SCHMRD

Frauds in Banking Sector

A brief study
Pankaj S Salunke
Tazir Hashmi
Krishna Subramanian
PGDF

Frauds in Banking Sector

 Frauds committed in banking sector-An overview
Banking Fraud is posing threat to Indian Economy. The recent erupted fraud in
Housing Loans has caused a havoc in the banking sector, which will now make the red-
tapism(in obtaining a loan) even more stringent, cause of few scamsters the whole housing
industry will fall short of the finance for their housing projects which they could have got
from banks .Now the housing projects will have to be more dependent on the public money
raising options which is troublesome to the companies as well as create some amount of
loss to banking housing loan companies. The other impact will be on the retail housing
finance loan seekers which will jeopardize the economical cash flow of an common man to
some extent. In other words the “Loans for housing and Infrastructure “, which was used as
an financial advantage to both parties became sceptical and more long procedural work
hampering the growth of nation on a very wrong timing.
Banks started providing service through internet websites which prevented clients
from cumbersome time-consuming queues. As Criminals saw this, they found a unique way
to steal money without leaving their fingerprints behind.
By making frauds in Banking, though made by anyway or to any amount, it ultimately
hits the depositors of the bank. In country like ours where the common man (urban/semi
urban job doing middleclass or the hard working rural farmer) never gets lured by Share
markets nor by other saving financial instruments (like ETF’s, mutual funds, money mutual
funds, etc) feels the safest place for his money in banks, and if such frauds start floating up
involving high amounts will create a distrust in their minds. Its traditional imbibed in Indian
minds that the keeping money in banks is far good than taking a risk in any financial saving
related instrument. Though through the financial awareness the scenario is changing, some
technological reforms are required which will avoid the frauds as well as create a free and
safe atmosphere for all type transactions in banks.
The banking system in our country has been although taking care of all segments of
our socio-economic set up(mainly by RBI) certain things are to be paid attention upon and
reformed. The Article contains a discussion on the rise of banking frauds and various
methods that can be used to avoid such frauds. A bank fraud is a deliberate act of omission
or commission by any person carried out in the course of banking transactions or in the
books of accounts, resulting in wrongful gain to any person for a temporary period or
otherwise, with or without any monetary loss to the bank.
Bank fraud is a big business in today’s world. With more educational qualifications,
banking becoming impersonal and increase in banking sector have gave rise to this white
collar crime.
 Bank Frauds-Types and Analysis
Losses sustained by banks as a result of frauds exceed the losses due to robbery,
dacoity, burglary and theft-all put together. Unauthorized credit facilities are extended for
illegal gratification such as case credit allowed against pledge of goods, hypothecation of
goods against bills or against book debts. Common modus operandi are, pledging of
spurious goods, inletting the value of goods, hypothecating goods to more than one bank,
fraudulent removal of goods with the knowledge and connivance of in negligence of bank
staff, pledging of goods belonging to a third party. Goods hypothecated to a bank are found
to contain obsolete stocks packed in between goods stocks and case of shortage in weight
is not uncommon.

Types of frauds can be broadly classified in two categories:-

1)Fraud from purely from outside the entity
In this category the frauds are generated by an outsider by using his intellectual
knowledge and finding a loophole to cheat the bank or by cheating the bank official in an
dynamic way.

2)Fraud with collusion from inside

In this category an secret alliance is created by an bank official and an outsider who
cheat bank by sharing data and strategically planning of a master scam. In which both share
the looted amount.

An analysis and emphasis of above two points can be made as follows

i) Active involvement of the staff-both supervisor and clerical either independent of

external elements or in connivance with outsiders.

ii) Failure on the part of the bank staff to follow meticulously laid down instructions and
guidelines.

1. Lack of properly trained and experienced employees in banks.

2. There is a sudden and tremendous increase in banking business. This expansive explosion has created a vacuum of
personnel
3. New recruits often do not have adequate training or experience before they are put in responsible positions.
4. Bank employees feel overburdened due to excess pressure.
5. Dilution of system and non-adherence to procedures.
6. Unauthorized delegation at branches.
7. Frauds in deposits accounts are mainly due to policy of “know your customer (KYC)” are not followed properly.

iii) External elements perpetuating frauds on banks by forgeries or manipulations of cheque

, drafts and other instruments.

iv) There has been a growing collusion between business, top banks executives, civil
servants and politicians in power to defraud the banks, by getting the rules bent,
regulations flouted and banking norms thrown to the winds.
 Top 10 Frauds in Indian Banking Sector
The Reserve Bank of India (RBI) Maintains Data on Frauds on the basis of area of
operation under which the frauds have been perpetrated. According to such data
pertaining to the calendar year 2009, Top 10 Categories under which Frauds have been
reported by banks (number wise and amount wise) are as follows,

