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Introduction:
EVOLUTION OF BANKING SYSTEM IN INDIA:
Banking system occupies an important place in a nations economy. A
banking institution is indispensable in a modern society. It plays a pivotal
role in economic development of a country and forms the core of the
money market in an advanced country.
Banking industry in India has traversed a long way to assume its present
stature. It has undergone a major structural transformation after the
nationalization of 14 major commercial banks in 1969 and 5 more on 15
April 1980.
Banks are the engines that drive the operations in the financial sector,
which is vital for the economy. With the nationalization of banks in 1969,
they also have emerged as engines for social change. After Independence,
the banks have passed through three stages. They have moved from the
character
based
lending
to
ideology
based
lending
to
today
(ii)
(iii)
Definition of Fraud:
Fraud is defined as any behavior 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/s 17 of the Indian
Contract Act. Thus essential elements of frauds are:
1. There must be a representation and assertion;
2. It must relate to a fact;
3. It must be with the knowledge that it is false or without belief in
its truth; and
4. It must induce another to act upon the assertion in question or to
do or not to do certain act.
A false representation of a matter of fact whether by words or by
conduct, by false or misleading allegations, or by concealment of what
should have been disclosed that deceives and is intended to deceive
another so that the individual will act upon it to her or his legal injury.
In law, the deliberate misrepresentation of fact for the purpose of
depriving someone of a valuable possession or legal right. Any omission
or concealment that is injurious to another or that allows a person to take
unconscionable advantage of another may constitute criminal fraud. The
most common type of fraud is the obtaining of property by giving a check
for which there is insufficient funds in the signer's account. Another is the
assumption of someone else's or a fictitious identity with the intent to
deceive. Also important are mail and wire fraud (fraud committed by use
of the postal service or electronic devices, such as telephones or
computers). A tort action based on fraud is sometimes referred to as an
action of deceit.
Bank Frauds:
Losses sustained by banks as a result of frauds exceed the losses due to
robbery, dacoit, burglary and theft-all put together. Unauthorized credit
facilities are extended for illegal gratification such as case credit allowed
against pledge of goods, hypothecation of goods against bills or against
book debts. Common modus operandi are, pledging of spurious goods,
inletting the value of goods, hypothecating goods to more than one bank,
fraudulent removal of goods with the knowledge and connivance of in
negligence of bank staff, pledging of goods belonging to a third party.
While the operations of the bank have become increasingly significant,
there is also an occupation hazard. There is a Tamil proverb, which says
that a man who collects honey will always be tempted to lick his fingers.
Banks are all the time dealing with money and the temptation should
therefore is very high. Oscar Wilde said that the thief was an artist and the
policeman was only a critic. There are many people who are
unscrupulous and are able to perpetrate a fraud. We must be able to see
that we devise our systems and procedures in such a way that the scope
for such clever and unscrupulous people is reduced.
Frauds in deposit accounts take place by opening of bogus accounts,
forging signatures of introducers and collecting through such accounts
stolen or forged cheques or bank drafts. Frauds are also committed in the
area of granting overdraft facility in the current accounts of customers. A
large number of frauds have been committed through bank draft, mail
transfers and telegraphic transfers.
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An analysis made of cases brings out broadly the under mentioned four
major elements responsible for the commission of frauds in banks.
1. Active involvement of the staff-both supervisor and clerical either
independent of external elements or in connivance with outsiders.
2. Failure on the part of the bank staff to follow meticulously laid
down instructions and guidelines.
3. External elements perpetuating frauds on banks by forgeries or
manipulations of cheques, drafts and other instruments.
4. There has been a growing collusion between business, top banks
executives, civil servants and politicians in power to defraud the
banks, by getting the rules bent, regulations flouted and banking
norms thrown to the winds.
Accounting fraud has also been used to conceal other theft taking
place within a company.
10.Bill discounting fraud
Essentially a confidence trick, a fraudster uses a company at their
disposal to gain confidence with a bank, by appearing as a genuine,
profitable customer. To give the illusion 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
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.
