PROJECT REPORT

ON

Frauds and Scams In Banking Sector In India

Submitted to University of Mumbai

In

2016-2017

Partial fulfillment of the requirement of the Degree of

Bachelor of Banking and Insurance

Under Guidance Of

Ms. Khushboo Bhatia

K. M. AGRAWAL COLLEGE OF ARTS, COMMERCE & SCIENCE.

GANDHARE, KALYAN (W)

BY-

Priyanka Raghuwanshi
ROLL NO:22

EXAM SEAT NO:

1
 K.M.AGRAWAL COLLEGE OF ARTS, COMMERCE& SCIENCE ,
KALYAN
(Conducted by HINDI BHASHI JANKALYAN SHIKSHAN SANSTHA
KALYAN)
(Affiliated by University of Mumbai)

Bachlor of Banking and Insurance

CERTIFICATE
This is to certify that Miss. Priyanka Raghuwanshi, Roll no.22, Seat No.
, has satisfactorily carried out the project work of the topic Frauds and
Scams in Banking sector in India for the 5th semester of T.Y.B.B&I ,in the
Academic year 2016-2017

PLACE: KALYAN
DATE : _________ Principal
(Mrs. Anita Manna)

Signature of Examiner B&I Coordinator

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 CERTIFICATE

I, Ms. Khushboo Bhatia here by certify that Miss. Priyanka Raghuwanshi ,

of T.Y.B.B&I (SemV), Roll No. has completed project on Frauds and
Scams in Banking sector in India in the academic year 2016-2017. The
information submitted is true and original to the best of my knowledge.

Place: Kalyan ---------------------

Date: Signature of project Guide

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 DECLARATION

I, Priyanka Raghuwanshi student of T.Y.B.B&I semester V (2016-2017)

hereby declare that I have completed the project on Frauds and Scams in
Banking sector in IndiaI further declare that the information imparted is true
and fair to the best of my knowledge.

SIGNATURE

Priyanka Raghuwanshi

Roll No.22

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 . ACKNOWLEDGEMENT

I hereby express my heartiest thanks to all sources who have contributed to the
making of this project. I oblige thanks to all those who have supported,
provided their valuable guidance and helped for the accomplishment of this
project. I also extent my hearty thanks to my family, friends, our coordinator
MR. SUJEET SINGH, college teachers and all the well-wishers.

I also would specially like to thanks my project guide Ms. Khushboo Bhatia
for his guidance and timely suggestion and the information provided by him on
this particular topic.

It is matter of outmost pleasure to express my indebt and deep sense of gratitude

to various person who extended their maximum help to supply the necessary
information for the present thesis, which became available on account of the
most selfless cooperation.

Above all its sincere thanks to the UNIVERSITY OF MUMBAI for which this
project is given consideration and was done with outmost seriousness.

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 INDEX

S. No. Chapters Name Page. no

1 Introduction To Bank Fraud 9-14

2 Literature Review 15-16
3 Categories Of Bank Frauds And Scams

Frauds Done by Insider 17-26

Frauds Done by Outsider 27-39

4 Types Of Bank Frauds And Scams 40-47

5 Effects Of Banking Frauds 48-50
6 Bank Rules Regarding Bank Frauds 51
7 Responsibilities Of Banker 52-53
8 Regulations Of Reserve Bank Of India 54-55
9 Factors Of Banking Frauds

Internal Factors 56-62

External Factors

10 Actions Taken By Banks 63-65

11 Present New Fraud Prevention Challenges 66-68
12 Case Study 69-70
13 Conclusion 71
14 Webliography 72

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 OBJECTIVES
To understand the meaning of banking frauds and scams.
To understand the various types of banking frauds and scams.
To ascertain the factors this encourages the fraudulent activities in banks.
To understand the categories of banking frauds and scams.
I.e. Frauds and scams done by insiders and outsiders.
To determine the effects of banking frauds and scams on the society.
To suggest the measures and techniques for reducing the incidence of banking frauds and
scams.
To understand the Reserve Bank of India (RBI) rules to prevent banking fruds and
scams and responsibility of bankers in banking frauds and scams.

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 RESEARCH METHODOLOGY
Primary Data:
My primary data consists mainly from my visit to the THANE DUSTRICT CENTRAL
CO. OP.BANK LTD. ULHASNAGAR-3

Secondary data:
My secondary data consists of the information collected from various, Internet sites,
newspapers.

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 INTRODUCTION TO FRAUD

Fraud can be seen as the intentional misrepresentation, concealment, or omission of the truth
for the purpose of deception or manipulation to the financial detriment of an individual or an
organization (such as a bank) which also includes embezzlement, theft or any attempt to steal
or unlawfully obtain, misuse or harm the asset of a bank. Fraud and its management have
been the main factor. In the distress of banks, and as much as various measures have been
taken to minimize the incidence of fraud, it still rises by the day because fraudsters always
device strategic ways of committing fraud. This has become a point of great attention in the
rural banking sector as well as every organization in Ghana. Although this phenomenon is not
unique to the rural banking industry or peculiar to Ghana alone, the high incidence of fraud
within the banking industry has become a problem to which solution must be provided in
view of the large sums of money involved and its adverse implications on the economy.
Fraud in its effects reduces the assets and increases the liability of any company. In the case
of rural banks, this may result in the loss of potential customers or crisis of confidence of
banking public and in the long run end up in another failed bank situation. It is instructive to
know that many banking operatives have different reasons for joining various banks. Many
have the intention of working for a short time in the banking industry (get whatever they
could and find another job that is less demanding), some are in the industry because of their
love for banking and all it stands for, while majority are there to enrich themselves by
fraudulent means.
Due to the upsurge of great viability in the rural banking sector, its dynamic and fast
expanding level of activities, rural banks are faced with different kinds of challenges, among
which is trying to prevent various fraudulent intentions of both staff and customers As it were
frauds seem to have increased as new technology is born and more advanced techniques of
enhancing business transactions have been developed. Fraudsters are constantly devising new
plans, updating old methods and trying out new techniques of bypassing these electronic
systems meant to ensure high security of banking operations. The introduction of automated
systems that lose handwriting and fingerprint trails have not helped matters either. In view of
the staggering sums lost to fraudsters by the Ghanaian financial sector, in these recent times
and the rate at which fraudsters appear to have shifted their attention and directed their

9
energies to banks, devising all unimaginable tactics to exploit loopholes in the control
measures and capitalize on carelessness of the staff and customers, fraud in the industry has
prevented many banks from achieving their goals. Some banks were just seen in the physical
as body and building whilst in reality they were already liquidated and many were already
into distress. Taking a walk down memory lane. The banking sector plays a very significant
role in the development of any economy. Banks in most economies are the principal
depositories of the publics monetary savings, the nerve centre of the payment system,
the vessel endowed with the ability of money creation and allocation of financial
resources and conduit through which monetary and credit policies are implemented.
The success of monetary policy, to a large extent, depends on the health of the
banking institutions through which the policies are implemented. Whatever problems
which militate against the proper functioning of the banking sector will invariably
have multiplier effects on the other sectors of the economy. This is one of the reasons
why it is essential to quickly diagnose any factor which may hamper the smooth
functioning of the rural banking sector and urgently address such issues.

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 MEANING OF FRAUD:

The progress of business depends upon expansion & diversification. The indicators of
growing economy are acceleration in per capita income, standard of living & national wealth,
national income etc. In the growing economy some unethical practices has been observed.
Nowadays scams, frauds & corruptions etc. has entered in every sector.

Fraudulent practice are like slow poisoning which destroy the system of faith , loyalty, &
reliability confidence of the people & help to proceed towards under developed society.
Fraud is any dishonest act and behavior by which one person gains or intends to gain
advantage over another person. Fraud causes loss to the victim directly or indirectly. Fraud
has not been described or discussed clearly in the Indian penal code but sections dealing with
cheating. Concealment, forgery counterfeiting and breach of trust has been discusses which
leads to the act of fraud. In contractual term as described in the Indian contract act, sec 17
suggests that a fraud means and includes any of the acts by a party to a contract or with his
connivance or by his agents with the intention to deceive another party or his agent or to
induce him to enter in to a contract.

