FRAUDS IN BANKING

EXECUTIVE SUMMARY

Bank fraud is the use of potentially illegal means to obtain money, assets, or other
property owned or held by a financial institution, or to obtain money from depositors by
fraudulently posing as a bank or other financial institution. In many instances, bank fraud
is a criminal offence. While the specific elements of particular banking fraud laws vary
depending on jurisdictions, the term bank fraud applies to actions that employ a scheme
or artifice, as opposed to bank robbery or theft. For this reason, bank fraud is
sometimes considered a white-collar crime. Some customers avoid online banking, as
they perceive it as being too vulnerable to fraud. The security measures employed by
most banks are never 100% safe, but in practice the number of fraud victims due
to online banking is very small. Indeed, conventional banking practices may be more
prone to abuse by fraudsters than online banking. Credit card fraud, signature forgery
and identity theft are far more widespread "offline" crimes than malicious hacking. Bank
transactions are generally traceable and criminal penalties for bank fraud are high.
Online banking can be more insecure if users are careless, gullible or computer
illiterate.

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INTRODUCTION

A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental
banking services such as accepting deposits and providing loans. There are also
nonbanking institutions that provide certain banking services without meeting the legal
definition of a bank. Banks are a subset of the financial services industry. A banking
system also referred as a system provided by the bank which offers cash management
services for customers, reporting the transactions of their accounts and portfolios,
throughout the day. The banking system in India should not only be hassle free but it
should be able to meet the new challenges posed by the technology and any other
external and internal factors. For the past three decades, Indias banking system has
several outstanding achievements to its credit. The Banks are the main participants of
the financial system in India. The Banking sector offers several facilities and
opportunities to their customers. All the banks safeguard the money and valuables and
provide loans, credit, and payment services, such as checking accounts, money orders,
and cashiers cheques. The banks also offer investment and insurance products. As a
variety of models for cooperation and integration among finance industries have
emerged, some of the traditional distinctions between banks, insurance companies, and
securities firms have diminished. In spite of these changes, banks continue to maintain
and perform their primary roleaccepting deposits and lending funds from these
deposits.

The term bank is either derived from Old Italian word banca or from a French word
banque both mean a Bench or money exchange table. In olden days, European money
lenders or money changers used to display (show) coins of different countries in big
heaps (quantity) on benches or tables for the purpose of lending or exchanging.

What is a Bank?

A bank is a financial institution which deals with deposits and advances and other
related services. It receives money from those who want to save in the form of deposits
and it lends money to those who need it.

Oxford Dictionary defines a bank as "an establishment for custody of money, which it
pays out on customer's order."

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CHARACTERISTICS OF A BANK
1. Dealing in Money-
Bank is a financial institution which deals with other people's money i.e. money
given by depositors.

2. Individual / Firm / Company

A bank may be a person, firm or a company. A banking company means a
company which is in the business of banking.

3. Acceptance of Deposit
A bank accepts money from the people in the form of deposits which are usually
repayable on demand or after the expiry of a fixed period. It gives safety to the
deposits of its customers. It also acts as a custodian of funds of its customers.

4. Giving Advances
A bank lends out money in the form of loans to those who require it for different
purposes.

5. Payment and Withdrawal

A bank provides easy payment and withdrawal facility to its customers in the form
of cheques and drafts; it also brings bank money in circulation. This money is in
the form of cheques, drafts, etc.

6. Agency and Utility Services

A bank provides various banking facilities to its customers. They include general
utility services and agency services.

7. Profit and Service Orientation

A bank is a profit seeking institution having service oriented approach.

8. Ever increasing Functions

Banking is an evolutionary concept. There is continuous expansion and
diversification as regards the functions, services and activities of a bank.

9. Connecting Link
A bank acts as a connecting link between borrowers and lenders of money.
Banks collect money from those who have surplus money and give the same to
those who are in need of money.

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10. Banking Business

A bank's main activity should be to do business of banking which should not be
subsidiary to any other business.

11. Name Identity

A bank should always add the word "bank" to its name to enable people to know
that it is a bank and that it is dealing in money.

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CLASSIFICATION OF BANKS

Scheduled banks

A scheduled bank, in India, refers to a bank which is listed in the 2nd Schedule of the
Reserve Bank of India Act, 1934. Banks not under this Schedule are called non-
scheduled banks. Scheduled banks are usually private, foreign and nationalized banks
operating in India. However, cooperative banks are allowed to seek scheduled bank
status if they satisfy certain criteria.[2] A scheduled bank is eligible for loans from the
Reserve Bank of India at bank rate. They are also given membership to clearing
houses.

I} Commercial banks-

Commercial Banks are those banks which perform all kinds of banking functions such
as accepting deposits, advancing loans, credit creation, and agency functions. They are

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also called joint stock banks because they are organized in the same manner as joint
stock companies.

a. Public sector banks -Commercial Banks that are nationalized by the government
of a country. In public sector banks, the major stake is held by the government. In
India, public sector banks operate under the guidelines of Reserve Bank of India
(RBI), which is the central bank. Some of the Indian public sector banks are State
Bank of India (SBI), Corporation Bank, Bank of Baroda, Dena Bank, and Punjab
National Bank.

b. Private Sector Banks-Commercial Banks in which major part of share capital is

held by private businesses and individuals. These banks are registered as
companies with limited liability. Some of the Indian private sector banks are
Vysya Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank,
and Housing Development Finance Corporation (HDFC) Banks.

c. Foreign banksCommercial Banks that are headquartered in a foreign country,

but operate branches in different countries. Some of the foreign banks operating
in India are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank,
American Express Bank, Standard & Chartered Bank, and Grindlays Bank. In
India, since financial reforms of 1991, there is a rapid increase in the number of
foreign banks. Commercial banks mark significant importance in the economic
development of a country as well as serving the financial requirements of the
general public.

d. Regional rural banks -Regional Rural Banks are local level banking organizations
operating in different States of India. They have been created with a view to
serve primarily the rural areas of India with basic banking and financial services.
Some of the RRBs operating in India is Marathwada Gramin Bank, Assam Gram
Vikas Bank.

II} Co-operative banks-

A Cooperative credit institution is a voluntary association of members for self-
help and caters to their financial needs on mutual basis. Indian farmers need
three types of credit- viz- short-term, mid-term, long-term. The short term and
medium term requirements are met by the cooperative banking institutions like
primary agricultural credit societies, district central cooperative banks and state
cooperative banks. Their long-term credit requirements are catered to by
development banks presently known as state agriculture and rural development

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bank. The existing cooperative structure in the country for short-term and mid-
term credit is composed of a pyramid type of three-tier structure comprising of
State Cooperative Banks (SCBs) at state level.
District Central Cooperative Banks (DCBs) at district level.
Primary Agricultural Credit Societies (PACS) at the village level.

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SEVICES OFFERED BY BANKS

1. ACCEPTING DEPOSITS
Accepting deposit from savers or account holders is the primary function of bank.
Banks accept deposit from those who can save money, but cannot utilize in
profitable sectors. People prefer to deposit their savings in a bank because by
doing so, they earn interest.

2. ADVANCING OF LOANS
Banks are profit oriented business organizations. So they have to
advance loan to public and generate interest from them as profit. After keeping
certain cash reserves, banks provide short-term, medium-term and long-
term loans to needy borrowers.

3. DISCOUNTING OF BILLS OF EXCHANGE

Bill of exchange is a negotiable instrument, which is accepted by the debtor,
drawn upon him/her by the creditor and agrees to pay the amount mentioned on
maturity. Discounting bill of exchange is another function of modern commercial
bank. Under this, banks purchase bill of exchange from holder in discount after
making some marginal deduction in the form of commission. The banks pay the
deducted value to the holders when traders discount it into bank.

4. CHEQUE PAYMENT
Banks provides cheque pads to the account holders. Account holders can draw
cheque upon bank to pay money. Banks pay for cheques of customers after
formal verification and official procedures.

5. REMITTANCE
Remittance is a system, through which cash fund is transferred from one place to
another. Banks provide the facilities of remittance to the customers and earn
some service charge.

6. COLLECTION AND PAYMENT OF CREDIT INSTRUMENTS

In modern business, different types of credit instruments such as bill of
exchange, promissory notes, cheques etc. are used. Banks deal with such
instruments. Modern banks collect and pay different types of credit instruments
as the representative of the customers.

7. FOREIGN CURRENCY EXCHANGE

Banks deal with foreign currencies. As the requirement of customers, banks
exchange foreign currencies with local currencies, which is essential to settle
down the dues in the international trade.

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8. CONSULTANCY
Modern commercial banks are large organizations. They can expand their
function to consultancy business. In this function, banks hire financial, legal and
market experts, who provide advices to customers in regarding investment,
industry, trade, income, tax etc.

9. BANK GUARANTEE
Customers are provided the facility of bank guarantee by modern commercial
banks. When customers have to deposit certain fund in governmental offices or
courts for specific purpose, bank can present itself as the guarantee for the
customer, instead of depositing fund by customers.

10. NEFT (National Electronic Funds Transfer)

NEFT refers to an online system for transferring funds from one financial
institution to another within India. The system was launched in November 2005
and was to inherit every bank that was assigned to the SEFT clearing system.
There is no minimum or maximum limit for fund transfer in NEFT system. The
persons or parties which have bank accounts, generally use this facility. This
facility is open even to those, who do not have bank account. The persons
without bank accounts can deposit cash at the NEFT-enabled branch with
instructions to transfer funds using NEFT. A separate Transaction Code (No. 50)
has been allotted in the NEFT system to facilitate walk-in-customers to deposit
cash and transfer funds to the beneficiary.
11. RTGS (Real Time Gross Settlement)
It is a system to transfer funds from one bank to another bank on a 'real time' and
'gross basis'. The settlement in 'real time' means payment transaction is not
subjected to any waiting period. The transaction is settled as soon as processed.
'Gross settlement' means the transaction is settled on one to one basis, without
bunching or netting with any other transaction. Once processed, the payment is
final and irrevocable. This system of electronic transfer takes place with the help
of Central Bank of the country. The electronic payment system is maintained or
controlled by the Central Bank of the Country. In India, Reserve Bank of India
(RBI, Central Bank of the Country) maintains this payment network. RTGS is the
fastest possible money transfer system. Core Banking enabled banks and
branches are assigned an Indian Financial System Code (IFSC) for RTGS and
NEFT purposes. This is an eleven digit alphanumeric code and unique to each
branch of bank. The first four alphabets indicate the identity of the bank and
remaining seven numerals indicate a single branch. This code is provided on the
cheque books which are required for transaction along-with recipient's account
number. Customers can access RTGS facility between 9 a.m. to 4.30 p.m. on
week days and 9.30 a.m. to 1.30 p.m. on Saturday. This timing may also vary
from bank to bank, depending upon the timings of the branches.

