PRESENTED BY:

71 Nishit Patil.
72 Nouman Khan.
73 Paresh Jain.
74 Parvaz Shaikh.
75 Prashant Verma.
Bank Frauds
76 Pratik Bacche
77 Pratik Saraiya
78 Priyanka Baheti
79 Purvesh Alandikar
80 Riddhi Dalal.
Loan Fraud

 Internal loan fraud

– Loans to “Phantom” borrowers
– Loan lapping
– Kickbacks on illegal loans
– Reciprocal loans
– Commercial loans
– Suspense account fraud

Bank Frauds
© Paul Lower 2010
Employee Level Fraud

 Scale of employee level fraud

– Many ways for bank employees to commit fraud
– Loan fraud is the area of highest risk
– But embezzlement remains high on the list
– Two categories of employee fraud for banks
• Looting customer accounts
• Exploiting weaknesses in operations

Bank Frauds
© Paul Lower 2010
Employee Level Fraud

 Two types of employee fraud

– Looting customer accounts
• Theft from customer accounts
• Dormant account fraud
• Cashier theft of cash or “Skimming”
• Cheque fraud

Bank Frauds
© Paul Lower 2010
Employee Level Fraud

 Two types of employee fraud

– Looting customer accounts
– Exploiting weaknesses in operations
• Theft of consignment items
• Invoicing fraud

Bank Frauds
© Paul Lower 2010
Employee Level Fraud

 Theft from customer accounts

– Employees divert funds from customer accounts
– Fraud is then concealed with false records
– Hudson Savings Bank fell victim to this scheme

Bank Frauds
© Paul Lower 2010
Bank Frauds
 Harshad
Harshad Mehta
Mehta -- RsRs 4,000
4,000 crore
crore
He
He triggered
triggered aa rise
rise in
in the
the Bombay
Bombay Stock
Stock Exchange
Exchange in
in
Core
the
the year
year 1992
1992 by
by trading
trading in in shares
shares at
at aa premium
premium across
across
many
many segments.
segments.


Taking
Taking advantages
advantages of
of the
the loopholes
loopholes in
in the
the banking
banking
system
system

 Harshad
Harshad and and his
his associates
associates triggered
triggered aa securities
securities
scam
scam diverting
diverting funds
funds to
to the
the tune
tune of
of Rs
Rs 4000
4000 crore
crore (Rs
(Rs 40
40
billion)
billion) from
from the
the banks
banks toto stockbrokers
stockbrokers between
between April
April 1991
1991
to
to May
May 1992.
1992.

Bank Frauds
Detailed analysis SCENE
4

Harshad
Harshad Mehta
Mehta -- Rs
Rs 4,000
4,000 crore
crore

Mehta
Mehta mastered
mastered the
the tricks
tricks of
of the
the trade
trade and
and set
set out
out on
on
Core
dangerous
dangerous game
game plan
plan

 Mehta
Mehta has
has siphoned
siphoned off
off huge
huge sums
sums of
of money
money from
from
several
several banks
banks and
and millions
millions ofof investors
investors were
were conned
conned inin
the
the process.
process.


 His
His scam
scam was
was exposed,
exposed, the
the markets
markets crashed
crashed and
and hehe
was
was arrested
arrested and
and banned
banned for
for life
life from
from trading
trading in
in the
the stock
stock
markets.
markets.

Bank Frauds
 Harshad
Harshad Mehta
Mehta -- Rs
Rs 4,000
4,000 crore
crore

He
He was
was later
later charged
charged with
with 72
72 criminal
criminal offences
offences
Core


He
He died
died in
in 2002
2002 with
with many
many litigations
litigations still
still pending
pending
against
against him.
him.

Bank Frauds
Detailed analysis SCENE
4
Impress your audience with graphic analyses.

Ketan
Ketan Parekh
Parekh -- Agrregate
Agrregate Borrowings
Borrowings Rs
Rs 1,500
1,500 Cr
Cr

Ketan
Ketan Parekh
Parekh followed
followed Harshad
Harshad Mehta's
Mehta's footsteps
footsteps to
to
Core
swindle
swindle crores
crores of
of rupees
rupees from
from banks.
banks.