Deceit, trickery, sharp practices or breach of confidence , perpetrated for profit or

gain some unfair or dishonest advantages.

- Collins English dictionary.

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 MEANING OF BANK FRAUD
Bank fraud is the use of potentially illegal means to obtain money, assets, or other property
owned or held by a financial institution, or to obtain money from depositors by fraudulently
posing as a bank or other financial institution. In many instances, bank fraud is a criminal
offence. while the specific elements of particular banking fraud laws vary between
jurisdictions, the term bank fraud applies to actions that employ a scheme or artifice, as
opposed to bank robbery or theft. for this reason, bank fraud is sometimes considered
a white-collar crime. Banking frauds constitute a considerable percentage of white-collar
offences being probed by the police. unlike ordinary thefts and robberies, the amount
misappropriated in these crimes runs into lakhs and crores of rupees. bank fraud is a federal
crime in many countries, defined as planning to obtain property or money from any federally
insured financial institution. it is sometimes considered a white collar crime. The number
of bank frauds in india is substantial. it in increasing with the passage of time. all the major
operational areas in banking represent a good opportunity for fraudsters with growing
incidence being reported under deposit, loan and inter-branch accounting transactions,
including remittances. Bank fraud is a big business in todays world. with more educational
qualifications, banking becoming impersonal and increase in banking sector have gave rise to
this white collar crime. in a survey made till 1997 bank frauds in nationalised banks was of
rs.497.60 crore. The occurrence of frauds in the banks is not a recent observable fact; infact
the misdemeanor of forgery is perhaps as old as writing itself. Of the inestimable types of
financial offences that our nation and all countries across the globe have had to eyewitness
and undergo from, a major one is financial frauds caused in the banks popularly know as
bank frauds. Any organisation which deals with money is always vulnerable to frauds and
this is more so in the case of financial institutions like banks which are dealing only in money
and that to as a business commodity. Bank frauds are on the augment. The graph of fraud
money is mounting steeply. The reasons for increase in number of frauds in the post
nationalization period is attributed to a numerous reasons, the most likely ones are the
widespread branch network, lack of trained staff for the expanding network and a shift from
the security oriented lending to the development oriented approach i.e. advances to the
priority sectors. Frauds in Indian banks only prove that financial liberalization aggravates the
inherent tendency of shallow markets to foster excessive speculation and worsens the
systemic consequences of such speculative activity. Revelations of fraud, evidence of insider
trading and a consequent collapse of investor interest have led to an almost unstoppable

12
downturn in Indian banks. Bank frauds concern all citizens. It has become a big business
today. Bank frauds are the creation of professional criminals, desperate customers or of errant
bankers or their collusion inter se. However the prima donna in the drama is the insider or the
banker. He opens the purse. He is often the target and at times the tool. Occasionally, he is
the victim of the temptations. Other contributory factors are incompetence, lethargy,
negligence, connivance and ignorance. Situational pressures and permissive attitudes of the
society promote them. High gains and low stakes encourage the incidence. The rising trend
makes it more and more important that ways and means are found to combat the menace.

Bank frauds can be explained through following diagram:

Bank fraud means obtaining money or property held by bank or customer of the bank in order
to make more money. So generally there are two factors of frauds: Complexity of bank
transactions and failure in observance or procedures and norms laid down in branch
operations. Fraud is any dishonest act and behavior by which one person gains or intends to
gain an advantage over other person. The gain may accrue to the person himself or to
someones. Fraud causes loss to the victim, directly or indirectly. In earthly terms bank frauds
include all sorts of misappropriations, embezzlements, manipulations of negotiable
instruments (cheques, drafts, handiest, bills or statements of accounts, securities etc.). Also
13
included are misrepresentations, cheating, thefts, undue favors and irregularities. The frauds
may be intentional or incidental and can be committed by (I) the bank employees themselves,
(ii) the staff members of the banks in collusion or connivance with the customers or outsiders,
and (iii) the customers or outsiders.

The word fraud has been defined in the Indian contract act. In short fraud is dishonesty
leading to loss to someone. Dishonesty is never accidental. Therefore there is always a
swindler behind each bank fraud. The number of bank frauds in india is substantial. It is
increasing with the passage of time. Bank frauds are due to the bunko and the bungler
bankers, situational pressures and permissive attitudes. Fraud has not been defined in the
Indian penal code directly. However sections dealing with cheating, concealment, forgery,
counterfeiting, misappropriation and breach of trust cover the same adequately. Hence what
this paper fundamentally tries to focus on is on the bankers responsibility vis--vis the reach
of deception therein, consequences of such incident and tries to look into the entire possible
panacea to such a menace in the society.

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 LITERATURE REVIEW

In legal terms, fraud is seen as the act of depriving a person underhandedly of something, which
such a person would or might be entitled to, but for the perpetration of fraud. In its lexical
meaning, fraud is an act of trickery which is intentionally practiced in order to gain illegitimate
advantage. Therefore, for any action to constitute a fraud there must be deceitful objective to
benefit (on the part of the perpetrator) at the disadvantage of another person or group. Fraud
typically requires stealing and manipulation of accounts, frequently accompanied by cover up of
the theft. It also involves the translation of the stolen resources or property into own resources or
property. Young, (2002) says that, ample evidence exists that individual integrity of those
running the banks today has never been at a higher level. Never before have we seen attention to
the actual steps; procedures and control of monetary transactions. Employees as well as firms in
all industries engage in fraudulent practices all over the world. Although the existence of fraud in
our banks is not an uncommon or unexpected behavior, its prevalence is what is worrying
because of all the various problems confronting the most untraceable and Kindle. Frauds in banks
lead to loss of monies that ordinarily belong to someone other than the banks. The loss results in
some cases, in reducing the level of resources available for use in the operations of the banks. In
very bad cases where frauds occur with crippling frequency and in wholesomeness, the bank may
be forced to close down as a result. When the bank loses money and is wound up, the customers
lose money. This leads to loss of confidence and eventually reduced patronage. Another reason
for worrying in the banking industry is the vast variety of nature, character and methodology
employed in fraud. Moreover, the control of identified specie seems to give birth to another that
is invariably more sophisticated and complex. Thus each case can be said to be a variant of
another and undoubtedly an instructive study in human negative use of ingenuity and endowment.

15
There is a common agreement amongst criminologists that fraud is caused by three Elements:

Elements of Fraud

Will

Opportunity

Exit

called WOE . For any fraud to take place there must be a Will, an Opportunity and Exit (escape
route). A fraud will only come about if the perpetrators have the will to commit the fraud, if the
occasion to commit the fraud is presented and if there is a way out or escape means from
appropriate sanctions or institutions that are against fraud or related abnormal behavior .. Fraud is
a global occurrence; it is not peculiar to the banking industry. With the collapse of foremost
international corporations together with high level allegations and real cases of business fraud, a
lot of organizations in their effort to advance their image have resorted to developing ethical
guiding principles and codes of moral values. The whole essence of these is to guarantee that all
organizational members irrespective of position or rank, complies with the least standard of
ethical responsibility in order to encourage the reputation of such firms in their selected industry,
earn the goodwill of clients and thus improve their competitive advantage. As logically
anticipated, fraud is perpetrated in several forms and guises, and usually have insiders (staff) and
outsiders conniving together to effectively execute the act.

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 CATEGORIES OF BANKING FRAUDS

Categories of frauds classified by Ghosh Committee:

Categories of Banking Frauds

Frauds Done by Frauds Done by

Insider Outsiders

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 Frauds done by Insiders
Rogue Trading

Fradulent Loans

Wire fraud

Demand draft fraud

Theft of identity

Forged or fraudulent documents

Uninsured deposits

1. Rogue Trading:

A rogue trader is a highly placed insider nominally authorized 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 rupees; there have even been cases in which a bank goes out
of business due to market investment losses.

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2. Fraudulent loans:

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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.