Top 10 Categories of Fraud in the Indian Banking Sector [ Based on Number of Complaints]
1. Credit Cards
2. Deposits – Savings A/C
3. Internet Banking
4. Housing Loans
5. Term Loans
6. Cheque / Demand Drafts
7. Cash Transactions
8. Cash Credit A/C [Type of Overdraft A/C]
9. Advances
10.ATM / Debit Cards

Top 10 Categories of Fraud in Indian Banking Sector [Based on Amount involved in Fraud]

1. Cash Credit
2. Advances – Others
3. Letter of Credit [Mostly issued to Corporate]
4. Advances – Term Loans
5. Bills – Purchase and Discounting
6. Housing Loans
7. Deposits – Current A/C
8. Credit Card
9. Deposits – Savings A/C
10.Deposits – Term / Fixed
 Types of Major Frauds

Credit card fraud

Credit card fraud is widespread as a means of stealing from banks, merchants and clients. A
credit card is made of three plastic sheet of polyvinyl chloride. The central sheet of the card
is known as the core stock. These cards are of a particular size and many data are embossed
over it. But credit cards fraud manifest in a number of ways. 
They are:
1) Genuine cards are manipulated
2) Genuine cards are altered
3) Counterfeit cards are created
4) Fraudulent telemarketing is done with credit cards.
5) Genuine cards are obtained on fraudulent applications in the names/addresses of other
persons and used.

It is feared that with the expansion of E-Commerce, M-Commerce and Internet facilities
being available on massive scale the fraudulent fund freaking via credit cards will increase
tremendously.

Counterfeit credit cards are known as white plastics.

1)Booster cheques
A booster cheque is a fraudulent or bad cheque used to make a payment to a credit card
account in order to "bust out" or raise the amount of available credit on otherwise-
legitimate credit cards. The amount of the cheque is credited to the card account by the
bank as soon as the payment is made, even though the cheque has not yet cleared. Before
the bad cheque is discovered, the perpetrator goes on a spending spree or obtains cash
advances until the newly-"raised" available limit on the card is reached. The original cheque
then bounces, but by then it is already too late.

2)Stolen payment cards

Often, the first indication that a victim's wallet has been stolen is a 'phone call from a credit
card issuer asking if the person has gone on a spending spree; the simplest form of this
theft involves stealing the card itself and charging a number of high-ticket items to it in the
first few minutes or hours before it is reported as stolen.A variant of this is to copy just the
credit card numbers (instead of drawing attention by stealing the card itself) in order to use
the numbers in online frauds.
3)Duplication or skimming of card information
This takes a number of forms, ranging from a dishonest merchant copying clients' credit
card numbers for later misuse (or a thief using carbon copies from old mechanical card
imprint machines to steal the info) to the use of tampered credit or debit card readers to
copy the magnetic stripe from a payment card while a hidden camera captures the
numbers on the face of the card.
4)Attached devices to ATM’s
Some thieves have surreptitiously added equipment to publicly accessible automatic teller
machines; a fraudulent card stripe reader would capture the contents of the magnetic
stripe while a hidden camera would sneak a peek at the user's PIN. The fraudulent
equipment would then be removed and the data used to produce duplicate cards that
could then be used to make ATM withdrawals from the victims' accounts.

Ways to avoid these type of frauds

1. Keep your credit cards safe
Keep your credit cards in a purse or wallet close to your body where it can't easily be
snatched away. Ladies, make sure your purse is zipped. If you're shopping in a high traffic
area, carry a smaller purse. For both men and women, carry only the one or two credit and
debit cards you'll be using that day. Leave all your other credit cards at home.Thieves can
take pictures of your credit card with a camera or cell phone, so don't leave your credit card
exposed any longer than necessary.After you make a purchase put your credit card away
immediately. Confirm you have your credit card back in your possession before you leave
the store or restaurant.
2. Shred anything with your credit card number on it
Rather than toss your credit card billing statements directly into the trash, shred them to
keep dumpster divers from getting their hands on your credit card number. The same thing
applies to old credit cards that have expired or been cancelled. You might even put the
shredded pieces in different trash bags to thwart clever thieves who can put shredded
pages back together.
3. Don't sign blank credit card receipts
To avoid credit card fraud, always verify the amount on your credit card receipt before
signing it. If you get a credit card receipt that has blank spaces in it, write $0 in those spaces
or draw through them before putting your signature on the card. Otherwise, the cashier
could write in an amount and send the purchase to your credit card issuer.
4. Avoid giving out your credit card information
Only give out your credit card number or other sensitive information on calls you initiate to
customer service using the number on the back of your credit card. Don't return calls to a
phone number left on your answering machine and don't give your credit card number to
anyone who calls you requesting the number. Credit card thieves have been known to pose
as credit card issuers and other businesses to trick you into giving out your credit card
number.
5. Be safe with your credit card online
Don't click on email links from anyone pretending to be your bank, credit card company, or
other business who uses your personal information, even if the email looks legitimate.
These links are often phishing scams and want to trick you into entering your login
information on their fake website.Only enter your credit card number on secure websites
that you can be 100% sure are legitimate. To be sure a website is secure, look for a lock in
the lower right corner of your internet browser.
6. Report lost or stolen credit cards immediately
The sooner you report a missing credit card the less likely it is that you'll have to pay for any
fraudulent charges made on your credit card. Write down your credit card companies'
customer service number now so you'll have it if your credit card is ever missing.
7. Review your billing statements each month
Unauthorized charges on your credit card are the first indicator of credit card fraud. If you
notice a charge you didn't make, no matter how small, report the charge to your credit card
issuer immediately. Your credit card issuer will tell you whether you should close your
account to avoid credit card fraud.

