SUBJECT

BUSINESS ETHICS AND CORPORATE GOVERNANCE.

TOPIC
CORRUPTION FRAUD SCAMS IN BANKING
INSURANCE AND FINANCIAL MARKETS.

CONTENTS

CORRUPTION AND FRAUDS AND SCAMS.

CORRUPTION DEFINITION – Corruption is defined by the world bank and transparency international (TI) as “the miss use of public office for private gain’’.CORRUPTION CORRUPTION MEANING Corruption is the misuse of power . office or authority for private profit which could occur in the public and private domain. CAUSES OF CORRUPTION –  Unnecessary regulation  Lack of transparency  Scarcity of goods and services  Advertisement delay  Scope of personal discretion . whose position create opportunities for the diversion of money and assets from government to them and their collaborator. Corruption involves the improper and unlawful behavior of public –service officials . both politicians and civil servants .

IMPACT OF CORRUPTION TO SOCIETY –  Resource allocation and government performance – The causes of its development are many and vary from one country to the next country. more crime.  Increasing poverty – Poor cannot afford bribes. democracy leads to anger.  Civil and political right – Corruption also leads to violation of civil and political rights by causing discrimination in favour of the powerful and against the poor and the marginalized. less protection. in families. etc. terrorism. conflict.  Damages security system – It damages the security system in the society viz. in the workplace. Among the contributing factors are policies. politics. drugs. programs and activities that are poorly conceived and managed. frustration.  Consumption – Corruption includes the use of public resources for conspicuous consumption by public offices. people live in fear and citizens concerns as to unsafe food. In emerging democracies. relief diverted which causes people to lose trust in each other. and in government. . vote buying through corrupt deals prior to elections is another serious problem and hampers peoples right to vote. no one is safe.  Basic human right – The vital concern in many countries is that basic human rights.  Freedom of expression – It is threatened when corruption causes intimidation and harassment of its critics. workplace. education and clean water cannot be realized because of corruption that results in the diversion of development funds into private pocket. such as right to health care.

 Empowerment – While human rights empower people and provide standards against which Governments and other actors can be held accountable. social and cultural rights. corruption the expectation. such as participation.  Episodic corruption – Honest behavior is the norm.which has implication for progressive realization of economic. TYPES OF CORRUPTION –  Petty corruption – Practiced by public servants who may be basically decent and honest individuals but who are grossly underpaid and depend on small bribes from the public to feed and educate their families. The corruption is motivated by personal greed. CORRUPTION RELATED ISSUES –  Good governance – Good governance and human rights are mutually reinforcing and share some common principles. they cannot be . and systems depend on corruption for the survival. accountability.  Systemic corruption – Channels of malfeasance extend upwards from the bribe collection points. transparency and responsibility.  Grand corruption – High-level public officials and politicians make decisions involving large public contracts or projects financed by external donors. and the dishonest public servant is disciplined when detected.

 Transnational corporations – The involvement of transnational corporations in corrupt practices in their host countries. the role of good governance practices by states and the importance of implememtation of national regulations by TNCs. Administrative delays – 2. To receive complaints – To receive complaints from all sources and scrutinize them with a view to finding out if the allegations involve a vigilance angle. To investigate – To investigate or cause an investigation to be made into such specific and verifiable allegations as involved a vigilance angle. To prepare a list of officers of doubtful integrity – The list would include names of those officers who. 5. Regulatory function – Government taking upon themselves more than what they can manage by way of regulatory functions. there by violating thei rights. Corporate social responsibility and corporate compliance are two method in effort to prevent corruption.  Corporate social responsibility – There is a great role of private society in fighting corruption. MEASURES TO REDUCE CORRUPTION – 1. after .respected and protected in a sustainable manner without democracy and good governance. 4.  Fighting corruption while safeguarding human rights – Anti-corruption campaigns can be used politically to suppress political opponents can be used politically to suppress political opponents. 3. journalists or human rights advocates.

inquiry or during the course of inquiry. A strong civil society – A government needs to put in place a solid set of preventive tools. ZERO TOLERANCE OF CORRUPTION – 1. The best law has no value if it is not enforced. banks. Codes of conducts and strong independent oversight bodies can help ensure that the acceptable standards of behaviour are respected in both the private and public sector. 3. which is itself the graduation of laws and integrity. etc. The best judge and magistrates are wasted if cases are never brought to them. The presence of rules of law – The public needs to be educated on the advantages of good governance and participate in promoting it. Democratic development – The capacity and integrity of enforcement need to be enhanced. Economic development – The basic institution of good governance needs to be strengthened. Demand and supply – Zero tolerance corruption should be a principle not only from the demand side of public . have been found to be lacking in integrity. 2. public sector enterprises. Corruption perception index – Corruption participation index of all Government departments. At the head of this list is the judiciary. The public itself bears a large share of responsibility for insisting on honesty and integrity in government and business. 2. 4. Basic areas for anti-corruption within country The anti-corruption strategy can be grouped under four pillars : 1.

