CAUSES, EFFECTS AND MANAGEMENT OF

FRAUD: A STUDY WITH REFERENCE TO

THE INDIAN BANKING SECTOR
Presented By: URVI SINGH
Research Scholar
Enrollment Number : 2014PHDCOM003
Supervisor: Dr. RUCHITA VERMA
Assistant Professor
Department of Commerce
School of Commerce and Management
Central University of Rajasthan
October 2015

Contents of Presentation
Introduction
Review of Literature
Classification of fraud
Factors Causing Banks Fraud
Effects of fraud in Banks
Fraud Management
Conclusion
References

Introduction
Fraud is a wrongful or criminal deception intended to result in
financial or personal gain. It is an aspect of corruption & it occurs in
organization where governance structure is weak.
Fraud is rising across the banking product range and surfacing in
different forms across the globe.
Banking Frauds constitute conscious misrepresentation, obtaining
possessions, money or other property which is owned or held by a
financial institution or depositors by using those means which are
against the law.
Reserve Bank of India defines it as,
A deliberate action 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.

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 2013

169190

29910.12

SOURCE: - The Journal for CMAs , The management Accountant ,

JULY 2014 VOL 49 NO. 7

Review of Literature
Khanna and Arora (2009), . Anwar and Baig (2010) , Nagarajan
and Sheriff (2012), Subha V (2012) , Kingsley A(2012) , Fernandes
L (2013) , Kundu and Rao (2014) , Olaoye and Adekola D R
(2014) and Rahman R A and Anwar I S K (2014) etc have studied
and analyzed the nature, causes, effects and diagnosis of frauds in
banks and concluded that the battle for the deterrence, detection
and vengeance of fraud offenders must be fought to reduce the
inducement to commit fraud and to boost the chances of detection.
The results of the study revealed that the losses incurred due to
such crime are in billions of dollars and to understand such fraud
the attackers and defenders in this environment have to be
understood and accordingly necessary actions should be taken so as
to free the economies from the trap of financial termite called
fraud.

Statistics on Bank Frauds

Frauds in Indian banks have amounted to Rs 17,284 crore during
2012-13 , in a near four-fold jump over the previous fiscal.
62 banks filed a total of 26,598 cases involving a sum equivalent to,
for example, three years' budget of Indian Space Research
Organization.
These cases are being investigated by the CBI or the state police.
Although private banks account for about 75% of the total number
of cases registered, fraud here amounted to Rs 970 crore while the
fraud in state-run banks amounted to Rs 16,314 crore during the
year. In comparison, frauds amounted in all the banks together is
Rs 4448 crore during 2011-12.
According to the data,Punjab National Bank was the worst hit, with
cases of fraud involving Rs 1,375 crore whilefraud amounted in
Canara Bankwas of Rs 1,166 crore. Followed by State bank of India,
Bank of India andOriental Bank of Commerce.
Among the private sector banks,ICICI Banktopped the list with
5,280 cases of fraud, followed by Citibank and Standard Charterted
bank, with 2,934 and 2,568 cases, respectively. Fraud amounted
together in these three is Rs 187 crore.

Classification of fraud (fraud by

Insiders)
S.No. Types

Description

1.

Rogue Traders

Employee making unauthorized trades on behalf of its employer.

2.

Fraudulent

3.

Loan borrowed by dishonest or non-existent entity controlled by

Loans

a dishonest bank officer.

Wire Fraud

Fraudulent pretences for obtaining money by means of wire, radio

or television etc.

4.

Forged

Documents used by fraud to conceal the minor detail.

documents
5.

Uninsured

Asking for deposits by a bogus bank.

deposits
6.

Theft of identity

Employees of fictitious bank use personal information of

customers & misuse it.

7.

Demand
fraud

Draft Fraud caused by deceptive Demand Draft by insincere bank

employees.

Source: - http://www.legalserviceindia.com/article/l261-BankFrauds.html

Classification of different types of fraud (fraud by others)

S.No.

Types

Description

1.

Changing the entries of cheque& misusing it.

2.
3.

Forgery & altered

cheques
Stolen cheques
Accounting Fraud

4.

Bill Discounting fraud

5.

Cheque Kiting

6.
7.

Credit Card fraud

Counterfeit Credit Cards

8.

Stolen Payment Cards

Fraud committed by use of payment card in a transaction.

Fraud by making copies of legitimate credit cards by copying or skimming the
data on the cards magnetic stripe.
Misusing credit or debit cards after stealing it from others.

9.

12.

Skimming of card
information
Theft of identity &
impersonation
Fraudulent Loan
applications
Internet fraud & phishing

Fraud by attaching card stripe reader to ATMs etc. to gain unauthorized access to
the contents of magnetic stripe.
By obtaining information of customers & using it for withdrawing cash from
bank.
Using false information to hide a credit history filled with financial problems &
obtaining risky loans as sound investment for a bank.
Fraud by the way of internet by impersonating.

13.
14.

Money Laundering
Fake Currency Notes

Any scheme by which true origin of funds is hidden.

Forgery of currency notes.

15.

Cyber Fraud

Frauds committed by technology like computer etc.

10.
11.

Stealing cheque of hefty amount & misusing it.

Concealing of original financial status by creative accounting & cheat while
dealing with bank.
Fraudulently discounting bill of huge amount from bank after gaining confidence
with bank.
Taking advantage of the float to make use of non-existent funds in bank account.

