A

Project

On

Banking system frauds and control

SUBMITTED BY

HARSHITA PATEL

T.Y.B.C.B.I, SEM-V

PROJECT GUIDE

Dr. LIPI BHATTACHARIYA

SUMITTED TO

UNIVERSITY OF MUMBAI

RAJASTHANI SAMMELAN’S

Ghanshyamdas saraf college

Of Arts & Commerce

Affiliated to University of Mumbai

Reaccredited by NAAC with ‘A’ Grade

S. V. Road, Malad (W)

Mumbai -400 064

A. Y. 2014 – 2015

1

RAJASTHANI SAMMELAN’S

Ghanshyamdas saraf college

Of Arts & Commerce

Affiliated to University of Mumbai

Reaccredited by NAAC with ‘A’ Grade

S. V. Road, Malad (W)

Mumbai -400 064

CERTIFICATE

I Prof. Dr. Lipi Bhattacharya hereby certify that Harshita

Patel a student of Ghanshyamdas Saraf college of Arts &

Commerce, T.Y.B.C.B.I., SEM – V as completed report on

“Banking System Fraud and Control” in the Academic Year

2014 – 2015.

Thus information submitted is true and original to the best of

my knowledge.

Project Guide: Principal:

Date:

External Examiner: College Seal:

Date:

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ACKNOWLEDGEMENT

I take this opportunity to thank the UNIVERSITY OF MUMBAI

for giving me a chance to do this project.

I express my sincere gratitude to the Principal Dr. Sujata

Karmarkar, chief co-ordinator Dr. Rajyalakshmi Rao Guide Dr. Lipi

Bhattacharya, teaching faculty and our librarian for their constant

support and helping for completing the project.

My deep sense of gratitude to the staff and employees of for their

support and guidance.

I am also grateful to my friends for giving me moral support

during the course of my project work. Lastly, I would like to

thank each and every person who helped me in completing the

project successfully especially MY PARENTS.

Student Signature

3

DECLARATION

I Harshita Patel a student of Ghanshymdas saraf college of

Arts & Commerce, malad (W) T.Y.B.C.B.I., Sem – v hereby

declare that I have completed project on “Banking System

Fraud and Control” in the Academic Year 2014 – 2015. This

information submitted is true and original to best my

knowledge.

Date:

Signature of Student

4

INDEX

Sr. No Chapter Name Page No.

Executive summary

Objective

1 Definition of fraud & Introduction of Banking

frauds

2 Types of frauds in banking industry

3 Cases of frauds in India

4 Major frauds in various countries

5 Frauds control in India

6 Frauds in banking sector; causes and cures

7 Banking frauds statistic

8 General safeguards / precautions

9 Suggestion to fight fraud in bank

10 A few recent articals

11 Conclusion

Bibliography

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Executive summary

Over the time, banking customer have developed a preference for transacting

through newer channels like payment cards and online banking over traditional

banking channels. While these payment channels have the advantage of ease

and speed of transacting on the flip side, these very advantage make bank’s

customers vulnerable to the ploys of fraudsters. This paper looks at the common

weaknesses to which banking customer using cards and online banking for

executing transactions are exposed to. It focuses mainly on skimming and online

frauds, probes the nature of these frauds and reveals the newer trends within

these fraud types. Further, this paper examine how bank have been trying to

control these frauds by improving their system and processes. It is evident that it

requires considerable investment in system processes to improve the fraud

monitoring and detecting capabilities. Small and medium banks, with limited IT

budget or fund constraints, have not been able to keep pace with the newer

techniques developed by fraudsters. Their ability to adopt newer better

technology for prevention, detection and early warning of fraud being low, they

are losing million of dollar in addition to customer confidence. we’ve made an

efforts to suggest how smaller and medium bank could use the services of IT

solution providers, who expertise in frauds prevention domain, in developing

customized solutions for such banks, which can help them reduce the instances

of fraud and thereby improve customer confidence and their bottom lines.

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Objective of the project

This paper examines the issue of frauds from the perspective of banking

industry. The study seeks to evaluate the various causes that are responsible for

banks frauds. It aims to examine the extent to which bank employees follow

the various fraud prevention measures including the once prescribed by Reserve

Bank of India. It aims to give an insight on the perception of bank employee

towards preventive mechanism and their awareness towards various frauds. The

study signifies the importance of training in prevention of bank frauds. A strong

system of internal control and good employment practices prevent frauds and

mitigate losses. The research reveals that implementation of various internal

control mechanism are not up to the mark. The results indicate that lack of

training, overburdened staff, competition, low compliance level(the degree to

which procedures and prudential practices framed by Reserve Bank of India to

prevent frauds are followed) are the main reasons for bank frauds. The banks

should take the rising graph of bank frauds seriously and need to ensure that

there is no laxity in the internal control mechanism

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CHAPTER 1

INTRODUCTION

DEFINITION OF FRAUD

Fraud is defined as "Any behaviour by which one person intends to gain a

dishonest advantage over another". In other words , fraud is an act or

omission which is intended to cause wrongful gain to one person and wrongful

loss to the other, either by way of concealment of facts or otherwise. Fraud is

defined u/s 421 of the Indian Penal Code and u/s17 of the Indian Contract

Act.

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 a particular banking fraud law 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. Stolen cheques The banks r able to recover less than 25%

in the losses in more than half of the fraud cases

Money laundering is the process of concealing the source of large amounts of

money that have been gained through illegitimate means. Money evidently

gained through crime is "dirty" money, and money that has been "laundered"

to appear as if it came from a legitimate source is "clean" money. Money can

be laundered by many methods, which vary in complexity and sophistication.

Different countries may or may not treat tax evasion or payments in breach of

international sanctions as money laundering. Some jurisdictions differentiate

these for definition purposes, and others do not. Some jurisdictions define

money laundering as obfuscating sources of money, either intentionally or by

merely using financial systems or services that do not identify or track sources

or destinations.

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Other jurisdictions define money laundering to include money from activity that

would have been a crime in that jurisdiction, even if it was legal where the

actual conduct occurred. For example, under British law, spending proceeds

from a bull fight in Spain constitutes money laundering because the bull fight

would have been illegal if it had been conducted in the United Kingdom. This

broad brush of applying money laundering to incidental, extraterritorial or

simply privacy-seeking behaviours has led some to label it financial thought

crime.

Many regulatory and governmental authorities issue estimates each year for the

amount of money laundered, either worldwide or within their national

economy. In 1996, the International Monetary Fund estimated that two to five

percent of the worldwide global economy involved laundered money. The

Financial Action Task Force on Money Laundering (FATF), an

intergovernmental body set up to combat money laundering, stated that,

"Overall, it is absolutely impossible to produce a reliable estimate of the

amount of money laundered and therefore the FATF does not publish any

figures in this regard." Academic commentators have likewise been unable to

estimate the volume of money with any degree of assurance. Various estimates

of the scale of global money laundering are sometimes repeated often enough

to make some people regard them as factual—but no researcher has overcome

the inherent difficulty of measuring an actively concealed practice.

Regardless of the difficulty in measurement, the amount of money laundered

each year is in the billions (US dollars) and poses a significant policy concern

for governments. As a result, governments and international bodies have

undertaken efforts to detect, prevent and apprehend money launderers. Financial

institutions have likewise undertaken efforts to prevent and detect transactions

involving dirty money, both as a result of government requirements and to

avoid the reputational risk involved. Issues relating to money laundering have

existed as long as there have been large scale criminal enterprises. Modern

anti-money laundering laws have developed along with the so-called modern

"War on Drugs" In more recent times anti-money laundering legislation is seen

as adjunct to the financial crime of terrorist financing in that both crimes

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usually involve the transmission of funds through the financial system

(although money laundering relates to where the money has come from, and

terrorist financing relating to where the money is going to).

93% of the respondents said that they have seen growth in fraud incidents

since last years. The banking and financial services sector has witnessed

potential growth in the last decade. This growth has not been without its

pitfalls as incidents of frauds in the industry have also been on rise. Deloitte’s

fraud survey shows that banks have witnessed rise in the number of fraud

incidents in the last one year and the trend is likely to continue in the near

future. The survey points to the increased difficult scenario for banks with

increased fraud incidents and low recoveries, thereby directly affecting their

bottom line. With increased regulatory scrutiny, banks are under increased

pressure to implement best practices and fraud risk management frame work.

However, as indicated from the survey, this still appears to b work in progress

in many of the organizations Risks are inherent in the banking business. In

today’s economic climate, the adage ‘prevention is better than cure’ has never

been so accurate. No organization can be completely immune to fraudulent

activities, but steps can be taken to reduce the exposure to financial loss and

reputational damage, which are common consequences of fraud. This survey

was aimed at gaining an insight into the fraud scenario in the industry, the

area that incur the maximum number of fraud incidents, and the measures

organizations are taking to fight the menace.

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CHAPTER 2

TYPES OF FRAUDS

Cashier’s cheques

A scam of a counterfeit cashier's check that is made to appear to be issued

by Wells Fargo Bank.

Fraudsters may seek access to facilities such as mailrooms, post offices, offices

of a tax authority, a corporate payroll or a social or veterans' benefit office,

which process cheques in large numbers. The fraudsters then may open bank

accounts under assumed names and deposit the cheques, which they may first

alter in order to appear legitimate, so that they can subsequently withdraw

unauthorised funds.

Alternatively, forgers gain unauthorised access to blank chequebooks, and forge

seemingly legitimate signatures on the cheques, also in order to illegally gain

access to unauthorized funds.

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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.

Forgery and altered cheques

Fraudsters 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

cheques, simple altering can change $100.00 into $100,000.00, although

transactions of this value are subject to investigation as a precaution to prevent

fraud as policy.

Instead of tampering with a real cheque, fraudsters may alternatively 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, etc. They

12

would subsequently cash the fraudulent cheque through another bank and

withdraw the money before the banks realise that the cheque was a fraud.

Accounting fraud

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. Examples of accounting frauds: Enron and

WorldCom. These two companies "cooked the books" in order to appear as

they had profits each quarter when in fact they were deeply in debt.

