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UNIVERSITY OF PETROLEUM & ENERGY STUDIES

SCHOOL OF LAW

BA LLB (Hons) Criminal Law

BATCH -2

Semester VII

Academic Year: 2021 Session: AUG- DEC

PROJECT

For

FINANCIAL FRAUD

Topic- Banking Protocol to curb Fraud

Submitted to- Ms. Nanda Pardhey

Submitted by- Riya

Sap ID- 500071374

Roll No. -134

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Index

1. Introduction………………………………………………4

2. What is fraud? ……………………………………………4

3. Bank Fraud and Elements………………………………. 5

4. Fraud classification and prevention……………………..6

5. Bank fraud mechanisms …………………………………6

 Purchased bill fraud………………………………6

 Hypothecation fraud………………………………7
 Loan Fraud…………………………………………7
 Computer Related Fraud………………………….8
 Cheque fraud ………………………………………9
 Credit and debit card fraud……………………….10

6. Fraud Prevention Measure…………………………………..11

 Fraud prevention in public sector bank……….12

7. Cases- ………………………………………………………….. 14

 Nirav modi scam………………………………..14

 Vijay mallya scam………………………………14
 Chanda Kochhar scam………………………….15

8. Conclusion and recommendation………………………………..16

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STATUTES REFERRED

1. Indian Penal Code, 1860

2. Prevention of Money laundering Act 2012
3. Information Technology Act 2002
4. Negotiable Instruments Act of 1881

TABLE OF ABBREVIATION

S.NO WORD ABBREVIATIONS

1. And &

2. Company Co.

3. Limited Ltd.

4. Versus V.

5. Others Ors.

6. Private Pvt.

7. Supreme Court Cases SCC

8. Dollar $

9. Indian National Rupee INR

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INTRODUCTION:

Banks are regarded as critical components of the Indian economy. Since the nationalisation of
banks in 1969 and the liberalisation of the economy in 1991, this sector has seen enormous
growth in recent years. Because of the nature of their everyday activity of dealing with
money, and even after having such a controlled and well-regulated system, it is quite
attractive for people who are either affiliated with the system or outside of it to uncover flaws
in it and make personal advantages through fraud. Banking fraud covers major proportion of
white collar crimes which is being addressed by the government. Unlike other crimes, the
sum misappropriated in these frauds is in the thousands and crores of rupees. In various other
countries, bank fraud is being defined as attempting to obtain property or money from a
federally insured financial institution. It's sometimes also being referred to as a white-collar
crime.

The Banking Regulations Act 1949 defines banking as stated in section 5(b). Banking,
according to it, entails receiving public deposits of money, repayable on demand or
otherwise, for the purpose of lending or investing. To comprehend the notion of bank fraud,
we must first understand the idea of fraud, as well as the numerous forms of scams, as well as
the methods for detecting and preventing them.

WHAT IS A FRAUD?

Fraud is a dishonest act or behaviour in which one person gets or attempts to gain an
advantage over another, resulting in the victim's loss, either directly or indirectly.

The IPC does not define fraud in any specific section, but it does allow for fines for numerous
conduct that lead to the commission of fraud.

Sections covering frogery, cheating, misappropriation, concealment, counterfeiting and

breach of trust, on the other hand, fully cover the subject. Section 17 of Contract Act, 1872
defines fraud as "any act by a party to a contract, or with his connivance or by his agents,
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with the intent to deceive another party or his agent or to encourage him to enter into a
contract" and includes:

1. The recommendation as fact of that which is false or by the one who does not
believe it to be true;
2. The active concealment of the fact by one who has the knowledge of the fact;
3. A promise made without any intention of keeping it;
4. Any other action fitted to deceive; and
5. Any act or omission which the law expressly declares to be fraudulent.