Source: - http://www.legalserviceindia.com/article/l261-Bank-Frauds.html

Factors Causing Banks Fraud

S. No. Institutional Factors
1.

Environmental Factors

Incompetent database management & Slothful legal process

IT

2.

Awful personnel policies

Job insecurity

3.

Frail accounting

Displeased expectations of society

4.

Less enthusiastic reporting of frauds

Get-quick-rich desire

5.

Greenness in staff

Economic disparity

6.

Feeble administration

Financial load on everyone

7.

Unaccomplished KYC scheme

Peer pressure

8.

Growing frustration

Safe & easy existence of fraud

9.

Less training & seminars

10.

Fragile infrastructure

11.

Less transparency

12.

Red-tapism

Source: - http://incometaxparaskochar.com/Image/BANKING%20FRAUDS.pdf

Effects of fraud in Banks

Erodes public confidence in banking system.

Diminishing the profitability of bank and thus
reduces firm value.
Depletion of stakeholders and bank capital
base.
Dismissal and retrenchment of staff.
Also, sometime threaten the going concern of
the commercial banks and forces a closedown.
Destroy the economy of the nation and its
sovereignty.

Fraud Management

Classical Fraud Motivation Model Kingsley (2012)

Why Fraud is committed?
PERCEIVED
OPPORTUNITIES

PERCEIVED
RATIONALIZATIONS

PERCEIVED PRESSURES

Fraud Management
Right Sourcing: A Proactive Model to Combat Fraud Subha
V (2012)
Right Sourcing Fraud Operations involves setting up and operating
fraud management activities for global banks from centers around the
world. These centers are staffed with fraud experts equipped with the
skills, tools and technologies to identify trends and proactively build
protective strategies. Ideally, the fraud management operations of
multiple banks would be with one partner who would provide this
specialized service using a shared operations model.

Working of The Right Sourcing model:

When a fraud trend hits one particular bank, the trend is immediately shared
with all the banks having the same service provider. The banks can now be
proactively prepared for the same trend to hit their bank and ensure that their
rules are ready to take care of the situation.
Taking this a step further, even before a full trend is observed by one bank's
Operations, if they find a new modus operandi or a new merchant/Merchant
Category Code (MCC) featuring in their monitoring, the information is
immediately shared with the Operations of the other banks having the same
service provider. Hence, reviewers of the other banks can also be alerted. A
trend can sometimes be formed by transactions across multiple banks and in
this model, all the banks can identify it and benefit faster.
Points of compromises and points of activation of skimmed cards can be
better determined when transactions across banks are compared to help quicker
identification of patterns and common purchase points.

Other Techniques for dealing with fraud Rahman(2014)

Ethics training
Inventory observations
Fraud hotline
Password protection
Continuous auditing
Increased role of audit committee
Reference check on employees
Data mining

Current Approach to Fraud Management

The usual measures, which make certain timely prevention and control of bank frauds,
are categorized by Shongotola (1994) as:
Personnel controls:- appropriate recruitment and apt disengagement
procedures,
posting and placement, job rotations, compulsory holidays and annual vacations, and
training programme are included.
Administrative controls:- separation of duties, security devices e.g. Regis cope
Cameras, passwords, etc. and franking machine are included.
Accounting controls:- data validation, prompt posting of transactions, balancing of
accounts, reconciliation, and proper identification of authorization and approvals are
included.
Financial controls:- cash limits, signing power and specialized stationer are included.
Under inventory controls, physical checks and counts and bin cards, stock receipt
notes, stock issued voucher, etc. are included.
Inventory controls:- physical checks and counts and bin cards, stock receipt notes,
stock issued voucher, etc. are included.
Process controls:- input/output validation and program controls are included.

Conclusion
Managing and minimizing fraud is an intrinsic part of any
banks operations, as banks face frauds across a wide range
of its products and services it renders. The cost of frauds can
be massive in terms of disturbance in the functioning of the
markets, financial institutions, and the payment system. The
function of prevention of fraud, its monitoring, investigation,
reporting should be particularly done by an independent
division in a bank. With the creation of healthy & positive
environment at workplace the temptation or desire of
committing fraud can be reduced. By strengthening the
internal control system the endeavors for frauds detection is
amplified. Timely justice delivery by the judiciary is
welcoming to efficiently combat fraud. Thus, Banking Sector
should and ensure preparedness for
such fraudulent
practices.

References

Adeyemo Kingsley, A. (2012). Frauds in Nigerian banks: Nature, deep-

seated causes, aftermaths and probable remedies.Mediterranean

Journal of Social Sciences, 279.
Babatunde, G. (2009). Precipitating factors in fraud and criminal
motivation. International Journal of Bank Marketing, 10(3), 232-250.
Subha V, (2012). Retail Banking Fraud Management - Challenges
and Emerging Alternatives
Rahman, R. A., & Anwar, I. S. K. (2014). Effectiveness of Fraud
Prevention
and
Detection
Techniques
in
Malaysian
Islamic
Banks.Procedia-Social and Behavioral Sciences,145, 97-102.
Shongotla, I.O, (1994).Fraud Detection and control Nigeria institute
of Bankers Lagos July- December VOi.30, NO.4 PP16-19.
Soni R.R., Neena S, (2013) An Investigative Study of Banking Cyber
Frauds with Special Reference to Private and Public Sector Banks Vol.
2(7), 22-27, 23191171
Wells, J.T. (2000, October). Fraud comes in many shapes and sizesand its growing faster than ever: So thats why its called a pyramid
Scheme. Journal of Accountancy.
https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=621

Thank You all