 AA chartered
chartered accountant
accountant he
he used
used to
to run
run aa family
family
business,
business, NH
NH Securities.
Securities.


He
He targeted
targeted smaller
smaller exchanges
exchanges like
like the
the Allahabad
Allahabad Stock
Stock
Exchange
Exchange and and thethe Calcutta
Calcutta Stock
Stock Exchange,
Exchange, andand bought
bought
shares
shares in
in fictitious
fictitious names.
names.

Bank Frauds
Detailed analysis SCENE
4
Impress your audience with graphic analyses.

Ketan
Ketan Parekh
Parekh -- Agrregate
Agrregate Borrowings
Borrowings Rs
Rs 1,500
1,500 Cr
Cr

Core
His
His dealings
dealings revolved
revolved around
around shares
shares of of ten
ten companies
companies
like
like Himachal
Himachal Futuristic,
Futuristic, Global
Global Tele-Systems,
Tele-Systems, SSI SSI Ltd,
Ltd,
DSQ
DSQ Software,
Software, Zee
Zee Telefilms,
Telefilms, Silver
Silver line,
line, pent
pent media
media
Graphics
Graphics and
and Satyam
Satyam Computer
Computer (K-10
(K-10 scripts).
scripts).

Ketan
Ketan borrowed
borrowed Rs
Rs 250
250 crore
crore from
from Global
Global Trust
Trust Bank
Bank to
to
fuel
fuel his
his ambitions.
ambitions.


Ketan
Ketan along
along with
with his
his associates
associates also
also managed
managed toto get
get
Rs1,000
Rs1,000 crore
crore from
from the
the Madhavpura
Madhavpura Mercantile
Mercantile Co-
Co-
operative
operative Bank
Bank

Bank Frauds
Detailed analysis SCENE
4
Impress your audience with graphic analyses.

Ketan
Ketan Parekh
Parekh -- Agrregate
Agrregate Borrowings
Borrowings Rs
Rs 1,500
1,500 Cr
Cr

Core

Was convicted in 2008, for involvement in the indian

stock market manipulation scam in late 1999-2001.

Currently he has been debarred from trading in the

indian stock exchanges till 2017

Bank Frauds
Detailed analysis SCENE
4
Impress your audience with graphic analyses.

C
CRR Bhansali
Bhansali -- Rs
Rs 1,200
1,200 crore
crore

The
The Bhansali
Bhansali scam
scam resulted
resulted in
in aa loss
loss of
of over
over Rs
Rs 1,200
1,200
Core
crore
crore (Rs
(Rs 12
12 billion).
billion).


He
He first
first launched
launched the
the finance
finance company
company CRB
CRB Capital
Capital
Markets,
Markets, followed
followed by
by CRB
CRB Mutual
Mutual Fund
Fund and
and CRB
CRB Share
Share
Custodial
Custodial Services.
Services.


He
He ruled
ruled like
like financial
financial wizard
wizard 1992
1992 toto 1996
1996 collecting
collecting
money
money from
from thethe public
public through
through fixed
fixed deposits,
deposits, bonds
bonds


The
The money
money was
was transferred
transferred to
to companies
companies that
that never
never
existed.
existed.

Bank Frauds
Detailed analysis SCENE
4
Impress your audience with graphic analyses.

C
CRR Bhansali
Bhansali -- Rs
Rs 1,200
1,200 crore
crore
 CRB
CRB Capital
Capital Markets
Markets raised
raised aa whopping
whopping RsRs 176
176 crore
crore
Core
in
in three
three years.
years. In
In 1994
1994 CRB
CRB Mutual
Mutual Funds
Funds raised
raised Rs
Rs 230
230
crore
crore and
and Rs
Rs 180
180 crore
crore came
came via
via fixed
fixed deposits.
deposits.


 However,
However, his
his good
good days
days did
did not
not last
last long,
long, after
after 1995
1995 he
he
received
received several
several jolts.
jolts.


 Bhansali
Bhansali tried
tried borrowing
borrowing more
more money
money from
from the
the market.
market.
This
This led
led to
to aa financial
financial crisis.
crisis.

Bank Frauds
Detailed analysis SCENE
4
Impress your audience with graphic analyses.