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12. Bank Overdraft

An overdraft is an advance given by the bank allowing a customer to overdraw
his current account up to an agreed amount. An overdraft account is operated in
the same way as a current account. In overdraft the interest is charged on the
credit actually utilized, i.e. to the extent amount is overdrawn. Overdraft facility is
widely used by the businessmen. They can use more money than the credit
amount in their account, and secondly, interest is paid only on the amount
actually withdrawn from the bank and not to the overdraft limit allowed by the
bank.

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FRAUDS

Fraud Definition:-
Fraud can loosely be defined as any behavior by which one person intends to
gain a dishonest advantage over another fraud, under section 17 of the Indian
contract act, 1872, RBI not defined the term fraud in its guidelines on frauds
which reads as under. 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.

Nature of Fraud:-
In the perspective of financial industry and specifically the banking sector, fraud
remains a huge issue. Banking fraud therefore is defined as the use of deliberate
misrepresentation in order to fraudulently obtain money, assets or other property
owned or held by a financial institution. Moreover in criminal law, bank fraud is an
intentional deception made for personal gain or to damage the financial
institution. Bank fraud is widely known as the white-collar crime: which require
some sort of technical expertise

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TYPES OF FRAUD:-
1. CHEQUE FRAUD cheque fraud is one of the oldest type of financial crime.
Even in our computer and internet technology era, many consumers still prefer to
pay by cheque or bankers draft. The cause of this is the people do not trust the
computer technology and have misconceptions about online banking. This is to
some extent understandable because of the fact that most of these humans are
computer illiterates and what is unknown to the human mind causes fear or
rejection. This fear however is totally obsolete because statistics has shown
currently that online banking is now safer than cheques.
To protect oneself from cheque fraud certain guidelines and precautions should
be taken before giving and receiving or sending any cheque. It I also strongly
recommended that one should responsibly inspect and analyze the cheques.

COUNTERFEIT CHEQUES these cheques are not written or authorized

by legitimate account holders. The existence of counterfeit cheques is
supported by new technology. The thieves now use printers, copiers and
softwares to make clone cheques with high resemblance to the original.
Many times these are hard to recognize as false even by experts.

STOLEN CHEQUES cheques not signed by account owner, rather

stolen, usually out of the glove box of cars or homes. The signature is than
forged and cheque used as pleased. Interestingly other documents not
well protected and have signatures are used to clone the signature.

ALTERED OR FORGED CHEQUES this cheque is issued by the

account holder but has been intercepted and the beneficiary or the
amount on the cheque being altered or new information added. To do so,
sharp instruments are used.

CLOSED ACCOUNTS bank account which are not used anymore or are
closed, but cheques still exist for these accounts, if these cheques are not
destroys then one can be a potential victim.

NEW ACCOUNT an identity is stolen or made up with a false document.

If a fraudster personal document and some potential information, one can
request and open new accounts, giving the scammer the opportunity to
steal money from individuals or businesses in the victims name.

OVERPAID CHEQUES Cheque overpayment fraud is when a fraudster

pays a business for goods or services by a fraudulent cheque. The
cheque is made for a higher than the actual value. The business
reimburses the fraudster with the excess amount of money that was

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apparently paid to it, before it discovers that the cheque was not genuine.
Not only does the business go unpaid for the goods or services, but loses
further money because of the excess payment it paid the fraudster.
Cheque overpayment fraud is often a method used in employment
opportunity scams or transactions for goods and services sold through
classified adverts. When an individual rather than a business is the victim
of such a fraud, it is known as advance fee fraud. Fraud has been
committed if money has been lost.

Measures to adopt to ensure that your cheques are not or cannot

be forged after they have been prepared and signed :-
Never leave gaps in your words.
Always draw a line after the name, amount , and wherever
the space is left.
Use full and correct names for all the information.
Prohibit transfer of cheques.
Never pre-sign any cheques.
Dont leave your cheque books in your cars as large
percentages of cheques are stolen for cars.
If you close an account, destroy the remaining cheques
relevant to that account.

2. INTERNET AND TELEPHONE FRAUDS - Fraudsters use social engineering

techniques such as Phishing and Vishing to trick you into providing your banking
login details and other sensitive information. Typically, you will receive an email
or cold call that appears to be from your bank, police or other reputable
organization, with the aim of tricking you into providing your personal or security
related information. You may unknowingly click on a link or attachment in an
email which redirects you to a fake website, or installs malicious software known
as Malware onto your PC. This enables the fraudster to steal your personal
information and money.

PHISHING - Fraudsters send bogus messages which appear to be authentic and

from legitimate organizations. The messages usually contain links or attachments
which, if accessed, will take you to a fake website and prompt you for your online
banking details. The key difference with the fake site is that you will be asked to
confirm your full security details, rather than the selected pieces of information.
The fraudsters then use your details to access your account(s) and steal your
money.

HOW TO PROTECT YOURSELF FROM THIS FRAUD?

Download Trustier Rapport Online Banking Security
Software. One of the features of this free software includes a
security alert if you try to access your internet banking login
credentials on an unknown website.

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Always use a leading antivirus software in conjunction with

Trustier Rapport and keep it up to date.
Look out for indications that you are using a secure site; a
key or padlock symbol and the address prefix https:/ If you
are unsure dont make the transaction or download any
software until you can check it out or obtain advice.
If you want to validate an email use contact details obtained
from a reliable source.
Never respond to a message from an unknown source, and
take care not to click any embedded links. Clicking the
embedded link can provide verification of your active email
address which could result in you being a target for further
malicious emails.
Dont use links in an email message to load a web page.
Always input the web address into the browser.
Only respond to expected email requests.

VISHING - The term Vishing comes from combining voice with phishing. This
method of social engineering involves the fraudster telephoning you claiming to
be from the Bank, Police or other reputable organization in an attempt to obtain
your personal information and steal your money.

HOW TO PROTECT YOURSELF FROM THIS FRAUD?

Do not assume a call is genuine because they know your
name, or other personal information such as your postal
address.
Say no to requests for information, dont be afraid to
terminate the call.
Do not assume a call is genuine by the caller ID information.
Fraudsters often clone the telephone number of the
organization they want to impersonate and make it appear
on the caller ID display of the individual's phone.
If you want to validate a phone call use contact details
obtained from a reliable source, and always use a different
telephone line to ensure that you dont unknowingly speak to
the fraudster again (who may attempt to keep your phone
line open). Expect the usual waiting messages and
timescales when calling a contact centre.
Never respond to requests asking you to confirm your PIN,
or requests to collect your bank card from your home
address. We will never ask you to do this.
Never respond to a request to transfer your funds to another
Bank, even if the caller advises you that you need to urgently
move your money to a safe bank account. We will never
ask you to do this.

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MALWARE - Malware is malicious financial software which steals your personal

and security information and feeds the information back to the fraudster, who
uses the details to access your account(s) and steal your money. Malware can
attack all customers and can be so sophisticated that it can work in the
background to move your money, or trick you into believing that you have been
unsuccessful in logging onto your online banking page, and prompts you to re-
enter your security details, which the fraudster captures. Malware includes;
viruses, worms, Trojan horses, spyware, Scareware, Crimeware and
Ransomware.

HOW TO PROTECT YOURSELF FROM THIS FRAUD?

Download Trustier Rapport Online Banking Security Software. One
of the features of this free software includes a security alert if you
try to access your internet banking login credentials on an unknown
website.
Always use legitimate antivirus software in conjunction with Trustier
Rapport and keep it up to date.
Look out for indications that you are using a secure site; a key or
padlock symbol and the address prefix https:/ If you are unsure
dont make the transaction or download any software until you can
check it out or obtain advice.
Be careful if you are asked to re-enter your security credentials or if
you see any unusual screens, these could be an indication of
malware.
Be vigilant to system outage messages within your login session,
e.g. Internet Banking is unavailable between 14.00-17.00. This is
likely to be a legitimate message from us but could be a fraudulent
message, always be cautious.
Check online banking payments before confirming to ensure they
are going to the right recipient.

SMISHING - One type of mobile fraud and a variant of the email phishing scam is
smishing (SMS phishing or smishing), which uses text messages to fool you into
sharing your financial and personal information. Heres how the scam works: You
receive a text message on your cell phone. The message states that it is from
Vancity and creates a sense of urgency by telling you that your account has been
suspended or locked for some reason. Some possible reasons they may use
include: due to unauthorized access, excessive unsuccessful attempts to gain
access or other fraudulent activity.The message will end by telling you that you
can reactivate or unlock your account by: calling the phone number provided or
linking to the Internet site provided in the text message. Whether calling the
phone number or linking to the internet site, you will be asked to provide personal
information, often including your account number (chequing, savings, credit or
debit card), personal identification number (PIN), security question/answers,
Social Insurance Number, and other personal information.

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HOW TO PROTECT YOURSELF FROM THIS FRAUD?

STOP. Do not respond. Toll free scams are rampant. If an
apparent toll free number is presented for you to dial, compare
it to ours: 1-888-Vancity (826-2489). Resist any exaggerated
claims that you must immediately respond and provide the
information requested. Never provide personal or financial
information in response to unsolicited email, voice, or text
requests.
LOOK. Read the message carefully or, if it was phone call,
listen to the recorded telephone message carefully. Ask
yourself why the information requested would really be needed.
Vancity never sends unsolicited requests for confidential
information.
CALL. If you think youve responded to or have discovered
a smishing scam that claims to be from Vancity, contact
the Member Services Centre at 604.877.7000 or toll free at
1.888.Vancity (826.2489) or visit your branch immediately.

3. MORTGAGE FRAUD - Mortgage fraud is a crime in which the intent is to

materially misrepresent or omit information on a mortgage loan application to
obtain a loan or to obtain a larger loan than would have not been obtained had
the lender or borrower known the truth.

OCCUPANCY FRAUD -This occurs where the borrower wishes to obtain a

mortgage to acquire an Investment fraud, but states on the loan application that
the borrower will occupy the property as the primary residence or as a second
home. If undetected, the borrower typically obtains a lower interest rate than was
warranted. Because lenders typically charge a higher interest rate for non-owner-
occupied properties, which historically have higher delinquency rates, the lender
receives insufficient return on capital and is over-exposed to loss relative to what
was expected in the transaction. In addition, lenders allow larger loans on owner-
occupied homes compared to loans for investment properties. When occupancy
fraud occurs, it is likely that taxes on gains are not paid, resulting in additional
fraud. It is considered fraud because the borrower has materially misrepresented
the risk to the lender to obtain more favorable loan terms.

INCOME FRAUD-This occurs when a borrower overstates his/her income to

qualify for a mortgage or for a larger loan amount. This was most often seen with
so-called "stated income" mortgage loans (popularly referred to as "liar loans"),
where the borrower, or a loan officer acting for a borrower with or without the
borrower's knowledge, stated without verification the income needed to qualify for
the loan. Because mortgage lenders today do not have "stated income" loans,
income fraud is seen in traditional full-documentation loans where the borrower
forges or alters an employer-issued Form W-2, tax returns and/or bank account
records to provide support for the inflated income. All lenders obtain an official

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IRS transcript that must match the borrower provided tax returns. It is considered
fraud because in most cases the borrower would not have qualified for the loan
had the true income been disclosed. The "mortgage meltdown" was caused, in
part, when large numbers of borrowers in areas of rapidly increasing home prices
lied about their income, acquired homes they could not afford, and then
defaulted. Many of the past problems no longer exist.

