of a falsehood. According to section 17 of the Indian
Contract Act, it means certain acts committed by a party to a contract or by his agent with the
intent to deceive another party or to induce him to enter into contract.
The Reserve Bank of India has classified frauds into the following categories for the purpose
of uniformity of reporting by the banks to the RBI and in keeping with the provision of the
IPC-
(a) Misappropriation and criminal breach of trust.
(b) Forging of documents and instruments and manipulation of the books of accounts.
(c) Negligence and cash shortages.
(d) Cheating.
(e) Irregularities in extention of credit facilities against illegal gratification.
(f) Cases of frauds not covered above.
22
It is pertinent to note here that the cases of theft, burglary and dacoity are not covered in
any of the above classification but have to be reported separately to the RBI.
IPC and Banking Frauds
Perpetrators of frauds in banking transactions are liable to be prosecuted under the criminal
law of the country for which adequate provisions of punishment have been prescribed
under the Indian Penal Code, 1860. Some of the important provisions of the IPC in this
regard are discussed hereunder-
(a) Section 403 of IPC-Dishonest misappropriation of property: According to this
provision, whoever dishonestly misappropriates or convert to his own use, any movable
property, shall be punished with imprisonment for a term which may extend to two years
or with fine or with both. For example, A takes B’s property in good faith believing that
the property belongs to himself. A is not guilty of misappropriation. But even after
discovering his mistake, A dishonestly misappropriates the property to his own use, he is
guilty of an offence under this section.
Explanation 1 to the section states that a dishonest misappropriation for the time being only
is a misappropriation within the meaning of this section. For example, A finds a property
and takes it with the intention of restoring it to the owner, A is not guilty of offence. But if
he appropriates it for his own use without using reasonable means to discover the owner,
he is guilty of the offence.
(b) Section 405 of IPC-Criminal breach of trust: According to this provision, anybody
entrusted with the property dishonestly misappropriates or converts to his own use or
dishonestly uses or disposes of that property in violation of any direction of law prescribing
the mode in which such trust is to be discharged, or of any legal contract, which he has
made touching the discharging of such trust, commits criminal breach of trust.
For example, A, an executor of a will, dishonestly disobeys the law which directs him to
divide the property according to the Will and appropriate the same to his own use, A has
committed criminal breach of trust. Section 406 prescribes punishment for criminalbreach
of trust which is imprisonment extending to three years or fine or both. Section 409 of IPC
prescribes higher imprisonment of upto ten years in respect of criminal breach of trust by
a public servant or by a banker or merchant or agent.

23
(c) Section 415 of IPC –Cheating : According to this provision, whoever, by deceiving
any person, fraudulently or dishonestly induces the person so deceived to deliver any
property, to any person, or to consent that any person shall retain any property or
intentionally induces the person so deceived to do or omit to do anything which he would
not do or omit, if he were not so deceived, and which act or omission causes or is likely to
cause damage or harm to that person in body, reputation or property, commits cheating.
Examples:
(a) A, by falsely pretending to be in civil service, intentionally deceives B and thus
dishonestly induces B to let him have on credit goods for which he does not mean to pay,
A cheats.

(b) A, by putting a counterfeit mark on an article, intentionally deceives B into a belief that
this article was made by a certain celebrated manufacturer, and thus dishonestly induces B
to buy and pay for the article, A cheats.
(d) Section 463-Forgery : It is defined as- “ Whoever makes any false document or false
electronic record or, part of a document, or electronic record, with intent to cause damage
or injury, to the public or to any person, or to support any claim or title, or to cause any
person to part with property, or to enter into express or implied contract, or with intent to
commit fraud or that fraud may be committed, commits forgery”.
The Madras High Court in AIR 1968 Mad 349 held that in order to constitute an offence
under this section, the document must be false and it must have been made dishonestly or
fraudulently and it must have been made with one of the intention specified in section 463.
In AIR 1979 SC 1890, Supreme Court held that mere presenting a lottery ticket to the state
authority which later on was detected as a forged one does not by itself amount to forgery.
The knowledge of forged document is a necessary requirement. Section 465 prescribes a
punishment for forgery which is imprisonment for a term which may extend to two years
or with fine or with both.

(e) Section 489-A – Counterfeiting of currency notes: This section provides that
whoever counterfeits, or knowingly performs any part of the process of counterfeiting, any
currency note or bank note, shall be punished for imprisonment for life, or with

24
 imprisonment of either description for a term which may extend to ten years, and shall also
be liable to fine.
3.3 TYPES OF FRAUDS
1. Deposit Account Frauds:
Following types of frauds are normally committed-
(a) Value of cheque deposited is inflated by inserting numbers.

(b) Nature of cheque is altered by deleting words. For example, crossed cheques are made

bearer cheques.

(c) Name of the payee in the cheque/draft is altered and money is withdrawn by the fraudster.

(d) A dormant account is fraudulently operated by forging signature.

(e) Collections of the Mini Deposit Account are not deposited with the bank and mis-
- appropriated by the agent.
Following preventive measures may be resorted to-
(i) The cheques /drafts should be examined under strong light and preferably under ultra violet
lamp. In case of material alterations, it will be noticed that the surface of the document is not
uniform, there are stains visible, background printing is disturbed, different inks have been
used, handwriting is not uniform and flow of writing is disturbed.
(ii) There should be surprise cheques on cashier’s cash and the cashiers should be rotated at
frequent intervals.

(iii) Cash handling operations and book keeping operations should be divorced.

(iv) Balancing of day books should be done every day in the evening.

(v) Bank statements should be issued and pass books updated at frequent intervals. The
customers should be asked to confirm their balances appearing in the bank statements /pass
books.

2. Frauds relating to loans and advances:

25
Following types of frauds are generally committed-
(a) A large number of loans advanced under the priority sector lending schemes turn NPAs
because either the loans are taken by ineligible persons or used for some social or consumption
purpose rather than utilizing it for agricultural operations.
(b) Proper appraisal of the project for which loan is advanced is not done by the staff for a
consideration.

(c) Collaterals lodged with the bank are inadequate or valueless.

(d) Value of Hypothecated /pledged stocks is inflated.

(e) Goods pledged with the bank are removed with the connivance of the bank staff.

(f) Hypothecated stock is sold but the godown is set on fire to show loss of stock due to fire.

(g) False title deeds of immovable property lodged with the bank.

(h) Duplicate title deeds lodged with several banks simultaneously.

Suggested preventive measures are-

(i) There should be random and regular checking of the pledged and hypothecated goods. The
personnel deployed for the purpose should be men of proved integrity and honesty and such
persons should be subjected to frequent rotation.
(ii) Trained personnel should scrutinize loan applications and check the quan- tity and value of
goods pledged/hypothecated.
(iii) Project should be properly appraised. Factory site should be inspected before sanction of
loan. It is preferable to disburse loan by way of direct payment to the supplier of plant and
machinery to ensure that loan is not diverted for any other purpose.
(iv) Verification of title of the immovable property should be done by obtaining proper search
report from the empanelled lawyer of the bank.
(v) Where loan is advanced against hypothecation of vehicles, lien of the bank should be
registered with the RTO office.
(vi) The hypothecated/pledged goods should be insured jointly with the borrower for fire and
burglary.
3. Frauds relating to purchase Bills:
26
Such frauds are committed normally in the following manner-
(a) Fraudster discounts the bogus or stolen railway receipts.

(b) False bills are drawn on sister concerns for the purpose of discounting.

(c) Bills are inflated in collusion with the supplier.

(d) Payment is obtained before the bill is presented by the bank for encashment.

(e) Worthless goods are dispatched and bills discounted on the strength of despatch papers.

Suggested preventive measures:

(i) Only the transport receipts of the approved transport concerns should be accepted.

(ii) Normally bills of sister/associate concerns should not be accepted for discounting.

(iii) The bank should inform the concerned transport company of its charge over the goods so
that the borrower may not take delivery of goods without the production of transport receipt.

(iv) In case of an unknown drawee, a report should be obtained from the banker of the drawee
about its bonafide and creditworthiness.

(v) In case bills are returned unpaid, the amount should be realized from the borrower without
delay.
4. Frauds relating to computers:
To provide efficient and fast service, most of the branches of the banks except the ones in the
rural and remote areas have been computerized. Not many frauds relating to computers have
yet been reported so far as computerization in the Indian banks is of recent origin. But in the
western countries where virtually everything is computerized, a large number of cyber crimes
in the banking sector are reported on a regular basis. There is a need to analyse the nature of
such crimes so that appropriate preventive measures may be devised. Normally following types
of frauds are committed-
(a) Spy software are devised by the cyber criminals to crack the passwords. They enter into the
computer system of the banks and manipulate the data to transfer the money from other’s
accounts.

27
(b) Computer virus are created by the mischief mongers which find way into the computer
system by way of e-mails. These virus destroy the data stored in the computers and slow down
the entire computer system. It is sometimes alleged that the manufacturers of anti-virus
software themselves create virus so that their product may be sold in the market.

