Abstract

The Punjab National Bank (PNB) lost $1.77 billion in Nirav Modi case. The magnitude of the
scam is very huge. This puts serious questions regarding how the scam took place either due to
combination of external &internal processes or some other reasons, the technicalities behind the
scam related to SWIFT, CBS, auditing etc. and the extent of scam impact as whole have been
found out in this paper. The RBI is facing questions from the public regarding why it did not able
to detect the banking scam during the auditing. The causes of this big scam with technical base
and the scam impact have been found out. Now, this is the time where all Public Sector Banks
(PSBs) should learn from such types of happenings. In this paper, the identification of the scam
& its analysis is carried out. This paper also focuses on the failure of the audit and internal
processes and practices that caused the scam.

Key point

PNB

Scam

Fraud

Introduction
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; and
4. It must induce another to act upon the assertion in question or to do or not to do certain act.

EVOLUTION OF BANKING SYSTEM IN INDIA:

Banking system occupies an important place in a nation’s 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 country.

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
economy.

A sound banking system should possess three basic characteristics to protect depositor’s interest
and public faith. These are

(i) a fraud free culture,

(ii) a time tested Best Practice Code,
Punjab National Bank (PNB) is a Banking and Financial service bank owned
by Government of India. Its headquarter is in New Delhi, India. The bank was founded
in 1894. As of June 2019, the bank has over 115 million customers, 7,036 branches and
8,906 ATMs.[6]

Punjab National Bank

Type Public

Traded as BSE: 532461

NSE: PNB

Industry Banking, Financial services

Founded 19 May 1894; 125 years

ago[1][2]

Founder Dyal Singh Majithia

Lala Lajpat Rai

Headquarters New Delhi, India

Key people • Sunil Mehta

(Chairman)
• S. S. Mallikarjuna Rao
(MD & CEO)[3]

Products Credit cards, consumer

banking, corporate
banking, finance and
 insurance, investment
banking, mortgage
loans, private banking, private
equity, wealth management

Revenue ₹58,688 crore (US$8.2 billion)

(2019)[4]

Operating ₹12,995 crore (US$1.8 billion)

income (2019)[4]

Net income ₹-9,975 crore (US$−1.4 billion)

(2019)[4]

Total assets ₹774,949

crore (US$110 billion)
(2019) [4]

Owner Government of India

Number of 70,810 (2019)[5]

employees

Capital ratio 11.28% (2016)[5]

Website pnbindia.in

PNB has a banking subsidiary in the UK (PNB International Bank, with seven
branches in the UK), as well as branches in Hong Kong, Kowloon, Dubai, and Kabul.
It has representative offices in Almaty (Kazakhstan), Dubai (United Arab
Emirates), Shanghai (China), Oslo (Norway), and Sydney (Australia). In Bhutan it
owns 51% of Druk PNB Bank, which has five branches. In Nepal PNB owns 20%
of Everest Bank Limited, which has 50 branches. Lastly, PNB owns 84% of JSC (SB)
PNB Bank in Kazakhstan, which has four branches.
Punbaj national bank
Informing awareness of fraud
 Identity TheftProtect yourself against ID theft

• Destroy any piece of paper that contains your login and password

• Never share your personal information with a stranger or any third party

• Update your bank records whenever you change your contact numbers, address or email ID

Bank frauds that have rocked Indian banking sector .

1. PNB scam
On February 14 this year, the state-run lender PNB shocked the entire banking industry of India
by revealing that it had been defrauded by Rs 11,400 crore allegedly by billionaire jeweler Nirav
Modi, his family members and business partner Mehul Choksi, owner of the Gitanjali Gems at
PNB's Brady House Branch in Mumbai. Following the scam, employees of PNB including
people at the general manager level were suspended from their post for their suspected
involvement in the biggest scam in the Indian banking sector. Also, the government has revoked
passports of Nirav Modi and Mehul Choksi.
2. Rotomac case
Rs 3,700 Rotomac fraud unearthed after the sensational PNB scam. Kanpur based Rotomac
Global is being probed by the CBI and Enforcement Directorate (ED) for allegedly cheating a
consortium of seven banks of Rs 3,700 crore. The investigation agency filed case against Vikram
Kothari and Rahul Kothari, directors of the business group for misusing credit sanctions
provided by Bank of Baroda (BoB), the member of consortium banks at its International
Business Branch (IBB) at The Mall Kanpur to the tune of Rs 456.63 crore.