3. 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. Wire fraud is defined as attempting to defraud using electronic
means, such as a computer or telephone. What must be proved is that the person knowingly
and willfully devised or intended to devise a scheme to defraud. Since the advent of the
internet, there are literally thousands of crimes that fall under the definition of wire fraud.

20
Here were going to take a look at some of the more common forms of wire fraud, why they
occur, and how you can protect yourself.

While security measures have certainly increased over the years, banks still fall victim to
wire fraud, costing them millions of dollars or more every year. Since banks are constantly
wiring extremely large sums of money back and forth between accounts, it may take them
awhile to notice when a large sum of money goes missing. This type of fraud is usually
perpetrated by insiders who forge documents a wire money to foreign accounts. Other
common ways this can occur is via the internet, through fraudulent activity such as stolen
identities, stolen credit card numbers, and hacked internet banking accounts

Wire Fraud on the Internet

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 There are many other forms of wire fraud that may occur on the internet. A few common
ones are:

Email Phishing:
The practice of sending out fake emails that look legitimate, in order to steal information
such as passwords, credit card numbers, or personal information.

Identity Theft:
Usually perpetrated by people who set up legitimate looking websites designed to trick
users into submitting personal information, similar to a loan or insurance application..
Other methods may include hacking databases containing business information, or
accessing a personal hard drive illegally to steal personal information.

Fraudulent Business Sales:

This is a common scam targeting webmasters and potential investors. When valuing an
internet business, revenue, traffic, and the future potential value of the website are used to
estimate the value. By faking revenue and traffic proof, a con artist can inflate perceived
value of the website, sometimes scamming victims out of thousands of dollars. Wire Fraud
On The Phone Wire fraud commonly occurs over the telephone as well. A con artist will
call your house, and try to talk you out of personal information. Common scams involve
criminals posing as salesmen, loan officers, and other business professionals in order to
collect personal information such as credit card numbers or social security numbers.

Measures from protecting the Wire frauds

Wire fraud is a very real threat in the world today. By using a little bit of common sense, you
can avoid becoming a victim yourself. Dont give out personal information over the
telephone to unsolicited callers without doing an extensive check on their background. Be
careful what kind of websites you use to conduct financial transactions. There are many
legitimate websites where doing credit card transactions, or even loan applications is
extremely secure. Be wary of any unknown websites. Bottom line, dont give out your

22
personal information to strangers. With just a little bit of common sense you can avoid
becoming a victim of wire fraud yourself.

4. Demand draft fraud:

DD fraud is usually done by one or more dishonest bank employees that is the Bunko Banker.
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.

5. Theft of identity:

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Dishonest bank personnel have been known to disclose depositors' personal information for
use in theft of identity frauds. The perpetrators then use the information to obtain identity
cards and credit cards using the victim's name and personal information.

Impact of Identity Fraud

The growth in identity fraud victimization rates over the past year is harmful not only
because of the dollar losses caused from identity fraud, but also because of the emotional
impact on the victims. Identity Fraud victimization and the accompanying fear it generates
lowers faith in the safety of the system and causes secondary effects, which are demonstrated
by changes of behavior, such as avoidance of certain merchants, altered usage of payment
types and channels, and severed relationships with primary card companies and banks. The
increased fraud incidence is being driven by the poor economy coupled with an increasingly
global, hierarchal and sophisticated criminal enterprise that specializes in developing new
weapons of attack. Meanwhile the consumer costs, the dollar amounts the victim pays on
average out-of-pocket, reached an all time low.

The relation of identity fraud is explained through following the following

diagram:

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6. 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.

7. 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, some
banks with no license and no affiliation to its seemingly apparent namesake; the real Chase
Manhattan bank, New York. There is a very high risk of fraud when dealing with unknown or

25
uninsured institutions. The structure of uninsured deposits is given as follows:

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 Frauds done by Outsiders
Bill Discounting Fraud

Booster Cheques

Stolen Cheques

Credit Card Fraud

Accounting Fraud

Cheque Kiting

Stolen Payment Cards

Duplication Or Skimming Of Card Information

Impersonation And Theft Of Identity

Fraudulent Loan Applications

Phishing And Internet Fraud

Money Laundering

Forged Currency Notes

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Advance Fee Fraud

Fund Diversion

Account Opening Fraud

Counterfeit Securities

Money Transfer Fraud

Letter of Credit Fraud

Computer Fraud

Clearing Fraud

Unofficial Borrowing

Voucher Manipulation

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1.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 ofs 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 certain 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.

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2. 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 100.00 into 100,000.00, 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.

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3. 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.

4. 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

31
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 cheque books are also of value to forgers who then sign as if they were
the depositor.

5. Credit 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:

Genuine cards are manipulated.

Genuine cards are altered.
Counterfeit cards are created.
Fraudulent telemarketing is done with credit cards.
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.

6. Accounting fraud:

32
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.

7. 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 1000 in one bank, write a
cheque on that amount and deposit it to your account in another bank; you now have 2000
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.

8. 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.

9. 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

33
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.

10.Impersonation and theft of identity:

Theft of identity has become an increasing problem; the scam operates by obtaining
information about a victim, 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 identity thief. Unfortunately for the banks, identity thieves 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.

11. 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. The resulting debt
load has ruined entire large companies, such as Italian dairy conglomerate Parma at, leaving
banks exposed to massive losses from bad loans.

12. Phishing and Internet fraud:

34
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. A number of malicious "Trojan horse" programmers have also been used to snoop on
Internet users while online, capturing keystrokes or confidential data in order to send it to
outside sites.

13. Money laundering:

The term "money laundering" dates back to the days of Al Capone Money laundering has
since 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.

14. Forged currency notes

35
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 its very difficult to catch
hold of such forgers as once such notes are circulated its very difficult to track its origin. But
the latest fraud which is considered as the safest method of crime without making physical
injury is the Computer Frauds in Banks.

Computerization of banks had started since 1994 in India and till 2000 4000 banks were
completely and 9000 branches have been partially computerized. About 1000 branches had
the facilities for International bank Transaction. Reserve Bank Of India has evolved working
pattern for Local area Network and wide area Network by instituting different microwave
stations so that money transactions could be carried out quickly and safely.

The main banking tasks which computers perform are maintaining debit-credit records of
accounts, operating automated teller machines, and carry out electronic fund transfer, print
out statements of accounts create periodic balance sheets etc. Internet facilities of computer
have revolutionized international banking for fund transfer and for exchanging data of
interest relating to banking and to carry out other banking functions and provides certain
security to the customers by assigning different pin numbers and passwords.

15. Advance Fee Fraud

This may involve an agent approaching a bank, a company or individual with another to
access large funds at below market interest rates often for long term. This purported source of
funds is not specifically identified as the only way to have access to it through the agent who
must receive a commission in advance. As soon as the agent collects the especially
distressed banks and banks needing large funds to bid for foreign exchange can easily fall
victim of this type of fraud. When the deal fails and the fees paid in advance are lost, these
victims are not likely to report the losses to the police or to the authorities.

36
16. Fund Diversion

In this case, bank staff sometimes diverts customers deposits and loan repayment for
personal use. Another case of this is the tapping of funds from interest in suspense accounts
in banks.

17. Account Opening Fraud

This involves the deposit and subsequent cashing of fraudulent cheques. It usually starts
when a person not known to the bank asks to open a transaction account such as current and
savings account with false identification but unknown to the bank.

18. Counterfeit Securities

Counterfeiting of commercial financial instruments is one of the oldest forms of crime.

Modern photographic and printing equipment has greatly aided criminals in reproducing
good quality forged instruments. The documents may be total counterfeit or may be genuine
documents that are copied, forged or altered as to amount, payout date, pay or terms of
payment. A common fraud is to present the counterfeit stocks or bonds as collateral for loan.
The presenter would draw out the proceeds and disappear before the financial instruments are
found to be counterfeit.