Uninsured deposit

A bank soliciting public deposits may 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, the unlicensed "Chase Trust Bank" of

Washington D.C. appeared in 2002, bearing no affiliation to its seemingly

apparent namesake; the real Chase Manhattan Bank] is based in New York.

Accounting fraud has also been used to conceal other theft taking place within

a company.

Demand draft fraud

Demand draft (DD) fraud typically involves one or more corrupt bank

employees. Firstly, such employees remove a 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. Such fraudulent demand drafts

are usually drawn payable at a distant city without debiting an account. The

draft is cashed at the payable branch. The fraud is discovered only when the

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bank's head office does the branch-wise reconciliation, which normally take six

months, by which time the money is irrecoverable.

Rogue traders

A rogue trader is a highly placed insider nominally authorised 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 dollars; there have even been

cases in which a bank goes out of business due to market investment losses.

Some of the largest bank frauds ever detected were perpetrated by currency

traders John Rusnak, and Nick Leeson. Jérôme Kerviel, allegedly defrauded

Société Générale of 4.9 billion euros ($7.1 billion) us dollars, while trading

stock derivatives.

Fraudulent loans

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.

This can also be seen as a component within mortgage fraud (Bell, 2010).

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

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corporations using accounting fraud to overstate profits in order to make a

risky loan appear to be a sound investment for the bank.

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

someone who wishes to conceal the minor detail that the bank's money has in

fact been stolen and is now gone.

Wire transfer fraud

Wire transfer networks such as the international SWIFT 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.

There is a very high risk of fraud when dealing with unknown or uninsured

institutions.

The risk is greatest when dealing with offshore or Internet banks (as this

allows selection of countries with lax banking regulations), but not by any

means limited to these institutions. There is an annual list of unlicensed banks

on the US Treasury Department site which currently is fifteen pages in length.

Bill discounting fraud

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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 of 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 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 crust

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.

Payment card fraud

Credit card fraud is widespread as a means of stealing from banks, merchants

and clients.

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. 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

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individual depositor or transferred or invested can therefore be valuable to

someone who wishes to conceal the minor detail that the bank's money has in

fact been stolen and is now gone.

Wire transfer fraud

Wire transfer networks such as the international SWIFT 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 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

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.

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.

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Duplication or skimming of card information

This takes a number of forms, ranging from merchants copying clients' credit

card numbers for use in later illegal activities or criminals 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 of the

card.

Some fraudsters have attached fraudulent card stripe readers to publicly

accessible ATMs, to gain unauthorised access to the contents of the magnetic

stripe, as well as hidden cameras to illegally record users' authorisation codes.

The data recorded by the cameras and fraudulent card stripe readers are

subsequently used to produce duplicate cards that could then be used to make

ATM withdrawals from the victims' accounts.

Empty ATM envelope deposits

A criminal overdraft can result due to the account holder making a worthless

or misrepresented deposit at an automated teller machine in order to obtain

more cash than present in the account or to prevent a check from being

returned due to non-sufficient fund. United States banking law makes the first

$100 immediately available and it may be possible for much more uncollected

funds to be lost by the bank the following business day before this type of

fraud is discovered. The crime could also be perpetrated against another

person's account in an "account takeover" or with a counterfeit ATM card, or

an account opened in another person's name as part of an identity theft scam.

The emergence of ATM deposit technology that scans currency and checks

without using an envelope may prevent this type of fraud in the future.

The fictitious 'bank inspector'

This is an old scam with a number of variants; the original scheme involved

claiming to be a bank inspector, claiming that the bank suspects that one of

its employees is stealing money and that to help catch the culprit the "bank

18

inspector" needs the depositor to withdraw all of his or her money. At this

point, the victim would be carrying a large amount of cash and can be

targeted for the theft of these funds.

Other variants included claiming to be a prospective business partner with "the

opportunity of a lifetime" then asking for access to cash "to prove that you

trust me" or even claiming to be a new immigrant who carries all their money

in cash for fear that the banks will steal it from them – if told by others that

they keep their money in banks, they then ask the depositor to withdraw it to

prove the bank hasn't stolen it.

Impersonation of officials has more recently become a way of stealing personal

information for use in theft of identity frauds.

CHAPTER 3

FRAUDS IN INDIA

NEW DELHI:

A gang of 11 men, comprising a B.Com graduate from St Xavier College in

Kolkata, two Delhi University graduates and seven Nigerians, has been arrested

in connection with a series of email and net banking frauds.

The cyber crooks, who are estimated to have cheated people of several crores,

duped people in two ways. They would empty their targets' accounts using a

combination of hacking and SIM card deactivation as well as send out emails,

1,000 at a time and text messages congratulating people on having won

astronomic sums which is a common phishing technique. In their last bid, the

gang stole Rs 19.31 lakh from the salary account of the country head of a

Geneva-based organization.

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MONEY LAUNDERINGPROBE:RBI TO SEE

CORBAPOST VIDEO ON BANK FRAUDS

MUMBAI; 16 march 2013

Intensifying its probe into charges of alleged money-laundering by banks, the

Reserve Bank has decided to study video clips that show bank staff

encouraging tax evasion and overseas remittances.

The investigation will focus on the possible violation of KYC norms even as

banks are independently probing any fraud by their staff, said three persons

familiar the development.

RBI is looking to get to the bottom of the charges made by Cobrapost.com,

an online news provider, that dozens of staff at various branches of ICICI

Bank, HDFC Bank and Axis Bank connived with tax evaders, resulting in loss

to the exchequer, said the persons on condition of anonymity. "The authenticity

of the tape would have to be checked. We would also wait for the

investigation report of the banks and then take a view on the matter," said

one of the persons.

Cobrapost on Thursday said bankers at these private lenders advise their clients

to avoid tax by various means, including declaring oneself as a farmer,

opening multiple accounts with small amounts, using other customers' accounts

for a fee, and creating shell companies to account for overseas travel and

other expenses.

BANK MANAGER HELD FOR FRAUD

KOLKATA

A manager of the Indian Overseas Bank, Gariahat branch, was arrested on

Thursday in connection with the Rs 60 crore fixed deposit scam. Bhaskar

Toleti, who had gone into hiding, was rounded up from Malkajgiri near

Hyderabad with Rs 2.39 crore in cash.

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"The money seized is part of the Rs 60 crore West Bengal State Cooperative

Bank (WBSCB) fraud," said joint commissioner (crime) Pallab Kanti Ghosh. It

was on interrogating a 1979 batch WBCS officer, Udayan Majumdar, that cops

were led to Toleti, sources said.

Probe revealed that WBSCB had deposited Rs 60 crore in three nationalized

bank at a higher rate of interest. But the account numbers provided belonged

to the fraudsters and were created under fictitious names.

Police said it was with help from a section of employees of the depositing

organization and the nationalized banks that the fraudsters siphoned off the

money.

"They posed as the bank authority and sent forged letters to the depositor.

Soon as the amount was electronically transferred to these accounts, the

fraudsters siphoned off the money," said an investigator.

The city police arrested another bank manager in connection with the multi-

crore bank fraud, commonly earned notority as fixed deposit scam, involving

several bank and government agencies. Bhaskar Toleti, a manager of Indian

Overseas Bank (IOB), Gariahat branch from Malkajgiri near Hyderabad. Police

retrieved from his possession Rs 2.39 crore in cash. This money is part of the

Rs 60 crore West Bengal State Cooperative Bank (WBSCB) fraud, said joint

commissioner (crime) Pallab Kanti Ghosh.

Earlier, a 1979 batch state civil service officer Udayan Majumdar was arrested

on April 22. Interrogating him, the anti-bank fraud section officer came to

know about the connivance of bank manager Bhasakar Toleti in the fraud

case. Probe revealed that WBSCB was supposed to deposit Rs 60 crores in

three different nationalized banks as a fixed deposit for higher rate of interest.

But finally following an electronic money transfer, the amount landed into

fraudsters account what soon siphoned off.

Investigators found that in connivance with a section of employees of the

depositing organization and the nationalized bank where the money was

21

deposited, fraudsters managed to create an account in fictitious name with IOB

at Gariahat branch. "The fraudsters, with the help of the insiders, sent forged

letters posing as bank authority and gave another account number to the

depositor, what was created in fictitious name. As soon the amount was

electronically transferred, the fraudsters got hold of the amount," said an

officer of detective department.

Investigation revealed that Toleti played the crucial role in offering higher rate

of interest to the State Cooperative bank and facilitating the bank account in

fictitious name. Toleti, ofcourse, was offered a handomse commission. The

money retrived from him is part of the commission of the scam.

On the other hand, as a bureaucrat Udayan Majumdar had access to a section

of employees of West Bengal State Cooperative Bank, who helped him to

execute the forgery. Majumdar has been suspended in September 2012 for

several corruption charges. His last posting was deputy commissioner of State

refugee rehabilitation department. Earlier he served as the sub-divisional officer

of Kakdwip in south 24 Paraganas and later also served as the joint

commissioner in Agriculture department. During his tenure, a major job scam

happened in Agriculture department and following departmental inquiry,

Majumdar's name was cropped up. Several vigilance inquiries are pending

against him. Like State Cooperative Bank, in similar modus operandi, Rs 120

crore was siphoned off from West Bengal Industrial Infrastructure Development

Finance Corporation. In same manner fraudsters duped West Bengal Marketing

Board and Fisheries and Animal Husbandry University. Police have initiated

probe on the Rs 120 crore fraud and rounded up notorious fraudster Indrajit

Chatterjee. Due to the similarities in the modus operandi, police have reasons

to believe that the same gang is behind all the frauds.

BANK EMPLOYEES ARRESTED FOR FRAUD

New Delhi; 17 january 2010

Five youths, including two bank employees and a struggling model were

arrested in New Delhi for allegedly cheating by withdrawing around Rs. 20

22

lakh using phone banking facility, police said on Sunday.

The arrested have been identified as Amit Chauhan (29), Sunil Grover (21),

Raman Preet Singh (26), Ashish Tiwari (24) and Deepak Malik (33), Deputy

Commissioner of Police (South) H G S Dhaliwal said.

