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Best Knowledgable of Fraudes in Banking
Best Knowledgable of Fraudes in Banking
trends in the
financial sector
June 2015
Contents
Financial services megatrends 04
08
Frauds in financial institutions: Understanding the types and modus operandi 10
Regulatory and legislative landscape 19
Global trends in fraud prevention and detection 21
Transformation through technology: The advent of a new world of financial services
PwC
D S Rawat
Secretary General
ASSOCHAM
Foreword
In todays volatile economic environment, the opportunity and incentive to commit frauds have both increased. Instances of
asset misappropriation, money laundering, cybercrime and accounting fraud are only increasing by the day.
With changes in technology, frauds have taken the shape and modalities of organised crime, deploying increasingly
sophisticated methods of perpetration. As financial transactions become increasingly technology-driven, they seem to have
become the weapon of choice when it comes to fraudsters.
In this paper, we share our perspective on the trends in frauds in the financial sector, the changing regulatory landscape and the
ways for fraud prevention and control. We hope these insights will help the financial services industry combat fraud and other
forms of economic crime.
Best regards,
Dinesh Anand
Partner and Leader, Forensic Services
PricewaterhouseCoopers Pvt Ltd. India
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
11-12
13-14
14-15
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
1,000
800
600
400
200
11-12
12-13
12-13
13-14
14-15
1. http://www.kurzweilai.net/the-law-of-accelerating-returns
2. https://www.pwc.in/en_IN/in/assets/pdfs/publications/2014/indian-workplace-of-2022.pdf
PwC
The reporting requirements of the financial sector have never been this stringent.
In India, the financial services sector operates as an arrangement of institutionsformal and informalthat facilitates the flow of
surplus funds in the economy to deficit spenders.
The institutional arrangement in the financial services sector consists of scheduled commercial banks (SCBs), insurance
companies, non-banking financial companies (NBFCs), mutual funds, specialised foreign institutional investors (specialised FII),
urban co-operative banks (UCBs), regional rural banks (RRBs), national pension scheme (NPS) fund and other smaller financial
entities.
Like many developing economies, India has an informal financial system consisting of loan brokers, NGOs helping self-help groups
(SHGs), share brokers and traders, pawnbrokers, etc. Given the heterogeneous nature of entities and activities, no consistent
database of customers and transactions is available. Informal financial agencies are also not considered very reliable in terms of
customer protection.
Rural
Semiurban
Urban
Metro
198081 to
198990
7.26%
3.55%
4.4%
4.63%
199091 to
19992000
-0.91%
3.3%
3.7%
6.24%
200001
2000 01toto
200910
2009-10
-0.37%
3.78%
5.77%
7.19%
Total
0.93%
2.67%
3.69%
4.55%
5%
Bank branches as
of March 2014
44,699
31,298
21,310
19,143
0%
40%
35%
30%
25%
20%
15%
2011
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
10%
: 77%
CAGR
60%
3. https://rbi.org.in/scripts/NotificationUser.aspx?Id=7344&Mode=0
33,042
330,302
Number of BCs as of
Number of BCs as of
50%
40%
7.0%
5.4%
FY03
6.5%
5.2%
3.9%
FY02
8.4%
6.7%
4.5%
3.3%
FY01
9.3%
8.4%
8.0%
7.2%
4.2%
9.6%
9.5%
FY04
FY05
FY06
2.5%
FY07
FY08
GDP
2.2%
2.3%
FY09
FY10
2.5%
2.4%
FY11
3.1%
FY12
FY13
4.9%
4.5%
3.6%
FY14E
GNPA
27.9
27.9
23.2
FY05
PwC
18.0
11.5
FY06
FY07
FY08
40.2
21.3
FY09
6.0
16.8
4. http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/DDP033012FL.pdf
(1.2)
5. http://www.gfintegrity.org/reports/
(8.4)
(13.9)
6. http://www.symantec.com/about/news/resources/press_kits/detail.jsp?pkid=norton-report-2013
54.1
54.0
43.2
FY10
FY11
16.6
FY12
15.1
FY13
Rural
Semiurban
Urban
Metro
198081 to
198990
7.26%
3.55%
4.4%
4.63%
199091 to
19992000
-0.91%
3.3%
3.7%
6.24%
200001 to
200910
-0.37%
3.78%
5.77%
7.19%
Total
0.93%
2.67%
3.69%
4.55%
5%