19. Money Transfer Fraud

Money transfer services are means of moving to or from a bank to beneficiary account at any
bank point worldwide in accordance with the instructions from the banks customers. Some
common means of money transfer are mail, telephone, over-the-counter, electronic process
and telex. Fraudulent money transfer may result from a request created solely for the purpose
of committing a fraud or altered by changing the beneficiarys name or account number or
changing the amount of the transfer.

20. Letter of Credit Fraud

This generally arises out of international trade and commerce. They stimulate trade across
national borders providing a vehicle for ensuring prompt payment by financially sound

37
institutions. Overseas suppliers continue to receive spurious letters of credit, which are
usually accompanied by spurious bank drafts with fake endorsements which guarantee
payments.

21. Computer Fraud

Computer Frauds involves the deceptive manipulation of the banks computer, either at the
data collection stage, the input processing stage or even the data dissemination stage.
Computer frauds could also occur due to improper input system, virus, program
manipulations, transaction manipulations and cyber thefts. It can also take the form of
corruption of the programmed or application packages and even breaking into the system
through remote sensors. A banks data can also be tampered with at the data centre to gain
access to unauthorized areas or even give credit to accounts for which the funds were not
originally intended. This kind of fraud can remain undetected for a long time. In this epoch of
enormous deployment of automated teller machines (ATMs) and online real time e-banking
and commerce; computer frauds arising from cyber thefts and crimes has assumed a very
threatening dimension . No bank seems to be invulnerable to it, and a considerable percentage
of the enormous amount of money spent annually in the banking sector to help reduce fraud
usually are channeled towards fighting computer frauds and cyber crimes and theft.

22. Clearing Fraud

Most clearing frauds hinge on suppression of an instrument so that at the expiration of the
clearing period application to the instrument, the collecting bank will give value as though
the paying bank had confirmed the instrument good for payment. Clearing cheques can also
be substituted to enable the fraudster divert the fund to a wrong beneficiary. Misrouting of
clearing cheques can also assist fraudsters to complete a clearing fraud. Askew, a local
clearing item can be routed to an up country branch; the delay entailed will give the
collecting bank the impression that the paying bank had paid the instrument.

23. Unofficial Borrowing

This occurs when bank employees borrow from the vaults and teller tills off the record. Such
unauthorized borrowings are done in exchange of the staff post-dated cheque or nothing.
These borrowings are more rampant on weekends and during the end of the month when
salaries have not been paid. Some of the unauthorized borrowings from the vault, which

38
could run into thousands of cedes, are used for fast businesses lasting a few hours or days
after which the resources are replaced without any substantiation in place that they were
taken in the first place. Such a practice when done recurrently and with no official records,
soon very easily becomes prone to manipulations, whereby they resort to other means of
balancing the cash in the banks vault without ever having to replace the sums of money
collected.

24. Voucher Manipulation

Manipulation of Vouchers involves the replacement or alteration of entries of one account to
another account being used to commit the fraud. This account would obviously be a
fabricated account into which the funds of unsuspecting clients of the banks are transferred.
The amounts taken are usually in small amounts so that it will not easily be noticed by top
management or other unsuspicious staff of the bank. Manipulation of vouchers can thrive in a
banking system saddled with inadequate checks and balances such as poor job segregation
and lack of detailed daily examination of vouchers and all bank records.

39
 TYPES OF BANKING FRAUDS

Types of Banking Frauds

Credit / Debit
Card Frauds
Fictitious
entries made in Hypothecation
book/ Frauds
manipulation
of record

Purchased Bill
Identity Frauds
Frauds
Type of
Banking
Frauds

ATM Frauds Loan Frauds

Deposit
Cheque Frauds Account
Frauds

40
As a customer you may be seen as a potential target for fraudulent activities. However by
arming yourself with information and tools you can protect yourself from becoming a victim
of fraud. Do you know the four biggest fraud threats you face Credit card and debit card fraud
is a crime whereby your credit or debit card can be reproduced in order to use the credit
balance to obtain a financial advantage. The creation and/or alteration of a credit/debit card
occurs when the information contained on the magnetic strip is reproduced. This type of
crime is known as skimming. Credit or debit card fraud can also occur when your card is
lost or stolen and used by a third party to purchase goods with those cards or to remove cash
from the cards. Credit or debit cards can also be intercepted in transit while being sent to
you. Your cards can also be compromised by a dishonest merchant who undertakes
unauthorized duplicate transactions on your card.

Protect your credit / debit card:

Memories your personal identification number (PIN). Don't use the same PIN for all your
cards, and don't choose your birth date or other easily identifiable numbers that might be on
something else in your wallet. Check statements and call your credit card issuer immediately
if you see anything suspicious on your bill. You could help the company uncover fraudand
save yourself from paying unauthorized charges. Do not let your credit card out of your sight
at anytime for example, at a restaurant go with the card. Card fraud is not applicable in
Australia only be just as vigilant when travelling overseas, credit card skimming is an
international crime. Always sign your card in ink as soon as you receive it. Keep track of
when new and reissued cards should arrive, and call the credit card issuer if they don't come
on time.

2.Cheque Fraud:

Cheque fraud is the use of a cheque to get financial advantage by:

altering the cheque (payee/amount) without authority theft of legitimate cheques and then
altering them duplication or counterfeiting of cheques using false invoices to get legitimate
cheques depositing a cheque into a third party account without authority depositing a cheque
for payment knowing that insufficient funds are in the account to cover the deposited cheque.

How to protect yourself from cheque fraud:

41
1. Reconcile your accounts promptly and regularly.
2. Never sign blank cheques, and only sign cheques after all details have been completed.
3. Limit the number of signatures to your account to ensure control.
4. Ensure that your signature is not with documents that can be accessed by the general
public.
5. Keep all cheques secure when not in use to deter theft.
6. Dont leave any gaps in the completion of the payee name, amount in words and in figures.
7. If cheques are lost or stolen contact ANZ immediately and ask them to stop payment on
the cheque.

3. ATM FRAUD

Has your ATM got the 'Jitters'. More anz ATMs now have in-built skimming prevention
software. You may have noticed that your card enters and exits the card reader slowly, or
jumps like it has the 'jitters'. That's a sign that the ATM is helping to protect you against card
skimming.

Card skimming:

Card skimming is the illegal copying of a card's magnetic strip that can later be used to
access your account and make unauthorized purchases using those details.
In the case of ATMs, this typically occurs when the would-be thief places a device over the
card entry point that scans the cards as they enter and exit the ATM, combined with a hidden

42
 camera to record you while you enter your PIN. The scanning device and camera can be
cleverly disguised so that you don't even notice the ATM has been modified.

What we are doing

To help prevent card skimming, more ANZ ATMs have been fitted with skimming
prevention software that 'shakes' the card as it enters and exits the ATM. The shaking
interrupts the scanning process and renders any skimming attempt ineffective All ANZ
ATMs across Australia have skimming prevention software. You will notice on our newer
ATMs there is either a green or blue plastic cover where you insert your card. This device is
installed to alter the shape of the card reader and making it difficult for the would-be thief to
install a skimming device on the ATM. ANZ are constantly looking at new technology for
ensuring that customer information and cash are secure at all times.
Along with the skimming prevention software, ANZ ATMs include the use of ink-staining
technology to deter theft.

4. Identity Fraud
Identity fraud can occur in many waysfrom somebody using your credit card details
illegally to make purchases to having your entire identity assumed by another person to open
bank accounts, take out loans and conduct illegal business under your name.

How to protect yourself from identity theft:

Never send money or give personal details to people you dont know and trust.
If you receive a call from your bank or any other organization, dont provide your personal
detailsinstead ask for their name and a contact number. Check with the organization in
question before calling back.
Never rely on a number provided in an email or click on the provided linkinstead find the
contact number through an internet search or check the back of your ATM card.
Regularly check your credit card and/or bank statements to ensure that suspicious
transactions are detected.
Shred all documents containing personal information, such as credit card applications and
bank statements.

43
 Log directly onto websites you are interested in rather than clicking on links provided in an
email.
Always get independent advice if you are unsure whether an offer or request is genuine.
Lock your letterbox securely to avoid your mail being stolen.

Ensure you choose passwords that are not easy for someone to guess, such as your date of
birth, pets name etc.

