DR.

RAM MONOHAR LOHIYA

NATIONAL LAW UNIVERSITY,
LUCKNOW.

Economics Project:

Topic: Bank Scams

Submitted to: Submitted by:

Dr. Mitali Tiwari Aman Kumar
Asst. Professor Semester - 2
RMLNLU 


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ACKNOWLEDGEMENT:-

I take this opportunity to express my profound gratitude and deep re-

gards to my guide Dean (Academics),Professor C.M.Jariwala and As-
sistant Professor Dr. Mitali Tiwari for their exemplary guidance, mon-
itoring and constant encouragement to give shape to this project. The
blessing, help and guidance given by them time to time shall carry me
a long way in the journey of life on which I am about to embark.

I also take this opportunity to express a deep sense of gratitude to my

respected seniors who share their cordial support, valuable informa-
tion and guidance, which helped me in completing this task through
various stages.

Lastly, I thank the almighty, my parents, brother, sister and friends for
their constant encouragement without which this assignment would
not have been possible.

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Contents
INTRODUCTION: ..........................................................................................4
Types of bank fraud:.....................................................................................4
Cheque kiting ..........................................................................................4
Accounting fraud ......................................................................................4
Uninsured deposits ....................................................................................5
Demand draft fraud ...................................................................................5
Remotely created check fraud ...................................................................... 6
Rogue traders ..........................................................................................6
Fraudulent loans ......................................................................................7
Fraudulent loan applications ........................................................................ 7
Forged or fraudulent documents ...................................................................7
Wire transfer fraud ...................................................................................8
Bill discounting fraud .................................................................................9
Booster cheques .......................................................................................9
Prime bank fraud ....................................................................................10
Frauds in the Indian Banking Industry ...............................................................11
Biggest banking scams witnessed in India ..........................................................12
2011  ...................................................................................................12
2014  ...................................................................................................13
2015  ...................................................................................................13
2016  ...................................................................................................13
2017  ...................................................................................................14
2018  ...................................................................................................15
What is Letter of Undertaking ? .....................................................................15
Conclusion ...............................................................................................17
Why a common man needs to worry about the big bank scams ? ............................ 17

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INTRODUCTION:

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.

Types of bank fraud:

Cheque kiting
Cheque kiting exploits a banking system known as "the float" wherein money is
temporarily counted twice. When a cheque is deposited to an account at Bank
X, the money is made available immediately in that account even though the
corresponding amount of money is not immediately removed from the account
at Bank Y at which the cheque is drawn. Thus both banks temporarily count the
cheque amount as an asset until the cheque formally clears at Bank Y. The float
serves a legitimate purpose in banking, but intentionally exploiting the float
when funds at Bank Y are insufficient to cover the amount withdrawn from
Bank X is a form of fraud.

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

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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 frauds: Enron and WorldCom and
Ocala Funding. These companies "cooked the books" in order to appear as
though they had profits each quarter, when in fact they were deeply in debt.

Uninsured deposits

A bank soliciting public deposits may be uninsured or not licensed to operate at

all. The objective is usually to solicit for deposits to this uninsured "bank", al-
though some may also sell stock representing ownership of the "bank". Some-
times the names appear very official or very similar to those of legitimate banks.
For instance, the unlicensed "Chase Trust Bank" of Washington D.C. appeared
in 2002, bearing no affiliation to its seemingly apparent namesake; the real
Chase Manhattan Bank[3] is based in New York. Accounting fraud has also been
used to conceal other theft taking place within a company.

Demand draft fraud

Demand draft (DD) fraud typically involves one or more corrupt bank employ-
ees. 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

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does the branch-wise reconciliation, which normally take six months, by which
time the money is gone.

Remotely created check fraud

Remotely created checks are orders of payment created by the payee and autho-
rised by the customer remotely, using a telephone or the internet by providing
the required information including the MICR code from a valid check. They do
not bear the signatures of the customers like ordinary cheques. Instead, they
bear a legend statement "Authorised by Drawer". This type of instrument is
usually used by credit card companies, utility companies, or telemarketers. The
lack of signature makes them susceptible to fraud. The fraud is considered DD
fraud in the US.

