Fraud in the Banking Sector

Fraud in the Banking Sector

Presented by D.RAKHUL14-CO-464

IntroductionBanks are an essential part of the Indian economy.The primary responsibility for preventing frauds lies with banks themselves.As banks deal with public's money and hence it is imperative that the employees should exercise due care and diligence in handling the transactions.The RBI has been advising banks from time to time about the major fraud prone areas and the safeguards necessary for prevention of frauds.

Definition of fraudFraud can loosely be defined as any behaviour by which one person intends to gain a dishonest advantage over another fraud, under section 17 of the Indian contract act, 1872,RBI not defined the term fraud in its guidelines on frauds which reads as under.A deliberate act of omission or commission by any person, carried out in the course of a banking transaction or in the books of accounts maintained manually or under computer system in banks, resulting into wrongful gain to any person for A temporary period or otherwise, with or without any monetary loss to the bank.

Types of Fraud

Cheque Kiting: It is a method where by a depositor utilizes the time required for cheques to dear to obtain an unauthorized loan without any interest charge.

Counterfeit Securities:

Currency, documents, securities, bonds and certificate could be forged, duplicated, adjusted or altered and presented for loan collection.

Computer fraud: Hacking, tampering with a diskette to gain access to unauthorized areas and give credit to an account for which the funds were not originally intended.

Money laundering fraud: This is a means to conceal the existence, source or use of illegal obtained money by converting the cash into untraceable transactions in banks.

Telex Fraud: The messages that are passed through telex in form of codes could be altered to divert the funds to another account Letters of Credit: Most common in international trading, these are instruments used across borders ads can be forged, altered, adjusted and take longer to identify.Advanced Fees Fraud: Popularly known as 419, advanced fees fraud may involve agent with an offer of a business proposition which would lead to access often for a long term.

Reporting Fraud

Reporting of frauds to RBI Frauds involving amounts of less than Rs 1.00 lakh: less than Rs 1.00 lakh are not to be reported individually to the RBI. Statistical data in respect of such frauds should, be submitted to RBI in a quarterly statement. Frauds involving amounts of Rs 1.00 lakh and above but less than Rs 25.00 lakh: Frauds involving amounts of Rs1.00 lakh and above but less than Rs 25.00 lakh should be reported to the regional office of urban banks department of RBI .In the format given in FMR-1, and within three weeks from the date of detection.

Frauds involving amounts of Rs 25.00 lakh and above : frauds involving amounts of Rs 25.00 lakh and above should be reported to central frauds monitoring cell, department of banking supervision, RBI.A copy of FMR-1 should also be submitted to the regional office of urban banks department of RBI.In addition banks may report the fraud by means of D.O. Letter addressed to the principal chief general manager of the department of banking supervision, RBI, central office.The letter may contain brief particulars of the fraud. Letter should also be endorsed to the regional office of urban banks department of RBI under the bank's branch.

Expectations of the supervisorRBI has clearly indicated that fraud risk management, fraud monitoring and fraud investigation function must be owned by the banks C.E.O. , and the audit committee of the board.In respect large value frauds, the special committee of the board are CMDs, CEOs, audit committee and the special committee evolving robust fraud risk management systems.They are responsible for effective investigation of fraud cases and accurate reporting to appropriate regulatory and law enforcement authorities. Top management puts in place targeted fraud awareness training for its employees focusing on prevention and detection of fraud.

Audit systems prevalent in banks have not proved effective in detecting fraud cases.

Providing individuals a means to report suspicious activity is a critical part of an anti-fraud program.

A system of protected disclosure scheme has been evolved which is regulated by CVC (Central Vigilance Comission) in case of public sector banks. RBI in case of private and foreign banks.

Recent Banking Frauds and Scams

CITI BANK FRAUDRetail banking unit in Gurgoan.

Rs 400 crore estimated fraud and forgery.

Main accused - SHIVRAJ PURI.

Investment of high net worth individuals.

Firm commitment of monthly returns as high as 1.5-2.5 %, or 18-30 % annually.

Fake fixed deposits receipts were issued against these investments.

Sanjay Puri- an RM at Citi Bank is accused of luring 40 HNIs and corporate entities to invest in the bogus schemes.

Schemes falsely substantiated with a forged letter from market regulator SEBI.

The investments ranged from 15 lakhs and above.

Puri initially returned some of the money at a 20 % interest to win their trust.

HARSHAD MEHTA SCAMAn Indian Stockbroker

Engaged in a massive stock manipulation scheme financed by worthless bank receipts.

Financial scandal valued at R.s 49.99 billion.

Mehta was dipping illegally into the banking system to finance his buying.