Signs of identity fraud

These can vary, but some typical signs that your identity is being used unlawfully are:
A financial institution informs you they have received an application for credit that you
have not applied for.
You receive phone calls or letters advising that you have been denied credit that you have
not applied for.
You receive bank, mobile phone or credit card statements or notices in your name, of which
you have no knowledge.
You notice that you no longer receive your bank or credit card statement or you notice that
not all your mail is being delivered.

What can you

You should also advise any other financial institution that you bank with so they are aware of
the situation. Any instance of identity fraud should also be immediately reported to your local
police. It is also a good idea to advise close family and friends as identity theft rings will
often target more than one member of a household. In addition, consider contacting Veda
Advantage, a credit agency, to obtain your credit history report so that you are kept fully
informed of any unauthorized activity on your own file.
5. Deposit Account Frauds:

A Accounts opened without introduction or with improper introduction, frauds under this
head are generally attempted t the time of opening of new branch when such emphasis is not
paid on abstention of introduction. Once the account is opened, the miscreant deposits,
stolen/materially altered cheques for collection/payment etchant dormant account is
fraudulently operated by a forger on forged signatures. Specimen signature card or signatures
on letters are utilized as models:

44
 1. Joint accounts are operated by one of the signatories (forger) by forging the signatures
of others.
2. Mini deposit collections are not deposited by the collecting banker.
3. The banker becomes joint account holder and withdraws the money.
4. The banker manipulates the depositor Pass Book.

6. Purchased Bill Frauds:

the frauds in this area are often costly. They can take the following forms:

1. Bogus or stolen railway receipts and motor transport receipts accompanied by

counterfeit bills are discounted.
2. Fake bills with inflated value, drawn on sister concerns, for discounts.
3. Genuine bills and railway are presented and got discounted from the bank but the
material is got released from the railways on indemnity bond.
4. Bogus bills for worthless goods are discounted on the strength of dispatch papers

7. Hypothecation Frauds:

Cash advances, against pledged goods, as security are fertile fields for frauds.

1. Stocks or part thereof, are removed unauthorized from the god owns.
2. Advance against pledge/hypothecation of securities, pledging inferior quality of
goods, overvaluation of stocks.

8. Loan Fraud:

The general policy of the government is to encourage loans to agriculturists or to small

artisans and businessmen. Infact, certain targets for these purposes are fixed for the banks. In
the initial stages, it resulted in losses to the banks due to lack of expertise in the field. The
following types of fraud were perpetrated.

1. Loans are taken by different persons on the same time.

2. Nomadic artisans obtain loans and vanish from the scene.
3. False firms appear everywhere and obtain loans.
4. Loans taken for agricultural development were later used as marriage celebrations.

45
 5. In connivance with the suppliers, farm machinery bills were inflated for accessories
which wee never supplied and included in the bills.
6. Farm machinery purchased with loans and hypothecated to banks is sold without
informing the banks or returning the loans.

9. Fictitious entries made in book/ manipulation of record:

These frauds normally take place with the active involvement of staff or where the books are
exposed to the members of public. In such cases, subsequently the record is destroyed.

I. Cash shortages:

Cash the most sensitive asset of the bank is prone to fraud. The shortages of fraud there is
generally due to carelessness/negligence of the concerned staff who are the joint custodians
of cash.

I. Frauds in Borrower Accounts:

1. Advance against clean/documentary bills purchased/discounted. The borrower

committed frauds by tendering fake bills/accommodation bills/cheques for
discounting. Later when the bills/cheques are received unpaid, the banks find it
difficult to recover the amount.
2. Advance under some priority sector schemes.
3. Advance granted in haste or at the behest of top management or any pressure or some
consideration.
4. Incomplete credit information.
5. Lack of post disimbursement supervision.
6. Miss-use of discretionary powers or exceeding discretionary powers by
Managers/Officers.

II. Frauds in Investment Portfolios:

Investment portfolio which constitutes a big chunk of the total assets of a bank is another
fraud prone area. The dealer in securities in the absence of proper policy, direction and
adequate system of checks and balances may misuse the position for his personal gains to

46
 the detriment of Bankas interest by putting through deals for passing on business to
the brokers which are otherwise not warranted by business considerations.

III. Frauds in Foreign Exchange Areas:

1. Frauds in this area are perpetrated in the dealing room operations, documentary
credits, export-import transactions, packing credit etc.
2. Some of the dealers have been put through fictitious deals with the help of
brokers due to lack of back-up functions.

IV. Frauds in computerized environment:

Hardware errors disable the working of any of the component of hardware with a view to
creating/temporary/permanent malfunction to either destroy the data or present its
disclosure for security. Pregame errors are created by miscreants to cripple the system or
to siphoned off the funds to unauthorized accounts or to prevent/reduce charges to select
accounts. Data entry errors are created by staff to give undue gain to interested accounts.
Errors are made to give a wrong picture of sanative data such as balances, classification
of advances, outstanding dues, interest rate applied etc.

VI. Frauds in inter branch and inter bank accounts:

1. Debiting bank accounts without remitting cash.

2. Debiting branch adjusting account without remitting cash.
3. Adjusting branch books-clean cash.
4. Fraudulently debiting/crediting Head office account.
5. Debiting/Crediting various deposit accounts without authority.

47
 EFFECTS OF BANK FRAUDS ON BANKS

EFFECTS OF FRAUDS ON BANKS

Loss of Public
Confidence in Banks

Loss of Money

Increased Operating
Cost

Low Asset Quality

Reduced the amount of

profit

Unattended

Creditability

1. Loss of Public Confidence in Banks

48
Fraud is perhaps the most fatal of all the risks confronting banks. The enormity of bank
frauds in Ghana can be inferred from its value, volume and actual loss. A good number of
banks frauds never get reported to the appropriate authorities, rather they are suppressed
partly because of the personalities involved or because of concern over the negative image
effect that disclosure may cause if information is leaked to the banking public The banks
customers may lose confidence in the bank and this could cause a setback in the growth of
the bank in particular.

2. Loss of Money
Fraud leads to loss of money, which belong to either the bank or customers. Such losses may
be absorbed by the profits for the affected trading period and this consequently reduces the
amount of profit, which would have been available for distribution to shareholders. Losses
from fraud which are absorbed to equity capital of the bank impairs the banks financial
health and constraints its ability to extend loans and advances for profitable operations. In
extreme cases rampant and large incidents of fraud could lead to a banks failure.

3. Increased Operating Cost

Fraud can increase the operating cost of a bank because of the added cost of installing the
necessary machinery for its prevention, detection and protection of assets. Moreover, devoting
valuable time to safeguarding its asset from fraudulent men distracts management. Overall, this
unproductive diversion of resources always reduces outputs and low profits which in turn could
retard the growth of the bank.

4. Low Asset Quality

It also leads to a diminishing effect on the asset quality of banks. The problem is more
dangerous when compounded by insider loan abuses. Indeed, the first generation of
liquidated banks (Co-operative Bank and Bank for Housing and Construction) by the Bank of
Ghana was largely a consequence of frauds perpetrated through insider loan abuses. If this
problem is not adequately handled, it could lead to distress and bank failure.

5.Reduced the amount of profit

49
 Banking frauds reduce the profit of banks. Because of the frauds there in decrease in the
profit of the banks. If there is no frauds in banks so bank is able to give maximum return on
the investment of the customers. Fraud leads to loss of money, which belong to either the
bank or customers, so there is decrease in the profit margin of the company.

6. Unattended
There are instances of fraud that adversely impact banks on a regular basis and go unnoticed
or unattended. All these cases of fraud result in sizeable monitory losses for the banks once
they go undetected.

7. Creditability

Fraud events raise questions around the credibility of the fraud deterrent processes and the
technological capabilities of the institution.