Internet frauds
1)Phishing 
A person's personal details are obtained by fraudsters posing as bankers, who float a site
similar to that of the person's bank. They are asked to provide all personal information
about themselves and their account to the bank on the pretext of database upgradation.
The number and password are then used to carry out transactions on their behalf without
their knowledge.
 2)Hacking 
Here, personal data is stolen through hacking. The fraudster needs to be an adept cyber
criminal who can steal information stored or transacted in any computer. Sometimes, a
spyware is installed in computer to gain access to all files.
A hacker is much more than an average thief. He gets into the system with the help of a
spyware and steals information. The hacker is always on the lookout for unsecured systems
and files. The spyware usually comes in the form of a virus. This spy transports all files
pertaining to bank accounts to the hacker. Therefore, it is advisable not to store much
information about your accounts on your computer or email which is unsecured
 
Ways to avoid these type of frauds
1)Securing your account 
Here are some simple tips to prevent you from falling into the trap of cyber criminals.
Remember, a simple ignorance or oversight can make a huge dent in your hard-earned
savings. Avoid online banking on unsecured wi fi systems and operate only from PCs at
home. Never reveal password to anyone. Do not even write it on a piece of paper on diary.
Just memorize it. It should be alphanumeric and change it frequently.
Never reply to queries from bank online about account or personal details. The personal
information should not be kept in a public computer or in emails.

2)Check sites Url 

Always check the URL of your bank's web site. Fraudsters can lure you to enter your user ID
and password at a fake website that resembles your bank. If you see anything other than
the bank's genuine URL, it has to be fake.
Never enter your user ID or password or such sensitive information without ascertaining
that you are on the right website. Always type the Web address of your bank into the
browser address space. Never click on the link in the email. 
3)Fool-proof password 
Change your online banking password at regular intervals.
Also, avoid easy-to-guess passwords, like first names, birthdays, kid's or spouse's name and
telephone numbers. Try to have an alpha-numeric password, one that combines alphabets
and numbers.If you have several bank accounts, never use the same online banking
password for all. Never select the option on browser that stores or retains user name and
password. As it can easily be cracked by cyber criminals. Also, never paste your password,
always type it in. This little amount of `finger exercise' will go a long way in safety.
 3)Keep your system up to date
 Regularly check for security updates for your computer operating system. Most security
updates are aimed at reducing risks to your computer, these may be data-related or
otherwise. Make sure that your operating system and browser have the latest security
patches installed. And, always install these only from trusted websites.
Install a personal firewall to prevent hackers from gaining unauthorized access to your
computer, especially if you connect to the Internet through a cable or a DSL modem.
 4)Always check 'last logged' 
Most banks have a 'last logged in' panel on their websites. If your bank has it, check the
panel whenever you log in. If you notice irregularities (like you are logging in after two days,
but the panel says you logged in that morning!), report the matter immediately to your
bank and change your password right away.
Always log out when you exit the online banking portal. Close the browser to ensure that
your secure session is terminated. Never exit simply by closing the browser.
5)Public access can be injurious 
Don't leave the PC unattended after keying in information while transacting on the website.
Avoid accessing your bank online at cyber cafes or on a share or public computer.
Also, avoid locations that offer online connections through wireless networks (Wi-Fi), where
privacy and security are minimal.
 6)What do the banks say 
Banks say that appropriate up gradations are carried out from time to0 time by their IT
departments for risk mitigation. They issue instructions to the customers to manage their
accounts through virtual keyboards by way of which the characters typed by them are not
identified by hackers. SMS alerts are also an important tool since any transaction carried
out on account is reported to the account holder through an SMS.
7)Public PCs 
Also, using Net banking services at cyber cafes leaves one vulnerable to data thieves.
Another modus operandi adopted by cheats these days is stealing data from public
computers or shared PCs.
Loan Frauds
1)Fake Documents
In this the loan applier cheats the bank by making false documents, over pricing of his
assets or deposits. If the loan given to the client is above his capacity of repayment and if
he defaults in repayment it becomes very difficult to recover the loan granted to the client.
2)Inner contacts
If any top bank executive is an close relative (or accomplice) of the loan applier, the loan
is passed by the bank personals on the effect of request or pressure.
3)Fraudulent loan applications
These take a number of forms varying from individuals using false information to hide a
credit history filled with financial problems and unpaid loans to corporations using
accounting fraud to overstate profits in order to make a risky loan appear to be a sound
investment for the bank Some corporations have engaged in over-expansion, using
borrowed money to finance costly mergers and acquisitions and overstating assets, sales or
income to appear solvent even after becoming seriously financially over extended. The
resulting debt load has ruined entire large companies leaving banks exposed to massive
losses from bad loans.
Ways to avoid these type of frauds
1)Corporate governance
Proper screening of top level bank employees. Continuous watch by public.
2)Proper check
Proper scrutiny of the documents at the moment of application.

