BANK FRAUDS

Introduction and Issues

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 liberalisation
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”.
2
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 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
2
https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=
826
IIMB-WP N0. 505
4|Page
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 analyse
underlying causes contributing to increasing trend in
frauds committed in Indian banking
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,

Bank fraud is the use of potentially illegal means to

obtain money, assets, or other property owned or
held by a financial institution, or to obtain money
from depositors by fraudulently posing as a bank or
other financial institution.[1] In many instances, bank
fraud is a criminal offence. While the specific
elements of particular banking fraud laws vary
depending on jurisdictions, the term bank fraud
applies to actions that employ a scheme or artifice,
as opposed to bank robbery or theft. For this
reason, bank fraud is sometimes considered
a white-collar crime.[2]

Types of bank fraud[edit]

Accounting fraud[edit]
In order to hide serious financial problems, some businesses have been known to use
fraudulent bookkeeping to overstate sales and income, inflate the worth of the company's
assets, or state a profit when the company is operating at a loss. These tampered
records are then used to seek investment in the company's bond or security issues or to
make fraudulent loan applications in a final attempt to obtain more money to delay the
inevitable collapse of an unprofitable or mismanaged firm.. Examples of accounting
frauds: Enron and WorldCom and Ocala Funding. These companies "cooked the books"
in order to appear as though they had profits each quarter, when in fact they were deeply
in debt.
Demand draft fraud[edit]
Demand draft (DD) fraud typically involves one or
more corrupt bank employees. Firstly, such employees
remove a few DD leaves or DD books from stock and
write them like a regular DD. Since they are insiders, they
know the coding and punching of a demand draft. Such
fraudulent demand drafts are usually drawn payable at a
distant city without debiting an account. The draft is
cashed at the payable branch. The fraud is discovered
only when the bank's head office does the branch-wise
reconciliation, which normally take six months, by which
time the money is gone.
Remotely created check fraud[edit]
Main article: Remotely created check § Fraud and
regulation
Remotely created checks are orders of payment created
by the payee and authorized by the customer remotely,
using a telephone or the internet by providing the required
information including the MICR code from a valid check.
They do not bear the signatures of the customers like
ordinary cheques. Instead, they bear a legend statement
"Authorized by Drawer". This type of instrument is usually
used by credit card companies, utility companies, or
telemarketers. The lack of signature makes them
susceptible to fraud. The fraud is considered Demand
Draft fraud in the US.
Uninsured deposits[edit]
A bank soliciting public deposits may be uninsured or not
licensed to operate at all. The objective is usually to solicit
for deposits to this uninsured "bank", although some may
also sell stock representing ownership of the "bank".
Sometimes the names appear very official or very similar
to those of legitimate banks. For instance, the unlicensed
"Chase Trust Bank" of Washington D.C. appeared in
2002, bearing no affiliation to its seemingly apparent
namesake; the real Chase Manhattan Bank[3] is based in
New York. Accounting fraud has also been used to
conceal other theft taking place within a company.
Bill discounting fraud[edit]
Essentially a confidence trick, a fraudster uses a company
at their disposal to gain the bank's confidence, by posing
as a genuine, profitable customer. To give the illusion of
being a desired customer, the company regularly and
repeatedly uses the bank to get payment from one or
more of its customers. These payments are always made,
as the customers in question are part of the fraud, actively
paying any and all bills the bank attempts to collect. After
the fraudster has gained the bank's trust, the company
requests that the bank begin paying the company up front
for bills it will collect from the customers later. Many banks
will agree, but are not likely to go whole hog right away.
So again, business continues as normal for the fraudulent
company, its fraudulent customers, and the unwitting
bank. As the bank grows more comfortable with the
arrangement, it will trust the company more and more and
be willing to give it larger and larger sums of money up
front. Eventually, when the outstanding balance between
the bank and the company is sufficiently large, the
company and its customers disappear, taking the money
the bank paid up front and leaving no-one to pay the bills
issued by the bank.
Duplication or skimming of card information[edit]
This takes a number of forms, ranging from merchants
copying clients' credit card numbers for use in later illegal
activities or criminals using carbon copies from old
mechanical card imprint machines to steal the info, to the