3. SBI fraud case

State Bank of India (SBI) is at the forefront of a bank scam involving jewellery network Kanishk
Gold Pvt Ltd (KGPL). The KGPL has been accused of defrauding a consortium of 14 banks
amounting Rs 824.15 crore bank fraud led by the SBI. The Enforcement Directorate (ED) and
CBI registered a case against Kanishk Gold.
4. R P Infosystem scam
In January the CBI has booked two directors of R P Info Systems and its directors for allegedly
cheating a consortium of banks including PNB, SBI, and Canara bank to the tune of Rs 515.15
crore. The banks alleged that loans were taken on the basis of fabricated documents.

5. PNB 91 million scam

After witnessing a scam of Rs 12,000 crore allegedly committed by Nirav Modi, the PNB has
unearthed another 91 million fraud in March. It involves officials of a little-known company
called Chandri Paper and Allied Products Pvt Ltd. The fraud has been spotted at the PNB's Brady
House Branch in Mumbai where the Nirav Modi scam had unfolded.

6. Karnataka Bank fraud case

Private sector lender Karnataka Bank on March 28 reported a fraud worth Rs 86.47 crore in the
fund based working capital facilities extended to Gitanjali Gems Limited- the jewelry network
which has been under the scanner in connection to the alleged involvement of the promoter
Mehul Choksi in the mega banking scam.
7. United Bank of India case
On March first week the Central Bureau of Investigation (CBI) has filed a disproportionate assets
(DA) case against Archana Bhargava, former chairperson and managing director of United Bank
of India (UBI). The CBI alleges that Archana Bhargava acquired movable and immovable assets
disproportionate to her income between 2004 and 2014.

Types of bank 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 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.

Demand draft fraud

Demand draft (DD) fraud typically involves one or more corrupt bank employees. 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 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 authorized 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 "Authorized 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.

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", 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 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.

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 payments are always made, as the customers in question are part of the
fraud,actively paying any and allbills 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 between the bank and the company is
sufficiently large, the company and its customers disappear, taking the money the bank paid up
front and leaving no-one to pay the bills issued by the bank.

Duplication or skimming of card information

This takes a number of forms, ranging from merchants copying clients' credit card numbers for
use in later illegal activities or criminals 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.

Some fraudsters have attached fraudulent card stripe readers to publicly accessible ATMs, to gain
unauthorised access to the contents of the magnetic stripe, as well as hidden cameras to illegally
record users' authorisation codes. The data recorded by the cameras and fraudulent card stripe
readers are subsequently used to produce duplicate cards that could then be used to make ATM
withdrawals from the victims' accounts.

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.

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
hasbeen borrowed as aloan, withdrawn by an individual depositor or transferred or invested can
therefore be valuable to someone who wishes to conceal the fact that the bank's money has in fact
been stolen and is now gone.

Forgery and altered cheques

Fraudsters 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 cheques, simple altering can change
$100.00 into $100,000.00. (However, transactions for such large values are routinely investigated
as a matter of policy to prevent fraud.)

Instead of tampering with a real cheque, fraudsters may alternatively 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, etc. They would subsequently cash the fraudulent cheque through another
bank and withdraw the money before the banks realise that the cheque was a fraud.

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.

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 be seen as a component
within mortgage fraud (Bell, 2010).

Empty ATM envelope deposits

A criminal overdraft can result due to the account holder making a worthless or misrepresented
deposit at an automated teller machine in order to obtain more cash than present in the account or
to prevent a check from being returned due to non-sufficient funds. United States banking law
makes the first $100 immediately available and it may be possible for much more uncollected
funds to be lost by the bank thefollowing business day before this type of fraud is discovered. The
crime could also be perpetrated against another person's account in an "account takeover" or with
a counterfeit ATM card, or an account opened in another person's name as part of an identity
theft scam. The emergence of ATM deposit technology that scans currency and checks without
using an envelope may prevent this type of fraud in the future.

The fictitious 'bank inspector'

This is an old scam with a number of variants; the original scheme involved claiming to be a bank
inspector, claiming that the bank suspects that one of its employees is stealing money and that to
help catch the culprit the "bank inspector" needs the depositor to withdraw all of his or her money.
At this point, the victim would be carrying a large amount of cash and can be targeted for the theft
of these funds.