The crucial mechanism through which the scam was effected was the ready forward deal

The RF is in essence a secured short term loan from one bank to another.

The bank lends against on government securities.

The borrowing bank sells the securities to the lending bank and buys them back at the end of the period of loan at a higher price.

It was this RF deal that Mehta used in great success to channel money from the banking system.

In a ready forward deal, securities were not moved back and forth in actuality.

Instead, the borrower gave the buyer of the securities a bank receipt.

Bank receipts confirms the sale of securities and acts as a receipt for the money received by the selling bank.

It promises to deliver the securities to the buyer

Mehta needed banks which issued fake BRs (Not backed by any government securities).

Two small and little known banks the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) came in handy for this purpose.

Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, assuming that they were lending against government securities when this was not really the case.

This money was used to drive up the prices of stocks in the stock market.

When time came to return the money, the shares were sold for a profit and the BR was retired.

The money due to the bank was returned.

This went on as long as the stock prices kept going up, and no one had a clue about Mehta's operations.

Once the scam was exposed, a lot of banks were left holding BRs which did not have any value.

The banking system had been swindled of a whooping Rs 40 billion.

UTI SCAMThe UTI scam involved the flagship US-64 scheme of UTI.

The scheme was meant to channel the funds of small investors into instruments bearing high returns.

Gradually, US-64 scheme developed an investor base of around 2 crore investors.

The UTI chairman Mr. P S Subramanyam, along with a couple of executive directors, acted wrongly to benefit powerfull brokers and industrialist.

The economic liberalisation in India.

The absolute opacity of in the operations of UTI, forced the government to announce a bailout of Rs 3,500- 4000 crores.

The reason of bailout was to prevent default in payment to the investors.

INDIAN BANK RIP-OFF 1992

The Indian bank rip-off scandal was worth Rs 1300 crores.

Aided by M. Gopalakrishnan, then the chairman of the Indian Bank.

Borrowers were mostly small corporates and expoters from south.

The borrowers never paid back.

Ketan Parekh ScamAfter UTI was bailed out by the government with Rs 4000 crore, it purchased huge bulks of manipulated shares from PENTAFOUR BULL

The 2001 stock market crash prompted the SEBI to inspect the books of Parekh.

The CBI arrested him on the charges of defrauding THE BANK OF INDIA of about $ 30 million.

Followed Harshad Mehtas footsteps to swindle crores of rupees from banks.

Targeted small exchanges like the Allahabad Stock Exchange and Kolkata Stock Exchange.

Bought shares in fictitious names.

Dealings revolved around shares of ten companies like Himachal Futuristic, Global Tele-Systems, SSI Ltd, DSQ Software, Zee Telefilms, Silver line, pent media Graphics and Satyam Computer.

Borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions.

Managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank.

According to RBI regulations, a broker is allowed a loan of only Rs 15 crore.

There was evidence of price rigging in the scripts of Global Trust Bank.

Statistics on Banking Fraud

Table 1: Number of frauds cases reported by RBI regulated entities(No. of cases in absolute terms and amount involved in Rs. crore)Source: BIS central bankers speeches 26 July 2013.

Table 2: Year-wise and amount of fraud cases in the banking sector(No. of cases in absolute terms and amount involved in Rs. crore)Source: BIS central bankers speeches

Table 3: Bank Group wise fraud cases(No. Of cases in absolute terms and amount involved in Rs. Crore)Source: BIS central bankers speeches

Table 4:Bank Group wise Technology Related FraudsSource: BIS central bankers speeches

Table :5 Year wise details of fraud cases closed

Source: BIS central bankers speeches

Table 6:Bank group wise fraud cases reportedas on march 31, 2013Source: BIS central bankers speeches

Preventing Banking Fraud

Online banking is a very secure and convenient way to access your bank's services. However, you need to be wary of fraudsters trying to gain access to your account. This is usually by trying to dupe you into handing over security information such as your username, passwords or your memorable information.

How to bank safely online

Never login to your bank website through a link in an email, even if the email appears to have come from your bank. Type the web address into your browser yourself.

The login pages of bank websites are secured through an encryption process, so a locked padlock or unbroken key symbol should appear in your browser window when accessing your bank site.

The beginning of your bank's internet address will change from 'http' to 'https' when a secure connection is made.

Be wary of any unexpected or suspicious looking pop-ups that appear during your online banking session.

Online Banking

Stop and think about the process you normally go through to make a payment to someone be suspicious if it differs from the last time you used it.

Fraudsters sometimes try to trick people into making a real payment by claiming "it's just a test".

Never give anyone your login details in full either by email or over the phone your bank will never request these in this way.