FAILURE TO DISCLOSE LIABILITIES: Borrowers may conceal obligations, such

as mortgage loans on other properties or newly acquired credit card debt, to
reduce the amount of monthly debt declared on the loan application. This
omission of liabilities artificially lowers the debt-to-income ratio, which is a key
underwriting criterion used to determine eligibility for most mortgage loans. It is
considered fraud because it allows the borrower to qualify for a loan which
otherwise would not have been granted, or to qualify for a bigger loan than what
would have been granted had the borrower's true debt been disclosed.

IDENTITY THEFT -Occurs when a person assumes the identity of another and
uses that identity to obtain a mortgage without the knowledge or consent of the
victim. In these schemes, the thieves disappear without making payments on the
mortgage. The schemes are usually not discovered until the lender tries to collect
from the victim, who may incur substantial costs trying to prove the theft of
his/her identity. Falsification of Loan Applications without the knowledge of the
Borrower. The loan applications are falsified without the knowledge of the
borrower when the borrower actually will not qualify for a loan for various
reasons. For Example:-parties involved will make a commission out of the
transaction. The business happens only if the loan application is falsified. For
example borrower applies for a loan stating monthly income of Rs 2000 (but with
this income Rs2000 per month the borrower will not qualify), however the broker
or loan officer falsified the income documents and loan application that borrower
earns a monthly income of Rs15, 000. The loan gets approved the broker/loan
officer etc. gets their commission. But the borrower struggles to repay the loan
and defaults the loan eventually.

APPRAISAL FRAUD -Occurs when a home's appraised value is deliberately

overstated or understated. When overstated, more money can be obtained by
the borrower in the form of a cash-out refinance, by the seller in a purchase
transaction, or by the organizers of a for-profit mortgage fraud scheme. Appraisal
fraud also includes cases where the home's value is deliberately understated to
get a lower price on a foreclosed home, or in a fraudulent attempt to induce a
lender to decrease the amount owed on the mortgage in a loan modification. A
dishonest appraiser may be involved in the preparation of the fraudulent
appraisal, or an existing and accurate appraisal may be altered by someone with
knowledge of graphic editing tools such as Adobe Photoshop. Appraisal
Independence is current law.

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4. BILL DISCOUNTING FRAUD- Essentially a confidence trick, a fraudster uses a

company at their disposal to gain confidence with a bank, by appearing as a
genuine, profitable customer. To give the illusion 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 raised by the bank.
After time, after the bank is happy with the company, the company requests that
the bank settles its balance with the company before billing the customer. Again,
business continues as normal for the fraudulent company, its fraudulent
customers, and the unwitting bank. Only when the outstanding balance between
the bank and the company is sufficiently large, the company takes the payment
from the bank, and the company and its customers disappear, leaving no-one to
pay the bills issued by the bank.

5. ACCOUNTING FRAUD - 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 fraud:
SATYAM(2009).

DEMAND DRAFT FRAUD - 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.

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THE FRAUD TRIANGLE

Basic factors influencing the occurrence of fraud-

1. PRESSURE
This is what causes a person to commit fraud. This includes medical bills,
expensive tastes, addiction problems, significant financial needs etc. Often this
need/problem is non-discloseable in the eyes of the fraudster. That is, the person
believes, for whatever reason, that their problem must be solved in secret.

2. RATIONALIZATION
It occurs when the individual develops a justification for their fraudulent activities.
The rationalization varies by case and individual. Some examples include: I
really need this money and Ill pay it back when I get my salary Other people
are doing it I didnt get a raise. The Company owes me.

3. OPPORTUNITY:
Opportunity is the ability to commit fraud. Because fraudsters dont wish to be
caught, they must also believe that their activities will not be detected.
Opportunity is created by weak internal controls, poor management oversight,
and through abuse of power.

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FRAUDS IN BANKING

THE EFFECT OF BANK FRAUD

Beyond financial (monetary) losses fraud has other negative consequences that
impact an institution reputation, customer loyalty and the confidence of the
shareholder.

Moreover in the greater impact, the fraud cost is passed on the customer. The
individual who fall victim to fraud can experience mental psychological, financial,
social and physical damage.

The impact of fraud can also be very damaging to cooperate victims where
small/medium scale businesses are most times unable to recover from the
financial or reputational damaged caused.

However most large companies literally feel the impact through the increase cost
of doing business.

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FRAUDS IN BANKING

FRAUD MANAGEMENT

Today while, electronic tracking and improved security has deter fraud practices the
threat still exist and bank fraud still occurs on regular basis. Fraud as have been
mentioned earlier on is a crime, and is becoming a difficult to pin down; however, with
the right management controls, practices, and policy framework, it can be mitigated.
While financial institutions are increasingly spending more resources on the
management of fraud and it allied, the traditional approach of using transaction
monitoring systems can only work well for detecting individual point of sales fraud in real
time.
The financial institutions need an integrated framework together with most
comprehensive plan new and modern fraud detection and prevention.
This management approach needs to protect fraud at the time of transaction, accurately
detect incidents in transaction, span all the ways customers interact with the institution
and provide structured oversight for the fraud management programme.
There are some key elements that can help institutions to successfully prevent fraud
The institutions must:-
Have staff code of conduct.
Have managers who understand their responsibilities for preventing and
detecting the risk of fraud.
Have fraud policy.
Take a proactive approach to preventing fraud.
Have employees who understand their responsibilities for preventing fraud
and detecting the risk of fraud.
Have a clear policy on accepting gifts and services.
Screen new employees, including criminal history checks.
Communicate staff code of conduct regularly- annually or biannually.
Designate a person to be responsible for fraud risks, including
investigations
Review fraud controls regularly annually or biannually.
Carry out due diligence on new suppliers, including credit checks, and
checks for conflict of interest.
Offers fraud awareness training.

21
FRAUDS IN BANKING

MASTER CIRCULAR BY RESERVE BANK OF INDIA ON FRAUDS AND

CLASSIFICATION

1. Introduction
1.1 Incidence of frauds, dacoities, robberies, etc., in banks is a matter of concern.
While the primary responsibility of preventing frauds lies with banks
themselves, Reserve Bank of India (RBI) has been advising them from time
to time about the major fraud prone areas and the safeguards necessary for
prevention of frauds. RBI has also been circulating to banks, the details of
frauds and unscrupulous borrowers and related parties who have perpetrated
frauds on other banks so that banks could introduce necessary safeguards /
preventive measures by way of appropriate procedures and internal checks
and also exercise caution while dealing with them. To facilitate this ongoing
process, it is essential that banks report to RBI complete information about
frauds and the follow-up action taken thereon. Banks may, therefore, adopt
the reporting system for frauds as prescribed in following paragraphs.
1.2 The Chairmen and Managing Directors/Chief Executive Officers (CMD/CEOs)
of banks must provide focus on the "Fraud Prevention and Management
Function" to enable, among others, effective investigation of fraud cases and
prompt as well as accurate reporting to appropriate regulatory and law
enforcement authorities including Reserve Bank of India.
1.2.1.1 The fraud risk management, fraud monitoring and fraud
investigation function must be owned by the bank's CEO, Audit
Committee of the Board and the Special Committee of the
Board.
1.2.1.2 Banks may, with the approval of their respective Boards, frame
internal policy for fraud risk management and fraud investigation
function, based on e the governance standards relating to the
ownership of the function and accountability which may rest on
defined and dedicated organizational set up and operating
processes.
1.2.1.3 Banks are required to send the Fraud Monitoring Returns (FMR)
and data, based on the Frauds Reporting and Monitoring
System (FRMS) supplied to banks, as detailed in para 3.2
below. Banks should specifically nominate an official of the rank
of General Manager who will be responsible for submitting all
the returns referred to in this circular.

22
FRAUDS IN BANKING

2. Classification Of Frauds

2.1 In order to have uniformity in reporting, frauds have been classified as under,
based mainly on the provisions of the Indian Penal Code:

a) Misappropriation and criminal breach of trust.

b) Fraudulent encashment through forged instruments, manipulation of books of
account or through fictitious accounts and conversion of property.
c) Unauthorized credit facilities extended for reward or for illegal gratification.
d) Negligence and cash shortages.
e) Cheating and forgery.
f) Irregularities in foreign exchange transactions.
Any other type of fraud not coming under the specific heads as above.

2.2 Cases of 'negligence and cash shortages' and irregularities in foreign exchange
transactions referred to in items (d) and (f) above are to be reported as fraud if the
intention to cheat/defraud is suspected/ proved. However, the following cases where
fraudulent intention is not suspected/ proved at the time of detection will be treated as
fraud and reported accordingly:
(a) Cases of cash shortage more than 10,000/-, (including at ATMs) and
(b) Cases of cash shortage more than 5,000/- if detected by
management / auditor/ inspecting officer and not reported on the day of
occurrence by the persons handling cash.

23
FRAUDS IN BANKING

3. Reporting Of Frauds To Reserve Bank Of India

3.1 Banks need not furnish FMR 1 return in fraud cases involving amount below 0.1
million to RBI in either hard or soft copy. However, banks at their end should make the
data entry in respect of such cases through the FRMS frauds above 0.1 million the
following procedure may be adopted. Package individually in FMR 1 format (less than
0.1 million) which will get automatically captured in FMR 2 return and will form part of
the consolidated database relating to frauds for the respective bank. In respect of

Amount Medium
To whom it Timeline
Name of involved in which
should be for Remarks
the return in the to be
reported reporting
fraud reported
FMR 1 Frauds Soft copy Central Fraud Within three
involving Monitoring Cell weeks of
Report on 0.1 million (CFMC), Bengaluru. detection
actual or and above
suspected
frauds

A format of
the return is
given in
Annex III
-do- 0.1 million Hard copy 1. To the Regional -do- List of banks
and above Office (RO) of RBI, under the
- 5 million Department of Banking supervisory
Supervision (DBS) purview of Senior
under whose Supervisory
jurisdiction the branch Mangers (SSMs)
where the fraud has and Small Bank
taken place is located. Monitoring
Division (SBMD)
2. To the RO, DBS / given in Annex I.
SBMD under whose
jurisdiction the Head
Office of the bank
where the fraud has
taken place is located
or to the SSM of the
Bank.
-do- Fraud Hard copy 1. CFMC Bengaluru -do- -do-
cases
involving 2. RO of RBI (DBS) /
an amount SBMD under whose
of 5 jurisdiction the head
million and office of the bank falls
above. or the SSM of the bank.
Flash report For frauds Hard copy 1. Through a DO letter Within a Should include
(in addition to involving addressed to the week of amount involved,
FMR 1) 10 million PCGM/ CGM-in- such frauds nature of fraud,