Other variants included claiming to be a prospective business partner with "the opportunity of a
lifetime" then asking for access to cash "to prove that you trust me" or even claiming to be a new
immigrant who carries all their money in cash for fear that the banks will steal it from them – if
told by others that they keep their money in banks, they then ask the depositor to withdraw it to
prove the bank hasn't stolen it.

Impersonation of officials has more recently become a way of stealing personal information for
use in theft of identity frauds
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 institutions.

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.
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.

8.Stolen cheques

Some fraudsters obtain access to facilities handling large amounts of cheques, such as a mailroom
or post office or the offices of a tax authority (receiving many cheques) or a corporate payroll or a
social or veterans' benefit office (issuing many cheques). A few cheques go missing; accounts are
then opened under assumed names and the cheques (often tampered or altered in some way)
deposited so that the money can then be withdrawn by thieves. Stolen blank chequebooks are also
of value to forgers who then sign as if they were the depositor

9.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 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.

Accounting fraud has also been used to conceal other theft taking place within a company.
10.Bill discounting fraud

Essentially a confidence trick, a fraudster uses a company at their disposal to gain confidence with
a bank, by appearing 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 payments are always made, as the customers in question are part of the
fraud, actively paying any and all bills raised by the bank. After time, after the bank is happy with
the company, the company requests that the bank settles its balance with the company before
billing the customer. Again, business continues as normal for the fraudulent company, its
fraudulent customers, and the unwitting bank. Only when the outstanding balance between the
bank and the company is sufficiently large, the company takes the payment from the bank, and the
company and its customers disappear, leaving no-one to pay the bills issued by the bank.

11.Cheque kiting

Cheque kiting exploits a system in which, when a cheque is deposited to a bank account, the money
is made available immediately even though it is not removed from the account on which the cheque
is drawn until the cheque actually clears.

Deposit Rs.1000 in one bank, write a cheque on that amount and deposit it to your account in
another bank; you now have Rs2000 until the cheque clears.

In-transit or non-existent cash is briefly recorded in multiple accounts.

A cheque is cashed and, before the bank receives any money by clearing the cheque, the money is
deposited into some other account or withdrawn by writing more cheques. In many cases, the
original deposited cheque turns out to be a forged cheque.

Some perpetrators have swapped checks between various banks on a daily basis, using each to
cover the shortfall for a previous cheque.
What they were actually doing was check kiting; like a kite in the wind, it flies briefly but
eventually has to come back down to the ground.

12.Payment 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:
i) Genuine cards are manipulated
ii) Genuine cards are altered
iii) Counterfeit cards are created
iv) Fraudulent telemarketing is done with credit cards.
v) 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.

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.

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.The use of a four digit Personal Identity
Number (PIN) instead of a signature helps to prevent this type of fraud.

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.

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.

13.Empty ATM envelope deposits:

A criminal overdraft can result due to the account holder making a worthless or misrepresented
deposit at an automated teller machine in order to obtain more cash than present in the account
or to prevent a check from being returned due to non-sufficient funds. The crime could also be
perpetrated against another person's account in an "account takeover" or with a counterfeit
ATM card, or an account opened in another person's name as part of an identity theft scam.
This scenario may become a thing of the past next decade due to the emergence of ATM
deposit technology that scans currency and checks without using an envelope.

14. Impersonation:
Impersonation has become an increasing problem; the scam operates by obtaining information
about an individual, then using the information to apply for identity cards, accounts and credit
in that person's name. Often little more than name, parents' name, date and place of birth are
sufficient to obtain a birth certificate; each document obtained then is used as identification in
order to obtain more identity documents. Government-issued standard identification numbers
such as "social security numbers" “PAN numbers” are also valuable to the fraudster.

Information may be obtained from insiders (such as dishonest bank or government employees),
by fraudulent offers for employment or investments (in which the victim is asked for a long
list of personal information) or by sending forged bank or taxation correspondence.

In some cases, a name is needed to impersonate a citizen while working as an illegal immigrant
but often the identity thieves are using the bogus identity documents in the commission of other
crimes or even to hide from prosecution for past crimes. The use of a stolen identity for other
frauds such as gaining access to bank accounts, credit cards, loans and fraudulent social benefit
or tax refund claims is not uncommon.