Malik is a graduate from Nagpur University who is working in the Preet

Vihar branch of ICICI bank as a Branch Sales Manager at a salary of Rs.

35,000 per month while Tiwari is an MBA who is also an employed in the

same branch.

Singh, son of a retired bank official, is basically a Printer and Photographer

while Grover, a struggling model, has earlier been arrested in similar type of

bank related cheating case in Shalimar Bagh police station two years ago and

remained in jail for two months, police said.

Chauhan is the alleged kingpin of the gang and is the main person who used

to put fake signature on the cheque leaf meant for fraudulent transaction and

physically went to the bank to withdraw cash. He spent all the money on his

paramour in a red light area, they said.

"They used to collect the information of a bank customer by going to them in

the guise of a bank official and making them fill personal details in the

feedback form. Later they use the same detail to cheat the customer," Dhaliwal

said.

The arrests came following investigations into a complaint by one Sidharth

Bharadwaj, that someone had fraudulently withdrawn amount Rs. 2.95 lacs

from his account.

3 HELD FOR NET BANKING FRAUDS, HAD DETAILS

OF 1 CRORE ACCOUNTS

23

NEW DELHI; 28 august 2013

Pause before you click on an attachment addressed to you from an e-mail id

seemingly from your bank. The mail could contain a malware sent to you by

hackers which would transfer your banking data to them.

On trail of suspects in an internet banking fraud, the special staff of south

district has taken into custody two students and a Nigerian national. The

malware was being sent from abroad while the SIM deactivation and actual

withdrawal of money took place in India. The trio has admitted to cheating

100 people.

Police have recovered the customer data of a staggering one crore customers

of different banks from the laptops of the arrested men who have been

identified as Saket Anand (21), a BTech student, Ujjwal Anand (21), a BCA

student, and Anthony Chienedu alias Tony (34), additional DCP (south) P S

Kushwah said. "A total of 136 SIM cards, five data cards, flash drives, three

laptops and fake debit and credit cards of various banks have been found,"

Kushwah added.

Explaining the modus operandi, Kushwah said a group of hackers, operating

from abroad, first obtained the e-mail IDs of customers of various banks using

special software. Then, they send a malware via a bogus attachment to all

these IDs.

"When the customer opened the attachment, a parallel folder with his details

was created on the hacker's computer. Whenever the customer used his internet

for banking, his data was stored in the hacker's computer. The Indian

counterparts then got the mobile number of the customer blocked so that he

did not receive SMS transaction alerts. They then transferred the money to

various bogus accounts abroad which was withdrawn at ATMs here," he said.

Arun Aggarwal had lodged a complaint with Hauz Khas police. On July 23 he

had received an SMS alert from ICICI Bank for a transaction he had not

made. On August 2, he received a similar SMS from OBC Bank. Upon

24

inquiry it was revealed that 33 transactions had been made within two hours

the previous night. In all, Rs 1.65 lakh had been transferred to unknown

accounts.

A team comprising inspectors Jasmohinder Chaudhary and Neeraj Kumar began

investigations. Chaudhary found the transfers were made from a single location

and the money was transferred to five different bank accounts located in

Bhagalpur, Bihar. A team led by ACP Kulwant Singh camped in Bihar and

traced the ATM addresses. The team apprehended Saket and Ujjwal from

Laxmi Nagar in east Delhi. Tony was arrested from Dabri Extension in west

Delhi on their instance.

Woman alleges bank fraud

GURGAON; 26 may 2011, 06.57am IST

A woman has lodged a case against the branch manager and cashier of a

nationalized bank for allegedly diverting Rs 5 lakh from her account. The case

has been registered at Civil Lines police station.According to the police, the

woman has lodged an FIR alleging that she lost her savings due to the

negligence of bank officials. The victim, Pushpa Devi, has a savings account

in the Gurdwara Road branch of the bank. She has alleged that few days back

Rs 5 lakh had been transferred from her account to another account without

her permission.

"When she filed a compliant with the bank, the branch officials investigated

the case and found that the amount was transferred to the account of another

customer," said a senior police officer. The victim, Pushpa Devi, has a savings

account in the Gurdwara Road branch of the bank. She has alleged that few

days back Rs 5 lakh had been transferred from her account to another account

without her permission.

25

CHAPTER 4

MAJOR FRAUDS IN VARIOUS COUNTRIES

Bank fraud in the United States

Under federal law, bank fraud in the United States is defined, and made

illegal, primarily by the Bank Fraud Statute in Title 18 of the U.S. Code. 18

U.S.C. § 1344 (Bank Fraud Statute) states:

Whoever knowingly executes, or attempts to execute, a scheme or

artifice—

(1) To defraud a financial institution; or

(2) To obtain any of the moneys, funds, credits, assets, securities, or

other property owned by, or under the custody or control of, a financial

institution, by means of false or fraudulent pretenses, representations, or

promises shall be fined not more than $1,000,000 or imprisoned not

more than 30 years, or both.

State law may also criminalize the same, or similar acts.

26

The Bank Fraud Statute was passed following the Supreme Court's decision in

Williams v. United States, 458 U.S. 279 (1982), in which the Court held that

cheque-kiting schemes did not constitute making false statements to financial

institutions (18 U.S.C. § 1014). Congress responded by passing the Bank Fraud

Statute (18 U.S.C. § 1344). Section 1344 has subsequently been bolstered by

the Financial Institutions Reform, Recovery and Enforcement Act of 1989

(FIRREA), Pub. L. No. 101-73, 103 Stat. 500.

The Bank Fraud Statute criminalizes federally cheque-kiting, cheque forging,

non-disclosure on loan applications, diversion of funds, unauthorized use of

automated teller machines (ATMs), credit card fraud, and other similar

offenses. Section 1344 does not cover certain forms of money laundering,

bribery, and passing bad checks. Other provisions cover these offenses.

In the United States, consumer liability for unauthorized electronic money

transfers on debit cards is covered by Regulation-E of the Federal Deposit

Insurance Corporatin. The extent of consumer liability, as detailed in section

205.6, is determined by the speed with which the consumer notifies the bank.

If the bank is notified within 2 business days, the consumer is liable for $50.

Over two business days the consumer is liable for $500, and over 60 business

days, the consumer liability is unlimited. In contrast, all major credit card

companies have a zero liability policy, effectively eliminating consumer liability

in the case of fraud.

BANK FRAUD IN CHINA

China has executed bankers for fraudulent activity; some recent cases (Sept

2004) which ended in capital punishment include:

Wang Liming link goes to the wrong person, former accounting officer,

China Construction Bank, Henan, with others stole 20 million yuan

($2.4 million in U.S. Currency) from the bank using fraudulent papers,

executed.

Miao Ping, an accomplice in the same case, executed.

27

Wang Xiang link goes to the wrong person, same bank in an unrelated

case, also executed for taking 20 million yuan from the bank.

Liang Shihan, Bank of China, Zhuhai, executed for helping cheat his

bank out of $10.3 million US.

In China, consumer liability for fraudulent electronic money transfers is

covered by an order of the China Banking Regulatory Commission, called The

Measures Governing Electronic Banking. Chapter 8 deals with legal liabilities.

Article 89 stipulates that if the bank causes any monetary loss for any reason

"irrelevant to the customer, it shall bear the liabilities accordingly." This leaves

consumer liability open to interpretation. As such, Chinese banks have a policy

of refusing to repay any fraud victim unless a lawsuit is filled. If a fraud

victim is successful in filling a lawsuit, the bank might settle out of court. If

a lawsuit goes to court, the success of the lawsuit depends largely on the

disposition of the local court in question. A lawsuit concluded in 2012 in the

city of Wenling, Jejiang province made news because the local court ordered

the bank to fully reimburse a man who was the victim of card duplication.

However, the extent of the uncompensated fraud victim issue is unknown, as a

result of China's censored media.

Bank fraud claims over four million victims in UK

Nearly 4.6 million people in the UK have had their personal details stolen and

their bank accounts used to buy goods or services, according the latest Deloitte

Consumer Review.

About two-thirds of more than 2,000 UK adults polled claimed to have

received phishing emails aimed at stealing personal information. A third of

respondents said they had been a victim of ‘cybersquatting’ where a website

that appears to be the site of a genuine company or brand is actually owned

and operated by a third party who may be trying to defraud visitors.

Consequently, only 44% said they trusted companies to tell the truth about the

quality of their data security procedures. And only 40% thought their data safe

when they shared it with a company – even one they trusted.

28

“People are doing more and more online, and as consumers’ digital activities

expand, so does their data footprint,” said Chris Gaines, partner in Deloitte’s

enterprise risk services practice.

“Consumer awareness of cyber crime is at an all-time high, fuelled by first-

hand experience and media coverage of recent high-profile security breaches,”

he said.

Nine out of 10 people said they had thought about the need to protect their

activities and data online, while 88% thought it was the responsibility of the

companies that collect their data to keep it secure and protect them from

fraud.

Consumers want companies to take more action too. Three-quarters said they

want businesses to introduce more ID authentication processes on their

websites, despite the extra effort this would mean for them.

Deloitte said consumers are clearly placing the burden of security with the

company, but this also presents an opportunity for retailers to differentiate

themselves.

Two-thirds of respondents said they were more likely to use companies that

went out of their way to show customers they kept their information safe.

Conversely, nearly a third of people affected by security breaches said they

had shifted their loyalty away from the company responsible for losing their

data.

Exceeding consumers’ expectations could help in maintaining loyalty and

attracting customers, while failure to do enough could push them away, the

Deloitte report said.

Banks top the list of organisations people trust least with their personal data,

according to a survey of 2,000 UK consumers.

29

Mobile phone operators and retailers also fare badly, according to the study

commissioned by collaboration and communication services firm Avaya and

contact centre technology firm Sabio.

According to a similar report by research consultancy Davies Hickman

Partners, six million UK consumers have stopped doing business with an

organisation because of concerns about security.

“The information companies hold about their customers is one of their most

valuable assets. In this new digital world, consumers will turn to trusted

brands who they know will protect this data. Those that fail to act risk losing

loyal customers,” said Gaines.