Check the online banking security options your bank provides; some offer free anti-virus and browser security software.

Check your bank statements regularly and contact your bank immediately if you spot any transactions that you didn't authorize.

When sending money via your online bank account, always double check the amount you are sending as well as the account number and sort code you are sending it to.

Make sure your bank has your up-to-date contact details.Browsers often come with security features built in. Make sure they are activated.

Malware, a shortened version of malicious software, is a computer virus that can be installed on your computer without you realizing. It is designed to enable fraudsters to steal your personal or financial information or perform unauthorized actions on your computer.

Malwarecan sometimes get on your computer if you visit untrustworthy websites, click links in spam emails or download a pirated computer file.

A common type of malware is a called a Trojan. This can install a keystroke logger on your computer which records the letters and numbers you type on your keyboard. Then, when you access an online bank account, the keystroke logger can record your login information.

Other Trojan malware can create a bogus pop-up webpage which appears in front of a genuine online banking login website, tricking you into entering your login details into a fraudulent website.

Other types of malware can alter webpages, meaning they are able to insert extra fields into an online banking website, tricking you into giving a fraudster personal information.Protect Your PC

How to avoid this type of scam:

Unsolicited emails that encourage you to click on links or open attachments. Emails containing Trojans often try to entice you to do so by pretending to include dramatic news or information.

Websites that launch a program unexpectedly or that create a lot of activity on your internet connection as it downloads computer files.

Downloading executable files (.exe) or zip files (.zip) from the internet or emails, especially from an unknown source.

Installing a firewall and anti-spyware programme also helps protect you from malware, and check that you have the latest operating system and web browser security updates installed.

If you detect malware on your computer, try to remove it using anti-virus software, or speak to your computer or software suppliers support centre.

If you suspect that your computer may have been infected with malware and you have used any online banking services, contact your bank immediately.

Conclusion The impact of frauds on entities like banks, and the economic cost of frauds can be huge in terms of likely disruption in the working of the markets, financial institutions, and the payment system. Besides, frauds can have a potentially debilitating effect on confidence in the banking system and may damage the integrity and stability of the economy. It can bring down banks, undermine the central banks supervisory role and even create social unrest, discontent and political upheavals. The vulnerability of banks to fraud has been heightened by technological advancements in recent times.

Customers love online banking for its convenience, while banks benefit from lower costs and a greater reach than a physical branch network provides. To ensure that both parties continue to benefit from online banking, it must remain a safe and secure channel that allows legitimate customers access as needed, while simultaneously blocking entrance to cybercriminals. Cybercriminals will continue to target online banking for as long as it is worth their effort to do so. Each instance of online fraud helps fuel additional investment by cybercriminals in the people and technology they need to overcome a banks defenses. Educating the customer on how to help prevent online banking fraud is just one element of a banks fraud defenses. Deploying advanced technology that can quickly adapt to the changes in the cybercriminals modus operandi is essential to protecting the online channel. Customers must have confidence in the security of a banks online platform. There is no end in sight, but banks must stay committed to winning each battle they fight to prevent online fraud.

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Counterfeiting

Indian Rupee (INR)

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How do you check for a counterfeit Indian Rupee Note?

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5 Answers

Jai Parimi39.5k Views

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The Reserve Bank has introduced banknotes in the Mahatma Gandhi Series since 1996 and has so far issued notes in the denominations of Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000 in this series. These notes contain distinct easily recognizable security features to facilitate the detection of genuine notes vis--vis forgeries.

Watermark:The Mahatma Gandhi Series of banknotes contain the Mahatma Gandhi watermark with a light and shade effect and multi-directional lines in the watermark window.

Security Thread:The Rs.500 notes have a security thread with windowed security thread alternately visible on the obverse with the inscriptions Bharat (in Hindi), and RBI. When held against the light, the security thread on Rs.500 can be seen as one continuous line. The security thread appears to the left of the Mahatma's portrait. Notes issued prior to the introduction of the Mahatma Gandhi Series have a plain, non-readable fully embedded security thread.

Latent Image:On the side of Rs.500, a vertical band on the right side of the Mahatma Gandhis portrait contains a latent image showing the respective denominational value in numeral.The latent image is visible only when the note is held horizontally at eye level.

Micro Lettering:This feature appears between the vertical band and Mahatma Gandhi portrait.The Rs. 500 notes contain the denominational value of the notes in micro letters. This feature can be seen better under a magnifying glass.

Intaglio:

The portrait of Mahatma Gandhi, the Reserve Bank seal, guarantee and promise clause, Ashoka Pillar Emblem on the left, RBI Governor's signature are printed in intaglio i.e. in raised prints, which can be felt by touch.