Unsurprisingly, the perpertators of such fraud have been known to take out loans and disappear
with the cash, quite content to see the wrong persons blamed when the debts go bad or the
police come calling

15. 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 overextended.

16. Prime bank fraud:

The "prime bank" operation which claims to offer an urgent, exclusive opportunity to cash in
on the best-kept secret in the banking industry, guaranteed deposits 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 fictitious financial instruments intended
to defraud individuals.

17. Phishing and Internet fraud:

Phishing operates by sending forged e-mail, impersonating an online bank, auction or payment
site; the e-mail directs the user to a forged web site which is designed to look like the login to
the legitimate site but which claims that the user must update personal info. The information
thus stolen is then used in other frauds, such as theft of identity or online auction fraud.

Phishing means sending an e-mail that falsely claims to be a particular enterprise and asking
for sensitive financial information. Phishing, thus, is an attempt to scam the user into
surrendering private information that will then be used by the scammer for his own
benefit.Phishing uses 'spoofed' e-mails and fraudulent Web sites that look very similar to the
real ones thus fooling the recipients into giving out their personal data. Most phishing attacks
ask for credit card numbers, account usernames and passwords. According to statistics phishers
are able to convince up to five per cent of the recipients who respond to them.

18. Money laundering

Money laundering has been used to describe any scheme by which the true origin of funds is
hidden or concealed.

The operations work in various forms. One variant involved buying securities (stocks and
bonds) for cash; the securities were then placed for safe deposit in one bank and a claim on
those assets used as collateral for a loan at another bank. The borrower would then default on
the loan. The securities, however, would still be worth their full amount. The transaction served
only to disguise the original source of the funds.

19. Forged currency notes:

Paper currency is the usual mode of exchange of money at the personal level, though in
business, cheques and drafts are also used considerably. Bank note has been defined in Section
489A.If forgery of currency notes could be done successfully then it could on one hand made
the forger millionaire and the other hand destroy the economy of the nation. A currency note
is made out of a special paper with a coating of plastic laminated on both sides of each note to
protect the ink and the anti forgery device from damage. More over these notes have security
threads, water marks. But these things are not known to the majority of the population. Forged
currency notes are in full circulation and it’s very difficult to catch hold of such forgers as once
such notes are circulated it’s very difficult to track its origin.

20. Computer Frauds:

Computerization has brought advantages of efficiency, speed and economy in all spheres of
life. It is a very powerful tool and provides opportunities of efficiency and speed to everybody
using it. Further, the vast increase in the memory (whether RAM or storage) and processing
speeds as well as availability of wide range of software, particularly Internet and web-based
applications i.e. connectivity, have made them pervade all aspects of our lives. This has also
brought large economy of scale particularly in our economic environment and we are becoming
more and more dependent on computers and their networks for the services such systems
deliver.

Frauds committed using computers vary from complex financial frauds where large amounts
are illegally transferred between accounts by sophisticated hackers, to the simpler frauds where
computer is only a tool that a criminal uses to commit a crime.
It also provides ample opportunities for their misuse particularly for economic or financial
gains. This is as computers networks can also be used to commit crimes from geographically
far places. Such computer frauds are known by various names such as cyber crimes or e-crimes
and we can describe them as an act involving computer equipment, software or data that results
in an unauthorized financial advantage. Worldwide frauds in computerized environment cause
losses running into very large sums. Although in India, frauds committed so far have not
revealed any extensive manipulation of computer systems, it is no doubt a potentially high-risk
area, which should be addressed carefully and in timely manner. According to a recent survey,
companies in India have not addressed security issues appropriately.

1)Manipulation:

In an ideal situation, where information systems have all the necessary controls, which are
properly integrated with other manual controls and maintained, there will generally be no cause
of worry. It is however, not so. Not only, most system controls are not perfect, people also try
to manipulate systems for variety of motives from games playing, ego peer pressure, and hatred
for the organization, emotional maladjustment, blackmail and economic gains. Such people
could be insiders, outsiders as well as vendors, competitors in fact any one.