50
 BANK RULES REGARDING BANKING FRAUDS AND SCAMS

After receiving Xerox papers (which were actually forged by the offenders) of the property,
the bank passed the same on to the legal section. After scrutiny, the legal consultant told the
bank that the Xerox documents were `perfect' and to release loan after execution of sale deed.
The bank rules state that loan applications can be examined "even with Xerox copies of
documents. The alleged greediness of employees to give their salary slips and other
documents on payment of some money made the job of the cheats easier. The police opine
that unless bankers evolve a foolproof system, the offenders continue to take advantage of the
lapses.

Though computer based banking crimes are yet limited but it is increasing with a huge pace.
Their investigation is highly intricate and daunting. Prevention is the best alternative. It is
comparatively easier, though even with the best laws, efficient investigation team the
successful conclusion of most cyber crimes will remain a remote possibility .Therefore
emphasis is more on prevention. In bank administration, one feels that not much attention is
paid to preventive measures. Bank managements must direct their orientation towards
preventive rather than detective or punitive measures. Preventive vigilance must be the prime
agenda to bring down the occurrence of fraud in banks.

51
 RESPONSIBILITY OF BANKERS IN A BANK FRAUD

Bank frauds crop up in all spheres of banking dealing, like: Cheque frauds, Deposit account
frauds, Purchased bill frauds, Hypothecation frauds, Loan frauds etc. A dishonest banker can
play havoc with the banks money. The bank has therefore to sentinel itself and its customer
against the deceitful employee. The vicinity of business of the banker is extensive. The
following operational avenues have been noticed time and again. Manipulation of cash by
those handling cash, misappropriation of customer deposit accounts, misappropriation of
money in telegraphic transfers, clearing forged cheques and other instruments, fraudulently
while working in clearing departments, creaming of the sundry accounts, tinkering with the
central accounts, accepting counterfeit currency for a consideration, helping the bank robber,
by giving information etc. An analysis of frauds reported by banks to RBI broadly indicated
that frauds perpetrated on banks could be classified into the following categories:-

1 Misappropriation of cash tendered by the banks constituents and misappropriations of cash

remittance.

2 Withdrawal from deposit accounts through forged documents/instruments.

3 Fraudulent encashment of negotiable instruments by opening an account in fake/fictitious

name.

52
4 Perpetration of frauds through clearing transactions.

5. Misutilisation/overstepping of lending/discretionary powers, non-observance of prescribed

norms/ procedures in credit dispensation etc.

6. Opening/Issue of Letters of Credit, Banks Guarantees Co-acceptance of bills without

proper authority and consideration.

53
 REGULATIONS RESERVE BANK OF INDIA (RBI)
Reserve Bank of India (RBI) rules to prevent Bank frauds

The Reserve Bank of India (RBI) has drawn up new rules for banks aimed at preventing fraud
and irregularities which is given as follows:

The regulator has asked banks to immediately frame staff rotation and mandatory
leave policies for employees in sensitive areas such as treasury and for relationship
managers handling high-value clients.

Staff rotations and leave are international practices that help banks keep track of
decisions and businesses handled by a particular employee.

Reserve Bank of India has introduced the rules following forensic studies at certain
banks due to the occurrence of large value frauds or sharp increase in number of
frauds at such banks.

In another notification, RBI directed private and foreign banks to appoint chief of
internal vigilance (CIV) officers, with responsibilities similar to those of chief
vigilance officers in public sector banks.

It was observed that the practices vary widely among banks. It has, therefore, been
decided to lay down detailed guidelines for private sector and foreign banks on
similar lines so that all issues arising out of lapses in the functioning of the private
sector and foreign banks, especially relating to corruption, malpractices, frauds, etc.,
can be addressed uniformly by the banks for timely and appropriate action.

54
 Banks need to implement an internal vigilance system by and submit a compliance
report.

RBIs directive on staff rotation and mandatory leave comes a few months after a
multi crore fraud involving a relationship manager at the Gorgon branch of Citibank
India came to light.

To prevent frauds, banks should have prescribed procedures and criteria to analyze
and assess irregularities, RBI said. Banks should be able to understand the nature of
an irregularity or fraud. For instance, whether it has taken place because of negligence
in duty as a result of a collusion by employees.

Any action taken in collusion to derive undue/unjust benefit or advantage should be

termed as fraud, RBI said.

It has asked banks to examine the intent to defraud, irrespective of whether or not
actual loss takes place.

If an irregularity is detected, banks should immediately assess if it was a result of

human or system failure.

This exercise is the first critical step towards corrective action in the sense that it
would lead to expeditious filing of police complaints, blocking/freezing of accounts
and salvaging funds from the blocked/frozen accounts in due course.

Banks asked to frame a fit and proper criteria for posting employees in critical
positions such as in dealing rooms and treasury, or as relationship managers for high-
value customers and heads of specialized branches.

RBI has allowed banks a free hand in appointing CIVs, but has fixed the initial tenure
at a maximum of six years.

55
 FACTORS OF FRAUDS

INTERNAL FACTORS

Poor Management

Inexperienced Personnel

Overstretching

Job Rotation

Poor Remuneration

Frustration

Inadequate Training and Re-Training

Poor Book-keeping

Weak Accounting

56
The institutional factors or causes are those that can be traced to the in-house environment of an
banks. They are to a great extent factors within the control of the management of the bank.
Major institutional causes fraud can be categorized as follows:

1. Poor Management

This comes in a form of inadequate supervision. A junior staff with fraudulent tendencies that
is not adequately supervised would get the impression that the environment is safe for the
perpetration of fraud. Poor management would also manifest in ineffective policies and
procedures, which a fraudulent minded operator in the system will capitalize on. Even where
there are effective policies and procedures in place, fraud could still occur with sometimes
deliberate skipping of these tested policies and procedures.

2. Inexperienced Personnel

Inexperienced personnel are susceptible to committing unintentional fraud by falling for

numerous tricks of fraudsters. Inexperienced personnel are unlikely to notice any fraud
attempts and take necessary precautionary measures to checkmate the fraudster or set the
detection process in motion.

3. Overstretching

Overstretching is another reflection of poor management. This can aid perpetration of fraud
to a large extent. A staff who is overstretched is not likely to perform at optimum level of
efficiency.

4. Job Rotation

Ordinarily, the longer a man stays on a job, the more proficient he is likely to be. An operator
who has spent so long on a particular job may be encouraged to think that no one else can
uncover his fraud. The existence of this kind of situation in a bank is clear evidence of poor
management and such situations encourage fraudulent practices.

57
5. Poor Remuneration

Poor salaries and poor conditions of service can also cause and encourage fraud. Employees
that are poorly paid are often tempted to fraudulently convert some of the employers monies
to their own use in order to meet their personal and social needs. This temptation is even
stronger on bank employees who on daily basis have to deal with cash and near cash
instruments. In our society, it is argued that greed rather than poor working conditions or
poor salaries is what lures most people into fraudulent acts. This explains why fraud would
still exist in the banking sector, which is reputed to be one of the highest paying sectors.
Some people have an insatiable appetite to accumulate wealth and would therefore steal
irrespective of how good their earnings are.

6. Frustration
Frustration could also lead to fraud. Where a staff feels short-changed in terms of promotion
and other financial rewards, they become frustrated and such frustration could lead to fraud
as such employee would attempt to compensate himself in his own way.

7. Inadequate Training and Re-Training

Lack of adequate training and retraining of human resources both on the practical and
theoretical aspects of banking activities and operations more often than not leads to poor
performance. Such inefficient performance creates a loophole which can very easily be
exploited by fraudsters.

8. Poor Book-keeping
Inability to maintain appropriate books of accounts together with failure to reconcile the
various accounts of the bank on daily, weekly or monthly basis more often than not will
attract fraud. This loophole can very easily be exploited by bank staff that is fraudulent. The
prevalence of fraud and forgeries are an indication of weakness in a banks internal control
systems. Aside the above-mentioned causes of fraud, the following factors greatly contribute
to fraud:

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 Inadequate compensation, salaries and fringe benefits which are accruable to bank
staff.

Refusal to comply with laid-down procedures without any penalty or sanction.

Conspiracy between interacting agents charged with the responsibility of protecting
the assets and other interest of the bank;

Poor working conditions;

Poverty and infidelity of employees.