Himalayan Bank loses Rs 4 million in debit card fraud Himalayan Bank Limited (HBL) has reported that Rs 4 milion was stolen from

the accounts from depositors through fraudulent use of the bank’s debit cards.

HBL has now halted all debit card transactions after it found the theft. HBL

has also announced that it will upgrade the bank’s entire security system as

well.

According to media reports, Rs 4 million was withdrawn last week from New

Delhi, India through HBL’s debit cards. The bank launched an investigation

after dozens of account holders complained about the missing funds. HBL has

reported that it suspects a former employee is involved in the fraud. The

former employee has been absconding after embezzling millions of Rupees

from the bank.

HBL customers will not be able to use their debit cards for another two

weeks. The country’s central bank has directed HBL to provide details of the

fraud. HBL has asked its debit card holders to contact their respective

branches to replace their existing pin numbers.

Nigerian scam

30

It is also called 419 scams, are a type of fraud and one of the most common

types of confidence trick.

There are many variations on this type of scam, including advance fee fraud,

Nigerian Letter, Fifo's Fraud, Spanish Prisoner Scam, black money scam. The

number "419" refers to the article of the Nigerian Criminal Code dealing with

fraud. The scam has been used with fax and traditional mail, and is now used

with the internet.

While the scam is not limited to Nigeria, the nation has become associated

with this fraud and it has earned a reputation for being a center of email

scam crimes. Other nations known to have a high incidence of advance fee

fraud include Ivory Coast, Benin, Togo, South Africa, Russia, India, Pakistan,

the Netherlands, and Spain.

Kenya

The Central Bank of Kenya ( CBK) has raised concerns over the rising

incidents of internally generated fraud within the banking industry.

Reported figures show commercial banks lost an estimated Sh1.5 billion

through electronic fraud in 12 months (April 2012-April 2013).

The funds were stolen through automated teller machines, payment cards and

Point of Sale between April 2012 and April 2013. “Most of these fraud is

internal to these institutions,” Stephen Nduati, Head of National Payments

System at the Central Bank told The Standard on Sunday.

“We have enhanced our ability to oversee payment systems. My job is to

ensure efficiency and safety of the payments system,” he noted

“If there is fraud, it is within a bank. Our Real Time Gross Settlement

(RTGS) system is clear and safe. We have encouraged banks to put in place

in internal controls as fraud can only be in an individual institution but not

within the RTGS systems.”

31

According to the bankers lobby, the Kenya Bankers Association (KBA) fraud

could take place at the point of entry into the RTGS.

“We are fairly confident about the RTGS system. Vulnerability lies at the

point of entry into the RTGS,” Chief Executive Habil Olaka told The Standard

on Sunday in an earlier interview.

“Individual banks are required to put in an elaborate internal control system to

ensure that the system is not interfered with.”

The introduction of RTGS was a risk mitigation measure, which has seen an

average of over 7,000 transactions valued at Sh86 billion moved through the

system daily according to the CBK’s latest statistics.

In 2011 commercial banks agreed to combine efforts in weeding out dishonest

employees from the banking industry following shocking incidents of banking

fraud. Under the arrangements commercial banks agreed to discuss and share

information on fraudulent staffs implicated in financial scams with a view of

tracking and blacklisting them.

In some incidences, bank tellers or clerks collude with outsiders and even with

their supervisors to defraud the banks they worked for.

KBA has since directed its members to re-audit their employees after it

emerged that most of the banking fraud, which have hit the industry, were

internally instigated.

KBA expects individual banks to put in place elaborate procedures to deal

with errant employees. “We are taking a zero-tolerance position where severe

action, including criminal prosecution would be taken against employees found

to have colluded with fraudsters,” said Olaka.

32

CHAPTER 5

FRAUDS CONTROL IN INDIA

In the banking and financial sectors, the introduction of electronic technology

for transactions, settlement of accounts, book-keeping and all other related

functions is now an imperative. Increasingly, whether we like it or no, all

banking transactions are going to be electronic. The thrust is on commercially

important centers, which account for 65 percent of banking business in terms

of value. There are now a large number of fully computerized branches

across the country. A switchover from cash-based transactions to paper-based

transactions is being accelerated. Magnetic Ink character recognition clearing of

cheques is now operational in many cities, beside the four metro cities. In

India, the design, management and regulation of electronically-based payments

system are becoming the focus of policy deliberations. The imperatives of

developing an effective, efficient and speedy payment and settlement systems

a r e getting sharper with introduction of new instruments such as credit cards,

33

tele-banking, ATMs, retail Electronic Funds T rans f e r (EFT) and Electronic

Clearing Services (ECS). We are moving towards smart cards, credit and

financial Electronic Data Interchange (EDI) for straight through processing,

amalgamation, reconstruction and liquidation. Under the RBI's supervision

and inspection, the working of banks has greatly improved. Commercial

banks have developed into financially and operationally sound and viable units.

The RBI's powers of supervision have now been extended to non-banking

financial intermediaries. Since independence, particularly after its

nationalization 1949, the RBI has followed the promotional functions

vigorously and has been responsible for strong financial support to

industrial and agricultural development in the country. India has a financial

system that is regulated by independent regulators in the sectors of banking,

insurance, capital markets, competition and various services sectors. In a

number of sectors Government plays the role of regulator. Ministry of Finance,

Government of India looks after financial sector in India. Finance Ministry

every year presents annual budget on February 28 in the Parliament. The

annual budget proposes changes in taxes, changes in government

policy in a lm os t a l l t he s ec t o r s a nd budge ta ry a nd o the r

allocations for all the Ministries of Government of India the annual budget is

passed by the parliament after debate and takes the shape of law. Reserve

bank of India (RBI) established in 1935 is the Central bank. RBI is regulator

for financial and banking system, formulates monetary policy and prescribes

exchange control norms. The Banking Regulation Act, 1949and the Reserve

Bank of India Act, 1934 authorize the RBI to regulate the banking sector in

India. India has commercial banks, co-operative banks and regional rural banks.

The commercial banking sector comprises of public sector banks, private

banks and foreign banks. The public sector banks comprise the

‘State Bank of India’ and its seven associate banks and nineteen other banks

owned by the government and account for almost three fourth of the

banking sector. The Government of India has majority shares in these public

sector banks. India has a two-tier structure of financial institutions with thirteen

all India financial institutions and forty-six institutions at the state level.

All India financial institutions comprise term-lending institutions, specialized

institutions and investment institutions, including in insurance. S t a t e level

34

institutions comprise of State Financial Institutions and State Industrial

Development Corporations providing project finance, equipment leasing,

corporate loans, short term loans and bill discounting facilities to corporate.

Government holds majority shares in these financial institutions. Non-banking

Financial Institutions provide loans and hire-purchase finance, mostly for retail

assets and are regulated by RBI. Insurance sector in India has been

traditionally dominated by state owned Life Insurance Corporation and General

Insurance Corporation and its four subsidiaries. Government of India has now

allowed FDI in insurance sector up to 26%. Since then, a number of new

joint venture private companies have entered into life and general insurance

sectors and their share in the insurance market in rising. Insurance

Development and Regulatory Authority (IRDA) is the regulatory authority in

the insurance sector under the Insurance Development and Regulatory Authority

Act, 1999.RBI also regulates foreign exchange under the Foreign Exchange

Management Act (FERA). India has liberalized its foreign exchange controls.

Rupee is freely convertible on current account. Rupee is also almost fully

convertible on capital account for non-residents. Profits earned, dividends and

proceeds out of the sale of investments are fully repatriable for FDI. There are

restrictions on capital account for resident Indians for incomes earned in India.

Securities and Exchange Board of India (SEBI) established under the Securities

and Exchange aboard of India Act, 1992is the regulatory authority for capital

markets in India. India as 23 recognized stock exchanges that operate under

government approved rules, bylaws and regulations. These exchanges constitute

an organized market for securities issued by the central and state governments,

public sector companies and public limited companies. The Stock Exchange,

Mumbai and National Stock Exchange are the premier stock exchanges. Under

the process of d e mutualization, these stock exchanges have been

converted into companies now, in which brokers only hold minority share

holding. In addition to the SEBI Act, the Securities Contracts (Regulation) Act,

1956 and the Companies Act, 1956 regulates the stock markets.

35

CHAPERT 6

FRAUDS IN BANKING SECTOR; CAUSES, CONCERN AND

CURES

Inaugural address by Dr. K. C. Chakraborty , Deputy Governor,

Reserve Bank of India on July 26, 2013 during the National

Conference on Financial Fraud organized by ASSOCHAM at New

Delhi

Dr. Rana Kapoor, President, ASSOCHAM and MD & CEO, Yes Bank; Shri

M. J. Joseph, Additional Secretary and Chief Vigilance Officer, Ministry of

Corporate Affairs, Ms. Preeti Malhotra, Chairperson, ASSOCHAM National

Council for Corporate Affairs; senior members from the financial services

industry; delegates to the conference; members of the print and electronic

media; ladies and gentlemen. It is a pleasure to be here this morning to

36

deliver the inaugural address at the National Conference on “Financial Frauds -

Risk & Prevention.”

We all know that fraud, and more so, the financial frauds have been in

existence for a very long time. Some may be surprised, but, it is interesting to

note that Kautilya, in his famous treatise “Arthashastra” penned down around

300 BC, painted a very graphic detail of what we, in modern times, term as

‘fraud’. Kautilya describes forty ways of embezzlement, some of which are:

“what is realised earlier is entered later on; what is realised later is entered

earlier; what ought to be realised is not realised; what is hard to realise is

shown as realised; what is collected is shown as not collected; what has not

been collected is shown as collected; what is collected in part is entered as

collected in full; what is collected in full is entered as collected in part; what

is collected is of one sort, while what is entered is of another sort.” As you

would all agree, some of the above actions continue to be the modus operandi

adopted in many instances of financial fraud that have hit the headlines in

recent times. This shows that very little has changed over such a long period

in the basics of fraud and brings me to the question why has ASSOCHAM

now been forced to devote an entire day for deliberating the issue.