(c) Hackers are computer experts who steal the passwords and access the classified information
stored in the computer system. They do not even fear to “raid” the government departments
including military establishments to carryout their nefarious design to destroy and mutilate the
date stored in the computer systems. Such acts are committed normally not for any material
gain but to derive mental satisfaction out of other’s sufferings.
(d) Wire tapping is a crime committed by tapping the wire of the ATMs of the banks to
withdraw money out of other person’s account. The fraudster, in this case, attaches a wireless
microphone to the telephone line connecting the ATM with the bank’s computer and records
signals through wire tapping while a customer is using the ATM. These signals are later on
utilized for withdrawing money.
The Government of India enacted the Information Technology Act, 2000 to provide for
punishment and penalties in respect of frauds committed in respect of computers. Section 43
of the said Act provides for hefty damages upto rupees ten lakhs payable by the offender to the
person affected in case there are unauthorized acts committed in respect of another person’s
computer system like access, downloads or taking copies of the information or data stored,
introduction of computer contaminant or computer virus, damages to the computer or its
system etc. Further, the said Act also provides for punishment with imprisonment upto three
years for tampering with computer source documents and for hacking the computer systems.

5. Report of the Sub-Group on banking sector frauds:

A meeting of the Sub-group constituted by the high level group on frauds in the banking
sector was held on 14.12.2001. The group deliberated on the issues like internal control
mechanism in banks, inspection & Audit, rationalization of control returns, internal house
keeping, delegation of powers, credit related frauds. It suggested, interalia the following
measures-

28
(a) There is need for periodical review of systems and procedures at certain intervals, say, once
a year.

(b) The main threat to the health of the public sector banks is from high value frauds which
mainly relate to advances and foreign exchange operations and also on account of delayed
reconciliation of high value inter branch transactions/suspense accounts. It requires special
attention of top management.

(c) There has been proliferation of returns and statements as a result of which, their purpose
and importance are often lost sight of. It is desirable to reduce the number and revise the
formats to make them meaningful for scrutiny and monitoring of large value transactions.
(d) The reconciliation department at the head office should ensure that reconciliation is upto
date.

(e) There has been higher delegation of discretionary powers due to increased volume of
business. All exercise of such powers should be reported immediately to the higher authority.
Non-submission or late submission of returns should be viewed seriously.

(f) Normally there is delay in reporting of fraud cases to RBI because of time consumed in
preliminary investigation. A time limit not exceeding fifteen days for completion of
preliminary investigation and reporting the case to RBI should be set.
As regards audit and inspection, the group observed that the banks have a system of internal
inspection and concurrent audit, verification audit, snap audit etc. But these have not been
proved to be as effective as expected for early detection of frauds. Substantial loss is caused
by the time fraud is detected. The group suggested that the banks should have a competent
cadre of inspecting officials who should conduct concurrent audit and internal inspection of
branches. The role of Chartered Accountants as concurrent auditors should be to supplement
and not supplant the regular internal check.

6. Fraudulent documentation
Fraudulent documentation involves altering, changing or modifying a document to deceive
another person. It can also involve approving incorrect information provided in documents

29
knowingly. Deposit accounts in banks with lax KYC drills/ inoperative accounts are
vulnerable to fraudulent documentation.
Some examples:
• An individual illegally obtains personal information/ documents of another person and
takes a loan in the name of that person.
• He/she provides false information about his/her financial status, such as salary and other
assets, and takes a loan for an amount that exceeds his eligible limits with the motive of
non-repayment.
• A person takes a loan using a fictitious name and there is a lack of a strong framework
pertaining to spot verifications of address, due diligence of directors/promoters, pre-
sanction surveys and identification of faulty/incomplete applications and negative/criminal
records in client history.
• Fake documentation is used to grant excess overdraft facility and withdraw money.
• A person may forge export documents such as airway bills, bills of lading, Export Credit
Guarantee Cover and customs purged numbers/orders issued by the customs authority.
7. Multiple funding/diversion/siphoning of funds
Siphoning of funds takes place when funds borrowed from financial institutions are utilised
for purposes unrelated to the operations of the borrower, to the detriment of the financial
health of the entity or of the lender. Diversion of funds, on the other hand, can include any
one of the following occurrences:
• Use of short-term working capital funds for long-term commitments not in conformity
with the terms of sanction
• Using borrowed funds for creation of assets other than those for which the loan was
sanctioned
• Transferring funds to group companies
• Investment in other companies by acquiring shares without the approval of lenders

8. Identity theft
Fraudsters are devising new ways to exploit loopholes in technology systems and
processes. In case of frauds involving lower amounts, they employ hostile software

30
 programs or malware attacks, phishing, SMSishing and whaling (phishing targeting high
net worth individuals) apart from stealing confidential data.
In February 2013, the RBI advised banks to introduce certain minimum checks and
balances such as the introduction of twofactor authentication in case of ‘card not present’
transactions.
Some examples:
• Unauthorized emails asking for account information for updating bank records are sent
by fraudsters. The customer information is then misused for misappropriating funds.
• Access rights for making entries are given to unauthorized people.
• Bank employees keep original Fixed Deposit (FD) receipts with themselves and hand
over phony FD receipts to customers. They then revoke FDs by forging signatures.
• Lost/stolen card: It refers to the use of a card lost by a legitimate account holder for
unauthorised/illegal purposes.
• Account takeover fraud: An individual illegally obtains personal information of valid
customers and takes control of the card account.
• Theft of valuables: Fraudsters open bank lockers to take key impressions of other lockers
and then use duplicate keys to steal assets.
9. Internet banking and related frauds
Around 65% of the total fraud cases reported by banks were technology-related frauds
(covering frauds committed through/ at an internet banking channel, ATMs and other
payment channels like credit/debit/prepaid cards), whereas advance-related fraud
accounted for a major proportion (64%) of the total amount involved in fraud.19

Some examples:
• Triangulation/site cloning: Customers enter their card details on fraudulent shopping sites.
These details are then misused.
• Hacking: Hackers/fraudsters obtain unauthorised access to the card management platform of
banking system. Counterfeit cards are then issued for the purpose of money laundering.
• Online fraud: Card information is stolen at the time of an online transaction. Fraudsters then use
the card information to make online purchases or assume an individual’s identity.

31
• Lost/stolen card: It refers to the use of a card lost by a legitimate account holder for unauthorized
/illegal purposes.
• Debit card skimming: A machine or camera is installed at an ATM in order to pick up card
information and PIN numbers when customers use their cards.
• ATM fraud: A fraudster acquires a customer’s card and/or PIN and withdraws money from the
machine.
• Social engineering: A thief can convince an employee that he is supposed to be let into the office
building, or he can convince someone over the phone or via e-mail that he’s supposed to receive
certain information.
• Dumpster diving: Employees who aren’t careful when throwing away papers containing
sensitive information may make secret data available to those who check the company’s trash.
• False pretences: Someone with the intent to steal corporate information can get a job with a
cleaning company or other vendor specifically to gain legitimate access to the office building.
• Computer viruses: With every click on the internet, a company’s systems are open to the risk of
being infected with nefarious software that is set up to harvest information from the company
servers.
Incorrect sanctioning or external vendor-induced fraud
According to PwC’s Global Economic Crime Survey 2014,20 external fraudsters are still the
main perpetrators of economic crime for the majority of financial service organisations (57%
in 2014 and 60% in 2011).
Financial institutions are prime targets for external frauds, given the amount of money fraudsters
can potentially obtain as well as the sensitivity of data held by these organisations (credit card and
personal identity details, for example).
The financial services sector also tends to be more strictly regulated and as a result, many business
processes and functions have corporate controls in place. This makes it more difficult for frauds
to be internally perpetrated without discovery. The absence of a proactive and robust monitoring
framework, however, does not allow the entity to identify conflict of interest issues such as
employees or agents having a close relationship with other entities.

Some examples:

32
• Falsified Valuations: External consultants advising loan borrowers to fabricate their
valuation report and inflate the amount of funds that can be borrowed
• Corporate espionage: Sharing trade secrets or confidential customer information with
the competitor for commercial benefits
• Merchant collusion: Merchant owners and/or their employees conspiring to commit
frauds using their customers’ accounts and/or personal information
• Ponzi scheme: A type of pyramid scheme, where money from new investors is used to
provide returns to previous investors
• Off shore investing: External vendors convincing investors to invest in outside
companies by showing higher returns when the companies don’t exist in reality
• Bogus offerings: Investing in a bogus company (no operations, earnings or audited
financial statements)
• Misappropriation of loan disbursements: Loans of lesser value being disbursed to
farmers and funds being misappropriated by intermediators through false documentation
• Inflation of projected sales figures or past income: Large and unusual year end
transactions resulting in profit for the enterprise.
• Others: Faking net worth of directors, faking CA certificates or financial statements,
inflating sundry debtors or reducing sundry creditors, reference checks not being
conducted, irregularities in repayments for loans availed from other banks, frequent start-
ups, maintenance of a large number of small enterprises, etc.

Tunneling/phoenixing or asset stripping

Even though the above-mentioned terms are interchangeably used, in the banking world,
asset stripping primarily implies taking company funds or assets of value, and leaving
behind debts.Current fraud trends in the financial sector 15 This can happen when a
company’s directors transfer only the assets of one company to another and not the
liabilities. The result is a dormant company which has to be liquidated as it has large
liabilities that cannot be met.