By reading relevant provisions of Indian Penal Code, 1860 and Contract Act, the essential
requirements for fraud are as follows: -

 Representation of an act
 Fact
 Believed to be false
 Inducement to Act

Bank Frauds and elements:

As previously noted, the amount of loss incurred as a result of outcome fraud far above the
losses incurred as a result of all other crimes combined. With the growing banking industry,
bank robberies are also increasing, and fraudsters are becoming more sophisticated and
cunning. The banking sector has differentiated its business model in order to keep up with
changing times. In the post-nationalization period, the replacement of the class banking
theory with mass banking has thrown a lot of challenges at the administration in terms of
reconciling social responsibility with financial reasonability.

The active involvement of the employees, failure to follow the bank's instructions and
guidelines by the staff, conspiracy amongst businessmen, executives, and politicians to bend
the rules and regulations, and any other external circumstances are the four most significant
parts that make up fraud.
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FRAUD CLASSIFICATION AND PREVENTION

Frauds have been categorized in order to keep the reporting of them uniform and the
instructions for reporting on the same, the Indian Penal Code types and provisions have

The Reserve Bank of India categorizes bank frauds as follows:

Categories:

1. Theft and betrayal of trust are both crimes.

2. counterfeiting of currency or checks, and tampering with financial records otherwise,
by creating fictitious accounts or stealing and converting assets.
3. The provision of unauthorised credit facilities in exchange for something of value or
for the purpose of enjoying something unlawfully.
4. Due to carelessness and a lack of funds.
5. Forgery and cheating.
6. Unpredictability in the conduct of foreign monetary transactions.
7. Another form of fraud not covered by the categories listed above.

Bank fraud mechanisms 

Types of fraud commonly committed include:

a) Inflation in the value of deposited checks

b) changing the type of checks that are issued (Crossed to bearer)
c) Dishonestly using an inactive account
d) Agents' failure to deposit and appropriation of funds

Measures of prevention

a) A methodical and thorough investigation of checks and other financial transactions.

b) A division between bookkeeping and cash handling tasks.
c) Pathfinders, sticky tape, and black light can all be used to confirm originality and
prevent tampering with the material.

 PURCHASED BILL FRAUDS:

These tend to be more expensive and can take the following forms:
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a) A discount for stolen or fake railway receipts, motor receipts, and other required
invoices is available to customers.
b) Forged/fake bills drawn on a sibling company with inflated value are discounted.

Measures of prevention

a) Examining the receipts thoroughly and accurately by obtaining confirmation from the
appropriate government agencies.
b) When there is an auction, notify the authorities about the bank's interest in the property
so that they can be alerted if the products are not collected.
c) To improve the relationship between the buyer and the seller in the event that proceeds
are sent.
d) The bill must be thoroughly examined before a discount is granted.

 Hypothecation fraud involves making cash advances in exchange for pledged

commodities as security.
a) Unauthorized removal of hypothecated goods from godowns.
b) The value of some of the vast quantities of stocked products may have decreased;
c) Stock statements have inflated.
d) Stocks with no intrinsic value are used as a kind of security.
e) Exchanging the same items for multiple banks' hypothecations.

Preventative measures include:

a) The credentials of the bank representative and borrower must be rigorously

scrutinised.
b) Only marketable products will be accepted as security
c) Proper stock evaluation
d) Stock-statement verification

 Loan Fraud
a) Two different people taking out loans on the same commodity or product is a
common sort of loan fraud.
b) Borrowers who fail to provide a physical address and then vanish when it's time to
return the loan.
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c) If you borrow money for agriculture but spend it for personal reasons, you've engaged
in a practice known as "loan fraud."
d) Loans are refused when the borrower is suspected of not making payments as agreed.

Prevention:

a) Documents and the purpose of taking the loan must be properly verified.
b) Including local authorities to verify the authenticity of the loan's purpose and
authentication
c) The appropriate authority should be consulted if a large loan is taken.