Computer frauds gain their criticality as they are easy to commit, difficult to detect and even
harder to prove. The most important type of such frauds is committing the fraud by
manipulation of input, output or throughput of a computer system.

a) Input Manipulation:

In input manipulation, input data such as deposit amounts in ledgers, limits in accounts or face
value of cheques are changed.

b) Output manipulation:

Output manipulation is achieved by affecting the output of the system, such as use of stolen or
falsified cards in ATM machines.

c) Throughput manipulation:
Throughput manipulation could be by rounding off sums credited to different accounts and
siphoning of the rounded digits to another account. No system is foolproof and fraudulent
transfers can occur in even highly automated and secure funds transfer systems.

2)Unauthorized use:

Other types of such frauds or crimes could be unauthorized access to computers by hacking
into systems or stealing passwords, deliberate damage caused to computer data or programs,
computer forgery (changing of data or images stored in computers) and un-authorized
reproduction / modification of computer programs.

3)Awareness:

Other important causes of such frauds are lack of employee awareness, poor implementation
of security policies and segregation of duties, vendor products with weak security controls,
outsourced service providers and hackers (many as young as school students). Computer frauds
in such cases are generally for economic benefit to the fraudster and corresponding loss to the
organization

Other sources of computer crimes are terrorists, organized criminals and groups hating the
organization.
 Research Methodology

Fraud is Defined as “any behaviour by which one person intends to gain a dis honest
advantage over another”.

On February 14 of last year, the state-run leader PNB shocked to entire banking industry
of India by revealing that it had been defrauded by ₹11,400 crore allegedly by billionaire
jeweler Nirav Modi, his family members and business partners Mehul Choksi, Owner of
the Gitanjali Gems at PNB’s bradly house Branch in Mumbai. Following the scam,
employees of PNB including people at the general manager level were suspended from their
post for their suspected involvement in the biggest scam in the India banking Sector, also the
government has revoked passports of Nirav Modi and Mehul Choksi.

OBJECTIVES
1. To study how plastic money can used to make fraud.
2. To study fraud through mobile banking.
 3. To study how there should be missmatch in application form and there be chances of
fraud.

4. To elucidate the impact of rising bank fraud on profitability of the banking sector in
India.

Scope of study
In the present scenario major economical and technical changes are undergoing in industrial and
financial revolution through the new information-processing technology. Especially in finance
sector it has a significant role for overall development. After identifying the subject (research area)
and referring the relevant literatures, it has been found that in most of the literature, the information
technologies have a wide application area. However, in finance sector major changes have been
made. Due to these drastic changes we have chosen to do the study on urban cooperative bank
system. After completing step by step procedure for automation process, now it is required to take
the review of the system. People used information technological tools to manage and process the
information. Atomization process use in the financial sector for transaction system. This type of
working methodology is used in the financial Institute since long years. The Urban Co-operative
bank sector is mostly related to all classes of people like businessmen, industry, agriculture, labor,
small entrepreneurs, workers etc. It has been changing complete culture and working methodology.
Therefore, it has a wide scope to study the existing modern transaction system in the financial
sector mainly in urban cooperative bank system. For that purpose we are going to utilize software
engineering model based techniques for theoretical evaluation of atomization process. In the
literature survey it has been found that the software engineering technology has monopoly for the
development of software product and it is observed that such technology is not used for study
purpose in any other different field. So why not this technology be tested on the external field
application intentionally for this study? It requires framework, structure, plan and controlling
parameters for research field. Such type of theory and planning is available in the software
engineering subject.

Research Design:
A research design is a basic plan which guides the researcher in the collection and analysis of data
required for practicing the research. Infant the research design is the conceptual structure which
the research is conducted. It constitutes the ‘Blue Print’ for the collection, measurement and
analysis of the data. The study is carried out to understand the Fraud in Indian Banking Sector in
Dombivli For this study the researcher used exploratory research design. This research covers 29
consumers in Dombivli belonging to various age groups.

Sample Design:

The process of drawing a sample from a large population is called sampling. Population refers to
the total of items about which information is defined. Well selected samples may reflect fairly and
accurately the characteristics of the population.

1) Sampling Unit:
➢ The sample unit of this survey was the customers having bank account in Mumbai
region in Maharashtra

2) Sample Size :
➢ The sample size was 30 customers having different bank account in different
banks.