Some examples:

33
• Asset stripping: Fraudsters deliberately target a company or companies to take
ownership, move the assets and then put the stripped entity into liquidation.
• Phoenixing: Directors of a company move the assets from one limited company to
another to ‘secure’ the benefits of their business and avoid the liabilities. Most or all
directors will usually be the same in both companies. This usually is a way of ‘rescuing’
the assets of a failing business rather than targeting a company.
• Teeming and lading: In order to maintain the liquidity situation artificially, amounts
received from the subsequent debtor are credited to the earlier debtor’s account so that one
debtor’s account does not show an outstanding balance for a long time. Such a process is
continued till the time the original amount misappropriated is finally replaced or till the
time the cashier is caught.
Mobile banking: Risks
There are two types of mobile financial services that are currently offered in the Indian
market—mobile banking and mobile wallets. Being an easy and convenient mode of
transacting, there has
been a 55 times rise in value usage of mobile banking and 5.5 times rise in the volume of
transactions between FY12 and FY15.
After the recent changes to RBI policy, customers of semi-closed pre-paid instruments
(PPIs) can now do the following:
• Load up to 1,00,000 INR in wallets
• Transfer money from their wallet to any bank account
This move, on one hand, enhances the convenience and adoptability of a mobile wallet and
on the other, makes it more susceptible to fraud risks.Risks associated with mobile banking.
• Mobile banking application being mapped to an incorrect mobile number: For bank
customers who do not use mobile banking, an employee of the bank could attach an
associate’s mobile number to the bank account and install a mobile application on his
mobile device. The customer’s account is compromised by the associate and he or she does
not get any notification about the same.
• Creating fake and non-existent users on the mobile financial services platform: Most
of the banks appoint a third party vendor to develop a mobile application to be integrated
with their core banking system. The vendor may create two unauthorized users with rights

34
to initiate and verify transactions, and transfer funds from the organisation to his associates’
wallets, effectively stealing money from the bank.
• Malware: The increase in the number of mobile banking users is accompanied by a rise
in attacks through malware.
• Data theft: Mass attacks are possible through the theft of credentials which can be used
for personal benefits.
• SIM swap: SIM swap means replacing the old SIM with a new one, when the old gets
lost or damaged, or when one needs a differently sized SIM card. If a fraudster manages
such a swap, he can carry out numerous fraudulent transactions using the mobile number
of the victim. For instance, the valid mobile station international subscriber directory
number (MSISDN) is moved to another handset. The user has no access to their account
and receives no notification. The user with the other handset, on knowing the PIN, can
transact in the account.
• Fake or similar interface apps:
Fake applications, with exactly the same user interface as the original application, are being
created to steal confidential information shared by the user.
Risks associated with mobile wallets.
• Increased risk of money laundering:
Transfer of money into and out of a mobile wallet from or to a bank account is now
possible. Cash-in from the bank account of an individual and cash-out to a different bank
account of another individual can be used as a platform for laundering unaccounted money.
• Unauthorised deductions from the wallet of a customer (especially a dormant or
infrequent customer account): Employees of the mobile wallet service provider may
misuse the balance stored in the wallet of a customer by making unauthorized deductions.
Moreover, in case of a mis-happening to a customer with no nomination facility, the
balance in the customer’s account is not passed on to his family members and remains with
the service provider, which ultimately becomes a low-hanging fruit for the fraudsters.
• Failure to conduct proper due diligence of merchants: If the merchant on-boarded by
the service provider is a fraudster, and the payment is made by the customer for fictitious
goods or services from the merchant, cash can be rotated with minimum transaction fees.

35
• No auto log off facility: An individual usually opens the application on his mobile device
for availing of the services and closes the application, instead of logging out. If the mobile
device is stolen or lost and a fraudster opens the application, he can misuse the remaining
balance in the service provider’s wallet.
Fraud risks: Insurance companies
Large accumulations of liquid assets make insurance companies attractive for loot
schemes. These companies are under great pressure to maximise the returns on investing
the reserve funds, making them vulnerable to high-yielding investment schemes.
The insurance industry has witnessed an increase in the number of fraud cases over the last
couple of years. A growing number of organisations are realising that frauds are driving up
the overall costs of insurers and premiums for policyholders, which may threaten their
viability and also have a bearing on their profitability.
To keep these risks under check, a detailed framework for insurance fraud monitoring
Current fraud trends in the financial sector 17 has been laid down with effect from
2013–14 and is applicable to all insurers and reinsurers.
• Policy holder and claims fraud: Policy holder committing fraud against the insurer at the
time of purchase and/or execution of an insurance product
• Intermediary fraud: Intermediaries committing frauds against the insurer and/or
policyholders
• Internal fraud: Employees commit fraud suo moto or in collusion with external parties
or amongst themselves against the insurer
Broad categories of fraud risks in the insurance sector
Misrepresentation: Misrepresenting critical information relating to a profile (incorrect
income, educational qualification, occupation, etc)
Example: The proposal form mentioned that the client had a shop in the market, whereas
investigations revealed that the client was a small-time vendor sitting on a footpath.
Forgery or tampering documents:
Forging the customer’s signature in any document, proposal or any supporting document
Example: The client (staying in one city) and working as a surgeon was required to
countersign the application form for some corrections. The form came back and it was
found that the signatures were forged by the advisor, who was the client’s brother.

36
Bogus business: Proposal forms submitted for non-existent customers
Example: A sales manager or broker logs in the proposal of a non-existing client
Cash defalcation: Agent collecting the premium but not remitting the cheque to the
insurance company, owing to which the insured has no coverage
Example: The advisor had collected the premiums from the customer and had not
deposited the same for almost a month; it came to the insurer’s notice when the customer
was sent the lapsed letter.
Mis-selling: A selling practice wherein the complete, detailed and factual information of a
product is not given to the customer (also called product misinformation); can include
incomplete or incorrect representation of the terms and conditions such as guaranteed
returns, rider features, charges, linked product vs endowment, facility of top-up vs regular
premium, premium holiday, etc
Example: The customer was given a cover of 1 lakh INR and the premium was 5 lakh INR.
This was a clear case of mis-selling as even the facility of a top-up was not explained to
the client.
Pre-signed forms: Obtaining pre-signed blank forms and filling the address change request
(ACR)/contact number change (CCR) without actually physically seeing the client or
satisfying oneself about the client
Example: While the proposal form mentioned that the customers were working in an
electronic agency, in reality they were working in some other business.
Doctor’s nexus: Doctor being involved with the perpetrators in committing life insurance
fraud
Example: A doctor gave clean medical reports, while the fraudster influenced the doctor
to conceal the information.
Procurement fraud:Procurement fraud can be of multiple types and is one of the most
widely used modus operandi for siphoning off funds and window dressing the financial
statements. Often defined as any illegal conduct through which the offender gains
advantage, avoids an obligation or causes damage to an organisation. Procurement fraud
can also be defined as the unlawful manipulation of the procurement process to acquire
goods /services, obtain an unfair advantage, avoid an obligation or cause a loss to public

37
property during the procurement process by public servants, contractors, or any other entity
involved. Some of the methods to do so are:
• bid rigging/bid splitting;
• creation of shell companies to facilitate fraudulent payments;
• collusion between employee and suppliers;
• purchase order and contract variation orders;
• unjustified single source awards;
• false invoices for products and services for suppliers who do not exist
Payroll fraud:
Payroll fraud is the theft of cash from a business via the payroll processing system. There
are several ways in which a payroll fraud can occur such as:
• advances not paid back
• buddy punching
• ghost employees
• pay check diversion
• pay rate alteration
• un rganizati hours
Tax evasion and money laundering:
Money laundering is a criminal offence aimed at presenting wealth of illicit origin or the
portion of wealth that has been illegally acquired or concealed from the purview of tax and
other authorities, as legitimate, through the use of methods that hide the identity of the
ultimate beneficiary and the source of the ill-gotten profits.
False employment credentials
Falsified credentials are a growing concern for rganizations, as job applicants fill their
resumes with bogus academic degrees and job titles. The real risk comes when these
applicants get the job and perhaps land in high-profile positions, as in the case of former
Yahoo CEO Scott Thompson, whose four-month tenure ended after controversy over
whether he had embellished his official bio.
Fraudulent expense claims
This is the easiest means of stealing some money from an rganization. Employees inflate
their expense reimbursements and derive gains from the company.

38
Misappropriation of Assets:
Asset misappropriation schemes include both theft of company assets, such as cash or
inventory, and the misuse of company assets, such as using a company car for a personal
trip.
3.4 Causes of Bank Fraud
There are two main sources of frauds in banks and these are the internal and the external.
Though distinguishable in theory, these sources are very often inseparable in practice.
That is to say, a successful fraud often takes place and succeeds as a result of the
collaboration, intentional or unintentional (i.e. due to carelessness or error of judgment, of
an insider, a bank employee or member of staff).Indeed it was recently affirmed that” the
public believes and rightly too, that most frauds in banks are the active connivance of bank
staff. Otherwise how does anybody explain for example, how a cheque drawn in favour of
a named payee is paid into a different account and the funds withdrawn? Or how does one
explain how a completely different institution or individual collects a draft prepared in the
name of another institution or individual? This is not an exception of the
rule, it is frequent occurrence” (Soneye, 1985), Botton et al (2002) The causes of bank
fraud can be classified into two namely institutional factors, lapses or inadequacies and
environmental/societal factors or lapses, Adewunmi, (1985), Cahill, Chen and Lambert
(2002) and Hulthen R et al (2002).

(1). Institutional Factors

According to Nawaze (2008), the institutional factors or causes are those that can be traced
to the internal environment of an organization. They are to a great extent factors within the
control of the management of the bank.
Major institutional causes of fraud can be categorized as follows
c) 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

39
where there are effective policies and procedures in place, fraud could still occur with
sometimes deliberate skipping of these tested policies and procedures.
ii. 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.
iii. 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.
iv. 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.
v. 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.

vi. 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.