Cobbler
Cobbler scam
scam

Sohin
Sohin Daya,
Daya, son
son ofof aa former
former Sheriff
Sheriff of
of Mumbai,
Mumbai, was
was the
the
Core
main
main accused
accused in
in the
the multi
multi -crore
-crore shoes
shoes scam
scam

Daya
Daya of of Dawood
Dawood Shoes,
Shoes, Rafique
Rafique Tejani
Tejani of
of Metro
Metro Shoes,
Shoes,
and
and Kishore
Kishore Signapurkar
Signapurkar of
of Milano
Milano Shoes
Shoes were
were arrested
arrested
for
for creating
creating several
several leather
leather co-operative
co-operative societies
societies which
which
did
did not
not exist.
exist.

They
They availed
availed loans
loans of
of crores
crores of
of rupees
rupees on
on behalf
behalf of
of
these
these fictitious
fictitious societies.
societies. The
The scam
scam was
was exposed
exposed inin 1995.
1995.

Bank Frauds
Detailed analysis SCENE
4

Cobbler
Cobbler scam
scam
The
The accused
accused created
created aa fictitious
fictitious cooperative
cooperative society
society of
of
Core
cobblers
cobblers to
to take
take advantage
advantage of of government
government loans
loans
through
through various
various schemes.
schemes.


Officials
Officials of
of the
the Maharashtra
Maharashtra State
State Finance
Finance Corporation,
Corporation,
Citibank,
Citibank, Bank
Bank ofof Oman,
Oman, Dena
Dena Bank,
Bank, Development
Development
Credit
Credit Bank,
Bank, Saraswati
Saraswati Co-operative
Co-operative Bank,
Bank, and
and Bank
Bank of
of
Bahrain
Bahrain and
and Kuwait
Kuwait were
were also
also charge
charge sheeted..
sheeted..

Bank Frauds
Detailed analysis SCENE
4

The
The UTI
UTI Scam
Scam -- Rs
Rs 32
32 crore
crore

Former
Former UTI UTI chairman
chairman PP SS Subramanyam
Subramanyam and and twotwo
Core
executive
executive directors
directors --
-- MM Kapur
Kapur and
and SSKK Basu
Basu --
-- and
and aa
stockbroker
stockbroker Rakesh
Rakesh G G Mehta,
Mehta, were
were arrested
arrested in
in connection
connection
with
with the
the 'UTI
'UTI scam‘
scam‘

UTI
UTI had
had purchased
purchased 40,000
40,000 shares
shares ofof Cyberspace
Cyberspace
betweenSeptember
betweenSeptember 25, 25, 2000,
2000, and
and September
September 25, 25, 2000
2000
for
for about
about Rs3.33
Rs3.33 crore
crore (Rs
(Rs 33.3
33.3 million)
million) from
from Rakesh
Rakesh
Mehta
Mehta when
when there
there were
were no
no buyers
buyers for
for the
the scrip.
scrip.

Bank Frauds
Detailed analysis SCENE
4

The
The UTI
UTI Scam
Scam -- Rs
Rs 32
32 crore
crore
The
The market
market price
price was
was around
around Rs
Rs 830.
830. The
The CBI
CBI said
said itit
Core
was
was the
the conspiracy
conspiracy ofof these
these four
four people
people which
which resulted
resulted in in
the
the loss
loss of
of Rs
Rs 32
32 crore
crore (Rs
(Rs 320
320 million).
million).


Subramanyam,
Subramanyam, KapurKapur and
and Basu
Basu had
had changed
changed their
their
stance
stance onon an
an investment
investment advice
advice of
of the
the equities
equities research
research
cell
cell of
of UTI.
UTI.


The
The promoter
promoter of
of Cyberspace
Cyberspace Infosys,
Infosys, Arvind
Arvind Johari
Johari was
was
arrested
arrested in
in connection
connection with
with the
the case.
case.


 The
The officials
officials were
were paid
paid Rs
Rs 50
50 lakh
lakh (Rs
(Rs 55 million)
million) by
by
Cyberspace
Cyberspace toto promote
promote its
its shares.
shares.