24
FRAUDS IN BANKING

and above Charge, DBS RBI, coming to modus operandi

Central Office, Mumbai. the notice of in brief, name of
the banks the branch/ office,
2. Copy to the RO of head office names of parties
RBI under whose involved, their
jurisdiction the bank's constitution
branch, where the fraud names of
has been perpetrated, proprietors/
is functioning and RO partners and
of RBI (DBS) / SBMD directors, names
under whose of officials
jurisdiction the head involved and
office of the bank falls lodging of
or the SSM of the bank. complaint with
police/CBI.
FMR 2 Quarterly Soft copy CFMC Bengaluru Within 15 Nil report to be
report on only days of the submitted if no
A format of frauds end of the fraud is
the return is outstanding quarter to outstanding.
given in which it
Annex III relates
FMR 3 Case-wise Soft copy CFMC Bengaluru Within 15 Nil report to be
quarterly only days of the submitted if there
A format of progress end of the are no frauds
the return is reports on quarter to above 0.1
given in frauds which they million
Annex III involving relate. outstanding.
0.1 million
and above

3.2 In respect of frauds in borrowal accounts, additional information as prescribed

under Part B of FMR 1 should also be furnished. It is observed while scrutinizing
FMR 1 returns from the banks, that certain vital fields in the returns are left blank.
As the complete particulars on frauds perpetrated in the banks are vital for
monitoring and supervisory purposes and issue of caution advices, banks should
ensure that the data furnished are complete/accurate and up-to-date.
Incidentally, if no data is to be provided in respect of any of the items, or if details
of any of the items are not available at the time of reporting of FMR 1 return, the
bank may indicate as no particulars to be reported or details not available at
present etc. In such a situation, the banks have to collect the data and report the
details invariably through FMR 3 return on quarterly basis.

3.3 Fraud reports should also be submitted in cases where central investigating
agencies have initiated criminal proceedings suomoto and/or where the Reserve
Bank has directed that such cases be reported as frauds.

25
FRAUDS IN BANKING

3.4 Banks may also report frauds perpetrated in their subsidiaries and affiliates/joint
ventures in FMR 1 format in hard copy only. Such frauds should, however, not
be included in the report on outstanding frauds and the quarterly progress
reports referred to in paragraph 4 below. Such frauds will not be entered in the
FRMS package at any stage. In case the subsidiary/ affiliate/joint venture of the
bank is an entity which is regulated by Reserve Bank of India and is
independently required to report the cases of fraud to RBI in terms of guidelines
applicable to that subsidiary/affiliate/joint venture, the parent bank need not
furnish the hard copy of the FMR 1 statement in respect of fraud cases detected
at such subsidiary/affiliate/joint venture.

3.5 Banks (other than foreign banks) having overseas branches/offices should
report all frauds perpetrated at such branches/offices also to RBI.

3.6 Central Fraud Monitoring Cell (CFMC), Department of Banking Supervision,

Central Office located at Bangalore will publish a directory of officers of all
banks/Financial Institutions (FI) responsible for reporting of Frauds etc. All
banks/Financial Institutions should furnish to Department of Banking
Supervision, Central Fraud Monitoring Cell, Bangalore any changes in the
names of officials that will be necessary for inclusion in the directory on priority
basis as and when called for.

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FRAUDS IN BANKING

4. Quarterly Returns

4.1 Report on Frauds Outstanding - FMR 2

4.1.1. The total number and amount of fraud cases reported during the quarter as
shown in Parts B and C of the return should tally with the totals of columns 4 and
5 in Part - A of the report.

4.1.2 Banks should furnish a certificate, as part of the above report, to the effect
that all individual fraud cases of 0.1 million and above reported to the Reserve
Bank in FMR 1 during the quarter have also been put up to the banks Board and
have been incorporated in Part - A (columns 4 and 5) and Parts B and C of FMR
2. A Nil report should be submitted if there are no frauds outstanding at the end
of a quarter.

4.2 Progress Report on Frauds - FMR 3

4.2.1 A list of cases of frauds where there are no developments during a quarter
with a brief description including name of branch and date of reporting may be
furnished in Part - B of FMR 3. A Nil report should be submitted if there are no
frauds above 0.1 million outstanding.

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FRAUDS IN BANKING

5. Delays In Reporting Of Frauds

5.1 Banks should ensure that the reporting system is suitably streamlined so that
delays in reporting of frauds, submission of delayed and incomplete fraud reports
are avoided. Banks must fix staff accountability in respect of delays in reporting
fraud cases to RBI.

5.2 Delay in reporting of frauds and the consequent delay in alerting other banks
about the modus operandi and issue of caution advices against unscrupulous
borrowers could result in similar frauds being perpetrated elsewhere. Banks may,
therefore, strictly adhere to the timeframe fixed in this circular for reporting fraud
cases to RBI failing which they would be liable for penal action prescribed under
Section 47(A) of the Banking Regulation Act, 1949.

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FRAUDS IN BANKING

6. Reports to the Board

6.1 Banks should ensure that all frauds of 0.1 million and above are reported to
their Boards promptly on their detection. Such reports should, among other
things, take note of the failure on the part of the concerned branch officials and
controlling authorities, and give details of action initiated against the officials
responsible for the fraud.

6.2 Quarterly Review of Frauds

6.2.1 As advised vide circular DBS.FrMC.BC.No.5/23.04.001/2012-13 dated

January 04, 2013 information relating to frauds for the quarters ending June,
September and December may be placed before the Audit Committee of the
Board of Directors during the month following the quarter to which it pertains.

6.2.2 These should be accompanied by supplementary material analysing

statistical information and details of each fraud so that the Audit Committee of
the Board would have adequate material to contribute effectively in regard to the
punitive or preventive aspects of frauds.

6.2.3 A separate review for the quarter ending March is not required in view of
the Annual Review for the year-ending March prescribed at para 6.3 below.

6.3 Annual Review of Frauds

6.3.1 Banks should conduct an annual review of the frauds and place a note
before the Board of Directors/Local Advisory Board for information. The reviews
for the year-ended March may be put up to the Board before the end of the next
quarter i.e. quarter ended June 30th. Such reviews need not be sent to RBI but
may be preserved for verification by the Reserve Banks inspecting officers.

6.3.2 The main aspects which may be taken into account while making such a
review may include the following:

a) Whether the systems in the bank are adequate to detect frauds, once they
have taken place, within the shortest possible time.
b) Whether frauds are examined from staff angle and, wherever necessary,
the cases are reported to the Vigilance Cell for further action in the case
of public sector banks.
c) Whether deterrent punishment is meted out, wherever warranted, to the
persons found responsible.
d) Whether frauds have taken place because of laxity in following the
systems and procedures and, if so, whether effective action has been
taken to ensure that the systems and procedures are scrupulously
followed by the staff concerned.

29
FRAUDS IN BANKING

e) Whether frauds are reported to local Police or CBI, as the case may be,
for investigation, as per the guidelines issued in this regard to public
sector banks by Government of India.

6.3.3 The annual reviews should also, among other things, include the following
details:

a) Total number of frauds detected during the year and the amount involved
as compared to the previous two years.
b) Analysis of frauds according to different categories detailed in Paragraph
2.1 and also the different business areas indicated in the Quarterly Report
on Frauds Outstanding (vide FMR 2).
c) Modus operandi of major frauds reported during the year along with their
present position.
d) Detailed analysis of frauds of 0.1 million and above.
e) Estimated loss to the bank during the year on account of frauds, amount
recovered and provisions made.
f) \Number of cases (with amounts) where staff are involved and the action
taken against staff.
g) Region-wise/Zone-wise/State-wise break-up of frauds and amount
involved.
h) Time taken to detect frauds (number of cases detected within three
months, six months and one year of their taking place).
i) Position with regard to frauds reported to CBI/Police.
j) Number of frauds where final action has been taken by the bank and
cases disposed of.
k) Preventive/punitive steps taken by the bank during the year to
reduce/minimize the incidence of frauds.

6.3.4 Banks may ensure to place the copy of the circular on modus-operandi of
fraud issued by them for alerting their branches/controlling offices etc., on
specific frauds before the Audit Committee of Board (ACB) in its periodical
meetings.

6.4 Special committee of the Board

6.4.1 While Audit Committee of the Board (ACB) may continue to monitor all the
cases of frauds in general, banks are required to constitute a Special Committee
of the Board for monitoring and follow up of cases of frauds (SCBF) involving
amounts of 10 million and above exclusively. The Special Committee may be
constituted with five members of the Board of Directors, consisting of MD & CEO
in case of public sector banks and MD in case of SBI, its Associates and private
sector banks, two members from ACB and two other members from the Board
excluding RBI nominee. The periodicity of the meetings of the Special
Committee may be decided according to the number of cases involved. In

30
FRAUDS IN BANKING

addition, the Committee should meet and review as and when a fraud involving
an amount of 10 million and above comes to light.

6.4.2 The major functions of the Special Committee would be to monitor and
review all the frauds of 10 million and above so as to:

Identify the systemic lacunae if any that facilitated perpetration of the

fraud and put in place measures to plug the same.
Identify the reasons for delay in detection, if any, reporting to top
management of the bank and RBI.
Monitor progress of CBI/Police investigation and recovery position.
Ensure that staff accountability is examined at all levels in all the cases of
frauds and staff side action, if required, is completed quickly without loss
of time.
Review the efficacy of the remedial action taken to prevent recurrence of
frauds, such as strengthening of internal controls.

6.4.3 The banks may delineate in a policy document the processes for
implementation of the Committee's directions and the document may enable a
dedicated outfit of the bank to implement the directions in this regard.

6.4.4 To align the vigilance function in Private sector and Foreign Banks to that
of the Public Sector Banks the existing vigilance functions of a few private sector
and foreign banks were mapped with the existing guidelines in the matter and it
was observed that the practices vary widely among the banks. The detailed
guidelines for private sector and foreign banks were issued on May 26, 2011 to
address all issues arising out of lapses in the functioning of the private sector
and foreign banks especially relating to corruption, malpractices, frauds etc. for
timely and appropriate action. The detailed guidelines are aimed at bringing
uniformity and rationalization in the function of internal vigilance. Private sector
banks (including foreign banks operating in India) were advised to put in place a
system of internal vigilance machinery as per the guidelines.

31
FRAUDS IN BANKING

7. Cases of Attempted Fraud

7.1 Banks need not report cases of attempted frauds of 10 million and above to
Reserve Bank of India, in terms of circular DBS.FrMC.BC.No.04/23.04.001/2012-
13 dated November 15, 2012. However, banks should continue to place the
report on individual cases of attempted fraud involving an amount of 10 million
and above before the Audit Committee of its Board. The report should cover the
following viz.

The modus operandi of the attempted fraud.