 Computer Related Fraud

The majority of banks' branches, except for those in rural and remote locations, have been
automated to provide efficient and speedy service. Since computerization in Indian banks is a
recent development, there haven't been many documented computer scams. However, in
western countries where nearly everything is computerised, a high number of cyber crimes in
the financial industry are regularly reported. It's important to figure out what kinds of crimes
are being committed so that preventive measures can be put in place. The following sorts of
frauds are common: -

a) Cyber attackers use spy software to break into computers and steal passwords. They
hack into the banks' computer systems and use data manipulation to move money
from other people's accounts.
b) Computer viruses are made by malicious individuals who gain access to computers
via e-mail. These viruses destruct computer data and cause it to run slowly as a result.
Anti-virus software makers have been accused of creating viruses to sell their own
software.
c) Hackers are computer professionals who steal passwords and gain access to sensitive
data held on computer systems. They have no qualms about raiding official
institutions, especially military ones, in order to carry out their diabolical plans to
destroy and mutilate the data contained in computer systems. Such deeds are typically
not carried deliberately for the purpose of making money, but rather to receive mental
enjoyment from inflicting pain on others.
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d) The crime of wiretapping is perpetrated by tapping the ATM wires of the banks in
order to take money from another person's account. In this instance, the fraudster adds
a wireless microphone to the telephone connection linking the ATM with the bank's
computer and records signals through wiretapping while a customer uses the ATM.
After then, the signals are used to withdraw money.

The Information Technology Act, 2000 was enacted by the Indian government to address
computer fraud penalties and punishments. If unauthorised acts like access, downloading, or
taking copies of stored data and information, introduction of a computer contaminant or
computer virus, damage to the computer or its system are committed on another person's
computer system, Section 43 of the aforementioned Act provides hefty damages up to Rs. ten
lakhs payable by the offender to the person affected. Furthermore, the aforementioned Act
imposes prison sentences of up to three years for those found guilty of tampering with
computer source documents or hacking computer systems.

 CHEQUE FRAUDS: This is the most common form of bank fraud. This type of
crime can be committed in many ways like-
a) Cheques are taken, filled out and signed falsely and cashed.
b) To raise the amount or change the beneficiary, or to add an extra beneficiary, the
signed checks are stolen and cashed with adjustments if necessary. 
c) To duplicate the checks issued by organisations for employees. 

Cheque kitting leverages the fact that money is made available instantly upon deposit, even if
it is not removed from the account from which it is pulled until after it has cleared a bank.

Preventive measure:

a) The instrument must have a suitable date on it.

b) The cheque must be thoroughly examined, and the character of the signer must be
verified 
c) Verify the amount is written in numerical and verbal form.
d) Verify the amount is written in numerical and verbal form.
e) Verifying cheque kitting
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CHEQUE FRAUD: CHEQUE DISHONOR

Cheque dishonour or cheque bounces are a severe problem that is only becoming worse. As a
result of this problem, the Indian government passed the Negotiable Instruments Act of 1881,
which has measures for dealing with incidents of cheque bounce. These regulations are found
in sections 138 - 142. In a landmark decision, India's Supreme Court outlined new procedures
for handling instances involving bounced checks.

Section 138 of the Negotiable Instruments Act, 1881 says that A check drawn by a person on
a bank account maintained by him for the payment of any amount of money to another from
the credit of that account for the discharge, in whole or in part, for any debt or other liability,
is returned unpaid by the bank because the money on the account is insufficient to honour the
check or it exceeds the amount arranged to be paid, such person will be convicted, the
offender will face imprisonment for [a term that may be extended to two years] or a fine that
may be up to twice the amount of the check, or both. Unless-

a) When a cheque is provided to the bank, it must be provided within six months of the
date it was drawn or during the period of validity, whichever is earlier.
b) When a check is returned as unpaid, the payee or cheque holder can initiate a claim
for payment by sending a notice in writing to the cheque drawer [within thirty days]
of receiving information from the bank about the cheque's return
c) The drawer of a check who fails to pay the money owing to payee or holder within
fifteen days of receipt of said notice is guilty of foreclosing on his or her obligations
under the law.