3) Sampling Technique Adopted :

➢ Random sampling

4) Source of data: The data is collected from two types of sources that is primary data and
secondary data.
• Primary Data: The data that is collected freshly or newly is called primary data. In
this survey the primary data is the 19 questionnaire.
 • Secondary Data: The data that is collected from already available data or sources.
Sources like
Books
Websites.

Limitation of the study:

Some of the major limitations are as follows:

➢ Time consuming: It was very time consuming because in this survey lots of people

were include and it took lots of time to receive their feedback and to analysis their

feedback, repeatedly explaining public about the survey and their role in this survey,

and solving their doubts regarding question and about survey, because of these our

project does not get completed within given time.

➢ Not accurate: The collected data was not accurate because some of the responders

did not give answers to some question and this survey was conducted with 50

responders only, so I assumed that this 20 responders represent the whole population.

➢ Expensive: Conducting survey is very expensive because it include lots of stationery,

travelling, if you hire someone to conduct survey on behalf of you, you have to pay

them.

➢ Ignorance: conducting survey offline or online in both the main problem is ignorance,

sometimes people ignore your survey or they participate in survey but does not

answers your question sincerely,

 ➢ Sometime people do not have knowledge about the survey topic then too they

participate in the survey, and because of this they give misleading information.

Sample size: Because of the small sample size and time constrain we cannot take
Response from large group of people.

Review of literature

Institutional provision of home loans is a societal compulsion and, as such, is a full scale

national priority of emerging economy like India. The existing regulatory and institutional

framework in India for meeting the growing needs of the people “to own their nest” is fairly

adequate and should continue. But recent reports from various sources indicate that some

home loan borrowers have been playing foul with banks in offering mortgage of the same

property to a number of banks by providing false ownership deeds / documents. Usually this

type of fraud appears because Banks, generally, prefer to obtain simple deposit of title deeds

i.e. (mortgage by deposit of title deeds) but it was found that title deeds of some property

were offered by having multiple registrations of the property, false income details, credit
officer not investigating properly borrower‟s income level, genuineness of title deeds ,bank

lending the loan before accepting mortgage of landed property as a security cover, title

scrutiny and non-encumbrance report from bank‟s approved lawyer. Generally, the lawyer

goes through the ownership records of the house for the past 30 years and submits his reports

but in practice, lawyers generally scrutinize only of photocopies of title deeds so, the recent

incidents of fraudulent mortgage practices need to be dealt with firmly. For this purpose, an

external protection for banks by way of title insurance is an immediate necessity. Skilled and

experienced officials may be entrusted to handle home loan account. Only registered

mortgage should be accepted. In the light of increasing credit risk in home loan accounts,

repayment period should not go beyond 10 / 12 years. If in the process, the quantum of loan

is not found justified in consideration of income level, the applicant should go in for lower-

cost home or alternatively raised unsecured funds. This is the suggestion made by Bagchi inhis
article. Safe, sound and healthy loan portfolio in a bank is the product of a robust credit

risk management system duly aided / supported by regulatory supervision and control

Financing to various sectors in Indian banking is generally in accordance with the policies of

the Government. When Government of India declared its housing and habitat Policy in 1997

and stated that there is a demand for 13.66 million new dwelling units in India, it appeared a
lucrative business avenue for the banks to finance. To encourage and motivate people to

construct houses by borrowing, Government of India provided relief under Income Tax Act

under Section 80C for repayment of housing loan installments and rebate on interest on

Housing Loans. In the process, a large number of banks entered the arena triggering fierce

competition. Almost all the banks went in for huge target –oriented lending to this sector.

Inadvertently, this great rush for financing housing generated an opportunity for miscreants to

make a killing. They have tried to manipulate the lacunae in the system of processing of

sanction of loans by banks. It is said that the strength of a chain depends on its weakest link.

In the processing of housing loan proposals, the most over-looked areas have become
vulnerable points for perpetration of frauds. Unfortunately, criminals and fraudsters are

always a step ahead of the lawmakers and find many ways to defraud individuals and

institutions.

He studied the prospects of the U.S. housing / mortgage sector over the next several years.

Based on his analysis, he believes that, there are elements in place for the housing sector to

continue to experience growth well above GDP. However, he believes that there are risks that

can materially distort the growth prospects of the sector. Specifically, it appears that a large

portion of the housing sector‟s growth in the 1990‟s came from the easing of the credit

underwriting process.