Statistics quoted in a recent report by the Association of Certified Fraud

Examiners’ (ACFE) 2012 titled “Report to the Nation on Occupational Fraud

and Abuse” may have some answers. The report has estimated that a typical

organization loses 5% of its revenues to fraud each year and cumulative

annual fraud loss globally during 2011 could have been of the order of more

than $3.5 trillion. The amount involved in the frauds reported by the banking

sector in India has more than quadrupled from Rs. 2038 crore during 2009-10

to Rs. 8646 crore during 2012-13. Similarly, another report has estimated the

losses of the Indian insurance companies at a whopping Rs.30, 401 crore in

the year 2011 due to various frauds which have taken place in the life and

general insurance segments. The losses work out to about nine per cent of the

total estimated size of the insurance industry in 2011. Enron, World com and

more recently, the Libor manipulation scandals, have caused major upheavals in

western nations and their impact has been felt not only in the individual

37

institutions or countries but across the global financial system. India too has

witnessed a spate of fraudulent activities in the corporate sector over the last

decade in the form of Satyam, Reebok, Adidas, etc. The ACFE report further

mentions that as in the previous years, banking and financial services industry

continues to be among the most commonly victimized sectors as far as fraud

is concerned. What the above statistics reveal is that the frequency, volume

and the gravity of instances of fraud across various sectors, particularly in the

financial sector, has gone up tremendously over the past few years. With the

sweeping changes in the scope and magnitude of banking transactions

witnessed in the past few decades, the emergence of hybrid financial products,

the increasing trend of cross border financial transactions and the dynamics of

real-time fund movement and transformation, the vulnerability of the system to

the menace of fraud has become higher than ever before

CHAPTER 7

BANKING FRAUDS STATISTICS

Table 1: No. of frauds cases reported by RBI regulated

entities

(No. of cases in absolute terms and amount involved in Rs.

crore)

Category No. of Cases Amount Involved

Commercial Banks 169190 29910.12

NBFCs 935 154.78

UCBs 6345 1057.03

FIs 77 279.08

176547 31401.01

38

As is evident from the above table, the cumulative number of frauds reported

by the banking sector and the total amount involved in these fraud cases have

a major share in the frauds reported by all entities under RBI’s supervisory

jurisdiction. A year-wise break up of fraud cases reported by the banking

sector together with the amount involved is given in Table below:

Year-wise no. and amount of fraud cases in the banking sector

(No. of cases in absolute terms and amount involved in Rs. crore)

Year No. of cases Total Amount

2009-10 24791 2037.81

2010-11 19827 3832.08

2011-12 14735 4491.54

2012-13 13293 8646.00

Total frauds reported as of March

2013169190 29910.12

It may be observed that while the number of fraud cases has shown a

decreasing trend from 24791 cases in 2009-10 to 13293 cases in 2012-13 i.e.

a decline of 46.37%, the amount involved has increased substantially from Rs

2037.81 crore to Rs. 8646.00 crore i.e. an increase of 324.27%. A granular

analysis reveals that nearly 80% of all fraud cases involved amounts less than

Rs. one lakh while on an aggregated basis, the amount involved in such cases

was only around 2% of the total amount involved. Similarly, the large value

fraud cases involving amount of Rs.50 crore and above, has also increased

more than tenfold from 3 cases in FY 2009-10 (involving an amount of Rs

404.13 crore) to 45 cases in FY 2013 (involving an amount of Rs 5334.75

crore) . Further, a bank group wise analysis of frauds reveals that while the

private sector and the foreign bank groups accounted for a majority of frauds

by number (82.5%), the public sector banks (including SBI Group) accounted

for nearly 83% of total amount involved in all reported frauds Table below.

Bank Group wise fraud cases

39

(No. of cases in absolute terms and amount involved in Rs. Crore)

Bank GroupNo. of

cases

% to Total

Cases

Amount

Involved

% to

Total

Amount

Nationalised Banks including SBI Group 29653 17.53 24828.01 83.01

Old Pvt. Sector Banks 2271 1.34 1707.71 5.71

New Pvt. Sector Banks 91060 53.82 2140.48 7.16

Sub Total (Private Banks) 93331 55.16 3848.19 12.87

Foreign Banks 46206 27.31 1233.92 4.12

Total 169190 100 29910.12 100

While the sheer number of frauds and the amount involved, when seen in

isolation, may appear overwhelming, it is important to view the incidence of

frauds in the banking sector in the context of the massive increase in the

number of deposit and credit accounts in banks and the staggering volume and

value of transactions that are processed by the banks every day. To put things

in perspective, let me quote some statistics again. The number of deposit

accounts in the banks over the last ten years (between end 2002 and end

2012) has gone up from 43.99 crore to 90.32 crore while the number of loan

accounts in the same period has also more than doubled from 5.64 crore to

13.08 crore. A quick estimate puts the average number of all transactions that

happen every day in the banking system at approximately 10 crore, which is

enormous. The number of frauds per million banking transactions was about

0.4, which is not a very high figure. Likewise, besides increase in the number

of brick and mortar branches, additional service delivery points like ATMs and

Point of Sale (POS) terminals have also gone up significantly. While the

number of ATM machines has grown from 34789 in March 2008 to 114014

in March 2013, the number of POS terminals has also more than doubled

(from 423667 to 845653) during the same period. The point I am trying to

drive home here is that on a standalone basis the quantum of frauds, both in

terms of number and amount involved, may appear to be very high, but when

40

one weighs it against the sheer magnitude of accounts and transactions handled

by the banking system, they are not alarming.

Category of Frauds

Broadly, the frauds reported by banks can be divided into three main sub-

groups:

a. Technology related

b. KYC related (mainly in deposit accounts)

c. Advances related

A closer examination of the reported fraud cases has revealed that around 65%

of the total fraud cases reported by banks were technology related frauds

(covering frauds committed through /at internet banking channel, ATMs and

other alternate payment channels like credit/ debit/prepaid cards) while the

advances portfolio accounted for a major proportion (64%) of the total amount

involved in frauds. Table below shows that relatively large value advances

related frauds (> Rs. 1 crore) have increased both in terms of number and

amount involved over the last four years.

Table 4: Bank Group wise Advance Related Frauds (Rs. 1 Crore & above in value)

(No. of cases in absolute terms and amount involved in Rs. Crore)

2009-10 2010-11 2011-12 2012-13

Cumulative total

(As

at end March

2013)

Bank

Group

No.

of

cases

Amount

Involved

No.

of

cases

Amount

Involved

No.

of

cases

Amount

Involved

No.

of

cases

Amount

Involved

No. of

cases

Amount

Involved

Nationalised

Banks

152 736.14 201 1820.12 228 2961.45 309 6078.43 1792 14577.28

41

including

SBI Group

Old Private

Sector

Banks

16 99.10 20 289.31 14 63.31 12 49.87 149 767.75

New Private

Sector

Banks

10 63.38 18 234.18 12 75.68 24 67.47 363 1068.18

Sub-total 26 162.48 38 523.49 26 138.98 36 117.34 512 1835.93

Foreign

Banks4 45.26 3 33.20 19 83.51 4 16.75 456 277.05

Grand Total 182 943.87 242 2376.81 273 3183.94 349 6212.51 2760 16690.26

Year wise fraud cases reported by commercial banks

(As on March 31, 2013)

(No. of cases in absolute terms and amount involved in Rs. Crore)

Amt

Involved< Rs 1 lakh

> 1 lakh and

up to Rs 1

crore

> Rs 1 cr and

up to Rs 50

crore

> Rs.50 croreTotal Fraud

cases

FY

(Apr-

Mar)

No. of

cases

Total

Amount

No. of

cases

Total

Amount

No.

of

cases

Total

Amount

No.

of

cases

Total

Amount

No. of

cases

Total

Amount

Pre-

20042292 4.24 819 96.65 613 2951.64 13 1244.26 3737 4296.80

2004-05 7553 12.50 2407 287.32 111 584.89 1 53.57 10072 938.29

2005-06 11395 18.63 2334 290.20 192 1009.23 2 135.47 13923 1453.53

2006-07 20415 31.22 3048 325.02 158 791.17 1 78.45 23622 1225.86

2007-08 17691 30.25 3381 383.98 177 662.31 - - 21249 1076.54

2008-09 19485 33.85 4239 442.94 214 1129.56 3 305.33 23941 1911.68

42

2009-10 20072 30.36 4494 474.04 222 1129.28 3 404.13 24791 2037.81

2010-11 15284 26.09 4250 494.64 277 1515.15 16 1796.20 19827 3832.08

2011-12 10638 19.05 3751 509.17 327 2113.23 19 1850.08 14735 4491.54

2012-13 9060 22.11 3816 491.13 372 2798.00 45 5334.75 13293 8646.00

Total 133885 228.31 32539 3795.10 2663 14684.46 103 11202.25 169190 29910.12

Bank Group wise fraud cases reported

(As on March 31, 2013)

(No. of cases in absolute terms and amount involved in Rs. Crore)

Amt

Involved< Rs 1 lakh

> 1 lakh and

up to Rs 1

crore

> Rs 1 cr

and up to Rs

50 crore

> Rs.50 croreTotal Fraud

cases

Bank

Group

No. of

cases

Total

Amount

No.

of

cases

Total

Amount

No.

of

cases

Total

Amount

No.

of

cases

Total

Amount

No. of

cases

Total

Amount

Nationalised

Banks

including

SBI Group

7622 31.97 19753 2847.11 2184 11867.24 94 10081.69 29653 24828.01

Old Pvt.

Sector

Banks

622 2.38 1463 225.09 181 1001.56 5 478.68 2271 1707.71

New Pvt.