40
vii. 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.
viii. 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
1. Inadequate compensation, salaries and fringe benefits which are accruable to bank staff
2. Refusal to comply with laid-down procedures without any penalty or sanction;
3. Conspiracy between interacting agents charged with the responsibility of protecting the
assets and other interest of the bank;
4. Poor working conditions;
5. Poverty and infidelity of employees.
(2). External Factors/Environmental 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 honoured. It is a fact of our
time that fraud has its root firmly entrenched in the social setting where wealth is honored
without question.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

41
legitimate income of the individual. Our societies have debased the entire old moral
standards and appear to be unconcerned with probity, honesty, integrity and “goodname”.
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 theseencourage 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
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 (Asukwo, 1999).
(3). Other Factors
1. Financial problems
“Trusted persons become trust violators when they conceive of themselves as having a
financial problem which is non-shareable, are aware that this problem can be secretly
resolved by violation of the position of financial trust, and are able to apply to their own
conduct in that situation verbalizations which enable them to adjust their conceptions of
themselves as trusted persons with their conceptions of themselves as users of the entrusted
funds or property.” (Cressey, 2013, p30)
The first factor, pressure on the employee, occurs due to “non-shareable” financial
problems. Cressey (2013) identified fraud as being the outcome of problems that the
individual perceived as being in some way non-sharable. He identified six types of non-
sharable problems that were seen to lead to the potential for fraud within the individual.
Types of problems. Cressey (2013) viewed the term “non-shareable” as being relative,
varying from person to person. Thus, what is non-shareable to one person may not be non-
shareable to another. However, he concluded that non- shareable problems were concerned
with status-seeking or status-maintaining activities. The six categories of non-shareable

42
problems include violations of obligations, personal failures, business reversals, isolation
from friends and associates, status gaining demands, and problems in the employer-
employee relationship .
2. Opportunity.
By itself the non-shareable problem will not lead an employee to commit fraud (Wells,
2014). The employee must also perceive that he/she has the opportunity to commit the
crime without being caught. While the position of trust may provide an opportunity for the
solution of a non-shareable financial problem, Cressey (2013) found that many trusted
people did not at first see in their positions of trust the opportunities which such positions
offer, and thus did not engage in fraud by using entrusted funds to solve their non-shareable
problems. Making the connection between the non-shareable problem and the illegal
solution is a product of the interrelated intellectual processes of knowing and rationalizing
that the problem can be solved by violation of their position of trust. Rarely would a person
in a position of trust not know, in a general way, that the position of trust can be violated,
and therefore, that an objective opportunity for trust violation exists. With respect to
general information, Wells (2014) states that the very essence of an individual’s fiduciary
capacity implies that since the position is one of trust it is capable of being violated.
Opportunities could present themselves in the form of poor internal controls, weak
discipline policies or poor organizational ethics.
3. Rationalization.
The act of rationalization is not an after-thought that justifies the fraud, but it is the real
reason(s) which the person has for acting in a fraudulent manner. Rationalization is,
therefore, part of the motivation to commit fraud and is often abandoned after the criminal
act has taken place (Wells, 2014). Cressey (2013) observed that a trusted person does not
invent a new rationalization for his violation of trust, but rather he applies to his own
situation a verbalization which has been made available to him by virtue of his having
come in contact with a culture in which such verbalizations are present. The fraudulent
individual acquires such verbalizations from other persons who have had prior experience
with situations involving positions of trust and trust violation. This resonates the
Differential Association theory earlier discussed (Sutherland, 2009) that suggests that an
individual learns crime from their association with persons already exposed to it. Examples

43
of such ideologies that seek to justify the crime are: “some of our most respectable citizens
got their start in life by using other people’s money temporarily”; “all people steal when
they get in a tight spot”; “my intent is only to use money temporarily so I am ‘borrowing’,
not ‘stealing’; “I have been trying to live an honest life, but I have had nothing but troubles
so ‘to hell with it” (Cressey, 2013; pgs. 102-107, 110, 118, 124)
These cultural ideologies are contradictory to the theme that honesty is expected in all
situations of trust. The individual uses such ideologies to adjust contradictory personal
values in regard to criminality on the one hand and integrity, honesty and morality on the
other. These rationalizations form excuses for the trusted person to violate the trust but are
not sufficient in escaping legal prosecution. Employees who take organization funds for
their own purposes over a prolonged period of time have been known to consider
themselves as borrowers rather than criminals. It is only when the rationalizations are
abandoned that the trust offender sees himself for what he is, a criminal (Cressey, 2013;
Wells, 2014).
Cresset’s Fraud Triangle has been used to explain the nature of fraudsters for many years.
However, in concluding his research Cressey (2013) points out that the fraud triangle
theory is limited in its practical use for prevention and detection of trust violation like fraud
or for treatment of apprehended offenders. Wells (2014) has also echoed the same
sentiment that the fraud theory triangle has had little application when it comes to fraud
prevention. This theory is therefore open to revision. One obvious critique of this model is
that it describes antecedents that may be present in a large number of cases that do not
result in fraud. Thus, the fraud triangle cannot be said to be predictive; rather it is a
descriptive model that is best used in post hoc analysis (Day, 2010). Furthermore, the
elements that are posed within this model cannot always be seen to be present; one example
of this is many cases of executive fraud, in which there is no discernible non-shareable
problem that must be solved by the fraud (Albrecht, Albrecht, & Albrecht, 2013). This
means that even if the fraud triangle is used predictively, it cannot be used to fully model
all cases, because some cases will fall outside this model. There is also a limitation in the
existing research in that the majority of research is placed on issues of opportunity and
putative motivation for the fraud. In contrast, elements of rationalization, cognitive
capability to perform the fraud, and the incentive to commit fraud have been relatively

44
poorly studied in the literature; thus, there are a number of assumptions that must be made
about these areas (Holton, 2009). The reason for this lack of study may be due to a
fundamental problem with the formulation of the rationalization construct; given that
actually identifying the rationalization used by the individual at the time of the fraud is not
possible and many individuals may engage in post hoc rationalization, there is no real way
to identify the actual rationalization for the crime (Souse & Wright, 2012). This means that
the majority of fraud research necessarily focuses on the development of opportunity and,
sometimes, identification of fraud incentives, rather than rationalization.
4. Differential Association
Sutherland (2009) suggested that crime is learned, just like any other subject. He believed
that criminal rganiza occurred with other persons in a process of communication and hence
criminality could not occur without the help of other people. Gaylord and Gallaher (2012)
observe that Sutherland in departure from economic explanations, biological and
pathological perspectives attributes crime to the social context of the individual. Sutherland
(2009) viewed criminal rganiza as arising when an individual is exposed more to
definitions favourable to violation of law than to definitions unfavourable to violation of
law; hence criminal rganiza is a consequence of conflicting values. He rganizat that the
learning process consisted of two areas: the techniques to commit the crime and the
attitudes, drives, rationalizations and motives of the criminal mind. Thus he found that
organizations that have dishonest employees will eventually ‘infect’ a portion of honest
ones and generally that honest employees will eventually have an influence on some of
those who are dishonest (Sutherland, 2009; Wells, 2014), and assumes all persons are
equally exposed to criminal and anti-criminal rganiza patterns. In spite of criticisms
brought forward against it, the Differential Association theory’s contribution is strong and
several contemporary theorists in criminology and sociology have extended and expanded
on Sutherlands’ theory to explain criminal behavior.

5. Job dissatisfaction
Research by Hollinger and Clarke (2011) on 12,000 employees revealed that dissatisfaction
motivated employees to commit fraud. When employees perceived that their jobs or
working conditions were unfair, they were more likely to justify and commit fraud (Wells,

45
2014). However, this theory is difficult to prove due to the relative lack of information
regarding employee theft in general; while it can be studied in its particulars, it is difficult
to identify in general due to lack of reliable and widespread information about employee
theft (Mustaine& Tewksbury, 2012).
6. Capability of the offender
Wolfe and Hermanson (2013), argued the offender requires the capability of committing
the crime, where capability may involve the technical knowledge, confidence etc. to
execute and/or get away with the crime (Wolfe &Hermanson, 2013). The inclusion of
cognitive capabilities and biases has helped to rectify some of the potential limitations of
the fraud triangle; for example, one group of researchers uses cognitive heuristics to
understand why in some cases managers may develop a rationalization to commit fraud,
while others did not, based on individual cognitive biases and conditions
(Anadarajan&Kleinman, 2011). Social manipulation, or the involvement of others in the
fraud through subterfuge or manipulation of emotions, social status, or other factors, is also
often called social engineering. This form of manipulation allows the fraud perpetrator to
involve others in the fraud, in order to use their access or skills to benefit the fraud
perpetrator. Thus, this type of fraud may involve others as co- conspirators who are not
fully cognizant of the nature of the fraud (or who may not know about it at all), but who
are rather acting out of desire to help a co-worker or other acquaintance
7. Criminal Organization is learned
Sutherland (2009) suggested that criminal organization is learned. However, it differs from
the Differential Association theory in that it presupposes the existence of a specific criminal
culture, which is associated with people living in a specific area or within a specific ethnic
group (Costello, 2012). He assumes that criminals have been transmitted into a culture of
crime by being socialized to accept specific values that condone crime. Therefore implying
that fraudulent rganiza in accounting is learned. These sociological theories of crime
emerged in the early 20th Century in order to explain the emergence of criminal groups in
specific regions of a city, ethnic group, or class (Costello, 2012). 2.2.1.2.6 Anomie
Theories
8. Misfit between values and norms

