FINANCIAL FRAUD : TYPES

FINANCIAL FRAUD
Statistics quoted in a recent report by the Association of Certified Fraud Examiners’ (ACFE) 2012 titled
“Report to the Nation on Occupational Fraud and Abuse” has estimated that a typical organization loses
5% of its revenues to fraud each year and cumulative annual fraud loss globally during 2011 could have
been of the order of more than $3.5 trillion. The amount involved in the frauds reported by the banking
sector in India has more than quadrupled from Rs. 2038 crore during 2009-10 to Rs. 8646 crore during
2012-13.
Financial fraud is the act of untruthfully taking financial assets that belong to another individual. There
are many different types of financial fraud. Some common types of fraud includes Money Laundering,
Insider Trading, Embezzlement, Ponzi Scheme etc. Fraud has been a battle in accounting for many
years. Various acts were passed to prevent and keep financial fraud at a minimum.
 CORRUPTION IN INDIA- SOME
STATISTICS
Political parties have been found to be the most corrupt institution in India with a corruption
rate as high as 4.4 on a scale of 5
• The Highest Amount Of Bribe By The Police - 62%
• Registry And Permit (61%),
• Educational Institutions (48%)
• Land Services (38%).
• India's Judiciary- 36% Involved In Bribes.
• Corruption Perception Index: Global Rank 94
• Control Of Corruption 36%
 MEASURES TO COMBAT CORRUPTION

• Right to Information Act (RTI)

• Central Vigilance Commission (CVC)
• Strong and stringent laws
• Establishment of special courts
 ANTI-CORRUPTION LAWS IN INDIA

• Prevention of Corruption Act,1988

• Money Laundering Act,2002
• RTI Act,2005
• Central Vigilance Commission Act,2003
• Lokayukta Acts Of States
• IPC,1860
 MONEY LAUNDERING
Engaging in financial transactions to hide the identity, or source of illegally obtained money.

• Section 3; "Whosoever directly or indirectly, attempts to indulge, or knowingly assists, or knowingly is

party, or is actually involved in any process, or activity connected, with the Proceeds of
Crime, including its Concealment, Possession, Acquisition or use; and Projecting or Claiming it
as Untainted Property shall be guilty of offence of Money-Laundering“

• Regulation- Prevention of Money Laundering Act 2002

• Penalty/Punishment:
(i) Rigorous imprisonment from three years to seven years
(ii) Fine upto five lakhs (amended in 2012)
 SOME FACTS

• The number of money laundering investigations in India increased from 798 at

the end of 2009 to 1,561 on April 30, 2013, the FATF said.
• According to the FATF's report, India is also probing 143 cases of terror
funding (as on March 31,2013) in which 470 people are accused.
 EMBEZZLEMENT

• Embezzlement is the act of dishonestly withholding assets for the purpose

of conversion of such assets by one or more individuals to whom such assets
have been entrusted, to be held and/or used for other purposes.
• Embezzlement is a kind of financial fraud. For instance, a lawyer could embezzle
funds from clients' trust accounts, a financial advisor could embezzle funds from
investors.
• Often it involves the trusted individual embezzling only a small proportion or
fraction of the total funds or resources receives or controls.
• It recommended that departmental enquiries be
expedited to bring the defaulters to book. Internal
controls in all organizations should be strengthened to
prevent such cases.
• Massive embezzlement of MNREGA funds in Madhya
Pradesh
• MP has posted an average expenditure of Rs.2,500 crore
under MNREGA in the last two year
 TAX FRAUD

• Tax evasion is governed under Wealth-Tax, Expenditure Tax and Benami

Transactions Prohibition Acts, including complaints and evasion petitions
• Tax fraud occurs when an individual or business entity wilfully and
intentionally falsifies information on a tax return in order to limit the amount
of tax liability
• Broad measure of the earnings that taxmen unearth from individuals and firms
following searches and raids — fell to Rs. 1,0291.61 crore in 2012-13 compared with
Rs. 15,070.64 crore in the previous year
• Even salaried people can evade tax:
• Salaried people who have filed returns might have either willfully or negligently failed to
report income from other sources, are guilty of tax evasion. A salaried person might have a
savings bank account wherein any interest income accrues to the balance at regular
intervals. This income needs to be reported in their income tax return but that is not done
by many taxpayers.

