Title: Understanding Loan Fraud: Causes, Detection, and Prevention

Strategies

Abstract:
This paper examines the pervasive issue of loan fraud in financial systems
worldwide. It investigates the root causes, methods of detection, and preventive
measures against loan fraud. Through an in-depth analysis of existing literature and
case studies, this paper provides insights into the complexity of loan fraud and
offers practical recommendations for financial institutions and regulatory bodies.

1. Introduction

What is Loan:
In a rapidly growing financial market, financial assistance is a key factor for the
businesses. The Financial Assistance provided by the bank against the time value
of money, which is termed as Interest in common parlance, is called as Loan.
Generally, loan is provided by the Financial Institutions for the specific purposes.
The Loan is the success wheel of any business for the expansion and to distribute
its risk with another.

As per Black’s Law Dictionary, “Loan” refers to a contract by which one delivers a
sum of money to another, and the latter agrees to return at a future time a sum
equivalent to that which he borrowed.

The loans can be categorized and sub categorized into different types by
differentiating the nature and unique characteristics of the loan, such as Secured
Loan, Unsecured Loan, Auto Loan, Home Loan, Credit Card, Personal Loan,
business Loan, Education Loan, Equity Loan, Payday Loans etc. Every loan has its
own characteristics, based on which the rate of interest, security and the payment
terms are decided. Loan having high risk in repayment may have higher rate of
interest in comparison to other and the repayment tenure is high based on the life
of the mortgaged asset.

What is Fraud:
“Fraud” is any activity that relies on deception in order to achieve a gain. Fraud
becomes a crime when it is a “knowing misrepresentation of the truth or
concealment of a material fact to induce another to act to his or her detriment”
(Black’s Law Dictionary). In other words, if you lie in order to deprive a person or
organization of their money or property, you’re committing fraud.
As per section 17 of Indian Contract Act 1872: “Fraud” Defined as–
“Fraud means and includes any of the following acts committed by a party to a
contract, or with his connivance, or by his agent1, with intent to deceive another
party thereof or his agent, or to induce him to enter into the contract.”
1) The suggestion, as a fact, of that which is not true, by one who does not believe
it
to be true.
2) The active concealment of a fact by one having knowledge or belief of the fact
3) A promise made without any intention of performing it
4) Any other act fitted to deceive
5) Any such act or omission as the law specially declares to be fraudulent

As per UK Fraud Act 2006, Fraud involved the following activities:

(a) dishonestly making a false representation (to a person, or to any system or
device) with a view to gain or with intent to cause loss or expose to a risk of loss;
(b) dishonestly (and with a view to gain or with intent to cause loss, etc) failing to
disclose information when under a legal duty to disclose it; or
(c) dishonest abuse of position, with a view to gain or to cause loss, etc. It is
irrelevant whether gain, loss or exposure to loss actually occurs.
(source: https://www.lexisnexis.co.uk/legal/glossary/fraud)

From the above study, it is clear that fraud include one important factor, which is
“the intent” of the person who commit fraud. If a person deceive someone with a
intent to gain something, this activity may come under the ambit of fraud.

What is Loan Fraud:

Loan fraud occurs when an individual or a company misrepresents or omits
relevant information with the intent to secure a loan they may not qualify for or on
terms they would not receive should the truth be disclosed.

Loan fraud manifests in various forms, from income falsification to identity theft.
It can also occur through sophisticated scams, including phishing schemes to
obtain personal data, which they then use to apply for loans under untrue pretenses.

For example, an applicant might inflate their income on a loan application to meet
the lending criteria, effectively misleading the lender regarding their accurate
financial stability.
The consequences of loan fraud are far-reaching, impacting financial institutions
through monetary loss and innocent victims with compromised personal
information and potentially damaged credit scores. Additionally, fraudulent loans
can distort a lender's risk assessment, leading to tightened credit markets and
increased interest rates for legitimate borrowers.

Loan fraud can be categorized in to the

photo

LOAN FRAUD IN RENOWNED CASES

BRIEF ABOUT AT LEAST 4 CASES:

PNB-NEERAV MODI: The Punjab National Bank Fraud Case relates to

fraudulent letter of undertaking worth ₹12,000 crore issued by the Punjab National
Bank at its Brady House branch in Fort, Mumbai; making Punjab National Bank
liable for the amount. The fraud was allegedly organized by jeweller and designer
Nirav Modi. Nirav, his wife Ami Modi, brother Nishal Modi and uncle Mehul
Choksi, all partners of the firms, M/s Diamond R US, M/s Solar Exports and M/s
Stellar Diamonds; along with PNB officials and employees, and directors of Nirav
Modi and Mehul Choksi's firms have all been named in a charge sheet by the CBI.
Nirav Modi and his family absconded in early 2018, days before the news of the
scam broke in India.

