Chapter 2

Lecture 2.1 Nature of Banking Frauds

Introduction

Bank frauds in India are increasing and banks had reported frauds at an average of at least one
each hour. According to the report, there has been an increase in the amount vis-a-vis bank
frauds during the year 2017-18. Public sector banks accounted for 85% of nearly 6,500 frauds,
amounting to more than Rs 30,000 Crores. Indian banks reported a total loss of about Rs 70,000
Crores to frauds during the last three fiscals. There are many different types of bank fraud. Some
of the most common types of fraud tend to be check fraud, debit and credit card fraud, safe
deposit box fraud, and ACH fraud, but there are many additional types of bank fraud both within
and beyond these basic categories. Here’s a closer look at some of the more unusual types of
bank fraud faced.

There are different types of bank frauds that take place and bank frauds can be classified as
insider frauds and outsider frauds.

Types of Bank Frauds

1. Fraudulent loans

Fraudsters take out money from banks in the name of loans. Banks always come forward granting
loans, if they believe that the money will be repaid with interest. In case of the fraudulent loan, a
borrower is a business entity controlled by a dishonest bank officer or an accomplice. After availing
a loan, the borrower declares bankruptcy and the loan will not be repaid. In some cases, the
borrower may even be a non-existent entity and the loan will be availed just to steal a large amount
of money from the banks.

2. Identity theft 

In case of identity theft, fraudsters steal your identity and use it to apply for a personal loan, two-
wheeler loan or a credit card with a bank. After fraudsters have availed a loan in your name, the
responsibility of repaying falls on you. You will be sent a notice by the bank and if you fail to repay
the loan, your credit score will come down and you will be marked a loan defaulter.

Checking credit report frequently helps you know if you are a victim of identity theft.

3. Card Skimming

Card skimming is a type of bank fraud, where a small electronic device called a skimmer is used by
fraudsters to steal card information. The skimmer is usually installed in the POS machine or ATM.
When a card gets run through a skimmer, the device captures and stores key information from the
magnetic strip of your credit/debit card. This information is copied to the magnetic strip of a blank
card and used by fraudsters to steal money from your bank account.

Many people in Kolkata recently lost lakhs of rupees to card skimming, in just 7 days. So, you have
to be careful when you insert your card in an ATM and it’s advisable to replace your magnetic plastic
card with a chip-based card.

4. Phishing
You might have received an email stating you are eligible for an interest-free loan, you can avail a
loan without checking your credit score and so on. But all these emails are not genuine. These
emails are called phishing mails. The intention of sending these emails is to steal bank details. Many
people believe these emails to be genuine and provide their bank details but finally, they end up
losing money. Phishing is when a scam artist uses email, text, phone calls, or other methods to try
to obtain a victim’s banking details. This type of fraud often overlaps with other types of fraud. For
instance, fraudsters often use phishing emails to get bank account details from their victims so they
can commit ACH or wire transfer fraud.

5. Vishing 

Vishing is also called voice phishing. In this fraud, fraudsters pose saying they are from a reputed
Organization and ask you for personal banking details. After collecting your personal banking
information, they use it steal money from your bank account. 

Fraudsters call claiming to be bank executives and say that your credit or debit card account will
expire and it has to be renewed as soon as possible, to prevent it getting blocked. They also claim
that they will help in renewing the account and you will be asked to give your personal information
like CVV number and OTP. In case you provide CVV number and OTP, money will be fraudulently
withdrawn from your bank account. Online Fraudsters will convince you, speaking just like
professional bank staff. Always remember, banks never ask you to provide personal information
over the phone.

Fraudsters will call, posing as executives from Airtel or Jio and tell you that they will help link
Aadhaar with the mobile number and collect personal information to conduct fraudulent banking
transactions.

6. Accounting Fraud

Accounting fraud primarily affects business lending. Businesses who commit accounting fraud “cook
the books” so they look more profitable on paper than they really are. Based on these fraudulent
statements, banks grant loans to these businesses, but ultimately, because the businesses are
insolvent, they can’t repay the loans. Then, the banks get left with a loss. The classic example is the
Enron scandal.

7. Loan Fraud

Accounting fraud can lead to loan fraud, but this type of fraud isn’t just limited to businesses
presenting fraudulent information on their loan applications. When individuals present false
information in order to obtain a loan, that is also loan fraud. Similarly, if a thief steals someone’s
identity and applies for a loan in their name, that is another type of loan fraud. Additionally, if
someone has a line of credit and a scam artist draws funds from that line, that also falls into this
category.

8. Wire Transfer Fraud

Wire fraud includes all cases of fraud involving wire transfers or the internet. In some cases, the
scammers steal the username and password of a banking customer, and they wire money to
themselves. For instance, when an attacker stole the sign-in details from a company in Missouri, the
attacker was able to steal $440,000 in wire transfers

Often, however, with this type of fraud, the scam artist convinces the victim to wire money to them.
For instance, in the all-too-popular secret shopper scam, the scam artist convinces someone that
they’ve been hired to be a secret shopper for a wire transfer company or a bank. The scam artist
directs the victim to wire some funds through that institution. The victim believes that if they do this,
they will be compensated for the funds they sent and for their work as a “secret shopper”. However,
after they wire the funds, the other party disappears, and the victim never gets their money back.

9. Rogue Traders

If you run an investment bank, you likely have traders on staff, and in this situation, you need to
ensure that you protect yourself from rogue traders. These are traders who engage in unauthorized
trades and manipulate the system to make it look as if their trading activities are generating more
money for the bank than they really are.
10. Demand Draft Fraud

Like rogue trading, demand draft fraud happens internally. One of the bankers simply generates a
demand draft payable at another branch or even at another bank. Then, they leverage what they
know about the system to avoid detection, they cash the demand draft, and they keep the funds.

11. Bill Discounting Fraud

Although this type of bank fraud is relatively rare, you should still understand the risk. Generally,
with bill discounting fraud, the fraudster opens a business account at the bank. Then, the “business
owner” convinces the bank to start collecting bills from the business’s clients. The so-called clients
are part of the scam, so they always pay the bills. After a while, the financial institution gets lulled
into a false sense of security about this customer. Eventually, the customer asks the bank to credit
the bills in advance. When the bank does that, the fraudster takes all the money and runs, and the
bank never gets those funds back.

12. ATM Fraud

ATM fraud includes everything from reprogramming the machine to installing a skimmer to steal
card details. However, it can also include making fraudulent deposits by depositing empty envelopes
— an envelope-free ATM is usually the easiest way to avoid that.

13. Money Laundering

Money laundering is when criminals deposit fraudulently obtained sums of cash into a bank. They
typically try to make the funds look as though they have come from a legitimate source. For
instance, if someone is selling drugs, they may try to pretend that the cash is from a business, and
they may deposit the funds in that business’s account. Legally, you are obligated to report cases of
suspected money laundering, and failure to do so, can put your financial institution into a precarious
position.