• Reward for reporting tax evasion:

• The maximum amount of reward to the informers is 20% of the value of articles seized and
the penalty realized.
 BANKING FRAUD

• The amount involved in the frauds reported by the banking sector in India
has more than quadrupled from Rs. 2038 crore during 2009-10 to Rs. 8646
crore during 2012-13
Broadly, the frauds reported by banks can be divided into two main sub-
groups:
• Technology related:- KYC (mainly in deposit accounts)
• Advances related
• KYC
• “Know your Customer”, a term used for customer identification process
• Guidelines are issued by the RBI to banks under Section 35A of the Banking Regulation Act, 1949 and Rule
7 of Prevention of Money-Laundering Rules, 2005. Any contravention thereof or non-compliance shall
attract penalties under Banking Regulation Act.
• Cases of circulation of fraudulent e-mails and sms messages conveying winning of prize money have
become matter of common occurrence in recent times
• Gullible people fall prey to such e-mails and pay money in designated accounts, which is then quickly
siphoned off through ATMs located in far flung areas of the country. For this purpose, the fraudsters
generally use deposit accounts in banks with lax KYC drills or accounts which remain inoperative for long.
• Advances related
• An advance fee scheme occurs when the victim pays money to someone in anticipation
of receiving something of greater value—such as a loan, contract, investment, or gift—
and then receives little or nothing in return
 SECURITY FRAUD
• Also known as stock fraud and investment fraud
• Practiced in the stock or commodities markets that induces investors to make purchase or sale
decisions on the basis of false information
• Misrepresentation
• If the safety or product is misrepresented which resulted into purchase, the advisor may be liable for any losses
incurred
• Ponzi scheme
• a fraudulent investment operation that pays returns to its investors from existing capital or new capital paid by new
investors
• The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920
• INSIDER TRADING
• all parties that may have been involved in passing and receiving non-public
informations are at risk of being found guilty..
 INSURANCE FRAUD

• Insurance fraud occurs when any act is committed with the intent to fraudulently obtain
some benefit or advantage to which they are not otherwise entitled or someone
knowingly denies some benefit that is due and to which someone is entitled.
•A report by India forensic Centre of Studies claims that, "The losses caused to the
insurance sector are Rs.30,401 crore which is roughly 9 per cent of the total estimated size
of insurance industry in the year 2011."
• It cited collusion between the employees of insurers and private persons, document
falsification and manipulation in citing cause of death to claim insurance benefits, as some
of the reasons behind these frauds.
 TYPES OF INSURANCE FRAUD

• Life insurance fraud may involve faking death to claim life insurance. Fraudsters
may sometimes turn up a few years after disappearing, claiming a loss of memory.
• Health insurance fraud is described as an intentional act of deceiving, concealing,
or misrepresenting information that results in health care benefits being paid to
an individual or group.
• Automobile insurance fraud rings or groups may fake traffic deaths or stage
collisions to make false insurance or exaggerated claims and collect insurance
money.
 CYBER CRIMES

• Cyber Crime is a term used to broadly describe criminal activity in which

computers or computer networks are a tool, a target, or a place of criminal
activity.
• Computer crime mainly consists of unauthorized access to computer
systems data alteration, data destruction, theft of intellectual property.
Cyber crime in the context of national security may involve hacking,
traditional espionage, or information warfare and related activities.
 CYBER CRIME VARIANTS

• Hacking • Defacement Of Websites

• Cyber Squatting • Computer Virus
• Phishing • Spam
• Cyber Stalking • Pornography
• Vishing • Identity Theft
INDIA STANDS 11TH IN THE RANKING FOR CYBER
CRIME IN THE WORLD, CONSTITUTING 3% OF THE
GLOBAL CYBER CRIME.
We have covered about three instances where high-profile government websites were hacked and defaced.
However, the actual number of Government Websites that were hacked are quite huge.

A total number of 90, 119, 252 and 219 Government websites tracked by the Indian Computer Emergency
Response Team (CERT-In) were hacked / defaced by various hacker groups in the year 2008, 2009, 2010 and
Jan–Oct 2011 respectively.
 LEGISLATIVE FRAMEWORK

Under The Information Technology Act, 2000

• 66. Hacking with computer system.
• 66A - Punishment for sending offensive messages through communication service, etc
• 66C - Punishment for identity theft
• 66D - Punishment for cheating by personation by using computer resource
• 66E - Punishment for violation of privacy.
• 67 A - Punishment for publishing or transmitting of material containing sexually explicit act, etc. in
electronic form
• 67 C - Preservation and Retention of information by intermediaries.
 FACTS AND FIGURES
• India is the third-most targeted country for
Phishing attacks after the US and the UK
• Social networks as well as ecommerce sites are
major targets
• 6.9 million bot-infected systems in 2010
• 14,348 website defacements in 2010
• 6,850 .in and 4,150 .com domains were defaced
during 2011
• 15,000 sites hacked in 2011
Source: Norton Cybercrime Report 2011
• India is the number 1 country in the world for
generating spam
• 29.9 million people fell victim to cybercrime,
• $4 billion in direct financial losses,
• $3.6 billion in time spent resolving the crime
• 4 in 5 online adults (80%) have been a victim of
Cybercrime
• 17% of adults online have experienced cybercrime on
their mobile phone
 BIBLIOGRAPHY

• RBI
• SEBI
• TRANSPARENCY INTERNATIONAL
• INDIA AGAINST CURRUPTION
• MINISTRY OF FINANCE,GOI
• KPMG REPORTS
• INDIA FORESIC CENTRE OF STUDIES
• ACFE REPORT 2012
• FATF REPORT 2013
• MNREGA
• NORTON CYBER CRIME REPORT 2012