11.Cheque kiting
Cheque kiting exploits a system in which, when a cheque is deposited
to a bank account, the money is made available immediately even
though it is not removed from the account on which the cheque is
drawn until the cheque actually clears.
Deposit Rs.1000 in one bank, write a cheque on that amount and
deposit it to your account in another bank; you now have Rs2000 until
the cheque clears.
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14. Impersonation:
Impersonation has become an increasing problem; the scam operates
by obtaining information about an individual, then using the
information to apply for identity cards, accounts and credit in that
person's name. Often little more than name, parents' name, date and
place of birth are sufficient to obtain a birth certificate; each document
obtained then is used as identification in order to obtain more identity
documents. Government-issued standard identification numbers such
as "social security numbers" PAN numbers are also valuable to the
fraudster.
Information may be obtained from insiders (such as dishonest bank or
government employees), by fraudulent offers for employment or
investments (in which the victim is asked for a long list of personal
information) or by sending forged bank or taxation correspondence.
In some cases, a name is needed to impersonate a citizen while
working as an illegal immigrant but often the identity thieves are using
the bogus identity documents in the commission of other crimes or
even to hide from prosecution for past crimes. The use of a stolen
identity for other frauds such as gaining access to bank accounts,
credit cards, loans and fraudulent social benefit or tax refund claims is
not uncommon.
Unsurprisingly, the perpertators of such fraud have been known to
take out loans and disappear with the cash, quite content to see the
wrong persons blamed when the debts go bad or the police come
calling.
15. Fraudulent loan applications
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but which claims that the user must update personal info. The
information thus stolen is then used in other frauds, such as theft of
identity or online auction fraud.
Phishing means sending an e-mail that falsely claims to be a particular
enterprise and asking for sensitive financial information. Phishing,
thus, is an attempt to scam the user into surrendering private
information that will then be used by the scammer for his own
benefit.Phishing uses 'spoofed' e-mails and fraudulent Web sites that
look very similar to the real ones thus fooling the recipients into
giving out their personal data. Most phishing attacks ask for credit
card numbers, account usernames and passwords. According to
statistics phishers are able to convince up to five per cent of the
recipients who respond to them.
18. Money laundering
Money laundering has been used to describe any scheme by which the
true origin of funds is hidden or concealed.
The operations work in various forms. One variant involved buying
securities (stocks and bonds) for cash; the securities were then placed
for safe deposit in one bank and a claim on those assets used as
collateral for a loan at another bank. The borrower would then default
on the loan. The securities, however, would still be worth their full
amount. The transaction served only to disguise the original source of
the funds.
19. Forged currency notes:
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pressure,
and
hatred
for
the
organization,
emotional
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Prevention of frauds:
i) Internal Prevention:
It is said that failures are the stepping stone for success. What this means
is that if we are able to analyse why a particular failure by way of a fraud
took place, we can then detect the loopholes in our system which led to
the fraud and take corrective measures or change the system. For instance
the great Harshad Mehta scam took place because among other things, the
public debt office of the Reserve Bank of India was not computerised and
was operating on a manual system. This gave a float of fifteen days,
which gave opportunity for people like Ketan Parekh to perpetrate the
fraud. Even after this scam while in the case of the RBI the defect was
rectified the overall banking system is still manual. Only 5000 out of the
65000 branches of banks are computerised. In today's competitive
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market, it is necessary that the banks are able to service their clients
effectively. Therefore strongly urge is that we should have a massive
effort at computerisation of the banks.
Execution of Documents:
1. A bank officer must adopt a strict professional approach in the
execution of documents. The ink and the pen used for the execution
must be maintained uniformly.
2. Bank documents should not be typed on a typewriter for
execution. These should be invariably handwritten for execution.
3.
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knows his job, the task of defrauder will become extremely difficult, if
not possible.
ii) External Prevention:
In the banking and financial sectors, the introduction of electronic
technology for transactions, settlement of accounts, bookkeeping and all
other related functions is now an imperative. Increasingly, whether we
like it or not, 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) Appropriate controls:
The first steps in prevention of frauds in computerized systems involve
setting up of proper access controls both physical and logical. The
physical protection of Information System assets means physical control
of access to computer and network systems and the devices to which they
are connected. Access to these systems could be controlled by security
guards, installation of code locks, smart card driven door opening devices
or modern biometric devices (which control the access on the basis of
certain individual characteristics such as finger-prints, eyes retina image
etc., which cannot be changed or falsified).