How the attempt did not materialize into fraud or how the attempt failed/
was foiled.
The measures taken by the bank to strengthen the existing systems and
controls.
New systems and controls put in place in the area where fraud was
attempted.

7.2 Further, a consolidated review of such cases detected during the year
containing information such as area of operations where such attempts were
made, effectiveness of new processes and procedures put in place during the
year, trend of such cases during the last three years, need for further change in
processes and procedures, if any, etc. as on March 31 every year may be put up
to the ACB within three months of the end of the relative year.

32
FRAUDS IN BANKING

8. Closure of Fraud Cases

8.1 Banks will report to CFMC, RBI and the respective Regional offices of the
DBS/SBMD/SSM, the details of fraud cases of 0.1 million and above closed
along with reasons for the closure after completing the process as given below.

8.2 Fraud cases closed during the quarter are required to be reported quarterly
through FMR 3 return and cross checked with relevant column in FMR 2 return
before sending to RBI.

i. 8.3 Banks should report only such cases as closed where the actions as
stated below are complete and prior approval is obtained from the
respective Regional Offices of DBS/SSM/SBMD. The fraud cases pending
with CBI/Police/Court are finally disposed of.
ii. The examination of staff accountability has been completed
iii. The amount of fraud has been recovered or written off.
iv. Insurance claim wherever applicable has been settled.
v. The bank has reviewed the systems and procedures, identified as the
causative factors and plugged the lacunae and the fact of which has been
certified by the appropriate authority (Board / Audit Committee of the
Board)

8.4 Banks should also pursue vigorously with CBI for final disposal of pending
fraud cases especially where the banks have completed staff side action.
Similarly, banks may vigorously follow up with the police authorities and/or court
for final disposal of fraud cases.

8.5 Banks are allowed, for limited statistical / reporting purposes, to close those
fraud cases involving amounts up to 2.5 million, where:

The investigation is on or challan/ charge sheet has not been filed in the Court
for more than three years from the date of filing of First Information Report (FIR)
by the CBI/Police or

The trial in the courts, after filing of charge sheet/challan by CBI / Police, has not
started or is in progress.

8.6 The banks are required to follow the guidelines relating to seeking prior
approval for closure of such cases from the RO of DBS under whose jurisdiction
the Head Office of the bank is located or the SSM/SBMD and follow up of such
cases after closure as enumerated in RBI circular DBS.CO.FrMC
BC.NO.7/23.04.001/2008-09 dated June 05, 2009.

33
FRAUDS IN BANKING

9. Guidelines for Reporting Frauds To Police/Cbi

9.1 In dealing with cases of fraud/embezzlement, banks should not merely be

actuated by the necessity of recovering expeditiously the amount involved, but
should also be motivated by public interest and the need for ensuring that the
guilty persons do not go unpunished. Therefore, as a general rule, the following
cases should invariably be referred to the State Police or to the CBI as detailed
below:

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FRAUDS IN BANKING

10. Cheque Related Frauds, Precautions to Be Taken and Reporting To

Rbi And The Police

10.1 In view of the rise in the number of cheque related fraud cases, which could
have been avoided had due diligence been observed at the time of handling
and/or processing the cheques and monitoring newly opened accounts, banks
were advised to review and strengthen the controls in the cheque
presenting/passing and account monitoring processes and to ensure that all
procedural guidelines including preventive measures are followed meticulously
by the dealing staff/officials. (DBS.CO.CFMC.BC.006/23.04.001/2014-15 dated
November 5, 2014) Banks were also given an illustrative list of some of the
preventive measures they may follow in this regard viz.

I. Ensuring the use of 100% CTS - 2010 compliant cheques.

II. Strengthening the infrastructure at the cheque handling Service Branches
and bestowing special attention on the quality of equipment and personnel
posted for CTS based clearing, so that it is not merely a mechanical
process.
III. Ensuring that the beneficiary is KYC compliant so that the bank has
recourse to him/her as long as he/she remains a customer of the bank.
IV. Examination under UV lamp for all cheques beyond a threshold of say,
0.2 million.
V. Checking at multiple levels, of cheques above a threshold of say, 0.5
million.
VI. Close monitoring of credits and debits in newly opened transaction
accounts based on risk categorization.
VII. Sending an SMS alert to payer/drawer when cheques are received in
clearing.

Banks were also advised that the threshold limits mentioned above can be
reduced or increased at a later stage with the approval of the Board depending
on the volume of cheques handled by the bank or it's risk appetite.

10.2 Banks may also consider the following preventive measures for dealing with
suspicious or large value cheques (in relation to an accounts normal level of
operations):

a) Alerting the customer by a phone call and getting the confirmation from
the payer/drawer.
b) Contacting base branch in case of non-home cheques.

The above may be resorted to selectively if not found feasible to be

implemented systematically.

10.3 It has been reported that in some cases even though the original cheques
were in the custody of the customer, cheques with the same series had been

35
FRAUDS IN BANKING

presented and encashed by fraudsters. In this connection, banks are advised to

take appropriate precautionary measures to ensure that the confidential
information viz., customer name / account number / signature, cheque serial
numbers and other related information are neither compromised nor misused
either from the bank or from the vendors (printers, couriers etc.) side. Due care
and secure handling is also to be exercised in the movement of cheques from
the time they are tendered over the counters or dropped in the collection boxes
by customers.

10.4 To ensure uniformity and to avoid duplication, reporting of frauds involving

forged instruments including fake/forged instruments sent in clearing in respect
of truncated instruments will continue to be done by the paying banker and not
by the collecting banker. In such cases the presenting bank will be required to
immediately hand over the underlying instrument to drawee/paying bank as and
when demanded to enable it to file an FIR with the police authorities and report
the fraud to RBI. It is the paying banker who has to file the police complaint and
not the collecting banker.

10.5 However, in the case of collection of an instrument which is genuine but the
amount is collected fraudulently by a person who is not the true owner or where
the amount has been credited before realisation and subsequently the
instrument is found to be fake/forged and returned by the paying bank, the
collecting bank, which is defrauded or is at loss by paying the amount before
realisation of the instrument, will have to file both the fraud report with the RBI
and complaint with the police.

10.6 In case of collection of altered/fake cheque involving two or more branches

of the same bank, the branch where the altered/fake cheque has been
encashed, should report the fraud to its Head Office. Similarly in the event of an
altered/fake cheque having been paid/ encashed involving two or more branches
of a bank under Core Banking Solution (CBS), the branch which has released
the payment should report the fraud to the Head Office. Thereafter, Head Office
of the bank will file the fraud report with RBI and also file the Police complaint.

36
FRAUDS IN BANKING

11. Loan Frauds - New Framework

11.1 Based on the recommendations of an Internal Working Group constituted

by the Bank, a framework for dealing with loan frauds was put in place vide
circular DBS.CO.CFMC.BC.No.007/23.04.001/2014-15 dated May 7, 2015.

11.2 Objective of the framework

The objective of the framework is to direct the focus of banks on the aspects
relating to prevention, early detection, prompt reporting to the RBI (for system
level aggregation, monitoring & dissemination) and the investigative agencies
(for instituting criminal proceedings against the fraudulent borrowers) and timely
initiation of the staff accountability proceedings (for determining negligence or
connivance, if any) while ensuring that the normal conduct of business of the
banks and their risk taking ability is not adversely impacted and no new and
onerous responsibilities are placed on the banks. In order to achieve this
objective, the framework has stipulated time lines with the action incumbent on a
bank. The time lines / stage wise actions in the loan life-cycle are expected to
compress the total time taken by a bank to identify a fraud and aid more effective
action by the law enforcement agencies. The early detection of Fraud and the
necessary corrective action are important to reduce the quantum of loss which
the continuance of the Fraud may entail.

11.3 Early Warning Signals (EWS) and Red Flagged Accounts (RFA)

11.3.1 A Red Flagged Account (RFA) is one where a suspicion of fraudulent

activity is thrown up by the presence of one or more Early Warning Signals
(EWS). These signals in a loan account should immediately put the bank on alert
regarding a weakness or wrong doing which may ultimately turn out to be
fraudulent. A bank cannot afford to ignore such EWS but must instead use them
as a trigger to launch a detailed investigation into a RFA.

11.3.2 An illustrative list of some EWS is given for the guidance of banks in
Annex II to this circular. Banks may choose to adopt or adapt the relevant signals
from this list and also include other alerts/signals based on their experience,
client profile and business models. The EWS so compiled by a bank would form
the basis for classifying an account as a RFA.

11.3.3 The threshold for EWS and RFA is an exposure of 500 million or more at
the level of a bank irrespective of the lending arrangement (whether solo
banking, multiple banking or consortium). All accounts beyond 500 million
classified as RFA or Frauds must also be reported on the CRILC data platform
together with the dates on which the accounts were classified as such. The
CRILC data platform is being enhanced to provide this capability. As of now, this
requirement is in addition to the extant requirements of reporting to RBI as
mentioned in Para 3 above.

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FRAUDS IN BANKING

11.3.4 The modalities for monitoring of loan frauds below 500 million thresholds
is left to the discretion of banks. However, banks may continue to report all
identified accounts to CFMC, RBI as per the existing cut-offs.

11.3.5 The tracking of EWS in loan accounts should not be seen as an additional
task but must be integrated with the credit monitoring process in the bank so that
it becomes a continuous activity and also acts as a trigger for any possible credit
impairment in the loan accounts, given the interplay between credit risks and
fraud risks. In respect of large accounts it is necessary that banks undertake a
detailed study of the Annual Report as a whole and not merely of the financial
statements, noting particularly the Board Report and the Managements
Discussion and Analysis Statement as also the details of related party
transactions in the notes to accounts. The officer responsible for the operations
in the account, by whatever designation called, should be sensitized to observe
and report any manifestation of the EWS promptly to the Fraud Monitoring Group
(FMG) or any other group constituted by the bank for the purpose immediately.
To ensure that the exercise remains meaningful, such officers may be held
responsible for non-reporting or delays in reporting.

11.3.6 The FMG should report the details of loan accounts of 500 million and
above in which EWS are observed, together with the decision to classify them as
RFAs or otherwise to the CMD/CEO every month.

11.3.7 A report on the RFA accounts may be put up to the Special Committee of
the Board for monitoring and follow-up of Frauds (SCBF) providing, inter alia, a
synopsis of the remedial action taken together with their current status.

11.4 Early Detection and reporting

11.4.1 At present the detection of frauds takes an unusually long time. Banks
tend to report an account as fraud only when they exhaust the chances of further
recovery. Among other things, delays in reporting of frauds also delays the
alerting of other banks about the modus operandi through caution advices by
RBI that may result in similar frauds being perpetrated elsewhere. More
importantly, it delays action against the unscrupulous borrowers by the law
enforcement agencies which impact the recoverability aspects to a great degree
and also increases the loss arising out of the fraud.