Remove laws and system that promote corruption – All the laws which leads to corruption in the country should be removed by the government. the term ``Fraud`` means and includes any of the following acts committed by a party to a contract . CHARACTERISTICS OF FRAUDSTER – General characteristics of those who commit occupational fraud are listed as under: . Annual property returns – Annual property returns by members of parliament and ministers. FRAUD DEFINITION – Indian Contract act : As per the provisions of section 17 of the ICA .or with his connivance or by his agent with intent to deceive another party thereto or his agent or to include him to enter into the contract. 5.servants and government departments but also from the supply side. 4. Mobilizing the youth to fight corruption – The youth of country should be unite and mobilized to fight corruption. 3.

6.Many are married employees who commit the grates number of frauds and cause the highest median losses. 4. INTELLIGENT – They are intelligent. pertaining to their job classification.  CREDITING OF INTEREST – At the time of half-yearly crediting of interest in the huge operative savings. they commit fraud for the challenge because they are bored with their job. . 5.1. 7. MALE – They are male 3/4th of all the frauds are committed by men. GREEDY AND FINANCIAL NEED . COMPUTERIZED BANKING ENVIRONMENT SOME OF THE FRAUDS OF THE SAME ARE SUMMARIZED BELOW:  MAINTENANCE SERVICE – Significant exposure of the banking activities to the employee of a software vendor. They are not afraid to fail. 2. You FBI agents know that serial killers often have instance of pre-crime stress. INQUISITIVE AND RISK TAKER – They are risk takers. EGOTISTICAL – They are very egotistical. CLOSE RELATIONSHIP . while later is providing the maintenance service. They feel they are worth more than they may be. HARD WORKER – They are hard workers. usually arriving early for work. Many a times.They usually keep close relations with the vendors or suppliers to fraud others. leaving late at night and never taking vacations. UNDER STRESS – They are under stress. 8. 3.

etc ]  APPLICATION CONTROL [ controls built into applications for checking security lapses ] . maintenance. important functions like password secrecy.  PASSWORD SECRECY – Even after years computerization. INTEREST PAID ON DEPOSIT AMOUNT – Bank account. monitoring. etc are not performed as per the laid down guidelines. business continuity planning.  MISAPPROPRIATION OF CASH – Misappropriation of cash received at single window counter due to the absence of scroll / control mechanism. substantial amount may be credited by inflating interest paid on deposit account by erasing genuine debits / fraudulent credits in the relative accounts. etc ]  ORGANIZATIONAL CONTROL [ segregation of duties between programmers. etc ]  ENVIRONMENTAL CONTROL [ control of air conditioning. printing of reports. FRAUD PREVENTING MEASURES IN COMPUTERIZED BANKING ENVIRONMENT  MANAGEMENT CONTROLS [ drafting a second security policy. humidity. etc ]  OPERATIONAL CONTROL [ checking physical access to computer resources. operators.

BANKING OPERATIONS AND ETHICS – MAJOR FRAUD PRONE AREAS IN A BANK:  OPENING FICTITIOUS ACCOUNT – Opening fictitious account for crediting proceeds of forged / unauthorized cheque for withdrawal immediately. cheque books.  PROMPT RECONCILIATION OF BANK ACCOUNT – Prompt reconciliation of bank accounts and inter branch transactions should be done atleast every month and this should be checked by responsible officer. . deposit receipts. specimen signature cards and other important documents should be done in the custody of a responsible officer.  ALL DEBIT AND CREDIT VOUCHERS – All debt and credit vouchers pertaining to a days transaction should be serially numbered and the totals of the same record in the main cash book.  THE BLANK PASSBOOKS .GENERAL PRECAUTIONS FOR FRAUD PREVENTION BY BANKS –  BALANCING OF BOOKS OF ACCOUNTS – Balancing books of accounts with general ledger balances should be done every month and this should be checked by responsible officer.  SPECIMEN SIGNATURE CARD – It should be in the custody of passing officials only and withdrawal slips should be serially numbered and the stocks accounted.  ALLOWING FREQUENT OVERDRAWING – Allowing frequent overdrawing in the current or operative limits and not reporting to the higher authorities and not getting it regularized.CHEQUE BOOKS ETC – The blank passbooks.

etc. TYPES OF FRAUD IN BANKING SECTOR – 1.Stolen instruments like cheque.  ENTERTAINING ACCOMMODATION OF BILLS OF EXCHANGE TRANSACTIONS – Entertaining bills of exchange transactions and wrongful encashment of loan proceeds through unauthorized withdrawals. UNAUTHORISED HANDLING OF SECURITIES CHARGED TO THEM 5.  AFTER AVAILING LOANS THE PROCEEDS OF THE ASSET PROCURED – The loan is not being deposited back to the bank or being routed through other bank for siphoning the frauds. .  RELEASE OF SECURITIES – Release of securities in an unauthorized manner before ensuring liquidation of direct or indirect liability of a borrower / guarantor. TAMPERING WITH RECORDS / VOUCHERS FRAUDS BY BANK EMPLOYEES –  LOWER LEVEL PEOPLE – Lower level employees who help the cashier at the counter often commit theft of small amounts from the casher’s box. MISREPRESENTATION 2. BREACH OF TRUST 3. FORGED DOCUMENTS – Availing loans on the strength of forged documents / titles deeds. credit advice. PASSING OF FICTITIOUS ENTRIES 4. demand draft.  ENCASHMENT OF STOLEN INSTRUMENT .