Bank branches as
of March 2014
44,699
31,298
21,310
19,143
0%
40%
35%
30%
25%
20%
15%
2011
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
10%
: 77
CAGR
60%
33,042
330,302
Number of BCs as of
March 2010
Number of BCs as of
September 2014
50%
40%
30%
20%
2011
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
0%
1972
~ 425 million
access to bank
adults had
accounts in 2014
1969
~ 296.1 million
access to bank
adults had
accounts in 2011
10%
2014
2010
50
million
CAG
R: 57%
305
million
16.15%
Demand
deposits
Time
deposits
17.54%
Credit
17.61%
Sources: RBI Statistical tables relating to banks in India; RBI Trends and progress of banking in India reports; Madras School of Economics research; World
Bank Findex; Census 2011; Planning Commission; PwC analysis
8
PwC
7.9
billion INR
42,300
Wi-Fi in 400
universities and
public places in 25
cities by June 2015
Villages to
be provided
universal mobile
access by 2018
320
billion INR
10 million
persons in towns and
villages provided
with IT services or
business training
Cost of establishing
rural broadband in
2.5 lakh villages by
March 2017
1,130 billion
INR Total investment
in Digital India
programme
Source:
Logging
intodocuments
Digital Banking
Source:
Official
policy
18
PwC
October 2008
Nonbanks/NBFCs
permitted to issue mbased semi-closed
instruments
April 2009
August 2009
Banks permitted to
issue semiclosed
instruments through
agents/BCs
September 2010
Immediate
payment services (IMPS)
launched in India
PwC
November 2010
RBI Master
circular on mobile
banking transactions
issued in July 2014
July 2014
Draft guidelines
for licensing of
payment banks
Modern banking
Currently, 74% of the Indian population
has mobile phones. Mobile payment
volumes have hence registered a steady
rise.
Emerging technologies
Capital markets
RBI circular November 2014:10 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 presented and encashed by fraudsters.
6.60%
18.50%
5.40%
9.70%
46.40%
2.40%
6.40%
13.50%
Note: These percentages dont add up to 100 because some of the complaints include more than one type of identity theft.
7. http://www.freepressjournal.in/over-rs-490-cr-involved-in-cyber-fraud-cases-since-2011-govt/
8. https://www.amfiindia.com/
9. http://www.fraud-magazine.com/default.aspx
10. https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=9322
11. http://ncrb.gov.in/
Evolution of fraud
19901999
Hawala transactions
Ponzi schemes
Fake currency
Cheque forgery
20002015
10 PwC
Cybercrime
Identity theft
Benami accounts
Major risk areas: Corruption and cash in hand are the most
fraud vulnerable areas in the financial services sector.16
Latest reported facts and figures: In India, frauds worth
11,022 crore INR were unearthed in public sector banks
between AprilDecember 2014; 2,100 cases of fraud were
reported to the RBI.17
11
Identity theft
Fraudsters are devising new ways to exploit loopholes in
technology systems and processes. In case of frauds involving
lower amounts, they employ hostile software programs or
malware attacks, phishing, SMSishing and whaling (phishing
targeting high net worth individuals) apart from stealing
confidential data.
In February 2013, the RBI advised banks to introduce certain
minimum checks and balances such as the introduction of twofactor authentication in case of card not present transactions.18
Some examples:
Unauthorised emails asking for account information for
updating bank records are sent by fraudsters. The customer
information is then misused for misappropriating funds.
Access rights for making entries are given to unauthorised
people.
18. https://rbi.org.in/scripts/NotificationUser.aspx?Id=7874&Mode=0
12 PwC
19. https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=826
13
Counterfeit cheques
Counterfeit or fake cheques that look too good to be true are
being used in a growing number of fraudulent schemes, including
foreign lottery scams, cheque overpayment scams, internet
auction scams and secret shopper scams. Unsuspecting sellers
get stuck when scammers pass off bogus corporate or personal
cheques.