11.4.2 The most effective way of preventing frauds in loan accounts is for banks
to have a robust appraisal and an effective credit monitoring mechanism during
the entire life-cycle of the loan account. Any weakness that may have escaped
attention at the appraisal stage can often be mitigated in case the post
disbursement monitoring remains effective. In order to strengthen the monitoring
processes, based on an analysis of the collective experience of the banks,
inclusion of the following checks / investigations during the different stages of the
loan life-cycle may be carried out:

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FRAUDS IN BANKING

Pre-sanction: As part of the credit process, the checks being applied during the
stage of pre-sanction may consist of the Risk Management Group (RMG) or any
other appropriate group of the bank collecting independent information and
market intelligence on the potential borrowers from the public domain on their
track record, involvement in legal disputes, raids conducted on their businesses,
if any, strictures passed against them by Government agencies, validation of
submitted information/data from other sources like the ROC, gleaning from the
defaulters list of RBI/other Government agencies, etc., which could be used as
an input by the sanctioning authority. Banks may keep the record of such pre-
sanction checks as part of the sanction documentation.

Disbursement: Checks by RMG during the disbursement stage may focus on the
adherence to the terms and conditions of sanction, rationale for allowing dilution
of these terms and conditions, level at which such dilutions were allowed, etc.
The dilutions should strictly conform to the broad framework laid down by the
Board in this regard. As a matter of good practice, the sanctioning authority may
specify certain terms and conditions as core which should not be diluted. The
RMG may immediately flag the non-adherence of core stipulations to the
sanctioning authority.

Annual review: While the continuous monitoring of an account through the

tracking of EWS is important, banks also need to be vigilant from the fraud
perspective at the time of annual review of accounts. Among other things, the
aspects of diversion of funds in an account, adequacy of stock vis-a-vis stock
statements, stress in group accounts, etc., must also be commented upon at the
time of review. Besides, the RMG should have capability to track market
developments relating to the major clients of the bank and provide inputs to the
credit officers. This would involve collecting information from the grapevine,
following up stock market movements, subscribing to a press clipping service,
monitoring databases on a continuous basis and not confining the exercise only
to the borrowing entity but to the group as a whole.

11.5 Staff empowerment - Employees should be encouraged to report fraudulent

activity in an account, along with the reasons in support of their views, to the
appropriately constituted authority, under the Whistle Blower Policy of the bank,
who may institute a scrutiny through the FMG. The FMG may hear the
concerned employee in order to obtain necessary clarifications. Protection
should be available to such employees under the whistle blower policy of the
bank so that the fear of victimization does not act as a deterrent.

11.6 Role of Auditors - During the course of the audit, auditors may come across
instances where the transactions in the account or the documents point to the
possibility of fraudulent transactions in the account. In such a situation, the
auditor may immediately bring it to the notice of the top management and if
necessary to the Audit Committee of the Board (ACB) for appropriate action.

39
FRAUDS IN BANKING

11.7Incentive for Prompt Reporting- In case of accounts classified as fraud,

banks are required to make provisions to the full extent immediately, irrespective
of the value of security. However, in case a bank is unable to make the entire
provision in one go, it may now do so over four quarters provided there is no
delay in reporting (cf. Circular DBR.No.BP.BC.83/21.04.048/ 2014-15 dated April
01, 2015). In case of delays, the banks under Multiple Banking Arrangements
(MBA) or member banks in the consortium are required to make the provision in
one go in terms of the said circular. Delay, for the purpose of this circular, would
mean that the fraud was not flashed to CFMC, RBI or reported on the CRILC
platform, RBI within a period of one week from its (i) classification as a fraud
through the RFA route which has a maximum time line of six months or (ii)
detection/declaration as a fraud ab initio by the bank as hitherto.

11.8 Bank as a sole lender

11.8.1 In cases where the bank is the sole lender, the FMG will take a call on
whether an account in which EWS are observed should be classified as a RFA
or not. This exercise should be completed as soon as possible and in any case
within a month of the EWS being noticed. In case the account is classified as a
RFA, the FMG will stipulate the nature and level of further investigations or
remedial measures necessary to protect the banks interest within a stipulated
time which cannot exceed six months.

11.8.2 The bank may use external auditors, including forensic experts or an
internal team for investigations before taking a final view on the RFA. At the end
of this time line, which cannot be more than six months, banks would either lift
the RFA status or classify the account as a fraud.

11.8.3 A report on the RFA accounts may be put up to the SCBF with the
observations/decision of the FMG. The report may list the EWS/irregularities
observed in the account and provide a synopsis of the investigations ordered /
remedial action proposed by the FMG together with their current status.

11.9 Lending under Consortium or Multiple Banking Arrangements

11.9.1 Certain unscrupulous borrowers enjoying credit facilities under "multiple

banking arrangement after defrauding one of the financing banks, continue to
enjoy the facilities with other financing banks and in some cases avail even
higher limits at those banks. In certain cases the borrowers use the accounts
maintained at other financing banks to siphon off funds by diverting from the
bank on which the fraud is being perpetrated. This is due to lack of a formal
arrangement for exchange of information among various lending banks/FIs. In
some of the fraud cases, the securities offered by the borrowers to different
banks are the same.

40
FRAUDS IN BANKING

11.9.2 In view of this, all the banks which have financed a borrower under
'multiple banking' arrangement should take co-ordinate action, based on
commonly agreed strategy, for legal / criminal actions, follow up for recovery,
exchange of details on modus operandi, achieving consistency in data /
information on frauds reported to Reserve Bank of India. Therefore, bank which
detects a fraud is required to immediately share the details with all other banks in
the multiple banking arrangements.

11.9.3 In case of consortium arrangements, individual banks must conduct their

own due diligence before taking any credit exposure and also independently
monitor the end use of funds rather than depend fully on the consortium leader.
However, as regards monitoring of Escrow Accounts, the details may be worked
out by the consortium and duly documented so that accountability can be fixed
easily at a later stage. Besides, any major concerns from the fraud perspective
noticed at the time of annual reviews or through the tracking of early warning
signals should be shared with other consortium / multiple banking lenders
immediately as hitherto.

11.9.4 The initial decision to classify any standard or NPA account as RFA or
Fraud will be at the individual bank level and it would be the responsibility of this
bank to report the RFA or Fraud status of the account on the CRILC platform so
that other banks are alerted. Thereafter, within 15 days, the bank which has red
flagged the account or detected the fraud would ask the consortium leader or the
largest lender under MBA to convene a meeting of the JLF to discuss the issue.
The meeting of the JLF so requisitioned must be convened within 15 days of
such a request being received. In case there is a broad agreement, the account
would be classified as a fraud; else based on the majority rule of agreement
amongst banks with at least 60% share in the total lending, the account would be
red flagged by all the banks and subjected to a forensic audit commissioned or
initiated by the consortium leader or the largest lender under MBA. All banks, as
part of the consortium or multiple banking arrangements, would share the costs
and provide the necessary support for such an investigation.

11.9.5 The forensic audit must be completed within a maximum period of three
months from the date of the JLF meeting authorizing the audit. Within 15 days of
the completion of the forensic audit, the JLF will reconvene and decide on the
status of the account, either by consensus or the majority rule as specified
above. In case the decision is to classify the account as a fraud, the RFA status
would change to Fraud in all banks and reported to RBI and on the CRILC
platform within a week of the said decision. Besides, within 15 days of the RBI
reporting, the bank commissioning/ initiating the forensic audit would lodge a
complaint with the CBI on behalf of all banks in the consortium/MBA.

11.9.6 It may be noted that the overall time allowed for the entire exercise to be
completed is six months from the date when the first member bank reported the
account as RFA or Fraud on the CRILC platform.

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FRAUDS IN BANKING

11.10 STAFF ACCOUNTABILITY

11.10.1 As in the case of accounts categorized as NPAs, banks must initiate and
complete a staff accountability exercise within six months from the date of
classification as a Fraud. Wherever felt necessary or warranted, the role of
sanctioning official(s) may also be covered under this exercise. The completion
of the staff accountability exercise for frauds and the action taken may be placed
before the SCBF and intimated to the RBI at quarterly intervals as hitherto.

11.10.2 Banks may bifurcate all fraud cases into vigilance and non-vigilance.
Only vigilance cases should be referred to the investigative authorities. Non-
vigilance cases may be investigated and dealt with at the bank level within a
period of six months.

11.10.3 In cases involving very senior executives of the bank, the Board / ACB/
SCBF may initiate the process of fixing staff accountability.

11.10.4 Staff accountability should not be held up on account of the case being
filed with law enforcement agencies. Both the criminal and domestic enquiry
should be conducted simultaneously.

11.11 Filing Complaints with Law Enforcement Agencies

11.11.1 Banks are required to lodge the complaint with the law enforcement
agencies immediately on detection of fraud. There should ideally not be any
delay in filing of the complaints with the law enforcement agencies since delays
may result in the loss of relevant relied upon documents, non-availability of
witnesses, absconding of borrowers and also the money trail getting cold in
addition to asset stripping by the fraudulent borrower.

11.11.2 It is observed that banks do not have a focal point for filing CBI / Police
complaints. This result in a non-uniform approach to complaint filing by banks
and the investigative agency has to deal with dispersed levels of authorities in
banks. This is among the most important reasons for delay in conversion of
complaints to FIRs. It is, therefore, enjoined on banks to establish a nodal point /
officer for filing all complaints with the CBI on behalf of the bank and serve as the
single point for coordination and redressal of infirmities in the complaints.

11.11.3 The complaint lodged by the bank with the law enforcement agencies
should be drafted properly and invariably be vetted by a legal officer. It is also
observed that banks sometimes file complaints with CBI / Police on the grounds
of cheating, misappropriation of funds, diversion of funds etc., by borrowers
without classifying the accounts as fraud and/or reporting the accounts as fraud
to RBI. Since such grounds automatically constitute the basis for classifying an

42
FRAUDS IN BANKING

account as a fraudulent one, banks may invariably classify such accounts as

frauds and report the same to RBI.

11.12 Penal measures for fraudulent borrowers

11.12.1 In general, the penal provisions as applicable to willful defaulters would

apply to the fraudulent borrower including the promoter director(s) and other
whole time directors of the company insofar as raising of funds from the banking
system or from the capital markets by companies with which they are associated
is concerned, etc. In particular, borrowers who have defaulted and have also
committed a fraud in the account would be debarred from availing bank finance
from Scheduled Commercial Banks, Development Financial Institutions,
Government owned NBFCs, Investment Institutions, etc., for a period of five
years from the date of full payment of the defrauded amount. After this period, it
is for individual institutions to take a call on whether to lend to such a borrower.
The penal provisions would apply to non-whole time directors (like nominee
directors and independent directors) only in rarest of cases based on conclusive
proof of their complicity.

11.12.2 No restructuring or grant of additional facilities may be made in the case

of RFA or fraud accounts.

11.12.3 No compromise settlement involving a fraudulent borrower is allowed

unless the conditions stipulate that the criminal complaint will be continued.