Bank Frauds
Detailed analysis SCENE
4

Citibank
Citibank India;
India; fraud
fraud worth
worth 400
400 crore
crore

AA case
case of
of possible
possible fraud
fraud was
was reported
reported at
at DLF-II
DLF-II branch,
branch,
Core
Gurgaon
Gurgaon and
and is
is reportedly
reportedly estimated
estimated at
at Rs
Rs 300-350
300-350 crore.
crore.


The
The scam
scam was
was engineered
engineered byby none
none other
other than
than an
an
employee
employee Shiv
Shiv Raj
Raj Puri
Puri who
who was
was working
working as
as aa
Relationship
Relationship Manager
Manager for
for the
the past
past 7-8
7-8 years.
years.


Puri
Puri had
had opened
opened aa joint
joint account
account inin the
the names
names of of Prem
Prem
Nath,
Nath, Sehna
Sehna Prem Prem Nath,
Nath, and
and Deeksha
Deeksha Puri Puri in
in September
September
2009;
2009; initial
initial investigations
investigations reveal
reveal that
that the
the joint
joint account
account (no
(no
5011666247)
5011666247) had had transacted
transacted aa huge
huge sum sum  ofof money.
money.

Bank Frauds
Detailed analysis SCENE
4

Citibank
Citibank India;
India; fraud
fraud worth
worth 400
400 crore
crore
Moreover,
Moreover, there
there were
were reports
reports of
of customers
customers revealing
revealing
Core
that
that the
the bank
bank was
was running
running some
some scheme
scheme that
that promised
promised aa
very
very high
high interest
interest rate.
rate.


Puri
Puri has
has also
also been
been charged
charged with
with producing
producing forged
forged
circulars
circulars from
from the
the Securities
Securities and
and Exchange
Exchange BoardBoard of
of India
India
(Sebi)
(Sebi) to
to con
con people
people into
into investing
investing in
in aa non-existent
non-existent
scheme
scheme andand making
making people
people believe
believe that
that the
the scheme
scheme waswas
only
only available
available in
in that
that particular
particular branch.
branch.

Bank Frauds
Detailed analysis SCENE
4

Citibank
Citibank India;
India; fraud
fraud worth
worth 400
400 crore
crore

Police
Police reports
reports say
say that
that Puri
Puri managed
managed to to get
get large
large
Core
deposits
deposits and
and made
made fake
fake bank
bank slips
slips and
and statements
statements forfor the
the
customers
customers


.. Puri
Puri siphoned
siphoned off
off the
the money
money to
to invest
invest in
in the
the stock
stock
market.
market.


Citibank
Citibank has
has intimated
intimated the
the Reserve
Reserve Bank
Bank of
of India
India and
and
Sebi
Sebi about
about the
the fraud.
fraud.

Bank Frauds
Detailed analysis SCENE
4

Citibank
Citibank India;
India; fraud
fraud worth
worth 400
400 crore
crore
The
The suspected
suspected employees
employees hadhad access
access to
to high
high net
net worth
worth
Core
individual
individual (HNI)
(HNI) clients
clients of
of the
the bank
bank


They
They were
were in
in roles
roles which
which involved
involved servicing
servicing their
their
requirements
requirements for
for investment
investment products,
products, according
according toto aa bank
bank
employee
employee who
who spoke
spoke onon condition
condition of
of anonymity.
anonymity.


.. The
The employees
employees claimed
claimed that
that the
the products
products were
were
authorized
authorized byby the
the banks
banks investment
investment product
product committee
committee
and
and used
used forged
forged bank
bank documents
documents andand letterheads
letterheads to
to
prove
prove the
the same.
same.

Bank Frauds
FRAUD DETECTION & CONTROL

MANAGEMENT LEVEL FRAUD

Bank Frauds
© Paul Lower 2010
Employee Level Fraud

CASE STUDY

Milton Pereira, former management of Hudson City Bank, was

convicted on charges of embezzling more than $650,000 from his
former employer to fund his gambling and credit card debts.
Over seven years Pereira tampered with more than 60 customer
accounts by executing thousands of fraudulent debits and credits

Bank Frauds
© Paul Lower 2010
Employee Level Fraud

CASE STUDY

How he did it:

Pereira repeatedly withdrew funds from customer accounts and
transferred them to accounts he had created and controlled and from
which he illegally withdrew funds.
He evaded detection by moving funds between accounts and
preventing customers from receiving statements.