46
When there is a misfit between values and norms e.g. the dilemma between goals and the
means to achieve it. In a bid to align the goals with the means an individual may adopt five
types of solutions, including conformity, innovation (using illegitimate means to achieve
success, as in accounting fraud), ritualism, retreatism, and rebellion (Durkheim, 2014;
Merton, 2012; Merton, 2011). All these adaptations arise from the pressures of the society
that accentuate economic success and the difficulty of achieving it.
9. Others
After the famous Pecora hearings in 1932 that left the world shocked to the core, the
following year saw enforcement of Glass Steagall Act by US Senate as a response to the
Great Depression with an objective to reduce risks to financial system by limiting a bank’s
risk taking ability as well as the many conflict of interests that exist in banking. The act
1. Separated commercial banking functions from ‘risky’ investment banking functions.
2. Established Federal Deposit Insurance Corporation, an insurance system for depositors.
As soon as the act was passed, however, lobbying efforts to repeal it began. A series of
deregulations by the board of governors of Federal Reserve System & Office of
Comptroller of the Currency as well as federal courts gradually enabled commercial banks
to participate in a variety of risky financial activities earlier restricted by the Glass Steagall
Act. So even before the act was repealed in 1999, it had been diluted to a great extent
rendering it ineffective. Those in favour of repeal of the Glass Steagall Act argued that in
the current state of highly deregulated financial markets, distinction between loans,
securities and deposits cease to exist.
Depository institutions were losing out to less regulated security institutions. Also, since
no such act existed in the rest of the world, they argued that this will put US on a back foot
as compared to Shanghai which was fighting so hard to become the next financial capital
of the world.Those who were against the repeal of the Glass Steagall maintained the issue
with conflict of interests in banking, possible consolidation into financial giants that may
end competition in loans and investments market, highlighted the various threats due to
risky activities that banks might engage in if let loose and how not very competent most
commercial banks were to handle and maintain these risks if the act was repealed.
Eventually, those in favour won and the act was repealed in 1999. Between 1999 and the
2008 crisis, regulation and supervision of traditional banking bodies weakened. They

47
engaged in a wide range of financial activities and operated with fewer constraints. It
started to become more and more difficult to distinguish between activities that will benefit
the bank vis-a-vis activities
that will benefit customers of these banks. For instance, the JP Morgan Chase Whale
Trades tell us about how commercial banks used deposits partly funded by the federal
government to make risky bets that they themselves did not fully understand. Mergers of
giants in the industry gave birth to the concept of “too big to fail”, which was thoroughly
misused by all.In response to the 2008 financial crisis, the Dodd Frank Wall Street Reform
and Consumer Protection Act was signed by President Barack Obama in 2010 with a view
to reduce the many risks involved in banking and financial system of United States of
America. It gave birth to the following new agencies to help monitor and prevent fraudulent
practices.
1. Financial Stability Oversight Council: Created to monitor firms that were “too big to
fail”, FSOC has the authority to liquidate or restructure these firms if need be. It also led
to creation of Financial Research Office within the Treasury to support the council.
2. Consumer Financial Protection Bureau: Created to monitor mortgage lending rganizat
in the industry, CFPB is responsible for other lending practices like credit and debit cards,
payday loans, consumer loans (except auto loans) as well. It requires all information
regarding lending to be disclosed to potential borrowers.
3. Office of Credit Ratings at SEC: It was created to provide investors with credible credit
ratings of firms.
4. Federal Insurance Office: It is tasked with monitoring insurance firms and identifying
risky ones. It is also responsible for information collection and to make insurance
affordable for the masses.
Volcker Rule: It is a part of Dodd-Frank Act that bans banks from engaging in proprietary
trading operations for profit. This means that banks cannot keep funds more than three
percent of their revenues as profits and cannot own or invest in funds like hedge funds,
private equity funds etc. The rule came into effect on April 2014. Banks have been asked
to divest existing funds within seven years starting July 2015.
When the 2008 crisis happened, International Monetary Fund (IMF) was in a relatively
weak position.

48
Based on common belief that the Global economy had entered a moderation phase, IMF
was in the process of gradual downsizing. The resources at IMF’s disposal were very low
and a lot of seasoned staffs had started leaving the organization. Some member states
accused IMF of not warning the world regarding the increasing risks and vulnerabilities
that led to the crisis.
IMF provided analytical support as well as coordinated with the G20 for a global fiscal
stimulus and promotion of financial stability. When the G20 leaders called for
collaboration between IMF and Financial Stability Board (FSB), IMF complied, though
there were concerns on IMF’s independence while coordinating with other organizations.
According to authorities from developed and emerging market economies, sufficient
analysis was not done on the approach followed by regulatory and supervisory agencies,
or the changing regulatory environment’s impact on investments.IMF coordinated with
European Commission (EC) and European Central Bank (ECB) on crisis response
programs. While European authorities appreciated the effort, considering the experience
brought in by the IMF, authorities of other economies criticized the move of IMF to be side
by side of the member countries while taking policy decisions. They felt it to be bad
governance and raised the question whether IMF shall follow similar lines of action if crisis
in future involves other member countries.Further IMF’s advice of expansionary fiscal
measures and accommodating monetary policies post 2008-09 seemed appropriate and
timely, but the optimistic growth forecast and the fiscal consolidation advocacy following
this forecast did not turn out to be the best of decisions. Additionally, the monetary
expansion approach combined with fiscal consolidation did not seem appropriate
considering the huge private debt that underlines the financial crisis.
IMF’s pre-crisis view on financial markets being self-stabilizing underwent an evolution
as the crisis unfolded. The need for bank recapitalization was advocated by IMF, along
with the role that regulatory and supervisory gaps and international policy coordination
issues played in the market failures leading to the crisis. IMF did not give appropriate
importance to how the incentives and actions of the Several noteworthy observations were
made by the updated IMF report3 on systemic banking crises.During the period 1970-2011,
around 40% of the systemic banking crises started during August, September and
December, pointing towards the tendency of crises to start towards the second half of a

49
year. Approximately 1 in 3 banking crises followed a credit boom, which shows a
correlation between relaxed credit expansion policies by banks and crises.Advanced
economies tended to have larger and prolonged impact of banking crisis, from the
perspective of output losses and increase in public debt. This shows dependency on
expansionary macro-economic policies, and diversion of effect from actual reorganization
of banks, by indirectly improving the banks’ growth and recovery prospects without
incentivizing the requisite restructuring.Though a point to be noted is that deep banking
systems in developed economies amplifies the impact of a banking crisis. On the other
hand, owing to depreciating currency and increased capital outflows from developing
economies during the crisis, they resort to tightening monetary policy. Fiscal costs incurred
by developing economies were larger than those of developed ones.Growth in NPAs results
in a vicious cycle affecting the sustainability of the banking system.Mismanaged NPAs
often result in failure of banks. The issue gained significance post the massive bailouts
following the failure of several banks that had a major share in global financial crisis.In his
speech at 2014 conference held by ASSOCHAM, Shri R. Gandhi (Deputy Governor, RBI)
discussed about causes of growing NPAs and recommendations towards addressing those
aspects.Assisted by external factors like recessionary pressures, there has been notable
increase in NPAs owing to reduction in quality of assets, primarily due to overruns and
delayed clearance of several projects, policy issues resulting in deadlocks, etc. The
underlying weakness in banking sector is primarily due to absence of robust credit appraisal
system, inefficient supervision post credit disbursal and ineffective recovery mechanism.
A working paper by RBI5 provides evidence on several macro-financial variables linked
with reduction in asset quality, namely credit cycle (where banks have a tendency to freely
issue loans during economic booms), GDP growth (inverse relation), interest rate cycle
(direct relation), inflation, asset prices etc. Further the paper accesses sector wise NPA
growth. Among the priority sectors, agricultural NPAs experienced an average growth rate
of approx. 55% during 2011 and 2012, primarily due to high credit growth during the pre-
financial crisis period, while SSI sector has been experiencing NPA growth due to
recessionary pressures. Among the non-priority sectors, retail loan segment has a high
share in overall NPAs, owing to rise in credit towards personal and housing loans due to
relaxation, during the pre-crisis period. Additionally, the slowdown in real sector impacted

50
the banks’ asset quality, when the real sector was affected by the global economic
slowdown resulting in fall in exports, domestic demands, slowing capacity expansion as
was planned, etc.
Money laundering refers to the process in which the offender disguises the money or
proceeds from illegal or criminal activities and makes it appear to have been derived from
a legitimate source.Among the current tools against money laundering, anti-money
laundering (AML) and counter terrorist financing (CTF) regimes are the most
comprehensive tools to counter such illicit flow of money.Based on OECD6 analysis, there
are a wide variety of channels and methods that are used to launder the illicit gains, and
several financial and non-financial institutions, ranging from banks to “trust and company
service providers (TCSPs)”, may get involved in money laundering activities, both
willingly and unwillingly. The 2014 OECD analysis on compliance with 2003 financial
action task force (FATF) recommendation notes weaknesses in regulation and performance
of “Designated Non-Financial Businesses and Professions (DNFBP)”. DNFBP comprises
of lawyers, TCSPs, real estate agents and other dealers.TCSPs are the financial
intermediaries which link the customers with the financial institutions. Based on the study
by FATF,7 the primary factors responsible for TCSPs being involved in such activities are
weak or ineffective anti-money laundering framework, lack of appropriate knowledge and
expertise of the staffs or presence of staffs in the TCSPs who get involved in money
laundering activities willingly.A report by OECD8 advocated that law enforcement
authorities should target information sharing of beneficial ownership and control of
corporate vehicles (like the TCSPs) and knowledge of the source of assets with the foreign
authorities requiring that information to prevent the misuse of these corporate vehicles. The
Offshore Group of Banking Supervisors’ list of best practices includes conducting
independent review of TCSPs and giving the auditors being utilized the necessary statutory
protection to report breaches in any matter.With advent of creative financial products and
increasing scope and magnitude of transactions across boundaries, frauds in the financial
world have escalated to new highs. Banks, urban cooperative banks as well as registered
NBFCs that fall under jurisdiction of RBI are monitored by it regularly for fraudulent
activities. Although a decline in number of frauds has been observed since 2009, the
amount involved in such activities has increased four folds. A major reason for this is the