Rogue traders

A rogue trader is a trader at a financial institution who engages in unauthorised

trading to recoup the loss he incurred in earlier trades. Out of fear and despera-
tion, he manipulates the internal controls to circumvent detection to buy more
time.[4]
Unfortunately, unauthorised trading activities invariably produce more losses
due to time constraints; most rogue traders are discovered at an early stage with
losses ranging from $1 million to $100 million, but a very few working out of
institutions with extremely lax controls were not discovered until the loss had
reached well over a billion dollars. The size of the loss is a reflection of the laxi-
ty in controls instituted at the firm and not the trader's greed. Contrary to the
public perception, rogue traders do not have criminal intent to defraud his em-

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ployer to enrich himself; he is merely trying to recoup the loss to make his firm
whole and salvage his employment.

Fraudulent loans

One way to remove money from a bank is to take out a loan, which bankers are
more than willing to encourage if they have good reason to believe 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.
This can also seen as a component within mortgage fraud (Bell, 2010).

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 corpo-
rations using accounting fraud to overstate profits in order to make a risky loan
appear to be a sound investment for the bank.

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

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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
someone who wishes to conceal the minor detail that the bank's money has in
fact been stolen and is now gone.

Wire transfer fraud

Wire transfer networks such as the international SWIFT 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 common-
place; 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 re-
quest a bank depositor's money be wired to another bank, often an offshore ac-
count in some distant foreign country.
There is a very high risk of fraud when dealing with unknown or uninsured in-
stitutions.
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 limit-
ed to these institutions. There is an annual list of unlicensed banks on the US
Treasury Department web site which currently is fifteen pages in length.
Also, a person may send a wire transfer from country to country. Since this
takes a few days for the transfer to "clear" and be available to withdraw, the
other person may still be able to withdraw the money from the other bank. A
new teller or corrupt officer may approve the withdrawal since it is in pending
status which then the other person cancels the wire transfer and the bank institu-
tion takes a monetary loss.

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Bill discounting fraud

Essentially a confidence trick, a fraudster uses a company at their disposal to

gain the bank's confidence, by posing 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 pay-
ments are always made, as the customers in question are part of the fraud, ac-
tively paying any and all bills the bank attempts to collect. After the fraudster
has gained the bank's trust, the company requests that the bank begin paying the
company up front for bills it will collect from the customers later. Many banks
will agree, but are not likely to go whole hog right away. So again, business
continues as normal for the fraudulent company, its fraudulent customers, and
the unwitting bank. As the bank grows more comfortable with the arrangement,
it will trust the company more and more and be willing to give it larger and
larger sums of money up front. Eventually, when the outstanding balance be-
tween the bank and the company is sufficiently large, the company and its cus-
tomers disappear, taking the money the bank paid up front and leaving no-one
to pay the bills issued by the bank.

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"

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available limit on the card is reached. The original cheque then bounces, but by
then it is already too late.

Prime bank fraud

The "prime bank" operation which claims to offer an urgent, exclusive opportu-
nity to cash in on the best-kept secret in the banking industry, guaranteed de-
posits in "prime banks", "constitutional banks", "bank notes and bank-issued
debentures from top 500 world banks", "bank guarantees and standby letters of
credit" which generate spectacular returns at no risk and are "endorsed by the
World Bank" or various national governments and central bankers. However,
these official-sounding phrases and more are the hallmark of the so-called
"prime bank" fraud; they may sound great on paper, but the guaranteed offshore
investment with the vague claims of an easy 100% monthly return are all ficti-
tious financial instruments intended to defraud individuals.

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Frauds in the Indian Banking Industry


The Indian banking sector has experienced considerable growth and changes
since liberalisation of economy in 1991. Though the banking industry is gener-
ally well regulated and supervised, the sector suffers from its own set of chal-
lenges when it comes to ethical practices, financial distress and corporate gov-
ernance. This study endeavours to cover issues such as banking frauds and
mounting credit card debt, with a detailed analysis using secondary data (litera-
ture review and case approach) as well as an interview-based approach, span-
ning across all players involved in reporting financial misconduct. The report
touches upon the case of rising NPAs in the past few years across various
scheduled commercial banks, especially public sector banks. The study finally
proposes some recommendations to reduce future occurrence of frauds in Indian
banking sector. The credibility of third parties such as auditing firms and credit
rating agencies is also questioned in the study and is believed to be a significant
contributor amongst other causes, such as oversight by banks and inadequate
diligence.
In recent years, instances of financial fraud have regularly been reported in In-
dia. Although banking frauds in India have often been treated as cost of doing
business, post liberalisation the frequency, complexity and cost of banking
frauds have increased manifold resulting in a very serious cause of concern for
regulators, such as the Reserve Bank of India (RBI). RBI, the regulator of banks
in India, defines fraud as “A deliberate act of omission or commission by any
person, carried out in the course of a banking transaction or in the books of ac-
counts maintained manually or under computer system in banks, resulting into
wrongful gain to any person for a temporary period or otherwise, with or with-
out any monetary loss to the bank”.