India's Enforcement Directorate (ED) has begun attaching assets of the accused
and is seeking to immediate confiscation under the Fugitive Economic Offenders
Ordinance. Nirav is on the Interpol's wanted list for criminal conspiracy, criminal
breach of trust, cheating and dishonesty including delivery of property, corruption,
money laundering since February 2018. In March 2019, Nirav was arrested in
central London by UK authorities.

The bank initially said that two of its employees at the branch were involved in the
scam, as the bank's core banking system was bypassed when the corrupt employees
issued LOUs to overseas branches of other Indian banks, including Allahabad
Bank, Axis Bank, and Union Bank of India, using the international financial
communication system, SWIFT. The transactions were noticed by a new employee
of the bank. The bank then complained to the CBI, who is currently investigating
the scam apart from ED and Reserve Bank of India. CBI named key officials Usha
Ananthasubramanian, former CEO of PNB, executive directors KV Brahmaji Rao
and Sanjiv Sharan in a chargesheet holding them responsible for failure to
implement several circular and caution notices issued by the RBI regarding the
reconciliation of SWIFT messages and core banking systems.

ICICI-VIDEOCON LOAN SCAM: The ICICI-Videocon loan scam is

about a criminal conspiracy by Chanda Kochhar as Managing Director of ICICI
Bank who abused her position by sanctioning a ₹3,250 crore (US$696.34 million)
loan to Venugopal Dhoot's Videocon International Electronics Limited (VIEL)
between June 2009 and October 2011 to cheat the bank in lieu of illegal
gratification and undue benefit received in NuPower Renewables Private Limited
(NRPL), a company owned by Kocchar's husband, Deepak Kochhar.
In the course of its preliminary investigation, the Central Bureau of
Investigation (CBI) discovered that between June 2009 and October 2011, ICICI
Bank allegedly broke its own policies by authorising six loans totaling ₹1,875
crore to be given to companies affiliated with the Videocon Group. According to
the investigation agency, the loans were declared to be non-performing assets in
2012, which resulted in a loss of ₹1,730 crore for the bank.
The CBI filed a chargesheet in April 2023 against Kochhar, her husband Deepak,
Dhoot, and six other individuals. On June 26, 2023, the investigative agency
presented their arguments to a special court, seeking acknowledgment and
acceptance of the chargesheet

VIJAY MALLYA: Vijay Vittal Mallya (born 18 December 1955) is an Indian

fugitive former businessman and politician. He is the subject of an extradition
effort by the Indian Government to return him from the UK to face charges of
financial crimes in India.

The son of a businessman who was also in the alcoholic beverages business,
Mallya is the former chairman of United Spirits, the largest spirits company in
India, and continues to serve as chairman of United Breweries Group, an Indian
conglomerate with interests including beverage alcohol, aviation infrastructure,
real estate, and fertilizer. He was the chairman of Sanofi India (previously known
as Hoechst AG and Aventis) and the chairman of Bayer CropScience in India for
over 20 years, and the chairman of several other companies. Mallya was also the
founder and former owner of defunct Kingfisher Airlines and former co-owner of
the Force India Formula One team before it went into administration. He is also a
former owner of the Royal Challengers Bangalore cricket team.
On 18 April 2017, Mallya was arrested by the UK Metropolitan Police extradition
unit "on behalf of the Indian authorities in relation to accusations of fraud", and
was released on bail pending further consideration of the case.[66][67] On 9 May
2017, the Supreme Court of India found Mallya guilty of contempt of court and
summoned him to appear on 10 July.[68] When he failed to appear, the Supreme
Court said the contempt case would only proceed further after he is produced
before the court.[69] Mallya dismissed the proceedings against him – calling the
situation a "witch hunt".[70] He said "I have done absolutely nothing wrong. In
fact I am glad that it is finally before a UK court and an impartial court. So we wait
and see how it plays out."[70] In the meantime, he is not allowed to leave Britain,
but he said that is no hardship for him.[70] He said "There's nothing to miss" for
him about India, since his immediate family has all moved to England or the
United States.[70]

On 3 October 2017, Mallya was arrested as part of a money-laundering case in

London and was released on bail.[71]

An appeal to extradite him from Britain was filed on charges of bank fraud
estimated at ₹90 billion (US$1.1 billion). The final hearing on extradition will be
held at the Westminster Magistrate's Court on 31 July.