Misappropriation of loan disbursements: Loans of lesser value Even though the above-mentioned terms are interchangeably
being disbursed to farmers and funds being misappropriated by used, in the banking world, asset stripping primarily implies
taking company funds or assets of value, and leaving behind
intermediators through false documentation
debts.
20. http://www.pwc.com/gx/en/financial-services/publications/global-economiccrime-survey-2014-financial-services.jhtml
14 PwC
15
16 PwC
17
18 PwC
Misappropriation, siphoning
of funds by brokers or
intermediaries
Some examples:
The broker cheating the investor or
account holder by taking a blank
cheque and later misusing the same
Dormant accounts such as mutual fund
investments with long-term maturity
or redemption not being monitored
by investors regularly, making them
susceptible to fraud
Employees taking undue advantage
of the lack of segregation of duties
and manipulating the settlement or
clearing account reconciliations
Incorrect commission or
incentives
Lax internal controls may give way to
malpractices such as creation of agent or
broker codes in the system and collusion
in order to avail of extraneous commission
and incentives.
Some examples:
Employees creating fictitious
agent or broker identities with a
motive of personal profiteering and
misappropriating the commission
or incentives passed on to the other
agents or brokers
Employees conspiring with an agent
or broker for pay-out of commission
or incentives at rates higher than the
predetermined ones
Walk-in customers being shown as
referrals through agents or brokers,
resulting in wrongful commission
pay-out
Banking
The RBI issued a master circular on
Frauds Classification and Reporting.
The circular has fixed the responsibility
of preventing frauds on banks, exposing
them to a completely new horizon of
financial risks. Further, banks are now
required to report to the RBI the complete
information about frauds and the followup action taken thereon.
With the shift from traditional ways of
responding to frauds to new ways of
robust reporting and risk monitoring
systems, banks can now control financial
and reputational risks more efficiently.
Mobile banking
With the rapid growth in users and wider
coverage of mobile phone networks,
mobile banking is increasingly coming
up as a significant delivery channel for
extending banking services to customers.
Putting the onus on banks, the RBI has
issued operative guidelines to regulate
this channel, suggesting reporting of
suspicious transactions to its financial
intelligence unit.
Owing to the heavy reliance on telecom
operators for its services, the prevention
and detection of frauds in mobile banking
have become even more complex.
To keep a check on frauds, banks need to
incorporate a greater level of scrutiny, by
deploying advanced tools and technology
capable of protecting the customers
against unethical activities.
Insurance
The Insurance Regulatory and
Development Authority (IRDA) has
issued an Insurance Fraud Monitoring
Framework (IFMF) in order to guide the
implementation of measures to minimise
the vulnerability against frauds in the
insurance sector.
IFMF mandates for the insurance
companies to set up a risk management
committee, followed by disclosure of
adequacy of the systems in place to
NBFCs
The NBFC sector has evolved considerably
in terms of its size, operations,
technological sophistication, as well
as entry into newer areas of financial
services and products. NBFCs are now
deeply interconnected with entities in
the financial sector, on both sides of their
balance sheets. Being financial entities,
they are as exposed to these risks as banks.
Acknowledging the risk factors applicable
to NBFCs, the RBI has issued a master
circular on reporting of frauds. The
circular lays down a road map similar
to the one for banks. Akin to the
banking sector, the circular has fixed
the responsibility of preventing frauds
on NBFCs, subjecting them to uncertain
financial risks. The RBI has further
mandated the reporting of frauds by
NBFCs in a prescribed format. This is
expected to pose certain challenges to
NBFCs and may require many to re-visit
their business model. These regulations
call for NBFCs to invest in upgrading
their systems and processes and equip
them with advanced tools to prevent as
well as detect frauds in parlance with the
emerging threats by way of technology.