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Biggest banking scams witnessed in India

Public Sector Banks in India lost at least 227.43 billion (Rs 22,743 crore) owing
to fraudulent banking activities between 2012 and 2016, according to an IIM-
Bangalore study. This was recently informed by Electronics and Information-
technology minister Ravi Shankar Prasad in the Parliament, citing Reserve
Bank of India (RBI) data.
Prasad said there have been over 25,600 cases of banking fraud, worth Rs 1.79
billion up to December 21 last year. According to data released by the apex
bank for the first nine months of FY17, approximately 455 cases of fraud trans-
actions - each of Rs 1,00,000 or above - were detected at ICICI Bank; 429 at
State Bank of India, 244 at Standard Chartered Bank and 237 at HDFC
Bank. Data shows that over 60 employees from the State Bank of India; 49
from HDFC Bank, and 35 from Axis bank were involved in facilitating these
transactions. The country's second-largest state-owned lender Punjab National
Bank (PNB) also reported that it has suspended over 20 of its employees, in
view of the recent bank fraud to the tune of Rs 11,400 crore. In between April
and December 2016, over 3,500 cases of fraudulent transactions were reported
involving Rs 177.50 billion, which were facilitated by 450 private and public
sector employees.

2011

- In 2011, investigative agency CBI revealed that executives of certain banks

such as the Bank of Maharashtra, Oriental Bank of Commerce and IDBI created
almost created 10,000 fictitious accounts, and an amount of Rs 1.5 billion
or Rs 1,500 crore worth loans was transferred.

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2014

- Three years later in 2014, Mumbai Police filed nine FIRs against a number of
public sector related to a fixed deposit fraud to the tune of Rs 7 billion
or Rs 700 crore. In the same year, Electrotherm India, which defaulted payment
of Rs 4.36 billion or Rs 436 crore to the Central Bank. Apart from that, Bipin
Vohra, a Kolkata-based industrialist allegedly defrauded the Central Bank of In-
dia by receiving a loan of Rs 14 billion using forged documents.
- Besides, another scam that was unfolded in 2014 was the bribe-for-loan scam
involving ex-chairman and MD of Syndicate Bank SK Jain for involvement
in sanctioning Rs 80 billion or Rs 8,000 crore.
- In 2014, Vijay Mallya was also declared a willful defaulter by Union Bank of
India, following which other banks such as SBI and PNB followed suit.

2015

- In 2015, another fraud that raised eyebrows involved employees of Jain In-
fraprojects, who defrauded Central Bank of India to the tune of over Rs two bil-
lion. In the same year, employees of various banks were involved in a foreign
exchange scam involving a phony Hong Kong corporation. They had defrauded
the systems to move out Rs 60 billion.

2016
One of the biggest banking frauds of 2016 is the one involving Syndicate Bank,
where almost 380 accounts were opened by four people, who defrauded the
bank of Rs 10 billion using fake cheques, LoUs and LIC policies.

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2017

- In 2017, Mallya's debt - owing to defunct Kingfisher Airlines - rises to Rs 9.5

billion or Rs 9,500 crore to IDBI and other bank branches. CBI
prepares chargesheet but he had fled the country in 2016. Currently residing in
the UK, Mallya's extradition is being sought at the country's Westminster
Court.
- In the same year, Winsome Diamonds - also known to be India's second largest
corporate defaulter - came under the scanner after CBI booked six cases against
the group and the companies under it. This case is similar to the one observed in
the fresh bank fraud involving Nirav Modi group: Letters of Undertaking were
issued by Indian Banks to Jatin Mehta's Winsome Diamonds. It may be noted
that the gaps were first discovered in 2014. From mid-2013 the group failed to
payback its debts, and was declared a willful defaulter by banks. The total debt
amounts to almost Rs 7,000 crore.
- Another case that grabbed eyeballs in the same years involved Deccan Chroni-
cle Holdings for causing a loss of Rs 11.61 billion; CBI registered FIR against
five PSBs and six chargesheets were filed against the company.
- A Kolkata business tycoon Nilesh Parekh, a promoter of Shree Ganesh Jew-
ellery House, was arrested by CBI in 2017 for causing a loss of Rs 22.23 bil-
lion to at least 20 banks. Parekh, arrested at Mumbai airport last year, allegedly
defrauded banks by diverting loan money via shell companies in Hong Kong,
Singapore, and the UAE.
- In this case, CBI filed a case against the former zonal head of the Bank of Ma-
harashtra and a director of a private logistics company based in Surat, owing to
an alleged scam involving Rs 8.36 billion. 


