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I ntroduction:


Banking system occupies an important place in a nations economy. A banking
institution is indispensable in a modern society. It plays a pivotal role in economic
development of a country and forms the core of the money market in an advanced
Banking industry in India has traversed a long way to assume its present stature. It
has undergone a major structural transformation after the nationalization of 14
major commercial banks in 1969 and 5 more on 15 April 1980.
Banks are the engines that drive the operations in the financial sector, which is
vital for the economy. With the nationalization of banks in 1969, they also have
emerged as engines for social change. After Independence, the banks have passed
through three stages. They have moved from the character based lending to
ideology based lending to today competitiveness based lending in the context of
India's economic liberalization policies and the process of linking with the global
A sound banking system should possess three basic characteristics to protect
depositors interest and public faith. Theses are
(i) a fraud free culture,
(ii) a time tested Best Practice Code, and
(iii) an in house immediate grievance remedial system. All these conditions
are their missing or extremely weak in India.
Section 5(b) of the Banking Regulation Act, 1949 defines banking as Banking
is the accepting for the purpose of lending or investment, deposits of money from
the purpose of lending or investment, deposits of money from the public, repayable
on demand or otherwise and withdraw able by cheque, draft, order or otherwise.
In the present day, Global Scenario Banking System has acquired new dimensions.
Banking did spread in India. Today, the banking system has entered into
competitive markets in areas covering resource mobilization, human resource
development, customer services and credit management as well.
With the rising banking business, frauds in banks are also increasing and the
fraudsters are becoming more and more sophisticated and ingenious. In a bid to
keep pace with the changing times, the banking sector has diversified its business
manifold. Replacement of the philosophy of class banking with mass banking in
the post-nationalization period has thrown a lot of challenges to the management
on reconciling the social responsibility with economic viability.
The banking system in our country has been taking care of all segments of our
socio-economic set up. 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.

Definition of Fraud:
Fraud is defined as any behavior by which one person intends to gain a dishonest
advantage over another. In other words , fraud is an act or omission which is
intended to cause wrongful gain to one person and wrongful loss to the other,
either by way of concealment of facts or otherwise.
Fraud is defined u/s 421 of the Indian Penal Code and u/s 17 of the Indian Contract
Act. Thus essential elements of frauds are:
1. There must be a representation and assertion;
2. It must relate to a fact;
3. It must be with the knowledge that it is false or without belief in its truth;
4. It must induce another to act upon the assertion in question or to do or not
to do certain act.
A false representation of a matter of fact whether by words or by conduct, by
false or misleading allegations, or by concealment of what should have been
disclosed that deceives and is intended to deceive another so that the individual
will act upon it to her or his legal injury.
In law, the deliberate misrepresentation of fact for the purpose of depriving
someone of a valuable possession or legal right. Any omission or concealment that
is injurious to another or that allows a person to take unconscionable advantage of
another may constitute criminal fraud. The most common type of fraud is the
obtaining of property by giving a check for which there is insufficient funds in the
signer's account. Another is the assumption of someone else's or a fictitious
identity with the intent to deceive. Also important are mail and wire fraud (fraud
committed by use of the postal service or electronic devices, such as telephones or
computers). A tort action based on fraud is sometimes referred to as an action of

Bank Frauds:
Losses sustained by banks as a result of frauds exceed the losses due to robbery,
dacoit, 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.
While the operations of the bank have become increasingly significant, there is
also an occupation hazard. There is a Tamil proverb, which says that a man who
collects honey will always be tempted to lick his fingers. Banks are all the time
dealing with money and the temptation should therefore is very high. Oscar Wilde
said that the thief was an artist and the policeman was only a critic. There are many
people who are unscrupulous and are able to perpetrate a fraud. We must be able to
see that we devise our systems and procedures in such a way that the scope for
such clever and unscrupulous people is reduced.
Frauds in deposit accounts take place by opening of bogus accounts, forging
signatures of introducers and collecting through such accounts stolen or forged
cheques or bank drafts. Frauds are also committed in the area of granting overdraft
facility in the current accounts of customers. A large number of frauds have been
committed through bank draft, mail transfers and telegraphic transfers.
An analysis made of cases brings out broadly the under mentioned four major
elements responsible for the commission of frauds in banks.
1. Active involvement of the staff-both supervisor and clerical either
independent of external elements or in connivance with outsiders.
2. Failure on the part of the bank staff to follow meticulously laid down
instructions and guidelines.
3. External elements perpetuating frauds on banks by forgeries or
manipulations of cheques, drafts and other instruments.
4. 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.