Sector

Banks

83850 112.36 6984 510.18 225 1445.82 1 72.11 91060 2140.47

Sub Total 84472 114.74 8447 735.27 406 2447.38 6 550.79 93331 3848.19

43

(Private

Banks)

Foreign

Banks41791 81.60 4339 212.72 73 369.84 3 569.76 46206 1233.92

Grand Total 133885 228.31 32539 3795.10 2663 14684.46 103 11202.25 169190 29910.12

Year wise details of fraud cases closed

(No. of cases in absolute terms and amount involved in Rs. Crore)

Amt

Involved< Rs 1 lakh

> 1 lakh and

up to Rs 1

crore

> Rs 1 cr and

up to Rs 50

crore

> Rs.50

crore

Total Fraud

cases

FY

(Apr-

Mar)

No. of

cases

Total

Amount

No.

of

cases

Total

Amount

No.

of

cases

Total

Amount

No.

of

cases

Total

Amount

No. of

cases

Total

Amount

Pre-2004 1661 2.85 568 36.33 11 94.64 1 85.66 2241 219.48

2004-05 6047 8.47 470 33.27 13 99.68 - - 6530 141.42

2005-06 11611 9.47 154 10.86 11 75.93 1 55.28 11777 151.54

2006-07 14291 9.46 248 17.53 4 34.30 - - 14543 61.29

2007-08 12861 11.23 374 26.79 3 32.05 - - 13238 70.07

2008-09 6796 9.25 420 20.84 10 49.28 - - 7226 79.37

2009-10 5828 8.99 636 38.03 4 21.18 - - 6468 68.20

2010-11 13526 13.47 649 42.88 7 14.26 - - 14182 70.61

2011-12 38330 23.58 756 49.80 10 33.04 - - 39096 106.42

2012-13 11198 8.45 556 35.83 14 78.51 - - 11768 122.79

44

Total 122149 105.22 4831 312.16 87 532.87 2 140.94 127069 1091.18

CHAPTER 8

GENERAL SAFEGUARDS/PRECAUTIONS

1. Frauds cannot be prevented merely by laying down well conceived and well

defined procedural instructions. What is more important is the strict adherence

to the implementation of such instructions at the various levels. The need for

the banks to be on their guard all the time and to make available suitable

machinery for ensuring proper checks and counter checks at various stages

need hardly be emphasized. Some general precautions which may help early

detection of frauds are listed below:

2. Balancing of books of accounts with the general ledger balances should be

done every month and this should be checked by a responsible officer. An

element of rotation should also be introduced in the balancing of books of

accounts. Differences in balancing should be got reconciled promptly.

3. Prompt reconciliation of bank accounts and inter branch transactions should

be done atleast every month and this should be checked by a responsible

officer. Unreconciled entries especially which are old, large value and having

debit balances need to be reconciled as quickly as possible.

4. All debit and credit vouchers pertaining to a day's transactions should be

serially numbered and the totals of the same recorded in the main cash book.

45

The vouchers should be in the custody of passing officials who should hand

them over to another Officer for independent checking the next day.

5. Number of accounts as per the monthly balancing books should be tallied

with accounts opened closed register and account opening forms.

6. Inoperative accounts should be transferred to a separate register and all

precautions taken while allowing operations in such accounts.

7. The blank passbooks, cheque books, deposit receipts, specimen signature

cards and other important documents should be done in the custody of a

responsible officer.

8. Specimen signature cards should be in the custody of passing officials only

and withdrawal slips should be serially numbered and the stocks accounted.

The slips should be issued to account holders over the counter against

acknowledgement and passing officials should verify the balances in the

accounts before passing cheques for payment.

9. Balance confirmation should be obtained from depositors periodically.

10. In the case of withdrawal by means of withdrawal slips, pass books should

invariably accompany the slips.

11. For remittance by borrowers, supervisory officials should issue serially

12. numbered chalans after posting the number of the chalanas in the loan

accounts. At the end of the day it should be ensured that all the chalans

have been tendered to the bank.

13. Pledged jewels and other valuables should be verified independently by

officials unconnected with their custody. Surprise element for such verification

should be introduced.

14, Periodic rotation of duties among staff should be introduced.

46

15. Books of accounts of the bank should be periodically checked up by the

Chief Executive and other Senior Executives to ensure that unauthorized entries

and unauthenticated corrections do not exist.

16. After yearly closing of accounts, verification should be done to ensure that

inflated credit balances are not carried forward and differences, if any, are

reconciled immediately.

17. Banks should introduce a sound system of internal audit. The report of

the auditor and the action taken to rectify the defects should be placed before

the Board of Directors.

18. Banks should prescribe suitable periodical returns for branches and

submission of the same should be watched at Head Office.

Reporting of frauds by the UCBs to RBI

1. Frauds less than Rs.1 lakh – They need not be reported individually to

RBI. However, the data regarding them should be submitted in the quarterly

report on frauds outstanding to the RO of UBD of the RBI under whose

jurisdiction the Head Office of the banks falls.

2. Frauds of Rs.1 lakh and more but less than Rs.25 lakh – The cases of

individual frauds should be reported to the concerned RO of UBD of RBI

within three weeks from the date of detection

3. Frauds involving Rs.25 lakh and above – Individual cases should be

reported to the Fraud Monitoring Cell, DBS, CO, RBI, Mumbai within three

weeks from the date of detection. Additionally, banks may report the fraud

by means of a DO letter addressed to the CGM-in-Charge, DBS, CO, RBI

within a week of the fraud coming to notice of the banks head office, with a

copy endorsed to RO, UBD, RBI. The letter should contain particular such as

amount involved, nature of fraud, modus operandi, names of parties / officials

involved, complaint lodged with the police etc.

47

4. Quarterly progress reports on frauds of Rs.1 lakh and above are required to

be submitted to the RO, UBD, RBI.

5. Reports to Board of Directors (BOD) – Bank should report all frauds of

Rs.1 lakh and above to the BOD promptly on their detection, quarterly review

of frauds (March, June and September) and annual review of frauds for the

year ended December which may be reported by the end of March of the

following year. The review should cover whether frauds have occurred due

to laxity in following the systems.

CHAPTER 9

SUGGESTIONS TO FIGHT FRAUDS IN BANKS

Banks continue to be prime targets for all sorts of cybercrime and fraud. As the

risks escalate, so do the efforts of financial institutions to identify the fraudsters

and stymie their actions. These efforts, however, also have the potential to

complicate banks’ efforts to provide a good customer experience. What are the

current and emerging fraud threats to banks, and what kinds of technologies are

banks using (or should be using) to combat these threats? How can banks

balance fraud prevention and protection of customer information with the need

to optimize convenience, simplicity and ease of use for consumer and corporate

customers?

Give Customers A Sense Of Control

Today, we see threats associated with denial of service attacks, potential

disruptions of sites, not necessarily intrusion onto sites. Phishing exploits

continue, as do attacks on individual company databases. We have seen fewer

attacks on individual financial company databases to try to compromise data

and more attempts to attack our customers directly. Phishing attacks are

48

designed to essentially accumulate bank credentials so that unauthorized

transactions can be made.

Over the years, banks have grown accustomed to the balancing act between

protection and convenience. As threats change, protection measures must

change, as well. Some protection measures are more transparent to the

customer. One example is device authentication. Many customers use the same

personal computer to conduct online banking, and their financial institutions are

able to recognize the familiar computer as a method of authentication.

In some cases, the additional authentication is important to the customer. But

the customer can opt into that or not. As an example, banking customers can

opt to receive a text message on their mobile phones that a certain transaction

has occurred. The ability to set up these alerts according to their preferences

gives customers some control over their devices and authentication measures.

Banking customers may have to do something they might not ordinarily do to

get a measure of convenience. For example, a customer might use a computer

or device he or she doesn’t typically use to log on to mobile banking. This

will cause them to answer not some simple shared secrets but maybe some

complex information about themselves like transaction information. This

additional authentication measure gives additional protection while allowing the

customer the convenience of using an

Connect Fraud, AML, Security Data To Spot Patterns

While techniques evolve, today’s threats are as old as the financial system

itself. Cyber criminals are after money or other assets of value. Hacktivists are

politically and socially motivated so their attacks are often highly visible (e.g.,

DDoS). While they aim to disrupt services, attacks can result in financial loss

and reputational damage. Criminals may use DDoS as a diversionary tactic

while executing fraudulent activity.

It’s challenging to understand “normal” customer behavior across devices and

entry points. Many are implementing identity- and behavioral-based fraud

49

detection systems designed to identify and address issues before they become

major problems. Banks should connect fraud, anti-money laundering and

security data to recognize patterns and suspicious behavior.

It’s a delicate balance to successfully protect against fraud while minimizing

customer disruption. Banks should acknowledge that the customer end point is

compromised. Real-time, behavioral-based fraud detection helps allow legitimate

transactions while blocking malicious attacks. Early detection is critical to

minimizing consequences.

Security must be an ongoing practice, not a one-time exercise. Rules should

continuously be updated in response to new attacks. With mobile applications,

operating system updates should trigger an assessment. Independent security

assessments should be an integral part of the process.

According to EY’s Global Consumer Banking Survey 2012, greater confidence

in security would encourage 78 percent of young people to make greater use

of mobile banking. Banks should communicate to provide their customers with

greater assurance about the security of online and mobile banking. Security is

a shared responsibility. Conveying how security practices will benefit the

customer will promote accountability and more secure online behaviour.

Pursue the Convergence Of Biometrics & Mobile

It’s nothing new that banks are prime targets for all sorts of cybercrime and

fraud. The threat of Distributed Denial of Service (DDoS) attacks and phishing

expeditions, for instance, is constant. However, efforts to enhance fraud-

prevention and detection capabilities, such as requiring customers to use multi-

factor authentication, has the potential to diminish a good customer experience.

The bulk of fraud losses continue to come from traditional payment methods

such as credit cards, debit cards and checks. However, one of the current

fraud threats that the industry battles today is account takeover. This is partly

due to difficulties in accurately authenticating the customer as they are

50

transacting with the financial institution, even in the branches and call centers.

Account takeover results from criminals taking advantage of the vast amount

of personal information freely available on the Internet, through malware and

spear-phishing attempts, the utilization of social engineering tactics and the

compromise of data from merchant and processor breaches.

These threats do require enhanced methods like multi-factor authentication.

Financial institutions continue lead the pack in fraud detection and mitigation,

but are still dependent on using customer information and passwords that are

readily available and easily compromised. Technologies that use biometrics for

authentication are on the horizon and could make a difference with this issue.

The use of mobile devices for things like fingerprints, voice recognition and

visual identification appears promising and much more difficult to compromise.

Financial Institutions also need to combine all available data to enhance their

ability to identify anomalies in all aspects of customer interaction.