 EMPLOYEE COMMITS THEFT – Employee commits theft of DD forms and hands them over to an outsider. REGULAR CUSTOMERS APPROACH – Regular customers approach peons and attenders during rush time for help and handover them some cash along with the cashbook. . He also provides the branch code numbers and specimen signature of the bank officers to the criminals.Keeping a watch on the employee of doubtful integrity to know whether he is living beyond means.  ILLITERATE AND IGNORANT CUSTOMERS – Often illiterate and ignorant customers approach bank employee to assist them in effecting transactions. manner in which committed. GUIDELINES ON PREVENTION OF FRAUDS –  STUDY PREVIOUS FILES – File relating to commission of frauds and examine such as nature of fraud.Employee obtains the signatures of the party on a blank cheque or a withdrawal slip assuring him that he will fill in the details later and draws the higher amount.  MEASURES – Suggestive measures to prevent recurrence and streamline procedure. employee involved.  FINANCIAL PROBLEMS – Whether the employee has any financial problems and habitually increasing doubts. For this purpose he chooses an account in which there are mostly deposits and very few withdrawals.  KEEP A WATCH . defects in system which enabled the commission of fraud.  EMPLOYEE OBTAINS THE SIGNATURE .

vehicle arson. livestock. OTHER – [Casualty. pharmacy. sudden stop.  ANNUAL PROPERTY RETURNS . medical provider. AUTOMOBILE COLLISION – [Swoop and squat. personal files. inflated billing. etc] 5.Scrutinise the annual property returns. false policy application. etc] 6. pharmacy. INSURANCE COMPANIES – INSURANCE FRAUD 1. drinking or womanizing. agricultural. hit and run. legal provider. etc] 7. backing. vehicle theft. LIFE – [Questionable death. FIRE – . dental. paper collision ] 2. agent] 3. disability. bank accounts and financial transactions of doubtful integrity. others] 4. AUTOMOBILE PROPERTY [Faked damages. GAMBLING – Whether the employee is addicted to gambling. embezzlement. WORKERS ` COMPENSATION – [Claimant fraud. MEDICAL – [Slip and fall.

pharmacy.[Commercial. Majority of individuals take up a life insurance policy so that their families will be provided for financial should anything happen to them. or if your flight is delayed. arson for hire. inflated fire loss] 8. HEALTHCARE – [Identity theft. theft commercial. 2. TRAVEL INSURANCE FRAUD – Travel insurance can protect you if you have lost your luggage. property theft. medicare. 3. auto insurance fraud costs insurance companies more than $12. disability. mold related. or if you are sick while on a holiday. etc] 9. 4. HEALTH INSURANCE FRAUD – Health insurance plans like workers compensation plans. medicaid . LIFE INSURANCE FRAUD – Life insurance fraud costs companies billions of dollars every year. However there are some people whose intention is to defraud the life insurance company. etc] MAJOR FRAUD PRONE AREAS IN INSURANCE SECTOR 1. New ways are being developed to fraud the insurance companies.3 billion each year. AUTOMOBILE INSURANCE FRAUD – According to reports. With the help of a dishonest physician a person feigns an illness and show the evidence of his illness in order to fraud the insurance company. New ways are being developed by fraudsters to deceive insurance companies. PROPERTY – [Theft residential. residential. surgery fraud. billing fraud.

QUALIFICATIONS. PARTNERS OF CURRENT AUDIT – Patterns of current audit. RELATION – The relative of an executive director or senior executive or the promoter cannot be an independent director. 3. ALLOWANCE – A shareholder who has more than 2 percent stake in the company is not allowed to become an independent director. 5. DISQUALIFICATION – It disqualifies a company’s customer and material suppliers from becoming independent directors. Insurer frauds the company by making the false claim for financial gain. FRAUD PREVENTIVE MEASURES SUGGESTED BY SEBI 1. 4.insures a person so that they have access to healthcare if anything untoward happens. consulting and legal firms and partners of that firm had worked in the company in the preceding three years cannot be independent director. These plans also contain disability coverage.According to the new clause all members must be financially literate and that at least one . 2.

SCAMS DEFINATION A fraudulent scheme performed by a dishonest individual. a doctor. investor. .must be expertise in either accounting management or financial management. lawyer. phishing.e. or company in an attempt obtain money or something else of value. Scams traditionally resided in confidence tricks. scam baiting. i. email spoofing. where an individual would misrepresent themselves as someone with skill or authority. new forms of scams emerged such as lottery scams. group. After the internet became widely used.

scheme.or request for helps. Also see phishing. . These are considered to be email fraud.