Mechanics of bank frauds:
By Insiders:
1. Wire fraud
Wire transfer networks such as the international interbank fund transfer system
are tempting as targets as a transfer, once made, is difficult or impossible to
reverse. As these networks are used by banks to settle accounts with each other,
rapid or overnight wire transfer of large amounts of money are commonplace;
while banks have put checks and balances in place, there is the risk that insiders
may attempt to use fraudulent or forged documents which claim to request a
bank depositor's money be wired to another bank, often an offshore account in
some distant foreign country.
2. Rogue traders
A rogue trader is a highly placed insider nominally authorised to invest sizeable
funds on behalf of the bank; this trader secretly makes progressively more
aggressive and risky investments using the bank's money, when one investment
goes bad, the rogue trader engages in further market speculation in the hope of a
quick profit which would hide or cover the loss.
Unfortunately, when one investment loss is piled onto another, the costs to the
bank can reach into the hundreds of millions of dollars; there have even been
cases in which a bank goes out of business due to market investment losses.
3. Fraudulent loans
One way to remove money from a bank is to take out a loan, a practice bankers
would be more than willing to encourage if they know that the money will be
repaid in full with interest. A fraudulent loan, however, is one in which the
borrower is a business entity controlled by a dishonest bank officer or an
accomplice; the "borrower" then declares bankruptcy or vanishes and the
money is gone. The borrower may even be a non-existent entity and the loan
merely an artifice to conceal a theft of a large sum of money from the bank.
4. Forged or fraudulent documents:
Forged documents are often used to conceal other thefts; banks tend to count
their money meticulously so every penny must be accounted for. A document
claiming that a sum of money has been borrowed as a loan, withdrawn by an
individual depositor or transferred or invested can therefore be valuable to a
thief who wishes to conceal the minor detail that the bank's money has in fact
been stolen and is now gone.
5. Uninsured deposits
There are a number of cases each year where the bank itself turns out to be
uninsured or not licensed to operate at all. The objective is usually to solicit for
deposits to this uninsured "bank", although some may also sell stock
representing ownership of the "bank". Sometimes the names appear very
official or very similar to those of legitimate banks. For instance, the "Chase
Trust Bank" of Washington D.C. appeared in 2002 with no licence and no
affiliation to its seemingly apparent namesake; the real Chase Manhattan Bank
is based in New York.
There is a very high risk of fraud when dealing with unknown or uninsured
The risk is greatest when dealing with offshore or Internet banks (as this allows
selection of countries with lax banking regulations), but not by any means
limited to these institutions.
6. Demand draft fraud
Demand draft fraud is usually done by one or more dishonest bank employees.
They remove few DD leaves or DD books from stock and write them like a
regular DD. Since they are insiders, they know the coding, punching of a
demand draft. These Demand drafts will be issued payable at distant town/city
without debiting an account. Then it will be cashed at the payable branch. For
the paying branch it is just another DD. This kind of fraud will be discovered
only when the head office does the branch-wise reconciliation, which normally
will take 6 months. By that time the money is unrecoverable.
By others:
7. Forgery and altered cheques
Thieves have altered cheques to change the name (in order to deposit cheques
intended for payment to someone else) or the amount on the face of a cheque (a
few strokes of a pen can change Rs.10000 into Rs.100,000, although such a
large figure may raise some eyebrows).
Instead of tampering with a real cheque, some fraudsters will attempt to forge a
depositor's signature on a blank cheque or even print their own cheques drawn
on accounts owned by others, non-existent accounts or even alleged accounts
owned by non-existent depositors. The cheque will then be deposited to another
bank and the money withdrawn before the cheque can be returned as invalid or
for non-sufficient funds.