Letter of Credit Frauds

1) Document precision
As the LC involves lots of small precise points, banks are easily legally made fool by some
high intellectuals right in front of them which may make bank to lose lots of money in
international business deals.
Ways to avoid these type of frauds
1)Highly experienced and intelligent staff
A international business finance veteran as a staff member would help in avoiding such
type of frauds. Getting an professional advice through external agencies may be another
option to avoid such type of frauds.
Fraud Prone Areas in Different Accounts
The following are the potential fraud prone areas in Banking Sector. In addition to those
areas I have also given kinds of fraud that are common in these areas.
1)Savings Bank Accounts
The following are some of the examples being played in respect of savings bank accounts:
(a) Cheques bearing the forged signatures of depositors may be presented and paid.
(b) Specimen signatures of the depositors may be changed, particularly after the death of
depositors,
(c) Dormant accounts may be operated by dishonest persons with or without collusion of
bank employees, and
(d) Unauthorized withdrawals from customer's accounts by employee of the bank
maintaining the savings ledger and later destruction of the recent vouchers by them.

2)Current Account Fraud

The following types are likely to be committed in case of current accounts.
(a) Opening of frauds in the names of limited companies or firms by unauthorized persons;
(b) Presentation and payment of cheques bearing forged signatures;
(c) Breach of trust by the employees of the companies or firms possessing cheque leaves
duly signed by the authorized signatures;
(d) Fraudulent alteration of the amount of the cheques and getting it paid either at the
counter or though another bank.

3)Frauds In Case Of Advances

Following types may be committed in respect of advances:
(a) Spurious gold ornaments may be pledged.
(b) Sub-standard goods may be pledged with the bank or their value may be shown at
inflated figures.
(c) Same goods may be hypothecated in favour of different banks.

Ways to avoid these type of frauds

1)Proper diligence is required while filling of forms and accounts. The accounts should be
rechecked on daily basis.
Detection of Frauds
Despite all care and vigilance there may still be some frauds, though their number,
periodicity and intensity may be considerably reduced. The following procedure would be
very helpful if taken into consideration:
1. All relevant data-papers, documents etc. Should be promptly collected. Original vouchers
or other papers forming the basis of the investigation should be kept under lock and key.
2. All persons in the bank who may be knowing something about the time, place a modus
operandi of the fraud should be examined and their statements should be recorded.
3. The probable order of events should thereafter be reconstructed by the officer, in his
own mind.
4. It is advisable to keep the central office informed about the fraud and further
developments in regard thereto.

The Reserve Bank of India had set-up a high level committee in 1992 which was headed by
Mr. A... Ghosh, the then Dy. Governor Reserve Bank of India to inquire into various aspects
relating to frauds malpractice in banks. The committee had noticed/observed three major
causes for perpetration of fraud as given hereunder:

1. Laxity in observance of the laid down system and procedures by operational and
supervising staff.

2. Over confidence reposed in the clients who indulged in breach of trust.

3. Unscrupulous clients by taking advantages of the laxity in observance of established, time

tested safeguards also committed frauds.

In order to have uniformity in reporting cases of frauds, RBI considered the question of
classification of bank frauds on the basis of the provisions of the IPC.