use of tampered credit or debit card readers to copy the
magnetic stripe from a payment card while a hidden
camera captures the numbers on the face of the card.
Some fraudsters have attached fraudulent card stripe
readers to publicly accessible ATMs, to gain unauthorised
access to the contents of the magnetic stripe, as well as
hidden cameras to illegally record users' authorisation
codes. The data recorded by the cameras and fraudulent
card stripe readers are subsequently used to produce
duplicate cards that could then be used to make ATM
withdrawals from the victims' accounts.
Cheque kiting[edit]
Cheque kiting exploits a banking system known as "the
float" wherein money is temporarily counted twice. When a
cheque is deposited to an account at Bank X, the money
is made available immediately in that account even though
the corresponding amount of money is not immediately
removed from the account at Bank Y at which the cheque
is drawn. Thus both banks temporarily count the cheque
amount as an asset until the cheque formally clears at
Bank Y. The float serves a legitimate purpose in banking,
but intentionally exploiting the float when funds at Bank Y
are insufficient to cover the amount withdrawn from Bank
X is a form of fraud.
Forged or fraudulent documents[edit]
Forged documents are often used to conceal other thefts;
banks tend to count their money meticulously so every
penny must be accounted for. A document claiming that a
sum of money has been borrowed as a loan, withdrawn by
an individual depositor or transferred or invested can
therefore be valuable to someone who wishes to conceal
the fact that the bank's money has in fact been stolen and
is now gone.
Forgery and altered cheques[edit]
Main article: Forgery
Fraudsters have altered cheques to change the name (in
order to deposit cheques intended for payment to
someone else) or the amount on the face of cheques,
simple altering can change $100.00 into $100,000.00.
(However, transactions for such large values are routinely
investigated as a matter of policy to prevent fraud.)
Instead of tampering with a real cheque, fraudsters may
alternatively attempt to forge a depositor's signature on a
blank cheque or even print their own cheques drawn on
accounts owned by others, non-existent accounts, etc.
They would subsequently cash the fraudulent cheque
through another bank and withdraw the money before the
banks realise that the cheque was a fraud.
Fraudulent loan applications[edit]
These take a number of forms varying from individuals
using false information to hide a credit history filled with
financial problems and unpaid loans to corporations using
accounting fraud to overstate profits in order to make a
risky loan appear to be a sound investment for the bank.
Fraudulent loans[edit]
One way to remove money from a bank is to take out a
loan, which bankers are more than willing to encourage if
they have good reason to believe that the money will be
repaid in full with interest. A fraudulent loan, however, is
one in which the borrower is a business entity controlled
by a dishonest bank officer or an accomplice; the
"borrower" then declares bankruptcy or vanishes and the
money is gone. The borrower may even be a non-existent
entity and the loan merely an artifice to conceal a theft of a
large sum of money from the bank. This can also be seen
as a component within mortgage fraud (Bell, 2010).[4]
Empty ATM envelope deposits[edit]
A criminal overdraft can result due to the account holder
making a worthless or misrepresented deposit at
an automated teller machine in order to obtain more cash
than present in the account or to prevent a check from
being returned due to non-sufficient funds. United States
banking law makes the first $100 immediately available
and it may be possible for much more uncollected funds to
be lost by the bank the following business day before this
type of fraud is discovered. The crime could also be
perpetrated against another person's account in an
"account takeover" or with a counterfeit ATM card, or an
account opened in another person's name as part of
an identity theft scam. The emergence of ATM deposit
technology that scans currency and checks without using
an envelope may prevent this type of fraud in the future.[5]
The fictitious 'bank inspector'[edit]
This is an old scam with a number of variants; the original
scheme involved claiming to be a bank inspector, claiming
that the bank suspects that one of its employees is
stealing money and that to help catch the culprit the "bank
inspector" needs the depositor to withdraw all of his or her
money. At this point, the victim would be carrying a large
amount of cash and can be targeted for the theft of these
funds.
Other variants included claiming to be a prospective
business partner with "the opportunity of a lifetime" then
asking for access to cash "to prove that you trust me" or
even claiming to be a new immigrant who carries all their
money in cash for fear that the banks will steal it from
them – if told by others that they keep their money in
banks, they then ask the depositor to withdraw it to prove
the bank hasn't stolen it.
Impersonation of officials has more recently become a
way of stealing personal information for use in theft of
identity frauds.