19
Salient features
Is aimed at advising banks about fraud prone processes and the safeguards necessary for
prevention of fraud
Has made fraud reporting a mandatory process
Mandates all banks to file suspected transaction reports
Instructs them to follow KYC, AML and CFT guidelines
Issues guidelines for the classification and reporting of frauds
Empowers the Serious Fraud Investigation Office (SFIO) with powers to probe companies
suspected of fraud
According to the act, the SFIOs report filed in a court for framing charges is to be equivalent to a
police report under the Code of Criminal Procedure, 1973
Authorises the auditor to act as a whistleblower and report fraud to the central government, audit
committee or the board, depending on the quantum of fraud (as prescribed)
Places the primary responsibility for prevention and detection of fraud on the companys board of
directors and management
Protects the interests of policy holders and secures fair treatment for them
Prescribes the IFMF to address and manage fraud risks
According to this act, all insurance companies are required to have in place an anti-fraud policy,
duly approved by their respective boards
Directs an investigation into the affairs of intermediaries or persons associated with the pension
fund
Entrusts the Central Recordkeeping Agency (CRA) or the annuity service provider with managing
the withdrawals from the national pension
Makes provisions for investigation, enforcement and penalty in case of contravention of the
provisions of the act
Prevention of Money
Laundering Act, 2002
Prevents money laundering and provides for the confiscation of property derived from, or involved
in, money laundering and for related matters
Requires banks and other specified institutions to maintain a record of clients and transactions,
and furnish them to the prescribed authority; this record needs to include full-fledged money
changers, money transfer service providers, and casinos under its reporting regime
Deals with the problem of black money (undisclosed foreign income and assets)
Penalises the concealment of foreign income and makes attempting to evade tax in relation to
foreign income a criminal liability
Specifies the applicable tax rates or assets, scope of income to be taxed, tax authorities, penalty
and prosecution in relation to undisclosed foreign income and assets
Authorises banks to frame an internal policy for fraud risk management and fraud investigation
Instructs to form an audit committee in terms of RBI guidelines for reviewing cases of fraud and
action taken thereon
Issues guidelines on causes and remedial action in terms of incidence of frauds in housing finance
Shares the modus operandi and causative factors of housing finance frauds (The Fraud
Management Cell has been collecting such information from housing finance companies, the RBI,
IBA, etc, and circulating the same to HFCs to enable them to take adequate precautions, exercise
due diligence and initiate timely corrective actions to avoid such fraudulent incidences in future).
21. Master Circular on Frauds Classification and Reporting DBS.CO.CFMC.BC.No.1/ 23.04.001/2014-15. Circular on Risks and Controls in Computers and
Telecommunications DPSS.CO.PD.No.1017/02.23.001/2014-2015
22. Circular on Fraud Classification and Reporting for NBFC DNBS (PD).CC. No. 315 /03.10.42 /2012-13 SEBI (Prohibition of fraudulent and unfair trade practices
relating to securities market) Regulations 2003
23. Circular on Insurance Fraud Monitoring Framework IRDA/SDD/MISC/CIR/009/01/2013
24. http://www.prsindia.org/billtrack/industry-commerce-finance/
25. http://www.prsindia.org/uploads/media/Black%20Money/Black%20money%20act,%202015.pdf
26. (Ref.No.NB.DoS.HO.POL.CFMC/ 3662 /P. 78/2009-10 dated 10 November 2009. Circular No. 189 /DoS. 40 /2009)
27. NHB(ND)/HFC/BP&P/2966/2005
20 PwC
Global
in fraud prevention and
Fraud risktrends
assessment
In certain jurisdictions, FS regulatory requirements exist for risk areas like money laundering
detection
and fraud. Our survey asked about fraud risk assessments (FRAs) and the results reveal a
surprising number of FS organisations still do not carry any out. It is possible that if FRAs took
place more regularly additional economic crime would have been detected. Other economic
crime areas such as bribery, corruption and money laundering also benefit from thorough
Similarly, the IRDA is also in the process
enterprise-wide risk assessments. Many financial institutions are thus
Current
scenario
effective
method in fraud detectionThe
(17%
experienced
by FS respondents were
RBI of
hasserious
released frauds
a new framework
to
Industry-wide trends
detected
this way).
Only 13% of frauds
detected
through
suspicious transaction reporting
checkwere
loan frauds
by way
of early warning
Financial
institutions
are enhancing
signals
for banks
and red data
flagging
of
Whilst
the legal
environment
their
processes, controls
fraud risk
(compared
to 19%and
in 2011).