9. Weak Accounting
The weak accounting is one of the important internal factor which causes to the banking
frauds and scams.

2. EXTERNAL FACTORS

Environmental factors are those that can be traced to the banks immediate and remote
environment. If the whole society of which the bank is a part is morally bankrupt it will be
difficult if not impossible to expect the banks to be insulated from the effects of such moral
bankruptcy. The banking industry is not immune from the going on in its external
environment. Our present society is morally bankrupt. Little or no premium is put on things
like honesty, integrity and good character. The society does not question the source of wealth.
Any person who stumbles into wealth is instantly recognized and honored. It is a fact of our
time that fraud has its root firmly entrenched in the social setting where wealth is honored
without questions. Ours is a materialistic society which to a large extent encourages fraud.
The desire to be with the high and mighty caliber of the society, extreme want that is often
characterized by need, cultural demands or the cultivation of a life too expensive for the
legitimate income of the individual. Our societies have debased the entire old moral standards
and appear to be unconcerned with probity, honesty, integrity and good name. The family
friends, the religious houses and society at large seem not to care how you come about your
riches but accept, accommodate and even respect you for your wealth, however, dishonestly
it has been acquired. All these encourage fraud as the end seems to justify the means, and no
means seems to be morally unacceptable. With reference to fraud, criminal motivation is said
to be pathological when the state of mind of the criminal disposes and impels him to commit

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fraud even though he is not in dire need of the resources. Bank frauds seriously endanger the
organizational growth of a bank as it leads to bank distress. This is because fraud reduces the
deposits of depositors and ultimately leads to the erosion of the capital base of banks. The
cost of fraud is also usually difficult to estimate because not all frauds are discovered or even
reported since most banks have a propensity to cover up the frauds emanating from their
banks, all in a bid to continue to gain customers goodwill and stimulate their clients
confidence all the time.

EXTERNAL FACTORS

Slow and Tortuous Legal Process

Poverty

Widening Gap between the Rich and the Poor

Job Insecurity

Peer Group Pressure

Increased financial burden on Individuals

Lack of Proper Training

Lack of Sufficient Staff

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1. Slow and Tortuous Legal Process

In Banks there is a slow legal process which is one of the reason for occurring the frauds. If
in every bank there is a strong measures and fast legal process to deal with the frauds then
chances of will be less or minimize. So every bank there should be a strong procedures to
handling this type of baking frauds.

2. Poverty

The another reason for banking frauds is poverty. In India there is so much poverty so that
people are makes the frauds for removing there poverty because some peoples wants the all
type of facilities in their life and wants to improve their standard of living. So they started the
illegal activities for earning money. So poverty is also leads to banking frauds.

3. Widening Gap between the Rich and the Poor

In India there is so much gap between the rich and poor people. Because of money some
peoples are behaving different .In most of sectors there is a partiality between the rich and
poor peoples. So this gap is increasing by day to day and this leads to the banking frauds
and scams.

4. Job Insecurity:

Nowadays job insecurity is one of the serious problem that leads to banking frauds.
Permanent jobs are very less . So for living the money is so much important. The needs
and wants of the people are increasing so money is become necessary to satisfied that needs
and wants. Because of the job insecurity some peoples want to reserve money that in future
they can use. So for satisfying the future needs and wants he is undertake the baking frauds.

5.Peer Group Pressure:

The another reason for happening the frauds is that there is peer group pressure in some of
the banks. So because of that people are doing this illegal activities which are very harmful
to all the society.

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6.Increased financial burden on Individuals:

There is so much financial burden on each and every individuals so because of that financial
burden people are stated to earning from doing the bank frauds

7.Lack of Proper Training

There is lack of properly trained and experienced person. There is a sudden and tremendous
increase in banking business. The sudden expansive explosion has created a vacuum of
personnel. New recruits often do not have adequate training or experience before they are put
in responsible positions. The findings reveal that 68.77% of respondents have not undergone
any formal training in prevention of bank frauds.

8.Lack of Sufficient Staff

Moreover bank staff feels overburdened. The life has become too fast. The banker does not
have enough time to scrutinize documents thoroughly. About two thirds of the respondents
feel that they do not have sufficient staff to carry out the work meticulously. The
overburdened staff was given the highest weight age as the reason responsible for bank
frauds.

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 ACTIONS TAKEN BY BANK TO MINIMIZE THE BANK FRAUDS

Banks should adopt the following actions for minimize the bank frauds:

ACTIONS TAKEN BY BANK

Assess Fraud Implictions

of Banks Strategy

Model Customer Behaviors

and Situations

Develop Dynamic Analytical

Models

Develop Pan-Channel Customer

Authentication

Develop the IT Strategy for

Holistic Decisioning

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1. Assess fraud implication of banks Strategy

The fraud function has an opportunity to transform its role and status by thinking and acting
more like a stakeholder in the business. This involves assessing the risk factors and their
relative volatility, adopting a more commercial and customer-focused approach and using
technology innovation to provide customer-centric solutions. Understanding the risks will
enable capability or knowledge gaps to be identified and mitigating actions to be taken. Our
research has found that the innovation agenda is central to banks strategic growth plans and
therefore will open up new risks for banks in the areas of fraud management and IT security.
Experience also shows that business units in many organizations elect for point solutions.
When this occurs, there is a clear risk that a lack of coordination and integration will
seriously undermine the effectiveness and efficiency of enterprise-wide fraud management.

2. Model customer behaviors and situations

Fraud solutions and offerings should be developed and refined to address the risks of
individual customers or customer segments. Fraud interventions which impact the customers
should be based on individual customer behavior and circumstance. This positions the fraud
management function as an insightful guide to the business, enabling the design and
implementation of robust fraud mitigation as part of the overall customer offering. For
example, gaining a better understanding of current and future customer demographics
provides the opportunity to predict future vulnerabilities thereby turning fraud management
into a competitive advantage by developing products and services that meet the needs of
customers.

3. Develop Dynamic Analytical models

Our experience is that banks have historically deployed anti-fraud and anti- AML solutions
without the appropriate capabilities for dynamic optimization. Fraud management must be
highly responsive, as criminals are more sophisticated and increased processing power is
available through cloud technologies. Organizations that fail to maintain and optimize their
systems are likely to be targets for fraudsters. Typically, to optimize analytical models, banks
need to interact more closely both with internal and external analytical resources and with
software suppliers. Fraud teams need to be equipped with the skills and processes to manage
this. Governance of models, analytics and rules changes is coming under increasing

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regulatory interest and therefore, as part of developing this capability, proper governance
should also be established. In the past, fraud managers would have a hypothesis which they
would test with analytics (often calling on credit risk resources to perform the analysis).
Going forward, fraud managers will start with a business outcome or goal rather than a
hypothesis. They will use analytics to gather historical data that will help them find the
answer. They will then reuse analytics to create statistical or machine-learning models of the
data to answer their question. This will create an increasing need to bring various data
sources together, particularly if an organization has deployed a number of non-integrated
point fraud solutions.

4. Develop Pan-Channel Customer Authentications

Customer on-boarding and ongoing authentication policy are no longer the preserves of the
compliance function or of the individual channel owner. These are essential elements of the
customers experience and therefore key to business growth and customer retention. The
fraud management team, as trusted advisor, needs to work with the business to develop a pan-
channel, customer-centric authentication strategy that provides consistency of customer
experience and reduced cost for deployment while managing risk. The authentication strategy
will shape the IT strategy, and the development of strategy should cover the following four
key elements to optimize the business value derived: first, define authentication; second,
develop the authentication solutions; third, mobilize the change, and fourth, communicate the
strategy.

5. Develop the IT Strategy for Holistic Decisioning :

The first step revising the IT strategy to incorporate Customer Authentication Strategy and
Analytical Capability Requirements is considered very important. Second, banks should
consider what changes would need to be made to effect decisions based on a holistic
overview of the many different aspects of a transaction, whether such aspects involve a
customer, member of staff, retailer, device or anything else.