Educating and enlisting customers in the fight against fraud must remain a

priority. In addition, the biometric technologies mentioned are beginning to be

incorporated into the mobile devices which have become ubiquitous throughout

the world. These techniques, along with comprehensive data analysis,g may be

able to enhance the institutions ability to properly authenticate without

inconveniencing the customer.

Adopt a Layered Approach Leveraging Multiple Analytical

Techniques

There has been an increase in both frequency and complexity in bank fraud.

Opportunistic fraudsters are taking advantage of financial institutions’ customer-

centric programs, while organized fraudsters are becoming more and more

sophisticated in multi-dimensional attacks. Today's fraud exposure is growing

with more advanced plays involving everything from cyber to organizational

and logistical capabilities to attack banks in multiple locations at once.

51

We believe that banks need to look at layered approaches to predict fraud and

protect the organization on multiple levels. Organized fraudsters are smart and

know how to defeat your models and your rules, but they leave trails. Banks

need the ability to identify these trails, and uncover how the fraudsters mask

their identities. On the other hand, opportunistic fraudsters do not leave trails,

but can be caught with more sophisticated predictive analytics.

Banks also must widen their observation space, which defines the areas and

sources of data that they can analyze and observe behavior. The richer and

broader that you can make this space, the more likely you’ll be able to

disrupt and defeat the more sophisticated fraudsters.

There’s no magic for balancing fraud protection with customer convenience,

but a layered approach can go a long way for financial firms. Banks cannot

separate fraud from other customer-centric activities. Launching a customer-

focused enterprise or doing a digital transformation and other customer-focused

initiatives create avenues and opportunities for fraudsters.

To protect themselves from both organized and opportunistic fraudsters, banks

need to be able to model behaviors using predictive analytics and have the

ability to recognize and understand history and relationships. Otherwise, if an

individual exhibits a behavioral tendency that indicates that he or she is a

fraudster, but if a bank doesn’t connect that information to the individual’s

identify or relationships, the institution could make a big mistake in flagging

the activity as fraudulent. On the flipside, today’s sophisticated analytics may

be able to uncover hidden patterns and relationships that can help banks to

contain fraud and better manage risk while improving customer relationships.

The normal approach is to use pattern recognition and behavioral tendency, but

if you don’t couple that with identity detection and relationship analysis, you

could come up with many false positives. It all goes back to the essential

layered approach that leverages multiple advanced analytical techniques.

52

CHAPTER 10

A FEW RECENT ARTICLES

ARTICLE: 1

Source: The times of India

CBI developing database to curb banking frauds

NEW DELDI

August 8, 2012 | TNN

The CBI is developing a database of bank fraudsters to check cheating cases,

which have resulted in loss of Rs 3,799 crore during 2010-11, an increase of

53% as compared to the previous year, agency chief A P Singh said on

Tuesday. "Banks lost Rs 2, 017 crore due to frauds in 2009-10. This has seen

a quantum jump in 2010-11, with the loss amount rising to Rs 3,799 crore,"

he told the annual conference of Chief Vigilance Officers of public sector

banks and financial institutions. While CBI's Bank Securities and Fraud Cell

registered criminal cases involving Rs 4,000 crore in 2011, cases regarding

frauds worth Rs 2,500 crore have been registered from January to July this

year," he said. Singh said the CBI is developing a Bank Case Information

System (BCIS) which contains names of accused, borrowers and public

servants in its records. "This information may also be made accessible to field

53

functionaries of the banking sector in collaboration with the Indian Bank

Association (IBA) once modalities are worked out," he said.

Delivering the keynote address, Singh said the increasing amount of frauds in

the banking sector is a "disturbing factor". The CBI chief said the agency

would now probe only those bank fraud cases where loss is more than Rs 3

crore, while those below it would be investigated by the state police.

"On the request of CBI, CVC has notified revised threshold limits for

reporting bank fraud. CBI will now only register bank fraud cases involving

loss of over Rs 3 crore. Frauds involving loss of below Rs 3 crore shall be

reported to state police," he said.

The conference on Preventing Bank Frauds with Systemic Intervention was

organized by the CBI at its headquarters to sensitize the vigilance officers of

the banks. Singh pointed out that the losses incurred by public sector banks

and financial institutions clearly suggest that a better system of checks and

balances is required to prevent such frauds. He said existing loopholes need to

be plugged, manuals updated and Standard Operating Procedures framed to

ensure that lending and borrowing takes places in a healthy environment, free

of fraud.

Singh asked the Chief Vigilance Officers to sensitize their respective banks to

grant sanction for prosecution of public servants promptly as undue delay

sends a wrong signal to persons engaged in corrupt activities. He said that

some banks report fraud to the CBI to put pressure on borrowers to get their

dues recovered, and, later show reluctance to cooperate with investigation.

The CBI, he said, does not interfere in cases where commercial decisions

involving risks have resulted in losses to banks.

ARTICLE: 2

Ludhiana businessman booked for bank fraud

54

SHIMLA

TNN Sep 5, 2012, 02.17AM IST

CBI has arrested a Ludhiana businessman Rakesh Narula and charged him with

fraud with a bank in Baddi. He had allegedly obtained Rs 9 crore loan on

fake property documents. Investigation has found that he also duped a bank in

Chandigarh to the tune of Rs 10-11 crore. CBI officials, however, say the

accused might have cheated more banks.

A case was registered against Narula on a complaint by the Baddi bank.

Sources said he took the loan in 2009 and had submitted fake documents

citing property in Ludhiana, and used this money to open a garment factory in

Jharmajri area of Baddi. Irregularities in his account made the bank suspicious.

Sources said the bank officials initially investigated on their own and took

possession of the Jharmajri plant. Later, they discovered the property in

Ludhiana registered in another person's name. A case was registered under

sections 420, 467, 468, 471 and 120 (B) of IPC and Section 13(2) of the

Prevention of Corruption Act. CBI has also booked two bank officials and a

lawyer.

ARTICLE: 3

Bank fraud training for men in uniform

BHUBANESHWAR

January 17, 2011 | TNN

As bank-related frauds have emerged as a major crime in the city and across

the state, often leaving the police at their wit's end, a workshop was organized

here recently to familiarize the men in uniform with the technical know-how

for tackling such offences. The orientation programme was organized by the

commissionerate police in collaboration with the ICICI bank. "The aim behind

organizing such an event was to understand the nitty-gritties of banking,

55

mostly e-banking functioning which has become more prone to fraud," twin

city police commissioner Bijay Kumar Sharma said after inaugurating the event

on Saturday. Even though the bank fraud scenario, relating to credit card theft

and hacking of e-accounts is not so grave in Bhubaneswar and Cuttack, but

police received some complaints in past, he said.

"At times, the investigating officers struggle to crack such cases because of

their ignorance about the dos and don'ts of e-banking, credit card and digital

documents. So they need to be prepared professionally and mentally to tackle

the cyber offences," the police commissioner pointed out. As many as 30

police officers between the ranks of sub-inspector and assistant commissioner

of police took part in the orientation programme.

"Apart from sensitizing police officers, we have been urging the public to take

steps to protect their personal information, keep PIN numbers safe and secure,

check financial statements regularly and alert the financial institution if they

see any anomalies," a bank official said.

ARTICLE: 4

Bank fraud: Cops to grill suspect's wife

KOLKATA

April 18, 2013 | TNN

The bank fraud squad of the detective department of Kolkata Police has found

Rasika Chattopadhyay, wife of the mastermind of the Rs 120-crore bank fraud

with state run WBIDFC, Indrajit Chattopadhyay, as his partner in the crime.

Police said that they would interrogate his wife shortly. The police have, so

far, traced movable and immovable properties worth Rs 60 crore belonging to

Indrajit. Investigation revealed that his wife Rasika was the owner of Ma

Karunamoyee Films Ltd, that produced films and serials. Indrajit was the

promoter of a company, Amtech Universal. The duo had produced a Bengali

56

film, 'Greftar'. With steady flow of easy money from various fraudulent

transactions with banks, Indrajit ventured into Bollywood and invested Rs 7

crore in a movie. Probe also revealed that Indrajit developed a steady network

with bankers, bureaucrats, police and politicians, so that he remained

perpetually elusive to police. After his arrest in 2008, following a Rs 10-crore

fraud with a bank, Indrajit became extremely careful not to come to the

forefront of such fraudulent dealings, unless it was really big. He used to

operate from behind the scene.

Because of his connections, he used to travel in beacon-fitted expensive cars.

Police have seized many of his cars. He invested in real estate in some prime

localities of South Kolkata. Police said he also used to throw expensive parties

for his associates and contacts. Chattopadhyay used to live a lavish life.

The apartment at posh South City, where he lived, was in his wife's name. He

used to live at an apartment he bough at the upscale South City in the name

of his wife.

Police suspected that he invested in the realty after siphoning off the WBIDFC

funds. He often posed as a senior banker while duping the victims. had

amazing relationship with bankers and often project himself as senior banker.

He was often seen occupying the chairs of senior officials of banks, said an

investigator.

Police are, so far, convinced that Indrajit also played a crucial role in

fraudulent transactions worth Rs 50 crore - with the West Bengal University of

Fisheries and Animals and State Agricultural Marketing Board.

The UCO Bank had responded to a tender floated by the WBIDFC for

perking their money in fixed deposits with bankers quoting the highest interest

rate. Two branches of the UCO Bank - Circus Avenue and Howrah -

responded. The Circus Avenue Branch quoted the highest interest rate of

9.65% for a three-year deposit. The WBIDFC perked Rs 59 crore in August

and another Rs 61 crore in January, 2013.

57

In fact, his track record in bank fraud case dated back to 2006. The economic

offences wing of the CBI was looking for him as he had been duping various

banks since 2006.