11.12.4 In addition to above borrower- fraudsters, third parties such as builders,

warehouse/cold storage owners, motor vehicle/tractor dealers, travel agents, etc.
and professionals such as architects, valuers, chartered accountants, advocates,
etc. are also to be held accountable if they have played a vital role in credit
sanction/disbursement or facilitated the perpetration of frauds. Banks are
advised to report to Indian Banks Association (IBA) the details of such third
parties involved in frauds as advised vide circular
DBS.CO.FrMC.BC.No.3/23.08.001/2008-09 dated March 16, 2009.

11.12.5 Before reporting to IBA, banks have to satisfy themselves of the

involvement of third parties concerned and also provide them with an opportunity
of being heard. In this regard the banks should follow normal procedures and the
processes followed should be suitably recorded. On the basis of such
information, IBA would, in turn, prepare caution lists of such third parties for
circulation among the banks.

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FRAUDS IN BANKING

12. Reporting Cases Of Theft, Burglary, Dacoity And Bank Robberies

12.1 Banks should arrange to report by fax / e-mail instances of bank robberies,
dacoits, thefts and burglaries to the following authorities immediately on their
occurrence.

a) CFMC, Bengaluru
b) RO of DBS/SSM/SBMD under whose jurisdiction the Head Office of the
bank falls.
c) RO of DBS under whose jurisdiction the affected bank branch is located to
enable the Regional Office to take up the issues regarding security
arrangements in affected branches during the State Level Security
Meetings with the concerned authorities.
d) The Security Adviser, Central Security Cell, Reserve Bank of India,
Central Office Building, Mumbai - 400 001.
e) Ministry of Finance, Department of Financial Services Government of
India, Jeevan Deep, Parliament Street, New Delhi-110 001.

The report should include details of modus operandi and other information as at
columns 1 to 11 of FMR 4.

12.2. Banks should also submit to CFMC, Bangalore a quarterly consolidated

statement in the format given in FMR 4 (soft copy) covering all cases pertaining
to the quarter. This may be submitted within 15 days of the end of the quarter to
which it relates.

12.3 Banks which do not have any instances of theft, burglary, dacoity and / or
robbery to report during the quarter, may submit a nil report.

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FRAUDS IN BANKING

LIST OF BANKS UNDER THE SUPERVISORY PURVIEW OF

SENIOR SUPERVISORY MANAGERS (SSM)

Banks Under Risk Based Supervision (For Cycle 2015-16)

A. Banks Supervised by SSMs

S/No. Name of Bank S/No. Name of Bank
1 Punjab National 18 IndusInd Bank
Bank Ltd.
2 Canara Bank 19 Federal Bank Ltd.
3 Bank of Baroda 20 South Indian Bank
Ltd.
4 Bank of India 21 Ratnakar Bank
Pvt Ltd
5 Union Bank of 22 Citibank N.A.
India
6 Oriental Bank of 23 HSBC
Commerce
7 Indian Bank 24 Standard
Chartered Bank
8 IDBI Bank Ltd 25 Deutsche Bank (
Asia )
9 Central Bank of 26 DBS Bank Limited
India
10 Vijaya Bank 27 BNP Paribas
11 Syndicate Bank 28 JP Morgan Chase
Bank, National
Association
12 State Bank of 29 Barclays Bank Plc
India
13 ICICI Bank Ltd. 30 Bank of America,
National
Association
14 HDFC Bank Ltd. 31 The Royal Bank of
Scotland N.V.
15 Axis Bank Ltd. 32 Credit Agricole
Corporate and
Investment Bank
16 Yes Bank Ltd 33 The Bank of
Tokyo - Mitsubishi
UFJ, Ltd.
17 Kotak Mahindra
Bank Ltd.

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FRAUDS IN BANKING

B. Banks supervised by Small Bank Monitoring Division (SBMD)

S/No. Name of Bank S/No. Name of Bank
34 Bank of Nova Scotia 50 Antwerp Diamond
Bank NV
35 Societe Generale 51 Industrial and
Commercial Bank of
China Limited
36 Mizuho Corporate 52 CTBC Bank
Bank Ltd.
37 Credit Suisse AG 53 Woori Bank
38 Australia and New 54 Commonwealth
Zealand Banking Bank of Australia
Group Limited
39 Westpac Banking 55 United Overseas
Corporation Bank Limited
40 Shinhan Bank 56 SBERBANK
41 American Express 57 Bank of Ceylon
Banking Corp.
42 Abu Dhabi 58 Mashreq Bank PSC
Commercial Bank
Ltd.
43 UBS AG 59 Krung Thai Bank pcl
44 Sumitomo Mitsui 60 Bank Internasional
Banking Indonesia
Corporation
45 Rabobank 61 HSBC Bank Oman
International S.A.O.G
46 Firstrand Bank 62 AB Bank Ltd
47 State Bank of 63 JSC VTB Bank
Mauritius Ltd.
48 Bank of Bahrain & 64 Sonali Bank Ltd
Kuwait BSC
49 National Australia
Bank

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FRAUDS IN BANKING

ANNEX II

1. Some Early Warning signals which should alert the bank officials about
some wrongdoings in the loan accounts which may turn out to be
fraudulent
2. Default in payment to the banks/ sundry debtors and other statutory
bodies, etc., bouncing of the high value cheques.
3. Raid by Income tax /sales tax/ central excise duty officials.
4. Frequent change in the scope of the project to be undertaken by the
borrower.
5. Under insured or over insured inventory.
6. Invoices devoid of TAN and other details.
7. Dispute on title of the collateral securities.
8. Costing of the project which is in wide variance with standard cost of
installation of the project.
9. Funds coming from other banks to liquidate the outstanding loan amount.
10. Foreign bills remaining outstanding for a long time and tendency for bills
to remain overdue.
11. Onerous clause in issue of BG/LC/standby letters of credit.
12. In merchant trade, import leg not revealed to the bank.
13. Request received from the borrower to postpone the inspection of the go
down for flimsy reasons.
14. Delay observed in payment of outstanding dues.
15. Financing the unit far away from the branch.
16. Claims not acknowledged as debt high.
17. Frequent invocation of BGs and devolvement of LCs.
18. Funding of the interest by sanctioning additional facilities.
19. Same collateral charged to a number of lenders.
20. Concealment of certain vital documents like master agreement, insurance
coverage.
21. Floating front / associate companies by investing borrowed money.
22. Reduction in the stake of promoter / director.
23. Resignation of the key personnel and frequent changes in the
management.
24. Substantial increase in unbilled revenue year after year.
25. Large number of transactions with inter-connected companies and large
outstanding from such companies.
26. Significant movements in inventory, disproportionately higher than the
growth in turnover.
27. Significant movements in receivables, disproportionately higher than the
growth in turnover and/or increase in ageing of the receivables.
28. Disproportionate increase in other current assets.
29. Significant increase in working capital borrowing as percentage of
turnover.
30. Critical issues highlighted in the stock audit report.

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FRAUDS IN BANKING

31. Increase in Fixed Assets, without corresponding increase in turnover

(when project is implemented).
32. Increase in borrowings, despite huge cash and cash equivalents in the
borrowers balance sheet.
33. Liabilities appearing in ROC search report, not reported by the borrower in
its annual report.
34. Substantial related party transactions.
35. Material discrepancies in the annual report.
36. Significant inconsistencies within the annual report (between various
sections).
37. Poor disclosure of materially adverse information and no qualification by
the statutory auditors.
38. Frequent change in accounting period and/or accounting policies.
39. Frequent request for general purpose loans.
40. Movement of an account from one bank to another.
41. Frequent ad hoc sanctions.
42. Not routing of sales proceeds through bank.
43. LCs issued for local trade / related party transactions.
44. High value RTGS payment to unrelated parties.
45. Heavy cash withdrawal in loan accounts.
46. Non submission of original bills.

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FRAUDS IN BANKING

CASE STUDIES

I. N.V. SUBARAO V. STATE OF ANDHRA PRADESH

FACTS OF THE CASE ARE AS UNDER:

That a case was registered against Sh.V.N.Subarao, the then Manager, Central Bank of
India and Sh.Attur Prabhakar Hegde, Prop of M/s A.P.Enterprises, Guntur for
commission of Offence alleging that Manager has abused his official position as a public
servant and entered into a criminal conspiracy with Prop And defrauded the Bank to the
tune of Rs.1.168 crores by sanctioning temporary overdrafts and term loans to various
individual sponsored by the said proprietor. A charge sheet was filed by CBI. The
Manager fraudulently and dishonestly disbursed 494 loans of Rs.10000 each to various
railway employees and other organization as he was instructed by his controlling
officers to disburse loans only after obtaining undertaking from their employers
(borrowers) that the monthly installment of repayment of loan will be deducted from the
salaries as primary security and also obtain a mortgage on the plots sold to the
borrower through the Prop M/s.A.P.Enterprises. An amounting to Rs.49, 40,000 and
credited the proceeds to the account of the Proprietor without obtaining the requisite
undertaking from the employers and without proper security of monthly installments to
be deducted from their salaries. Out of 494 borrowers, 45 persons have been identified
by the prosecution M/s. A.P. Enterprises after having received the proceeds fraudulently
and dishonestly did not got 45 plot registered in their names nor the borrowers got the
loan amount from the bank.

THE SPECIAL JUDGE FOR CBI CASES:

Vishakhapatnam sentenced them for 1 year rigorous imprisonment and to undergo RI

for a period of two years along with a fine of Rs.5000, in default, to further undergo
imprisonment for 3 months in lieu of offences punishable. Manager was further
sentenced undergo RI for 1 year along with fine of Rs.200, in default, to further undergo
simple imprisonment for 2 months for the offences punishable 5 and also ordered that
sentences shall run concurrently. N.V.Subarao v. State of Andhra Pradesh6 Two
appeals were filed before the High Court of Andhra Pradesh at Hyderabad. The appeals
were dismissed and confirmed the conviction and reduced the sentence of Two years to
one year and preferred these appeals by ways of special leave and leave was granted
on 20.10.08.

THERE WAS WRONGFUL LOSS TO THE BANK AS WELL AS TO THE

PURCHASERS. :

No mortgage was created putting loss to bank of Rs. 4, 50,000. M/s A.P.Enterprises
provided FCNR deposits to the Bank to the tune of Rs.8 crores for a period of 3 years.
However the Prop has purchased 60 acres land at Gorantla village near Guntur and 463
plots were registered. The Manager forwarded the proposal of M/s A.P.Enterprises to
Regional Office, Vijawadda for sanction of Overdraft facility of Rs.12 lac and sanctioning

49
FRAUDS IN BANKING

terms loan to borrowers for purchase of plot from M/s A.P. Enterprises on the basis of
FCNR deposits. It was also stated by Bank Manager that for total of 957 borrowers, only
122 letters of undertaking had been obtained. Pre inspection of the borrowers & plot
was not conducted as per the Manual of Instructions of the Bank Hence Administrative
action. The Manager could not delegate responsibility to someone else thus Debt,
Financial and Monetary laws provide Misconduct N.V. Subarao v. State of Andhra
Pradesh and. Non delegable duties. No Bank account was opened for the loans. Bank
Manager caused monetary loss to Bank on the presumption without following
established procedure10and debt, financial and monetary law- Bank Scam/Criminal
conspiracy/ embezzlement/ forgery Preponderance of probabilities-Prosecution
established its charges beyond reasonable doubt12 by adducing acceptable evidence.
Criminal conspiracy was held and proved and acceptance of money from and transfer of
fraudulently sanctioned loans to credit of the account and hence conspiracy established
and debt, financial and monetary law.