Mallya is on bail since his arrest on an extradition warrant in April 2017. Mallya is
fighting an extradition case in the UK. On 16 June 2018 Vijay Mallya was ordered
to pay £200,000 (₹18.1 million) to Indian banks by a United Kingdom court. He
was also asked to pay money towards registration of worldwide freezing order and
of Karnataka's Debt Recovery Tribunal (DRT). Vijay Mallya has to pay dues to 13
banks namely- SBI, BOB, Corporation Bank, Federal Bank Ltd, IDBI Bank, Indian
Overseas Bank, J&K Bank, Punjab and Sind Bank, PNB, State Bank of Mysore,
UCO Bank, UBI and JM Financial Asset Reconstruction Co. Pvt Ltd.[72] The
consortium attempted to gain possession of Mallya's £20 million property on
Cornwall Terrace in London, but Mallya claimed it was owned by his mother.[73]

UBS went to court in 2018, seeking to evict Mallya, his son Sidhartha and his
mother Lalith from Cornwall Terrace. A trial was set for May 2019.[74] The trial
did not go ahead since Mallya drew up a settlement with UBS. According to the
terms of the agreement, Mallya can remain in the property and if the mortgage is
not repaid by April 2020, UBS has a right to immediate possession. Mallya must
also pay the interest of £820,333 accrued up to April 2019 plus any further amount
accrued up to 1 May 2020. He was also instructed to pay legal costs of £1,047,081
and receivers' costs of £223,863.[75] In December 2018, the court ruled that he can
be extradited to India to face fraud investigations.[8] In July 2019, Mallya was
granted permission to appeal to London's High Court against his extradition.[76] In
April 2020, the plea file by Vijay Mallya against his extradition to India was
rejected by London High court.[77]

Vijay Mallya lost his final appeal against extradition. Mallya had filed an appeal in
the UK Supreme Court earlier in month of May 2020 in the wake of losing an
appeal in the London High Court against an extradition order to India on alleged
charges of fraud and money laundering related to unrecovered loans to Kingfisher
Airlines. It was said that he could be extradited in next 28 days.[78][79] However,
in October 2020 the Indian government was notified that Mallya could not be
currently extradited due to an unspecified "confidential legal matter".[80]

On 11 July 2022, the Supreme Court sentenced Mallya to four months in jail and
imposed a Rs 2,000 fine on him in a 2017 contempt of court case. He was
convicted of contempt in 2017 over transferring $40 million to his children in
violation of court orders.[81]

While awarding him a jail term, the top court also asked Mallya to deposit the $40
million with 8 percent interest within four weeks to the Supreme Court legal
services authority. A failure to do so would lead to attachment of properties and a
further sentence of two months.

FINANCIAL AND ECONOMIC IMPACT

ABOUT SHARE MARKET FALL

PROPOSED SOLUTION

2. Causes of Loan Fraud

Economic factors (e.g., recession, unemployment)

Motivations (e.g., financial gain, desperation)
Psychological factors (e.g., rationalization, opportunity)
Regulatory gaps and loopholes

3. Methods of Loan Fraud

Falsifying documents (e.g., income, identity)

Collusion between borrowers and insiders
Identity theft and synthetic identities
Cyber fraud (e.g., phishing, hacking)

4. Detection Techniques

Data analytics and AI-based solutions

Enhanced due diligence procedures
Red flags and warning signs
Collaboration with law enforcement agencies

5. Consequences of Loan Fraud

Financial losses for lenders

Impact on borrowers' credit history
Erosion of trust in financial institutions
Legal ramifications and penalties

6. Prevention Strategies

Strengthening regulatory frameworks

Implementing robust authentication measures
Educating borrowers and employees
Encouraging whistleblowing and reporting mechanisms

7. Case Studies

High-profile examples of loan fraud cases

Analysis of lessons learned and key takeaways

8. Future Trends and Challenges

Emerging technologies and their impact on loan fraud

Regulatory responses and evolving best practices
Potential obstacles to effective fraud prevention

9. Conclusion
Summary of key findings
Call to action for stakeholders to combat loan fraud effectively

10. References

Citations of relevant academic papers, reports, and regulatory guidelines

This outline provides a comprehensive framework for a research paper on loan
fraud, covering its various aspects from causes and detection methods to
prevention strategies and future challenges. Researchers can delve deeper into each
section, incorporating empirical data and real-world examples to enrich their
analysis.