Identification Mark:A special feature in intaglio has been introduced on the left of the watermark window on all notes. This feature is in different shapes for various denominations (Rs. 20-Vertical Rectangle, Rs.50-Square, Rs.100-Triangle, Rs.500-Circle, Rs.1000-Diamond) and helps the visually impaired to identify the denomination.

Fluorescence:Number panels of the notes are printed in fluorescent ink. The notes also have optical fibres. Both can be seen when the notes are exposed to ultraviolet lamp.

Optically Variable Ink:This security feature is incorporated in Rs.500 notes with revised colour scheme introduced in November 2000. The numeral Rs.500 is printed in optically variable ink viz., a colour-shifting ink.The colour of the numeral 500 appears green when the note is held flat but would change to blue when the note is held at an angle.

See through Register:The small floral design printed both on the front (hollow) and back (filled up) of the note in the middle of the vertical band next to the Watermark has an accurate back to back registration.The design will appear as one floral design when seen against the light.

Legal provisions against counterfeiting:Printing and circulation of forged notes are offences under Sections 489A to 489E of the Indian Penal Code and are punishable in the courts of law by fine or imprisonment or both.

Read more about RBI at http://www.quora.com/Jai-Parimi/...

Source: Reserve Bank of IndiaWritten Jul 7, 2014 View Upvotes

Related QuestionsMore Answers BelowWhat would happen if someone airdropped counterfeit notes all over densely populated areas across India?

What should I do if I have a counterfeit note? How can we prevent circulation of duplicate notes?

How do I know if an Indian rupee note is real or fake?

How does the new Indian 1000 rupee note look like?

If the Indian 1000 rupee note does not have date printed on backside, is it a fake note?

Avijit Ghosh, Finance / Tech / Photography enthusiast13.1k Views

1.The floral design marked by number one in the picture above is actually 500 written half way. If you move the note against light you will be able to see the complete 500 written on it.

2.When viewed against light, this empty place has a hidden picture of Mahatma Gandhi, multi-directional lines and 500 written on it.

3.The colour of this 500 appears green as such, but if you tilt the note to a certain angle, it would turn blue.

4.The ground, on which the number of the note is printed, glows when exposed to ultraviolet light.

5.This thread which appears broken is actually complete and can be looked at from behind when put against light. In addition to this, you will be able to see Bharat RBI and 500 written on it.

6.The panch sau rupiye written in the middle as well as the Reserve Bank of India written on the top of the note, are written in raised ink and can thus be felt by hand.

7.Under the vertical floral design marked by number 7, you will find 500 written when held against light.

8.Behind Mahatma Gandhis portrait, you will find RBI and 500 written, if you look with the help of a magnifying glass.

9.If you touch the note a little above the Ashoka emblem, you will be able to feel a small circle, although you wont be able to see it.

10.Right on the center bottom, on the back side of the note, the year the printing appears and you would be able to see it clearly.

11.On the back side of the note, you will be able to identify 500 entangled in the floral design. It would appear when looking at the note against light. With these signs and markings you cannot miss out a fake note coming to you. It is for our own good to check every note that comes to us so as too help ourselves and our country weed out this evil.

Thanks for A2A!Written Jul 7, 2014 View Upvotes

Annamalai Muthukaruppan5.4k Views

Ways to check whether Indian currency note is real or fake:Front side1) First see whether the printed currency amount exists or not.(Dont take any note of 30 Rs. of say 70 Rs.)2) Next see whether if you can see picture of Mahatma Gandhi in the white space provided.(Well the both the faces should match in the mirror images)3) Look for the strip to the right side of the currency amount number; the words written are RBI Bharat.4) When you see the water image of Mahatma Gandhi look for the currency amount again.5) Then on the right end of the note where a color strap is given look for the currency amount by focusing it parallel to the light source.6) Look for the matching serial number on the top-right corner and bottom-left corner.Back Side1) Count if there are 15 languages or not.2) Look for the minted year at the center bottom of the note(IF the year is printed it should be on or above 2009).Last but the most important of all!Fold the note into eight equal parts and now stamp on the note hardly with the paper weight if the the glasses of Mahatma Gandhi are broken then its a fake one!PS Except for the last one rest all points is true to the best of my knowledge.Written Oct 20, 2015 View Upvotes

Anand Agarwal3.6k Views

Wait.Hold on to your fake note and wait untilllll, u r asked for a bribe.And there u go. Make full use of it. By giving the person simply nothing.Written Jul 27, 2015 View Upvotes

Kamal Rathi, Curious!9.3k Views

This poster covers all the features one needs to know of a INR note.

Written May 30, 2013 View Upvotes

View More Answers

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