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2018

- Last but not the least by any means, the fresh bank fraud to the tune
of Rs 11,450 crore involving diamond merchant Nirav Modi. It has come to
light that the company, in connivance with retired employees of PNB, got at
least 150 Letter of Undertakings (LoUs), allowing Nirav Modi Group to de-
fraud the bank and many other banks who gave loans to him. An Indian Ex-
press report says that in addition to the Rs 11,450 crore, Modi also defrauded
17 other banks of Rs 3,000 crore. In this case, however, fake LoUs were recy-
cled by the diamond jewellery group and illegally issued to other banks for
borrowing money.
- Another case that came to light this year concerns a former Andhra Bank di-
rector, who was arrested by Enforcement Directorate, in connection to an al-
leged Rs 5 billion bank fraud case, involving a Gujarat-based pharma firm.

What is Letter of Undertaking ?

A Letter of Understanding or LOU is a formal text that sums up the terms and
understanding of a contract which mostly has been negotiated up to this point
only in spoken form. It reviews the terms of an agreement for a service, a
project or a deal and is often written as a step before a more detailed contract is
issued.
The LOU may provide for example:
• detailed summary of the work to be performed
• tasks of the service provider and the receiver
• milestones for the work to be done
• work steps that have been accomplished already

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In international banking system, Letter of Undertaking (LOU) is a provision of
bank guarantee, under which a bank allows its customer to raise money from
another Indian bank's foreign branch in the form of a short term credit. The
LOU serves the purpose of a bank guarantee. However, to be able to raise the
LOU, the customer is supposed to pay margin money to the bank issuing the
LOU and accordingly, he is granted a credit limit.[1]
The Letter of Understanding may also introduce key contractual elements, like
payment terms.

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Conclusion
Why a common man needs to worry about the big bank scams ?
The Public at large should not think that they escaped unharmed in the Punjab
National Bank (PNB) scam. In a way, the price the banks now have to pay, will
have to be paid by the general public. And the bill is so large, that this amount
keeps increasing. According to the estimates so far, the cost of the scam is at
around Rs 20,000 crore. Now if we started calculating the losses for the bank’s
share prices dropping, the final number would be mind-boggling. Mistakes like
the one made by PNB have also been made by many other national banks of
late. Scams, unsound decisions and decisions taken on the directions of higher-
ups that were bound to gut the bank. Official estimates till September 2017 put
the amount of bad loans in national banks at Rs 7,34,000 crore. And generally,
the amounts recovered from bad loans are negligible. Let us assume that the
country has lost Rs 7,34,000 crore. In order to fill that gaping hole of crores of
rupees, the cost per person for every individual in the country would be Rs
5,600. Imagine, 130 crore Indian citizens would each lose Rs 5,600.
When a national bank gets scammed, or gives bad loans, the cost for fixing
those mistakes is paid by us, the taxpayers. According to a Times of India report,
in order to help the ailing national banks, the government has contributed Rs
2,60,000 crore in the last 11 years. Meaning that effectively, every Indian has
paid about Rs 2,000 out of their pocket.
In this way, we have all paid an average of Rs 7,600 to the national banks,
thanks to their abysmal condition. Just think, 130 crore Indians each bearing the
Rs 7,600 burden.
On one hand, there has been constant talk of revitalising the country, of money
coming back to the common citizen. But, in reality, it’s the exact opposite – and
because of the banks’ failures, we are losing money right out of our pockets.


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BIBLIOGRAPHY:

• https://www.thequint.com/news/india/pnb-bank-scam-fraud-costs-over-rs-7000-to-eve-
ry-indian
• https://www.iimb.ac.in/research/sites/default/files/WP%20No.%20505.pdf
• https://en.wikipedia.org/wiki/Letter_of_understanding
• https://www.livemint.com/Opinion/ep5zwxjy8OlyrB9HOljmdO/Why-banking-frauds-are-
so-frequent-at-PSU-banks.html
• https://en.wikipedia.org/wiki/Bank_fraud
• https://www.anz.com.au/security/fraud-detection/types/
• https://www.ndtv.com/topic/bank-fraud
• https://legaldictionary.net/bank-fraud/

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