 CREDIT AND DEBIT CARD FRAUD:

As a natural negative fallout of the introduction of plastic money, frauds emerged. As the
number of people who use them grows, so does the risk of fraud in the connected industry. In
foreign countries, where general usage is considerably higher than in India, the situation is far
worse.

The following are the different kinds of credit/debit card fraud:

a) Genuine card abuse: Genuine cards are stolen while in transit from the institution to the
user or from the owners, and occasionally the card is taken, and the stolen cards are misused.
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Cardholders may even falsely declare their card as stolen and embark on a shopping binge
before the acquirer bank suspends the transaction.

b) Cards that have been altered An altered card is an original card that has been changed by
the fraudster by adding a new name and, if the signature strip is replaced as well, the
fraudster obtains a valid account number from a bunco banker. It's quite unusual and could
jeopardise the bank's card's security measures.

c) Plastics in  White are bogus cards that have been duplicated. They are exact replicas of the
actual cards. They are similar in appearance but lack the safety measures.

d) Frauds involving impersonation  are also termed as  Application frauds.  The fraudster
collects the card under the name and address of a well-known figure.

Preventive Measures:

 Using a dedicated webpage to accelerate the sending of information about the stolen or
changed card.
 Hiring qualified personnel to recognise and distinguish between authentic and fraudulent
cards.
 Observing the operation of the selling terminals on a regular basis to spot unethical
merchants

Fraud Prevention Measure

The root cause of widespread fraud is a lack of adequate measures to prevent banking fraud.
Another key factor is bank reporting delays. As a result, banks should ensure that the
reporting mechanism is properly optimised so that frauds are notified as soon as possible.
Banks must hold employees accountable for delays in reporting fraud cases to the RBI.
Delays in reporting frauds, as well as delays in alerting other banks about the scheme and
issuing cautionary letters to unscrupulous borrowers, may result in similar scams occurring
elsewhere.

As a result, banks should carefully adhere to the timeframes set by the RBI for reporting
fraud incidents, failing which they may face penalties under Section 47(A) of the Banking
Regulation Act, 1949. Banks should appoint a General Manager to be in charge of submitting
all of the returns mentioned in this circular. The Department of Banking Supervision's
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Central Office's Fraud Monitoring Cell publishes a directory of personnel from all banks and
financial institutions who are responsible for reporting frauds.Any modifications in the names
of officials that will be required for inclusion in the directory should be provided to the
aforementioned organization on a priority basis as and when required.

Banks must devote sufficient resources to the "Fraud Prevention and Management Function"
in order to conduct successful fraud investigations, among other things. Banks should be able
to report frauds to appropriate regulatory and law enforcement agencies, including the RBI,
in a timely and accurate manner. At least in the case of large-value frauds, the bank's CEO,
Audit Committee of the Board, and Special Committee of the Board must be in charge of
fraud risk management, fraud monitoring, and fraud investigation. Banks can also develop
internal policies for fraud risk management and fraud investigation that are based on
governance principles for function ownership and accountability for failures in their fraud
risk management processes.

So, what all preventive measures should banks take safeguard the interests of its customers?

Banks can use multipoint scrutiny — cryptographic check barriers – to safeguard and
preserve the safety, integrity, and validity of transactions. Banks should rotate the services of
people working on critical seats, keep a close eye on what they're doing, update the
technology they're using on a regular basis, and use more than one person in larger
transactions. The qualifications of the individual approaching the bank, the documents they
provide, the information provided in the forms they fill out, and the utmost care taken in
recruiting the personnel may all be verified by banks. Banks should educate and inform their
consumers about these types of scams by sending e-mails and posting suggestions on their
websites. Customers can have faith in banks if they have prescribed and followed best
practises as well as RBI requirements, have a fraud-free culture, and an in-house grievance
redress procedure.