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 PRESENT NEW FRAUD PREVENTION CHALLENGES

Present new fraud prevention challenges

Changing customer demographics

Market expansion

Adoption of new technologies and

channels

1. Changing customer demographics

Populations are aging, creating a large group that has assets but is vulnerable to attack.
Whilst some financial crime committed against the elderly is committed by strangers, this
group can also be vulnerable to exploitation by relatives and caregivers. And 2.5 million of
those people were fraud victims. It is found that many victims are unlikely to tell anyone
about it, and that there is still a feeling of embarrassment related to being scammed. Only 8%
went to the police, 9% got advice from organizations such as the Citizens Advice Bureau, and
72% did not tell friends or family about it. The research also found that the most common
type of scam people fell for was online fraud, with 34% of scams occurring via the internet.
As the numbers of people using family or other caregivers to help them manage their
finances rises, banks may want to re-think their approach to how customers identify
themselves as the customers team will require access to funds in this environment. To do
this successfully, Banks would have to look at each customer as an individual and, by
extension, look at each individual transaction holistically.

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2. Market expansion

Banks expansion into emerging markets is likely to continue as they represent circa 50 of
GDP and only 30% of the global consumer banking revenue pool. However, fraud
management and prevention techniques in emerging markets are not fully mature and a rush
to expand into these markets could lead to significant fraud losses. Know Your Customer
(KYC) data in emerging markets pose specific problems for banks seeking to limit fraud
losses. In addition, international cyber-criminals will be tempted to operate in markets where
they feel fraud controls are less sophisticated and local criminals may migrate to bank fraud
from other crimes. Rapid urbanization accelerates the trend toward increased fraud, putting
criminals in closer proximity to each other and encouraging the sharing of information as
well as the recruitment of allies and accomplices. Among the top 150 cities worldwide, 116
are in emerging markets. The volume of international payments traffic will also increase in
line with growth in emerging markets, which makes it easier for perpetrators of fraud to
conceal their activities. This creates the risk of volumes overwhelming existing (often
manual) fraud controls. Large migrant communities may need transfer and payment systems
to support the flow of remittances to home countries. Indeed, remittances sent home from
migrant workers are estimated to be three times the flow of aid sent from rich countries to
poorer countries. While much of this money is used for immediate family needs, there is a
significant portion available for savings and investment and banks have targeted this market
with new products
and offerings.

3. Adoption of new technologies and channels

Broad adoption of new technologies such as social media and mobile internet has created new
channels for transfers and purchases, along with numerous new opportunities for fraud.
Social networks can be used by fraudsters to secure customer data, share methodologies and
recruit new accomplices. Over 600 million individuals were on Face book by early 2011, and
nearly 3 billion consumers worldwide will be global 3G subscribers by 2014. New payment
channels such as mobile phones create technical risks for the banking sector to manage.
Remote banking access, presenting low personal risk, is attractive to criminals, and attacks on
remote access points are likely to continue to grow in value, speed and sophistication. The
opportunities to do so, will also grow as more people become comfortable with the digital

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environment and bank online; for example, said they preferred to bank online in a recent
survey, including 57% of those over the age of 55. As the customer experience is
transformed, banks should consider combining two previously distinct functionsIT
Security and Fraud Managementto address the increasingly technical nature of fraud
attacks. Clients across geographies leads us to believe that direct channels to the consumer
will see continued large-scale attacks, with criminals sharing and even jointly developing
new methodologies. Banks that are slow to adapt new protective measures may find
themselves ruthlessly attacked. Customers typically prefer to interact with their bank through
their chosen channel with simple and convenient on-boarding and ongoing identity and
verification procedures. The growth of new markets and the proliferation of channels, means
that banks must explore innovations in , including biometrics, to secure both themselves and
their customers from identity and verification procedures new kinds of attack.

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 CASE STUDIES

1. STATE BANK OF BIKANER AND JAIPUR

Date of occurrence : 26.06.2013

Date of detection : 22.01.2014
Place of occurrence : Jaipur
Name of the principal party/account : shri RKB
Area of operation where the fraud has occurred : term loan
Nature of fraud : C.F.
Amount of involved (Rs. In lakh ) : 2.46
Total recovery in lacs : 2.46
Modus operanty : shri RKB (state govt. employee) was sanctioned a personal loan for
Rs. 2.50 lacs on 26.06.2013 . branch obtained KYC documents, form-16, salary
certificate & irrecoverable authority letter issued by respective govt. department and
post dated cheques (PDCS) of salary saving a/c of borrower with branch pre-sanction
inspection of office & resident of borrower was conducted by the branch officials, at
the time of sanction. Recovery in the loan a/c was not for incoming & a/c stood
overdue, due to non credit of salary in saving a/c of borrower with branch on taking up
the issue with employer it was found that letter of authority was fake. Besides, the
details of salary provided to the branch did not tally with the detail of salary records
with department. It is also reported that the employee is absent since, july 2013 & no
salary is being paid by the department.

2. CENTRAL BANK OF INDIA

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Date of occurrence : 13.08.2010
Date of detection : 06.11.2013
Place of occurrence : Ahmadabad
Name of the principal account : Advance
Area of operation where fraud has occurred : export credit
Nature of fraud : C & F
Total amount involved : Rs. 38525.74 lac
Amount recovered : Nil
Brief history (modus operandi) :
M/S E, a company was enjoying credit facilities with consortium of banks . the
company approach education our bank for credit facilities outside purview of
consortium arrangement for executive of project in Tonzonic. The credit facilities
were sanctioned to the company as under.
1. Export packing credit (270 days) backed by confirmed order/ LC cum EBP/
EBD 330.00 crore.
2. Short term loons (unsecured) for 90 days 50.00 crore
3. Letter of credit (DA/DP) inland/ import/ 100 crore stand by LC buyers credit
& usance in 90 days inland 180 day import. The account was classified as NPA
on investigation it was observed that, funds were directed to companys a/cs
with other banks & not utilized for the purpose for which it was financed thus,
the has misrepresented the facts & cheted the bank.
company Complaint lodges : FIR lodges with the police on 03.01.2014

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 CONCLUSION
Bank frauds are done to make money by cheating the banks. There are several loopholes in
banking system that has been used by fraudsters. The number of bank frauds has been
increasing year on year along with that,RBI also engaged in making the banking system
accurate and secure. IT in banking sector is much more advanced than the traditional
banking. Online transactions are widely used than the manual transactions. Due to the frauds
the profit of the company is getting affected.

Bank fraud is the use of potentially illegal means to obtain money, assets, or other property
owned or held by a financial institution, or to obtain money from depositors by fraudulently
posing as a bank or other financial institution. Bank frauds concern all citizens. It has become
a big business today. Bank frauds are the creation of professional criminals, desperate
customers or of errant bankers or their collusion inter se. However the prima donna in the
drama is the insider or the banker. He opens the purse. He is often the target and at times the
tool. Occasionally, he is the victim of the temptations. There are internal factors and external
factors which are responsible for banking frauds and scams. There are two categories of
banking frauds i.e. Banking frauds done insiders and frauds done outsiders. There are some
effects of these frauds on banks like public loss confidence in banks, loss of bank money, it
helps to increase the operating cost of banks, low asset quality, reduced the amount of profit,
creditability etc. But there are also bank rules to prevent the banking frauds and scams. The
Reserve Bank of India (RBI) has drawn up new rules for banks aimed at preventing
fraudsand irregularities. Banks take actions to minimize these bank frauds. There are always
new challenges in banking sector but they are competent to deals with that challenges.

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 WIBILIOGRAPHY

http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=644b29ed-fee8-
4c25-ac71-a50a65db78bc&txtsearch=Subject:%20Finance/Banking
http://www.slideshare.net/akshayvirkar/frauds-scams-in-banks
https://www.anz.com/personal/ways-bank/security/online-security/threats-banking-
safety/fraud-types/
http://in.ask.com/wiki/Bank_fraud?lang=en
http://www.ehow.com/about_6396210_online-banking-fraud_.html
http://www.wisegeek.com/what-is-bank-fraud.htm

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