Bank Frauds
© Paul Lower 2010
Employee Level Fraud

CASE STUDY

How he was found out:

When a few customers became aware of unauthorised activity on
their accounts, Pereira corrected the “errors” by transferring funds
from other customers’ accounts.

Then he sent letters to the customers to tell them there had been an
error in the bank’s system that caused the error and that this had
subsequently been “corrected”.
Some of the customers remained suspicious and the ensuing police
and FBI investigation uncovered Pereira’s fraudulent scheme.
Pereira was tried and sentenced to two years in prison.

Bank Frauds
© Paul Lower 2010
Employee Level Fraud

CASE STUDY
When bank employees have too much control over
customer accounts

How could this fraud have been prevented?

Which controls should have been in place to prevent it?

Bank Frauds
© Paul Lower 2010
Employee Level Fraud

CASE STUDY
When bank employees have too much control over
customer accounts
Surprise audits of fund transfers might have revealed red flags of
unusual patterns in accounts being looted by Pereira and an
unusually high number of credits to the accounts he controlled.
Sampling of suppressed statements by auditors or regional
managers should have pointed to Pereira as being responsible for
requesting the statements to be held.
Use automated fraud pattern detection software; ensure IT
professionals set up to include flagging bank manager activity.
Thorough background checks on Pereira might have revealed his
personal debt and gambling problems

Bank Frauds
© Paul Lower 2010
Management Level Fraud

 Fraud at senior management level

– Occurs less frequently than employee level fraud
– But when it occurs losses tend to be greater
• Management has greater authority
• Possibly better knowledge of systems
• Better equipped to execute complex frauds

Bank Frauds
© Paul Lower 2010
Management Level Fraud

 Types of management level fraud

– Same as employee fraud but on a larger scale
• Cheque fraud
• Skimming
• Looting customer accounts
• Loan fraud – approving loans to oneself
• Loan fraud – kickback schemes & bribery
• Illegal financial transactions and corruption

Bank Frauds
© Paul Lower 2010
Management Level Fraud

 Types of management level fraud cont..

– Financial statement fraud causes a decrease in market value of stock of approximately
500 to 1,000 times the amount of the fraud.

$7 million fraud $2 billion drop in

stock value

Bank Frauds
© Paul Lower 2010
 Management Incentives

 Meeting market expectations

– Stock prices are tied to meeting earnings forecasts

– Focus is on short-term performance only

– Companies are heavily punished for not meeting forecasts

– Executives have been endowed with hundreds of millions of dollars worth of stock options
—far exceeds compensation (tied to stock price)

– Performance is based on earnings & stock price

Bank Frauds
© Paul Lower 2010
 Management Disclosure Fraud

 Meeting market expectations

– Overall misrepresentations about the nature of the company or its products, usually made
through news reports, interviews, annual reports, and elsewhere

– Misrepresentations in the management discussions and other non-financial statement

sections of annual reports, 10-Ks, 10-Qs, and other reports

– Misrepresentations in the footnotes to the financial statements

Bank Frauds
© Paul Lower 2010
 Role of Credit Reference Agencies

 Independent credit agencies play a part

– The three major credit rating agencies—Moody’s, Standard & Poor’s and Fitch/IBCA—
received substantial fees from Enron
– Just weeks prior to Enron’s bankruptcy filing—after most of the negative news was out
and Enron’s stock was trading for $3 per share—all three agencies still gave investment
grade ratings to Enron’s debt.

Bank Frauds
© Paul Lower 2010
 Role of Auditors

• They must be independent

– Auditors must not provide internal and external audits. Anderson was paid $52 million in
2000 by Enron, the majority for non-audit related consulting services.
– Auditors must not be solely reliant on one client. Enron was Andersen’s second largest
client and kept a whole floor of auditors assigned at Enron year around
– Auditors must not have been employed by the client CFOs and controllers were former
Andersen executives

Bank Frauds
© Paul Lower 2010