Fraud detection process in Public Sector banks-

The process of fraud detection and reporting at a public sector bank and who the various
stakeholders are involved in this process.

a) First, a bank's senior management is notified of a fraud internally. Senior management

may include the chief executive officers, chairman, and managing directors of the
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bank. To the bank's vigilance department, you can also report these people if you see
them.
b) When a fraud is disclosed to the bank's vigilance department, the department
examines it and then reports it to senior management and the central vigilance
commission (CVC), to the one they are obligated to report monthly.
c) Although CVC has the ability to report fraud straightforwardly to investigating
agencies like the CBI, the ultimate decision is generally made by senior management
of the bank as to whether fraud should be reported to an external entity or dealt with
internally. Determined by the size of the bank, the amount involved in fraudulent
activity, and the number of third parties involved, senior management may decide to
deal with the fraud internally or file a FIR and report it to the local police or CBI.
d) Independently monitored bank fraud is also conducted by a committee of the RBI.
The RBI's central board is updated on its findings on a quarterly basis. After that, the
board has the option of informing either the Central Vigilance Commission or the
Ministry of Finance about the situation.
e) Employees have the option of reporting any fraudulent activity on a company
account, as well as the reasons for the fraud.
f) Auditors, during the course of their audit, may come across instances where
alterations to accounts or documents suggest that there may be fraudulent activity in
the accounts. When this occurs, the auditor may submit it to the attention of the
company's upper management, and the audit committee of the board (ACB) if
necessary.
g) Employees have the option of reporting any fraudulent activity on a company
account, as well as the reasons for the fraud. Support for their opinions, to the
appropriate authority, under the policy of the bank's whistle blower, who can start an
investigation through fraud monitoring group (FMG). The FMG can 'hear' the
concerned employee to get the information they need. Such employees should be
protected by the bank's whistle blower policy so that they aren't scared to speak up for
fear of being persecuted.
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Recent Indian bank frauds:

Punjab National Bank reported the occurrences to the central bureau inquiry and initiated an
internal investigation on 5 February 2018 after deducting unlawful transactions of Rs. 280.70
crores from one of its Mumbai branches. Punjab national bank, a bank of this size, was
established in just ten days.

Nirav Modi Fraud-

Nirav Modi
Vs.
The State of Maharashtra & anr.1

Nirav Modi was running a gems and jewellery business, and the case of fraud committed by
three firms has been studied; the companies are involved in the diamond and jewellery
industry, and they have acquired credit facilities from a bank as part of an alliance
arrangement with one of the banks. The fraud is significantly more, totaling 11,400 crores
precisely; the bank has issued 200 erroneous notes. Pre-approved credit limit and at least 100
percent cash margin with the issuer bank are required.