ARTICLE: 5

Bank frauds on rise, trigger fear

LUDHIANA

June 22, 2012 | Naveen Kalia , TNN

Three bank frauds involving crores of rupees reported within three months in

the city is setting off alarm bells among residents, who claim that the

industrial town is becoming an easy target for such crimes. On Wednesday,

Punjab police and Kerala police detained three people in the city for a Rs 1.5

crore-fraud, recovering 200 ATM cards, 900g gold and land registry documents

worth Rs 9 lakh. Police sources said the gang used to open accounts for

acquaintances and take their cheque book and ATM card in exchange for a

nominal amount. They would then deposit Rs 10,000 in the account and carry

out multiple incomplete transactions to withdraw that amount. Each time, the

accused would pick up Rs 9,900 from the machine and leave behind Rs 100.

On June 18, division no 2 police booked Harbhajan Singh, owner of Royal

Industries, for issuing a fraudulent cheque of Rs 5.95 crore to Kunal Tanuja of

Ramsons Tyre. Police said Harbhajan had a network of people who were

procuring fake cheques from a Mumbai-based finance company, Shri Ram

Industries and issuing them to clients. They would write the cheque for an

amount larger than what they owed the client, ask him to encash it and

deposit the balance in their account. Four more people of the gang were

arrested while four others are absconding. The matter came to light when

58

Harbhajan, who owed Rs 2 crore to Kunal, issued a cheque worth Rs 5.95

crore and asked him to transfer the remaining Rs 3.95 crore in his bank

account. Kunal grew suspicious and reported it to the police.

On April 27, police busted a gang of six people including a bank employee

from Ludhiana for withdrawing Rs 26 lakh from various banks across Punjab.

The bank employee used to provide details of those holding accounts in their

bank. The gang would then issue cheques with forged signatures and withdraw

money.

Residents say banks should have tighter security systems to stall the rise of

such crimes. IT businessman Harpreet Singh, a resident of BRS Nagar, said he

is also a victim of bank fraud and saw the apathy of authorities up close. "A

few months ago, my ATM account was hacked and transactions were done in

Russia. I had lodged a complaint in a police station but nothing was done

about it. Banks should improve their security system to curb illegal activities,"

he said.

Barewal resident Amanpreet Singh, a businessman, said exemplary action

should be taken against those accused in the cases. "Banks also have the

responsibility of keeping a tight check on transactions and reporting any

suspicious pattern," he said. Charanjeet Singh, a resident of Shaheed Karnail

Singh Nagar said the rising incidents of bank frauds have caused fear and he

is hesitant to deposit his money in his account. A bank official, requesting

anonymity, said account holders have the responsibility of maintaining

confidentiality regarding their accounts. "One should never disclose or share

details of the account with strangers," he added.

Commissioner of police, Ludhiana, Ishwar Singh said cases of bank frauds are

a cause of concern as public money is being swindled. "However, we are

suspicious about the role of banks also in such cases and will investigate.

Banks also need to be stricter," he said.

59

ARTICLE: 6

Banks under lens for funding Delhi airport line

NEW DELHI

TNN | Oct 2, 2013, 06.08AM IST

The role of banks in funding about Rs 2,200 crore to the Delhi airport Metro

line is under the scanner. Separately, the road ministry has written to the

Central Vigilance Commission (CVC) to investigate if the developer, NHAI

and banks violated norms while building the Rs 1,600 crore Delh-Gurgaon

Expressway.

In the case of Airport Metro Express project, which was bagged by Reliance

Infra, lenders led by Axis Bank had extended a loan of Rs 2,220 crore against

government-approved debt of Rs 1,247 crore. "The funding pattern mentioned

what would be the debt component, equity and contribution of DMRC, Delhi

and central governments. While DMRC has taken approval for higher spending,

we have nothing on record showing the private player getting clearance for

higher debt," said an urban development ministry official.

Due to this increase, the DMRC now has to pay almost double the termination

fee than what was envisaged. Responding to this, a Reliance Infra

spokesperson said the project was awarded under competitive bidding to the

highest bidder and therefore estimated cost of DMRC was not relevant in the

present case. "Moreover, estimated cost of concessionaire was advised to

DMRC at the initial stage itself and it has not escalated further. It does not

require any formal approval from government or DMRC," he added.

Sources in the road transport and highways ministry said the role of five

major PSU banks including IDFC which refinanced the Gurgaon expressway

project also may be investigated.

The ministry has asked the central watchdog to examine whether a criminal

60

case is made and if so, the CVC can refer the case to Central Bureau of

Investigation (CBI). This is perhaps the first time when the ministry has taken

such a step. "Since there are allegations of NHAI that the fresh set of lenders

led by IDFC paid Rs 1,597 crore to the company without the authority's prior

approval, there is a need to investigate how banks did this," said a senior

ministry official.

NHAI in its termination notice has alleged the company Delhi-Gurgaon Super

Connectivity Ltd (DGSCL) did a "fraud" in obtaining this loan. Since the

beginning of this project, DGSCL has changed lenders thrice. NHAI has

alleged that the last two cases the company had concealed the transactions

until these were detected by the authority.

Originally, a consortium of banks led by HUDCO had provided Rs 483 crore

loan to the company. Later in 2009, it had requested for changing the lenders

with a new set of eight banks led by SBI to obtain Rs 1,275 crore only for

the project works. NHAI had given conditional clearance to get the loan. The

authority had alleged that DGSCL had suppressed the transaction and had even

diverted Rs 327 crore to its parent/ group company. Then the company again

changed the lenders led by IDFC and other PSU banks including Bank of

India, PNB and OBC to get Rs 1,600 crore loan without prior permission of

NHAI.

After getting this fresh loan DGSCL had paid back the entire outstanding

amount to SBI and others besides diverting a portion of this to its parent

company. The total diversion was Rs 656.9 crore in two installments.

"We have forwarded the entire bunch of documents relating to the project to

the CVC for investigation so that responsibility can be fixed and we can avoid

such controversies in future projects," said a ministry official.

It has also asked the enforcement directorate to find out whether DGSCL's

parent company or its sister firms have used the loaned amount for

infrastructure projects in foreign countries including Libya and Ghana. "In case

61

it has violated the laws then a case must be registered," officials said.

The ministry has also raised questions on why NHAI did not keep track of

the money trail to different projects. "There have been several negotiations to

save the project among all the stakeholders and have failed. All these should

be investigated to fix responsibility for the present mess," sources said.

ARTICLE: 7

Banks to pay for credit card frauds, RBI says

MUMBAI

TNN | Sep 29, 2013, 12.17AM

The Reserve Bank of India has refused to extend the deadline for upgrading

security on credit card swipe machines and has ordered banks to compensate

cardholders in seven days if any fraud occurs on non-compliant terminals.

If the bank fails to refund the disputed amount in seven days, it has to

compensate the cardholder with a penalty of Rs 100 per day until the date of

payment. At present, dispute resolution is a cumbersome process and takes

several weeks in case of credit card frauds.

Banks see the new directive as indicative of the central bank's seriousness on

card security. After a rise in credit card frauds, the RBI had asked banks to

add security features including an electronic chip and a secret PIN which the

cardholder is required to punch in the terminal to authenticate payment. This

feature was to come in force from July 1. But banks were behind schedule in

both issuing chip cards and in upgrading terminals to meet the new security

standards. Since the entire industry was behind schedule, the RBI was forced

to extend the deadline. Banks were required to get credit card swipe machines

upgraded by September-end and have all the cards upgraded by November. But

62

a few days ahead of the September deadline, banks have again said that they

are not ready.

"Various banks have approached us, seeking further extension of the time line

of September 30, 2013 for complying with the task of securing the technology

infrastructure," the central bank said in a statement.

Pointing out that banks were told that there would be no further extensions,

the RBI said, "It has been decided not to grant any further extension of time.

Accordingly, banks not complying with the requirements shall compensate loss,

if any, incurred by the cardholder using card at POS terminals not adhering to

the mandated standards."

There are usually two banks in every credit card transaction. One that issued

the credit card and the other that has installed the swipe machine. The RBI

has said that the card issuing bank should ascertain in three days whether the

fraud has taken in a non-compliant machine and within seven days refund the

money to the cardholder. The card issuing bank will in turn recover the

money from the bank which has installed the swipe machine.

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CHAPTER 11

CONCLUSION

Banks are facing a tidal wave of regulatory requirements and are increasingly

under regulatory scrutiny bid to tackle the rising incidents of frauds, The

Reserve Bank of India has issued various circulars and guidelines for banks to

implement robust anti-fraud system and controls to counter fraud risk. With the

expected economic slowdown, the incidents of frauds are expected to increase

further which is confirmed by the survey results. An interesting finding of the

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survey is that greater the asset size, higher is the number of fraud incidents

encountered. This could be due to fact that as banks continue to increase their

assets size by entering into new geographies or by introducing new products

and systems, these developments not managed well could contribute to

increased fraud. However, it is important first to note the cause of increase in

fraud incidents.

According to the survey respondents, it appears that ‘lack of oversight by the

line managers or senior managers to the deviations from existing

process/controls’ is cited as one of the major reasons for fraud followed by

the current ‘difficult business scenario’ and ‘business pressure’ to meet targets.

It is now indicated that there is going be a rise in fraud incidents, where

increase will be at least 6%. In the current fraud situation coupled with the

economic scenario it becomes all the more imperative for banks to ensure that

they adopt realistic business strategies and ensure adequate internal control and

vigilance so as not to accentuate the existing problem. It comes as no surprise

that the usual suspect -Retail Banking-has been identified as the major

contributor of fraud and will continue to do so in the foreseeable future. This

fact has been highlighted by The Reserve Bank of India well through their

circular in 2009. As retail banking is more process as well as volume driven

and decentralized, increased fraud incidents in this area could possibly be the

tip of the iceberg- an indicator of deeper issues waiting to surface that can

adversely impact the entire portfolio of the bank.

The Reserve Bank of India has been coming with various circulars and

guidelines prodding banks to adopt measures to fight the menace of fraud. The

challenge of banks is to develop comprehensive fraud risk management controls

that will not only prevent frauds, but also detect them as soon as they occur

and respond to them.

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BIBLIOGRAPHY

NEWS PAPER ARTICLES

BOOKS ON FRAUDS AND BANKING LAW

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WEBLIOGRAPHY

WWW.TIMESOFINDIA.COM

WWW.ECONOMICTIMES.COM

WWW.RBI.COM

WWW.DRTSOLUTIONS .COM

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