51
hike in number of cases involving more than Rs.50 Crore. While most number of frauds
has been attributed to private and foreign banks, public sector banks have made the highest
contribution towards amount involved. The industry has also witnessed a mindboggling
increase in both number of accounts opened as well as amount of transactions made which
has dwarfed the amount involved in fraudulent activities to some extent.
There are three categories of frauds, namely technology related, KYC related and advances
related. Although the number of technology related frauds is the highest among the three,
the highest amount comes from advances related frauds. Moreover, the latter involves
multiple banks mostly from public sector.
There is an urgent need to strictly monitor banks and other financial services institutions
so as to ensure that proper corporate governance checks and balances are in place. The
board of directors and senior management need to be made more responsible. Exchange of
information needs improvement to impress financial discipline. Internal systems and
control should be able to identify fraudulent activities and raise timely red flags. Delays in
reporting these activities should be minimized as it gives the fraudster enough time to erase
her trail making it difficult for investigative agencies to find convincing proofs. The law
should ensure that perpetrators are dealt with strictly and are barred from accessing banking
and other financial facilities once convicted of a fraud. RBI has issued various guidelines
to deal with these malpractices for all of banking and financial services industry to
follow.Currently frauds in banks are detected long after being committed. Timely handling
of the frauds shall result in substantial reduction of losses owing to those frauds, and at the
same time help in prevention of frauds of similar nature elsewhere. To maintain uniformity
in fraud reporting,

frauds have been classified based on their types and provisions of the Indian Penal Code,
and reporting guidelines have been set for those. An annual review of frauds shall be
conducted by the banks, which shall look at the system adequacy in dealing frauds, efficacy
of the actions taken, plugging of the loopholes and fraud reporting aspects. Towards
monitoring of frauds by the Board of Directors, RBI issued circular12 to cooperative banks
to set up committee to oversee the internal inspection and auditing and plan on appropriate

52
preventive actions, followed by review of efficacy of those actions. The anti-fraud
initiatives start with Board of any bank, by
giving importance to ethical values and taking exemplary actions when frauds are detected.
Employee empowerment starts with presence of impartial policy guidelines and
whistleblower policy in place which shall go a long way in enhancing employees’ trust on
the bank towards handling frauds.
In his speech, Shri R. Gandhi,13 stressed on the basic principles that can go a long way in
preventing fraud, namely the principles of knowing the customer, employees as well as
partners. He also pointed out the significance of a robust appraisal mechanism and
continuous monitoring in preventing fraud.
3.6 Anti-fraud programs
The key to any anti-fraud program is to have a framework in place that will not only prevent
fraud but also be able to detect fraud incidents in real time. However, the task of developing
and maintaining such a robust enterprisewide anti-fraud program with proactive
monitoring components can be daunting for any organization. The key features which
should necessarily be part of any organization’s fraud risk management program include
the following:

53
An effective fraud risk management solution can help banks manage fraud risks in a
manner consistent with regulatory requirements, as well as with the entity’s business needs
and marketplace expectations. Through this survey, we asked banks about the various anti-
fraud measures that they had adopted.
Survey respondents have highlighted that they face certain challenges in maintaining the
efficiency of antifraud security controls at an enterprise-wide level, such as struggling to
work across channels and/ or finding it difficult to integrate with applications/ tools (such
as integrating online transactions and ATM transactions, and integration between retail
banking, corporate banking and private banking transactions); however, over 80 percent of
them find their current controls to be largely effective. Further, in terms of the
implementation status of various anti-fraud programs, it is heartening to note that banks
have progressed across several parameters compared to the last edition of our ssurvey,
taking cognizance of the impact of fraud on their organization.

54
 Around 43 percent of the survey respondents appear to have an effective intelligence
gathering mechanism, compared to 28 percent from our previous survey in
2012. Such an intelligence gathering mechanism can enable banks to identify weaknesses
inherent to their process, and also be used to identify new threats hitherto unknown.
Only half of the survey respondents indicated having an effective risk assessment program;
however, more than two-thirds of the survey respondents indicated that they have effective
fraud control strategy and policies in place.A fraud control plan describes an organization’s
approach to controlling fraud. It includes actions to be taken to reduce the fraud risks
identified through the fraud risk assessment process and assigns responsibility for their
treatment. In case the fraud risks are not identified, the fraud prevention controls will be
rendered inadequate, posing a challenge to fraud risk strategy at banks.
A significant proportion of survey respondents have indicated that employee background
checks, while implemented in the organization, are not effective. In our experience, more
often than not, employees who engage in unethical behavior or commit fraud tend to have
a history of dishonesty. Pre-employment screening helps reduce the risk of employing
people with a checkered past or those who claim to have qualifications they do not possess.
It allows organizations to have greater confidence in the work ethics of their employees.
We recommend that banks undertake the following pre-employment checks at the
minimum:
• Confirmation of identity
• Police check for any convictions
• Residence/ address check
• Verification of qualifications claimed, and
• Employment check with previous employers
3.7 Prevention and Detection
Financial institutions are enhancing their processes, controls and fraud risk management
frameworks to rganiza the opportunities for fraud as well as reduce the time taken in their
detection. Funding for fraud control initiatives, however, continues to compete with other
business initiatives and is mostly challenged on a cost–benefit basis.
Many financial institutions are thus implementing their fraud control and reporting
frameworks to generate information in a way that the level of fraud identified, prevented

55
and actual losses incurred are identified. This approach has enabled the benefits of skilled
resources and automated tools to be quantified more precisely.
Regulators and investigative agencies are trying to gear up for the changed environment.
In 2012, the Central Bureau of Investigation (CBI) announced that it is developing a Bank
Case Information System (BCIS) to curb banking frauds.
This database contains the names of accused persons, borrowers and public servants
compiled from the past records.
The RBI has released a new framework to check loan frauds by way of early warning
signals for banks and red flagging of accounts where defaulters shall have no access to
further banking finance. It also plans to set up a Central Fraud Registry that can be accessed
by all Indian banks.
In addition, the CBI and Central Economic Intelligence Bureau (CEIB) will share their
databases with banks.
Similarly, the IRDA is also in the process of setting up an insurance fraud repository
in order to reduce monitoring costs, using advanced detection and prevention systems
deployed at the industry level.
The initiative is expected to identify fraudulent claims right at the processing stage, before
the payment occurs, and is aimed to ensure better screening of proposals at the underwriting
stage. This project aims at establishing an industrywide single fraud database that will
eliminate the need for individual insurers to do the same, and targets to ensure better flow
of information among the insurers.SEBI is in the process of getting its existing business
intelligence gathering software, which is used for detecting fraudulent activities in capital
markets, upgraded.

Whilst the legal environment and regulators have pushed the financial sector in the right
direction, individual institutions are also taking the lead in protecting their earnings and
reputation.Several financial frauds in the past and since the beginning of the century have
repeatedly breached the trust of investors. Despite incidents of frauds, rganizations still
lack a formal system of fraud detection, prevention, and a response mechanism.

56
Although, no system can give a 100 percent guarantee of prevention, the probability of their
occurrence can be reduced to low numbers. The damages occurring on account of these frauds
can be reduced by mitigating the risk factors associated with the businesses.
c) Formulating a strong anti-fraud programme:
A robust control environment is vital to reduce the risk on account of fraud and misconduct
within companies and their dynamic business environment. The following are some key
aspects of the anti-fraud framework that an organization should implement to mitigate the fraud
risks.

d) Leadership setting the tone:

Board of directors are responsible for setting the “tone at the top”, which flows across the entire
company and its various locations. Management views on mitigating fraud, corruption and
misconduct should be revealed to the employees. It is recommended that management should
actively assess frauds, corruption and misconduct risks and controls. Without ensuring that all

57
suspected allegations of misconduct are independently investigated, management might not be
able to develop the requisite neutral and balanced environment within the rganization.
Disciplinary action and zero tolerance for violations should also be part of the message that
the Board sends out to employees.
2. Fraud prevention policies:
Organisations willing to counter fraud should develop sound fraud prevention policies that
must have the following key components:
• Extensive background checks on new-hires, promotion candidates, suppliers, customers and
business partners (including international third parties);
• Segregation of duties;
• Position rotations;
• Limitations of physical access to assets; and
• Removal of rganization and old system users.
• Whistle blower mechanism
3. Ethics Code:
The ethics code of the company should be developed keeping in mind the size of the
rganization, the mix of employees, the number of employees, and the key risk areas.
Once developed, this code must be formally documented and communicated to the employees,
third parties, and other stakeholders (official website of the rganization, if any). It should
describe the disciplinary actions that can be initiated against people. This function should be
continuously monitored.