BANK SCAM/ CRIMINAL CONSPIRACY/ EMBEZZLEMENT/ FORGERY:

However the several decrees obtained. And few mortgages created but in
K.G.Premshanker v. Inspector of Police and R.Venkatkrishnanv.C.B.I .Departmental
Enquiry was conducted against the Bank Manager and accordingly he was dismissed
from the services however the attention of the Court was drawn to a decision in State
Bank of Hyderabad V.P.Kota Raoand State of M.P.v.Sheetla Sahaibut was not helpful
and court held that offence of criminal conspiracy can also be proved by circumstantial
evidence. It was contended that orders be set aside on the basis of decisions including
in Kashinath Mondal v. State of West Bengal. It was held that in view of the concurrent
findings recorded by both the courts based on acceptable evidence in the form of oral
and documentary evidence, we are of the opinion that it is not a fit case where we
should exercise discretionary jurisdiction 20, consequently both the appeals fail and are
accordingly dismissed.

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FRAUDS IN BANKING

II. GURGAON GRAMIN BANK V.KHAZANI

HARASSMENT TO THE GRAMIN BORROWER BY THE BANK- ROLE OF DISTRICT.

CONSUMER FORUM, STATE COMMISSION

NATIONAL COMMISSION CONSUMER PROTECTION ACT,1986.& SUPREME

COURT

FACTS OF THE CASE ARE AS UNDER:

That Smt. Khazani availed buffalo loan from appellant bank and was insured for
Rs.15000/- for period from 6,2,01 to 6.2.04 vide animal tag NIA/03170 WITH New India
Assurance Com Ltd 2nd respondents and premium was paid Rs.759/- vide receipt
No.170612 dt, 5.0.01. The buffalo was unfortunately died on 27.12.01.She lodged claim
for insurance money through bank and supplied them ear tag. No step was taken by the
Bank or Insurance Company. She served notice dated 30.07.03 but yielded no result.

She filed complaint bearing No.824 before the District Consumer Dispute Redressal
Forum 22 the same was allowed vide order dated 26.07.07 with the direction to
Insurance Company to pay money of buffalo together with rate of interest @ 9% p.a.
from the date of death of buffalo and pay Rs.3000/- as cost of litigation and
compensation for harassment to comply within one month.

The Bank was dissatisfied and filed an appeal before the State Commission23,
Haryana, Panchkula, Admittedly tag No 03170 and post mortem report. The Bank and
Insurance Company denied. Field Officer reported that when the buffalo died there was
no tag and tag was not sent to opposite party.

Bank moved to National Commission, New Delhi against the order dated 21.07.09 of
State Commission. The National Commission found no error/ irregularity inn exercise of
jurisdiction and ordered accordingly on 25.11.09.

SLP against the order dated. 25.11.09 was filed and Khazani was brought to Supreme
Court. Maybe ill luck of Bank, Bank is caused to worked, how much amount spent till
date on this dispute which relate to death of buffalo stake of which is Rs.15000/- and
bank will file an affidavit within weeks with regard to amount spent on litigation. The
Chief Manager of bank filed an affidavit for expenditure as under:

AMOUNT SPENT BY BANK:

District Forum Rs.2400 State Commission 2650 and Supreme Court 8500/- total
Rs.12950 The Supreme Court has not been told by the bank how much money have
been spent by Bank officer for their to and fro journey to lawyers office, the District
Forum, State Commission, National Commission and Supreme Court for partly amount
o Rs.15000/-. As per affidavit bank spent Rs. 12950/- . District

51
FRAUDS IN BANKING

forumawardedRs.3000/towards cost of litigation and compensation for harassment

caused to Khazani.
Remember buffalo died 10 years back till litigation is not over Advocate argued that
claim was false as no tag was found on dead buffalo. These types of litigation should be
discouraged and message should also go otherwise for all trivial matters. People will
rush to this court. Gramin Bank like appellant should stand for benefit of grant-
Repayment to large extent depends more they get. Driving poor gamins to various
FORUMS should be strongly depreciated because they have to spent large amount for
conduct of litigation. We condemn these types of practice unless the stake is very high
or matter affects a large number of persons or effects a general policy of the Bank
which has for reaching consequence.

APPEAL IS DISMISSED WITH COST OF RS.10000/-:

To be paid by bank to first respondent within a period of one month resultantly bank has
to spend Rs. 25930/ for claim of Rs. 15000/- spent to and fro traveling of the Bank
officer. Let God save the Gramin.

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III. M/S PIARA SINGH COLD STORAGE V. CANARA BANK AND ANOTHERS

MISUSE OF LOAN BY THE BORROWERS, DISHONOR OF CHEQUES, DEBT

RECOVERY TRIBUNAL, CONSTITUTIONAL LAW.

THE FACTS OF THE CASE AS UNDER:

That M/s Piara Singh Cold Storage was granted an agricultural loan of Rs.25 lakhs for
modernization of cold storage, for which rate of interest was less than the commercial
use of loan for commercial purpose. The debtor was in breach of terms and conditions
of the agriculture loan as the cold storage was converted into marriage palace. The term
loan was granted on 30.3.2000 to be repaid within seven years against mortgage of 18
Kanal of land Village Rehan Jattan, Phagwara Distt. Kapurthala. He repaid Rs. 6 lac up
to 7.4.01. The respondent Bank started proceeding under D.R.T26 and proceeding
were initiated due to dishonor of cheques. He applied for one time settlement of
Agriculture loan.

The main dispute was that borrower was granted agriculture term loan but the petitioner
stated that there was downfall in market and cold storage was not running in profit. He
had filed no application for diversion of funds.

It was held that petitioner is guilty of breach of terms and conditions of the agriculture
term loan. Therefore, he cannot ask for one time settlement and should not be permitted
for equitable relief. The petitioner is devoid of any merit and is frivolous and deserves to
be dismissed out rightly.

ACCORDINGLY PETITION IS DISMISSED WITH COST OF RS.5000/-:

This shall be paid by petitioner to High Court Legal Services Committee within 15 days.

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IV. CONCLUSION:

Ongoing through the discussions in all the three decided that how the public and Banks
and financial institutions employees and outsiders are playing their vital roles in fraud,
forgery and corruption in the banking and financial institutions. This tendency must not
occur in the banking and financial institutions. However, law is there but implementation
is poor. The Public Interest Litigation PIL has proved to be a strong and potent weapon
in the hand of Court enabling it to unearth many scams and corruption cases in public
life and to punish guilty involved in those Scam. Hawala Scam, Urea Scam, Fodder
Scam in Bihar, St.Kit Scam, Ayurvedic, Medicine Scam and illegal Allotment of
Government Houses and Petrol Pumps has come to light through Public Interest
Litigation. The detection of fraud and corruption has become a big problem. This
phenomenon surprisingly is not limited to a particular area, city, or country. It is
throughout the world. There must be strict law and severe punishment must be there to
curb the fraud, forgery and corruption. The judiciary has also played its role through
various judgments delivered by the Supreme Court of India, High Courts and District
Consumer Redressal Forum, State Consumer Redressal Forum and National
Consumer Redressal Commission. Thus analysis on the scrutiny of fraud and forgery
and corruption provisions, judicial functioning and to create new provisions for arresting
fraud, forgery and corruption in banks and financial institutions. The criminal persons
who commit fraud, forgery and corruption in the banks and financial institutions must be
given life imprisonment and sent behind the bar so that coming generation my not
commit any fraud and forgery which case huge loss to the government revenue and
cause great problems to Banks, Financial Institution because after committing fraud and
corruption the role of police department, Central Bureau of Investigation, Central
Vigilance Commission started as per the quantum of fraud and forgery. The scope of
the Disciplinary action under administrative law has been very vast during the tenure of
the services of the employees in the concerned departments. While discharging their
duties with sincerity, dedication and devotion, sometimes something wrong may be
committed under pressure, coercion and threat, but one should not come under any
undue influence and work as per rules, regulations and laws enacted for checking
menace of fraud and forgery in the banks. The C.V.C has also played its role and
establishment of vigilance Department in all the banks at Head Offices and Regional as
well as Zonal Offices in the country for checking the menace of fraud and forgery in the
banks. The Reserve Bank of India has also been issuing directions got prevention of
fraud and forgery in all the banks and reporting system to Higher Authorities, including
C. B. I, C.V.C. and State Police. The judiciary has also played its role through various
judgments delivered by the Supreme Court of India, High Courts and District Consumer
Redressal Forum, State Consumer Redressal Forum and National Consumer Redressal
Commission. Thus analysis on the scrutiny of fraud and forgery and corruption
provisions, judicial functioning and to create new provisions for solution of the fraud and
corruption in the Banks and financial institutions.

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CONCLUSION

Bank Frauds Are Done To Make Money By Cheating The Banks Through Various
Ways. Frauds cant be eliminated as such. There Are Several Loopholes in Banking
System That Has Been Used by the Perpetrators. The effort lies in trying to contain the
menace. Its effect can be widespread, causing long term financial and reputational
damage.

Fraud risk is something that no bank would like to deal with. Internal controls need to be
strengthened as they can weaken over time due to technological advances or human
intervention or because of the rise in new fraud schemes.

The Number Of Bank Frauds Is Increasing Year By Year Along With That, Reserve
Bank Of India (RBI) Also Engage In Making The Banking System Accurate And
Secured. In Todays Economic Climate It Is More Important Than Ever to Take
Precautions to Reduce Exposure to Financial Loss, Reputational Damage and Service
Interruption Which Are the Common Consequences of Fraud.

Nonetheless, having anti-fraud measures in an organizations control environment can

go a long way in deterring individuals from perpetrating fraud because the message
going down the line is that the senior management is cognizant of this crime and is
committed to preventing it within the organization. Remember the fraudster is always a
step ahead!!

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REFRENCES

WEBLIOGRAPHY

http://kalyan-city.blogspot.in/2011/02/what-is-bank-introduction-definition.html

http://old.nios.ac.in/Secbuscour/15.pdf

https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9878

http://www.iosrjournals.org/iosr-jef/papers/vol3-issue6/F0365357.pdf

BIBLIOGRAPHY

I. Frauds in Banks - By Narasimhan R

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