Ways to stop bank scams

1. Multi-Factor Authentication
The best approach is to start with a multi-factor
authentication/multi-layered security structure. This is what
Romeo is seeing from the institutions that are successfully
thwarting fraud. "Remember, there is no one silver bullet that
will solve this problem, so if you put all your hope in a single
solution, you'll get compromised, and the intruder will have
everything."

This multi-layered approach from a software perspective,

combined with old-fashioned out-of-band phone calls to the
customer to confirm a questionable transaction, can cut the
institution's headaches and the business' fraud losses.

In the old days, Romeo says, calendars were put in place for all
set transactions for all accounts, whether they were large
corporates or small businesses. "If they had a weekly payroll,
that only went out once a week, and then all of a sudden we
saw something going out every day -- that would be a red flag;
we would question it," he says.

2. Banks: Monitor Transactions

In his days in bank operations, Romeo says, the bank used to
set up daily limits on each user. "We used to set these limits on
our mainframe processor in the bank, along with file limits and
batch limits, so if there were something added, or out of the
ordinary, we would spot it." Another thing to watch for is a
whole lot of activity right under $9,000. "Because the
fraudsters know they won't draw suspicion of a bank if they fly
under $10,000 mark."

3. Businesses: Reconcile Corporate Accounts Daily

For businesses, Romeo recommends reconcilement of banking
accounts and transactions on a daily basis -- either at end of
day or at least at the beginning. "This will help catch any
transactions you didn't make, and the sooner you bring it to
your bank's attention, the better chance to retrieve the money,
with the bank doing a recall or reversal of the transaction. The
longer you wait, the less likely it is that you'll see that money
recovered."
4. Employ Dual, Triple Controls
Dual controls at the corporate side are, at the very least,
tablestakes. Romeo suggests even triple controls, where one
person creates the transaction, a second person approves it,
and then a third person actually sends the transaction.

"If you don't have the people, then set up the ACH transactions
with the institution, an out of band confirmation, whether it is
a phone call to confirm that you've sent it, and confirmation of
the correct information was received," he notes. This can be
done live or through an automated voice response system.
Usually, only one person would have the password and ID to
call the bank, which would be totally separate from the
person's computer.

5. Raise Fraud Awareness

Finally, Romeo says, continuous education of business
customers is important. At the national level, this problem of
corporate account takeover has gotten real attention. But real
solutions won't come until financial institutions and their
corporate accounts alike realize the real risks they face - and
simple solutions they can implement to help mitigate those
risks.

1. Bank Scam by Vijay Mallya Main Accuse: Vijay

Mallya Fraud Amount: ₹9,432 crore Mallya had
borrowed Rs. 9,432 crore for his Kingfisher Airlines
from 13 banks till February 2018. The biggest lender was
State Bank of India with 1600 crore, followed by PNB
with 800 crore, IDBI with 650 crore and Bank of Baroda
with 550 crore. He ran away from India on 2nd March
2016 and is in hiding in London. The Government of
India is fighting for his extradition even today.
 2. Nirav Modi Scam Main Accuse: Nirav Modi and his
uncle Mehul Surakshi Fraud Amount: ₹11,400 crore This
scam, of Rs. 11,400 crore, is being called the biggest
scam in the banking sector of India. Billionaire jeweller
Nirav Modi and his uncle Mehul Surakshi are the main
accused of this scam. A "Letter of Undertaking" had
been given to both of them 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. The Enforcement Directorate, however,
has seized Nirav Modi's assets worth over Rs 5870 crore.
Kolkata-based Allahabad Bank has claimed of having an
exposure of ₹2,363 crore in the PNB fraud case. The
scam in the Allahabad bank involved the misuse of
SWIFT technique by the internal employees of the
Allahabad bank.

3. Rotomac Scam Main Accuse: Vikram Kothari

(Owner) Fraud Amount: ₹3,695 crore Vikram Kothari,
the promoter of Rotomac pen, allegedly cheated seven
banks with Rs. 3,695 crore. Vikram Kothari has
misappropriated loans from seven banks worth Rs. 2919
crore. His total outstanding amount including interest is
Rs. 3695 crore. Rotomac Global is now being probed by
Enforcement Directorate (ED) and Central Bureau of
Investigation (CBI) . The CBI has arrested Vikram
Kothari, the managing director of Rotomac Global Pvt
Ltd. Here's a chart displaying information about all the
banks and the amount of their money that is stuck in this
scam.

4. R P Info Systems Scam Main Accuse: Company

Directors - Shivaji Panja, Kaustuv Ray and Vinay Bafna
Fraud Amount: ₹515.15 crore A computer manufacturer
R P Info Systems and its directors were booked by the
CBI for allegedly fraudulently cheated a consortium of
nine banks including PNB, SBI and Canara Bank with
Rs. 515.15 crore. The banks accused R P Info System of
taking a loan on the basis of fabricated and fraudulent
documents.

5. Kanishka Gold Pvt. Scam Main Accuse: Bhupendra

Kumar Jain (Director) and his wife Neeta Jain Fraud
Amount: ₹824.15 crore 6 | P a g e This scam is related to
the biggest Private Sector Bank of the country, SBI,
leading the consortium of 14 public and private sector.
The principle loan is about Rs. 824 crore, along with the
interest due, a loss of more than Rs 1,000 crore will be
faced by the banks. The main accuse is Chennai-based
company Kanishka Gold Pvt. The company did not pay a
loan of Rs. 824 crore, which has been converted into
"NPA". A case as been registered against Kanishka Gold
by CBI and ED has started investigating the fraud.