4. Whistleblower or complaint mechanism:

A whistleblower is a person(s) who has and reports insider knowledge of illegal activities
occurring in an rganization.
Whistleblowers can be employees, suppliers, contractors, clients or any individual who
becomes aware of illegal or fraudulent activities taking place in a business either through
witnessing the rganiza or being told about it.

58
The rganizations need to consider the following:
• Maintaining anonymity of the complaint mechanism
• Ensuring confidentiality of information reported through the whistle-blower mechanism
• Policy of non-retaliation against the whistle-blower
• Actions that can be initiated based on the nature and seriousness of the issue reported?
• Issues that are “not serious” taking up senior executives’ time.
• Concern about potential misuse of the channel, driven by personal agendas.
• Concern about compliance of policies or procedures with laws and regulatory guidance and
global best practices.
• Concern about effectiveness of the mechanism.
• What more can be done using the mechanism.
As previously stated, whistleblowers are the most common source of detection for frauds.
However, it is helpful and crucial to understand who is most likely to report fraud to the
rganizations. Below is the pictorial representation of the study carried out by ACFE across
nations in 2016. This depicts the types of whistleblowers.

59
5. Training/awareness programmes to employees:
After policies and procedures are developed they must be effectively communicated and
employees must be periodically trained. Some of the aspects to consider include:
• Management involvement in delivering the message
• In-person and web-based training
• Positive affirmation of policies
• Periodic reminders – once is not enough
• Consider annual confirmation for high risk functions
• Training people to rganizat and report red flags to frauds
• Special training for finance professionals
• Special training for senior executives
• Special training for others in high-risk positions (i.e. business developers, sales and
marketing)
• Broad roll-out of anti-corruption measures
(B) Enhanced focus on identifying fraud risks:
The purpose of fraud risk assessments can be established with the below;
• Assessing the types of frauds that can impact business and identifying relevant types of
fraud, such as fraudulent financial reporting, possible loss of assets, and corruption
methods through which fraud and misconduct can be done
• Developing scenarios and considering the ways that frauds can occur, including
management’s stand (e.g., in the selection of accounting principles), susceptibility to
management overriding and inculcating potential methods to circumvent existing control
activities
• Understanding frauds through business partners and assess the manner in which work is
performed by vendors, outsourced agencies and other third parties doing business for and
on behalf of the company.
• Identifying and evaluate frauds and risks that bring change in the operating environment
• Identifying where the company should focus its antifraud resources and periodically
review the results of the fraud risk assessment with the audit committee. Such periodic

60
assessment should be helpful in challenging certain key aspects such as management
override of controls
• Identifying areas of improvement
© Continuous monitoring using data analytics:
Business data is increasingly being managed and stored by IT systems. The pressure to
improve efficiencies and integrate supply chains has meant that many rganizations are now
heavily reliant on IT systems to support business processes. Such systems have also
reduced the level of human intervention required, which has traditionally acted as a fraud
control. As a result, rganizations are placing more reliance on automated controls to both
prevent and detect fraud. Financial and Corporate Frauds
The key aspects steps that rganizations can consider to start are the following:
• Proactively monitoring key processes and run data analytics modules on internal/external
communication, payroll and reimbursements, receivables and collections, sales and
distribution, time and physical access controls and vendor payments.
• Develop a robust log maintenance policy and retention period of logs in line with fraud
risk management requirements
• Develop notifications/alarms by which senior management can receive automated
messages in case of process overrides
• Adequate control on devices containing confidential data, encrypt devices and use reliable
software tools with remote data wiping capabilities to safeguard against device theft or
intrusions
(D) Due diligence on third parties:
Organisations mostly use services of third parties to manage their business operations and
other activities. Sometimes working with third parties can significantly increase the risk of
frauds. Organisations are able to extend limited control over their third party ecosystems
and unlike some of the other countries, incorporating right to audit clauses in vendor
contracts may be perceived as a breach of trust, damaging the business relationship. In
these circumstances due diligence can be a useful tool to understand one’s vendors and
business partners.
These areas mentioned here can be covered by due diligence on third parties in order to
address related fraud risks:

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• Knowledge of third party background information, including ultimate beneficial
ownership and affiliates, experience and competence/track record, any information on
these fronts/shell companies for money laundering etc.
• Business interests/ affiliations, conflict of interest
• Any adverse news in media about unethical business practices, involvement in tax
evasion, money laundering , terrorist financing or any bribery/corruption incidents
• Any Involvement in legal proceedings/ convictions for malpractice/crime etc.
• Any political affiliations, Inappropriate political support and links to politically exposed
persons/entities
• Credit defaults and bankruptcies
• Other reputational concerns

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 CHAPTER-4

DATA ANALYSIS, INTERPRETATION & PRESENTATION

1. WHICH ARE A BIGGEST BANKING SCAMS OF INDIA?

INTERPRETATION:

In the given diagram one can interprete that in India there is lot of cases of Banking Scams.
Recently one scams we all have noticed that is the scam of Neerav Modi. You can see in the
diagram Neerav Modi’s Scam was the highest in Banking Scam whereas lowest ranking got by
IDFC Bank.

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2. DEBIT CARD & CREDIT CARD FRAUDS ARE INCREASING IN INDIA?

INTERPRETATION:
We all know, the current age is a computer age, digitalized India. As the satisfaction level
of people are increasing, the frauds are also increasing. In India education level is not so
high that’s why litrate people cheated the other people while using debit card and credit
card.

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3. BANKING FRAUDS IS RISES BECAUSE OF FOLLOWING REASON?

INTERPRETATION
Neerav Modi cheated the bank, just because the Indians are depended digitally. Because of
online transactions, the level of frauds has increased a lot. However in India so many
persons are not using internet banking but with the use of mobile the new generation for
saving time indirectly connected with online transaction by the use of M-banking.

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4. I PROMISE TO PAY……. IS WRITTEN ON THE CURRENCY NOTES?

INTERPRETATION
Currency notes are like a promissory note between two persons .So it is
necessary , there should be written that I promise to pay….

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 5. IN INDIA SCAM IS RISING BECAUSE THE LOAN IS PROVIDED TO BIG
PEOPLE WITHOUT ANY STRONG DOCUMENTATION?

INTERPRETATION
While going for loan to bank, they are telling that documentation is compulsory. And it is
compulsory for any loan but for some commission, the internal employee making changes in the
document to approve such loans.

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6. BANKING FRAUDS IS RISES BECAUSE OF BANKS INTERNAL SYSTEM IS
NOT PROPER?

INTERPRETATION
It is noted that bank always says that documentation is compulsory for any transaction with
bank but the staff of bank gets commission at the time of disbursement of loan so they are
manipulating the document. A common person cannot change as per the demand of bank.
It means internal systems are not doing their work properly.

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 7. AFTER THE DEMOBILIZATION BANKING FRAUDS ARE RISES?

INTERPRETATION
Demobilisation banking frauds are not rises now a day because most of the frauds have been found
at the time of providing loan. In loan department there are so many kinds such as Business loan,
Personal loan, Housing loan etc. And frauds are mostly found in case of business loan.

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 8. ONLINE TRANSACTIONS ARE RISKY?

INTERPRETATION
Online transactions are time saving but it is risky. If we share are password and user id with
anyone, such person can access your account. For using online banking one should have very
cautious about this.

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 CHAPTER-5
SUGGESTION & CONCLUSION

It is observed that PSBs fare better than PVBs in terms of total number of bank frauds.
However, the total amount involved is much higher in PSBs as compared to the private
sector. This can be attributed to large size of loans which PSBs offer to customers.
Credit related frauds have the maximum impact in all the banking frauds in India because
of the high amount involved and the cumbersome process of fraud detection followed by
CVC. The frauds may be primarily due to lack of adequate supervision of top management,
faulty incentive mechanism in place for employees; collusion between the staff, corporate
borrowers and third party agencies; weak regulatory system; lack of appropriate tools and
technologies in place to detect early warning signals of a fraud; lack of awareness of bank
employees and customers; and lack of coordination among different banks across India and
abroad. The delays in legal procedures for reporting, and various loopholes in system have
been considered some of the major reasons of frauds and NPAs.
Also, despite efforts, banks have not been very successful in conviction of individuals
responsible for financial crimes. One of the root causes of this problem is identified as lack
of specialized financial sleuths with knowledge of nuances of forensic accounting as well
as a good legal understanding of frauds.
Therefore, following recommendations are suggested for an early detection of frauds.
a) Independent specialized cadre: The government could consider an independent
specialized cadre of officers on the lines of all India services, who are equipped with the
best financial and legal know-how to detect financial frauds and are capable of carrying
out an effective and time bound investigation of such scams. In short term, the government
can consider forming this cadre with a pool of commercial bankers, RBI and CBI officials
through lateral recruitment.
b) Know your markets: In addition to know your vendor and know your customer, the
banks should also focus on know your markets. There should be a dedicated cell within
each bank to assess the company/firm to which they are lending and the macro-economic