6% were
detected
through
analytics
(an
option
not offered
in and
accounts where defaulters shall have no
regulators have pushed the financial
management frameworks to minimise the
the 2011 survey) which is likely toaccess
become
a more
important
tool in
inthe
theright
future.
to further
banking
finance. Itdetection
also
sector
direction, individual
opportunities for fraud as well as reduce
plans
to
set
up
a
Central
Fraud
Registry
institutions
are
alsoknow)
taking the lead in
Surprisingly,1
in
5
FS
respondents
did
not
confirm
a
method
of
fraud
detection
(Dont
the time taken in their detection. Funding
that
can
be
accessed
by
all
Indian
banks.
protecting
their
earnings
and reputation.
forcompared
fraud control
toinitiatives,
only 8%however,
in 2011.
In addition, the CBI and Central Economic
Intelligence Bureau (CEIB) will share their
databases with banks.
18
19
for
ce
law
By
cid
ac
en
en
ics
lyt
ta
a
na
ete
rd
he
me
nt
Co
(bo rpor
th ate
IT
an secu
d p rit
hy y
sic
al
Inv
se
es
cu
tig
rity
ati
)
ve
me
dia
Ro
tat
ion
of
pe
rso
nn
el
ds
tho
on
cti
au
dit
ern
Int
By
21
7
56%
9
Da
13
Ot
14
al
st
iou
pic
Su
s
17
me
uti
ne
)
(ro
sa
c
ran
an
ing
Wh
ist
leb
low
ma
ris
k
ud
tio
n
dt
ipoff
nt
me
ge
na
2011 FS
20
Fra
no
w
Do
n't
k
2014 FS
rep
ort
ing
% FS respondents
Source: PwC Global Economic Crime Survey 2014
21
Top trends
Automated analysis tools: Today, the
industry is increasingly aware of the
need for automated analysis tools that
identify and report fraud attempts in
a timely manner. Solution providers
are providing real-time transaction
screening, third-party screening as
well as compliance solutions.
Sector-oriented benchmarking
solutions: Solutions aimed at assessing
the fraud vulnerability of financial
institutions are now available. They
help in formulating a targeted and
cost-effective action plan against fraud
risks.
Data visualisation tools: These
are being used to provide a visual
representation of complex data
patterns and outliers to translate
multidimensional data into meaningful
pictures or graphics.
Behavioural
analytics
Awareness
initiatives
Deep
learning
Data
visualisation
Forensic
tools
Compliance
solutions
Detection
Automated
controls
Investigation
cells
Prevention
Third-party
screening
Real-time
screening
Flexible
audit
plans
Benchmarking
Internal
controls
Fraud
risk
assessment
22 PwC
Vigil
mechanism
Back to basics
Hiring reliable management and
building relationships with genuine
clients, suppliers and partners are of
utmost importance. The lack of correct
background information can lead to both
reputation and business risks. Effective
background checks of employees and
associates are thus recommended.
It is difficult but also necessary to integrate
data from various sources to be able to
derive the benefits of analytics techniques.
Financial institutions do face challenges
in maintaining the efficiency of anti-fraud
security controls at an enterprise-wide
level. Challenges arise while integrating
channels or within applications and tools
(integrating online and ATM transactions,
Governance
Preventative
Operations
Oversight
Detective
Periodic reviews
and transparent
management reporting
Periodic review
Effective technology
solutions to be implemented
for business to run in sync
and data to be available
consistently
A well-defined
governance structure
Policies and
procedures
Staff
awareness and
training
Technology
framework
Effective data
Human capital
23
24 PwC
Notes
25
About ASSOCHAM
Contacts
About PwC
Contacts
Dinesh Anand
Partner and Leader, Forensic Services
M: +91 9818267114
Email: dinesh.anand@in.pwc.com
pwc.in
Data Classification: DC0
This publication does not constitute professional advice. The information in this publication has been obtained or derived from sources believed by
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estimates contained in this publication represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are
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publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for
any decisions readers may take or decide not to or fail to take.
2015 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability
company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International
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AK 385 - June 2015 Current fraud trends in the financial sector .indd
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