Others issued credit facilities based on letters of undertaking, which are promises made by a
local bank to a foreign counterpart, and these other banks lend money to a vendor who would
supply an amount, the bank that sanctions the amount has a long-distance relationship with
custom.
As a result of Robert's carelessness, the management system's control mechanism failed.
When a letter of undertaking is issued without notifying Punjab National Bank, there is a risk
minimization element at play. PNB suspects workers at these banks' overseas offices also
conspired with PNB employees, and other banks failed to conduct necessary checks before
accepting transactions.
Nirav Modi's Fraud Methods of Operation:
They emphasised the value of diamonds with the mollified animus of high credit facilities
from money mongers, as well as the security covering offered by money mongers, by
emphasising the evaluation of diamonds. The gem and jewellery industry extends credit to
these businesses, increasing the amount of credit they may offer. Limits on this type of credit
exposure should have been used to create some divide.
Units in the jewellery sector may also be expected to provide a monthly declaration to their
lenders' bank stating information of any financial arrangement contracts taken into by their
subsidiaries with their business associations.
1
Nirav Modi vs The State Of Maharashtra And Anr on 26 November, 2019
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Mallya Case2-
Mallya take over UB Alcohol which was previously owned by his father, which is well
known for the Kingfisher beer brand, and was developed it into India's largest spirits
producer. At the very early age of 28, he was ranked as the chairman of the UB Group.
- However, the group's other operations were not as successful, with Kingfisher Airlines
being the most notable failure.
- Kingfisher Airlines, which started its operations in the year 2005, was forced to close down
in year 2012 due to a huge debt burden that made it very difficult for the kingfisher airline to
continue the operations. The airline is also under investigation for the possible financial
violations and money laundering.
- Mallya flew from the country on March 2, 2016, the same day when a group of public-
sector banks filed a suit with the Debt Recovery Tribunal. Also The Fugitive Economic
Offenders Act held him as a fugitive economic offender in Jan 2019.
The Chanda Kochhar fraud-
As everyone knows, Chandra Kochar is the former CEO of ICICI Bank and a household
figure in the Indian banking industry.
After a scandal involving over 26000 crore rupees at ICICI Bank, she resigned. Because the
ICICI Bank brand had diluted that specific news from news agencies and the system, Express
News had fallen out of favour.
This decision had been taken mostly by Chanda Kochhar, who deemed these non-performing
Assets to be worthless.
As a result, in the vast majority of cases, no one has been identified as a suspect victim of this
particular fraud.
Chanda Kochhar, the former CEO of ICICI Bank, has a well-thought-out game plan.
However, she had just quit her job and was on the road again.

Conclusion and Recommendation

The frauds may be primarily caused by a lack of adequate top-management supervision,

faulty incentive mechanisms for employees, collusion between employees, corporate

2
Vijay Mallya vs State of Maharashtra And Anr.
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borrowers, and third-party agencies; a weak regulatory system; a lack of appropriate tools and
technologies to detect early warning signals of fraud; a lack of awareness among bank
employees and customers; and a lack of coordination between different banks in India and
abroad. Some of the key causes of fraud and NPAs have been attributed to the length of time
it takes for legal procedures for reporting and the different flaws in the system.

In addition, despite their efforts, banks have had little success prosecuting those responsible
for financial crimes. One of the fundamental causes of this issue is a scarcity of forensic
accountants who are also familiar with the legal aspects of fraud.

Recommendation for early detection of fraud-

 An independent specialised cadre of officers similar to the all-India services could be

considered by the government as a way to detect financial fraud and carry out an
effective and timely investigation. Such schemes are subject to thorough scrutiny. The
government can contemplate forming this in the near future. cadre with a pool of
commercial bankers, RBI and CBI employees through lateral recruitment
 Data collecting in banks is old and needs to be rethought using the most recent
technology. For effective implementation of RFA and early warning signals, banks
should use the best possible IT systems and data analytics. The RBI has proposed a
(EWS) framework to assist better profile customers assessing their transactions and
enabling near real-time monitoring for the benefit of financial institutions.
Additionally, we urge that the Institute for Banking Research and Development
Technology (IDRBT) should look at encouraging the creation of useful software for
Banks of commerce at a favourable rate.
 Monitoring transaction outlier movements at regional level: The RBI should think
about broadening the scope of its monitoring programme and keeping an eye on
transaction outlier movements at regional levels a regional circuit breaker, similar to
SEBI's, that could be effective in tracking the early warning indications of financial
fraud.
 To discourage future bank fraud, the government should look into the role of third
parties, such as chartered accountants and advocates. They should be held strictly
accountable, as should auditors and rating agencies. The accreditation and credentials
of other parties, such as auditors, should also be questioned in order to determine their
competency in reviewing accounts that contain possibly fraudulent entries.
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 Every PSB corporate office should have a specialised section equipped with legal
support that acts as a single point of contact with investigation agencies and provides
simple access to essential documents.