The paper examines the causal nexus between financial development, economic growth and

poverty reduction in India during 1951-2008. The empirical analysis is based on

integration and causality test. The co integration test finds the presence of long run

equilibrium relationship between financial development, economic growth and poverty

reduction. The Granger causality test at the end confirms the presence of unidirectional

causality from poverty reduction to economic growth, economic growth to finance

development, financial development to poverty reduction and economic growth to poverty

reduction. It also finds no causality between finance development and economic growth, and

poverty reduction and finance development. The paper suggests that economic growth is

considered as the policy variable to accelerate finance development and both could be used as

the policy variable to reduce poverty in the economy.

In this paper, the authors have studied the housing finance in India. Housing, as one of the

three basic needs of life, always remains on the top priority of any person, economy,

government and society at large. In India, majority of the population lives in slums and
shabby shelters in rural areas. The paper is based on the case study of LIC Housing Finance

Ltd., which analyzes region-wise disbursements of individual house loans their portfolio

amounts and the defaults for the last ten years, i.e., from 1995-96 to 2004-05 by working out

relevant ratios in terms of percentage and the compound annual growth rates.

Vandna Singh & Komal [2010]

The present paper entitled “Prospects & Problems of Real Estate in India” is an attempt to

reveal the issues concerned with real estate investment sector in India. This paper is

concerned with the investment on real estate in India and the trends in the concerned industry.

The paper has been divided into three sections. Section one deals with the fundamental

factors affecting the real value like demand, supply, property, restrictions to use and site

characteristics. Section two and three explains the causes and the constraints to the present

real estate boom respectively in India. The paper also presents the suggestions and future

prospects of real estate in the country.

Mergers of giants in the banking industry gave birth to the concept of “too big

to fail”, which eventually led to highly risky financial objectives and financial

crisis of 2008. In response to the 2008 crisis, Dodd Frank Act [7] gave birth to

various new agencies to help monitor and prevent fraudulent practices. Volcker

rule, a part of DFA, banned banks from engaging in proprietary trading

operations for profit.

Indian banking system has already been plagued with growth in NPAs [8]

during recent years, which resulted in a vicious cycle affecting its sustainability.

Chakrabarty [9] Deputy Governor of Reserve Bank of India, noted in his speech

that, while most numbers of frauds have been attributed to private and foreign

banks, public sector banks have made the highest contribution towards the
amount involved.

To maintain uniformity in fraud reporting, frauds have been classified by RBI

based on their types and provisions of the Indian penal code, and reporting

guidelines have been set for those according to RBI [10] and [11].Towards

monitoring of frauds by the board of directors by banks of India [12], A circular

was issued as per RBI [13] to cooperative banks to set up a committee to

oversee internal inspection and auditing, and plan on appropriate preventive

actions, followed by review of efficacy of those actions.

Key findings in RBI [12] included the stress of asset quality and marginal

capitalization faced by public sector banks, and various recommendations to

address these issues. Good governance and more autonomy [14] to be conferred

to public sector banks to increase their competitiveness and to be able to raise

money from markets easily.

In response to the common perception that increasingly strict regulations will

make business opportunities take a hit. Basic principles [15] that can go a long

way in preventing fraud, namely the principles of knowing the customer and

employees as well as partners. He also pointed out the significance of a robust

appraisal mechanism and continuous monitoring.

Great recession 2007 resulted in bankruptcy of many banks and financial

institutions. The Great Recession which had its impact globally was associated

with a severe financial crisis, but depositors were not rushing to the banks to

withdraw their deposits.

Banks suffered losses [16] on a scale not witnessed since the Great Depression.

It is precisely this special “risk evaluator” role that makes the banking industry

particularly opaque. The opacity of the sector has probably increased in recent
years due to the structural changes brought about by deregulation and financial

innovation; changes that have made the industry significantly more complex,

larger, more global and dependent on financial markets.

The bankruptcy of Lehman Brothers in 2008 [2] sent shockwaves through the

entire global banking and financial system across numerous and unexpected

transmission channels when the price bubble in the US housing market tied to

the subprime mortgage market suddenly burst.

Bad accounting treatment of financial transactions, loose risk management

policies and strategies led the financial conglomerate to its eventual collapse.