71
environment of the concerned industry or market where products are marketed. This
recommendation even seems relevant in the context of the recent crash of the Chinese
market. Several Indian manufacturing companies, which were dependent on import of
machinery from China, could not start their projects and generate cash flows, and this in-
turn affected the banks from which loans were raised.
c) Internal rating agency: Banks should have a strong internal rating agency, which
evaluates big ticket projects before sanctioning loan. The rating agency should strictly
evaluate the project on the basis of business model/plan of project without being influenced
by brand name or credit worthiness of the parent company, considering current macro-
economic situation and exposure of the sector to the global economy. In case ratings of
internal and external agencies are not similar then an investigation must be conducted to
establish the causes for such differences. Also, bank should seek services of at least 2-3
independent auditors in evaluation of such projects so as to prevent chances of any possible
collusion.
Organisations are facing a number of challenges in the current economic scenario. They
constantly deal with pressure of uncertain markets, escalating input costs, high
labour turnover and advent of technology. Additionally, companies have to meet rising
consumer demand across product categories with price innovation. Such challenges place
further pressure on companies and their business partners. Such pressures may provide
opportunity and incentives for fraudsters to commit frauds.While fraud is not a subject that
any organization wants to deal with, the reality is that most organizations experience fraud
to some degree. The important thing to note is that dealing with fraud can be constructive,
and forward-thinking, and can position an organization in a leadership role within its
industry or business segment. Strong, effective, and well-run organizations exist because
the management tends to take proactive steps to anticipate issues before they occur and to
take action to prevent undesired results. It should be recognized that the dynamics of any
organization requires an ongoing reassessment of fraud exposures and responses in light of
the changing environment an organization encounters. Especially given the unrelenting
pace of regulatory change within the banking sector, these stricter regulatory requirements
are demanding more attention from management, affecting the profitability of different
lines of business, and increasing costs of compliance. Financial institutions therefore,

72
should consider how their business models will be affected by current and potential future
new requirements, and whether their risk management programs have the ability to respond
flexibly to the ongoing process of regulatory change.
Financial institutions that have the ability to respond flexibly to the continuing series of
regulatory changes, coupled with effective risk governance, strong analytical capabilities,
and clear and consistent risk data, may be better placed to steer a steady course though the
ever-shifting risk management landscape. A proactive approach to managing the risk of
fraud is one of the best steps organizations can take to mitigate their exposure to fraudulent
activities. Although complete elimination of all fraud risks is most likely unachievable or
uneconomical, organizations can take positive and constructive steps to reduce their
exposure. The combination of an effective fraud risk governance, a thorough fraud risk
assessment, strong fraud prevention and detection strategies (including specific anti-fraud
control processes), as well as coordinated and timely investigations and corrective actions,
can significantly mitigate fraud risks. The important element to remember therefore is that
with evolving fraud threats, banking institutions’ defensive strategies also need to
necessarily keep up. Firms that are able to institutionalize compliance in an effective and
efficient manner could create competitive advantages, allowing them to best pursue their
growth agenda.Fraud for the responding bank averaged between 1% and 1.5% of annual
revenue. Moreover, the findings of this research indicated that the greater part of fraud in
the bank is both not technologically sophisticated and is relatively low-volume fraud. The
majority of the crime occurred through theft, direction, or misappropriation of cash or
cheques; only a few cases of crime were linked with credit cards, and there was little online
fraud reported. Over ally fraud that is detected is not very sophisticated. However, there is
a noteworthy concern that problems faced in fraud detection are due to lack of sophisticated
fraud detection systems; the study indicated that the majority of fraud cases that were
reported were in fact found by accident. Evidence shows, however, that this is not unique
to the Kenyan banks, and in fact insufficient fraud controls is an issue that affects the bank
globally in the various geographic locations it has presence in. Thus, the Kenyan bank is
perhaps not very different in terms of the fraud that is experienced globally, however there
are some differences created by the level of IT used within the bank.

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The habitually engaged measures used by the bank in preventing fraud include improving
or reviewing internal controls, establishing fraud prevention policies, establishing an
ethical code of conduct, training employees on fraud prevention and screening or reference
checks on new employees. The use of protective passwords, software and constant auditing
offer the bank some gauge of security against fraudulent actions.
On the other hand, highly effective software approaches such as data sampling, data mining
and digital analysis are less commonly employed by the bank supporting results by
Bierstaker et al. (2012). In the future the bank need to invest in fraud detection and software
approaches such as data mining, digital analysis and forensic services as these have been
found to be greatly effective by a minority who use them. Anti-fraud technology comes
with a very high price tag. However, the bank must consider the profit of such technology
which far outweighs the cost and results in efficient fraud detection and prevention.
Currently, as revealed by this study, fraud may be seen to be small scale fraud. The scale
of fraud is nonetheless expected to increase necessitating prospect investment in robust
technology.

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 CHAPTER 6
BIBILIOGRAPHY & WEBLIOGRAPHY

BIBLIOGRAPHY
1. Jose m. Pulino –The Fraud of Money & Banking.

2. Mary Zey - Banking On Fraud.

3. Josheph Norton & George Walkar – Banks Fraud and Crime.

4. Kanwar Mehta – Fence the Fraud.

WEBLIOGRAPHY
1. https://tejas.iimb.ac.in/articles

2. https://www.pwc.in/assets

3. https://iimb.ac.in

4. https://www2.deloitte.com

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 APPENDIX

1. WHICH ARE A BIGGEST BANKING SCAMS OF INDIA?

a. Neerav Modi Bank Scam
b. Bank Scam By Vijay Malia
c. Allahabad Bank Scam
d. Rotomac Pen Scam

2. DEBIT CARD & CREDIT CARD FRAUDS ARE INCREASING IN INDIA?

a. Yes
b. No
c. May Be

3 BANKING FRAUDS IS RISES BECAUSE OF FOLLOWING REASON?

a. Online Transaction
b. Net Banking
c. ATM Card

4. I PROMISE TO PAY……. IS WRITTEN ON THE CURRENCY NOTES?

a. Yes
b. No
c. May be

5. IN INDIA SCAM IS RISING BECAUSE THE LOAN IS PROVIDED TO BIG

PEOPLE WITHOUT ANY STRONG DOCUMENTATION?
a. Yes
b. No
c. May Be

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6. BANKING FRAUDS IS RISES BECAUSE OF BANKS INTERNAL SYSTEM IS
NOT PROPER?
a. Yes
b. No
c. May Be

7. AFTER THE DEMOBILIZATION BANKING FRAUDS ARE RISES?

a. Yes
b. No
c. May Be

8. ONLINE TRANSACTIONS ARE RISKY?

a. Yes
b. No
c. May Be

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 CASE STUDY
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 cr, IDBI 650 cr 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.

“The bank, through our overseas branch at Hong Kong, has been taking exposure with
Punjab National Bank as counter-party under various Letters of Undertakings issued
through authenticated SWIFT message”.

How this scam taken Place:

SWIFT stands for the "Society for Worldwide Interbank Financial Telecommunications".
It is a messaging network that financial institutions use to securely transmit information
and instructions through a standardized system of codes.

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To do the scam in the Allahabad bank; the SWIFT technique is misused by the internal
employees of the Allahabad bank. The internal banking system of the Allahabad bank was
not attached to the SWIFT that is why the transactions were not mentioned in the
accounting book of the Allahabad bank. That is why there was no transaction record found
between the PNB and Nirav Modi.

4. Rotomac Pen Scam;

The Promoter of Rotomac pen Vikram Kothari, allegedly fraudulently cheated Rs. 3,695
crore with seven banks. Kothari has misappropriated loans worth Rs 2,919 crore from 7
banks and the total outstanding amount, including interest on him, is Rs. 3,695 crore. The
CBI has arrested managing director of Rotomac Global Pvt Ltd Vikram Kothari.

The banks whose money is trapped in this scam are;

1. Bank of India:- Rs 754.77 crore

2. Indian Overseas Bank:- Rs 771.07 crore

3. Union Bank of India:- Rs 458.95 crore

4. Bank of Baroda:- Rs 456.53 crore

5. Allahabad Bank:- Rs. 330.68 crore

6. Oriental Bank of Commerce:- Rs 97.47 crore

7. Bank of Maharashtra: Rs 49.82 crore

This scam is related to the biggest Private Sector Bank of the country i.e. SBI leading the
consortium of 14 public and private sector. The principle loan is about Rs. 824 crore,
adding the interest due would indicate a loss of more than Rs 1,000 crore to the banks.

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The main accused in this scam is Kanishka Gold Pvt. This company did not pay a loan of
Rs. 824 crore, which has been converted into "NPA". The CBI has registered a case against
Chennai-based company Kanishka Gold and ED has started investigating the fraud. The
director of this company Bhupendra Kumar Jain and his wife Neeta Jain have fled the
country.

These banks have lent money to the Kanishka Gold Pvt;

1. State Bank of India :- Rs.240 crore

2. Punjab National Bank (PNB) :- Rs.128 crore

3. Bank of India :- Rs.46 crore

4. IDBI :- Rs.49 crore

5. Syndicate Bank :- Rs.54 crore

6. Union Bank :- Rs.53 crore

7. UCO Bank :- Rs.45 crores

8. Central Bank :- Rs.22 crores

6. R P Info Systems Bank Scam:

The CBI has booked a computer manufacturer R P Info 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.

7. Simbhaoli Sugar Mills Bank Scam:

CBI has registered another bank fraud against one of 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. 23,000 crore
have taken place in the country, due to which the country's banking system has suffered a
lot. This is why the total NPA of the country's banks has crossed the mark of 10 lac cr in
June 2018.

Now it is the need of the hour that the government should take some concrete actions to
check the Crony capitalism and the intervention of the politicians in the functioning of the
banks in India.

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