However, in a computerized environment, logical access controls (i.e.
controls to operating systems, data-base systems as well as application
systems) play more important role. Adequate controls over system
software and data is done by keeping a strict control over functional
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b) Proper Implementation;
Second step in prevention of frauds would be to ensure that the users
properly implement the control systems. Control measures could be either
software driven like passwords or system driven like exception reports
and transaction authorization processes. In this connection, it may be
noted that access controls are a system in themselves and existence of
such controls means existence and maintenance of such control systems.
In the case of passwords, as access control measures. It may be noted that
merely having passwords is not sufficient. It should also be ensured that
password have been prescribed to have certain minimum characters, are
stored in encrypted files, there is a forced change of passwords at the time
of first login as well as after a specified period. These features however
depend on the security policy of the organization.
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Detection of Frauds:
i) Internal detection:
Despite all care and vigilance there may still be some frauds, though their
number, periodicity and intensity may be considerably reduced. The
following procedure would be very helpful if taken into consideration:
1. All relevant data-papers, documents etc. Should be promptly
collected. Original vouchers or other papers forming the basis of
the investigation should be kept under lock and key.
2. All persons in the bank who may be knowing something about the
time, place a modus operandi of the fraud should be examined and
their statements should be recorded.
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Lack of transparency
Cushions of safety that have been built for the corrupt on the
healthy principle that everybody is innocent till proved guilty. We
have got voluminous vigilance manuals and the corrupt can find
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International crime:
A computer crime may be committed in one country and the result can be
in another country. There has been lot of jurisdictional problem a though
the Interpol does help but it too has certain limitations. The different
treaties and conventions have created obstructions in relation to tracking
of cyber criminals hiding or operation in other nations
No-scene crime:
The computer satellite computer link can be placed or located any where.
The usual crime scene is the cyber space. The terminal may be anywhere
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and the criminal need not indicate the place. The only evidence a criminal
leaves behind is the loss to the crime.
Faceless crime:
The major advantage criminal has in instituting a computer crime is that
there is no personal exposure, no written documents, no signatures, no
fingerprints or voice recognition. The criminal is truly and in strict sense
faceless.
There are certain spy softwares which is utilized to find out passwords
and other vital entry information to a computer system. The entry is
gained through a spam or bulk mail.
The existing enacted laws of India are not at all adequate to counter cyber
crimes. The Indian Penal code, evidence act, and criminal procedure code
has no clue about computers when they were codified. It is highly
required to frame and enact laws which would deal with those subjects
which are new to the country specially cyber law; Intellectual property
right etc.
The Reserve Bank of India has come up with different proposals to make
the way easier, they have enacted electronic fund transfer act and
regulations, have amended, The Reserve Bank of India Act, Bankers
Book Evidence Act etc., experience of India in relation to information
and technology is limited and is in a very immature state. It is very much
imperative that the state should seek the help of the experienced and
developed nations.
As the success of the fraudster depends on how fast their crime is
detected among very large number of transactions processed by the
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different laws. Despite this, it has been observed that frauds perpetrated
from across the globe have been detected and amounts recovered by
proper combination of technology and sleuthing skills. Hence, while
security administrators continually watch incidences and plug the holes,
fraud investigators improve their skills and actively liaise with authorities
to improve the legal framework.
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CHANGES
IN
LEGISLATIONS
TRANSACTIONS:
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AFTER
ELECTRONIC
Year
2002
2003
2004
Loss in
Fraud Cases
Rs.Crores
399.53 Cr.
1744
653.5 Cr
2207
600.16 Cr.
2663
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A survey On Frauds:
Highlights of the first annual survey published by India forensic Research
Foundation. This study was carried out in the period of August'2006
and February'2007. This is the first independent and privately
funded study carried out in India on the banking sector frauds.400
participants contributed their valuable views on this subject.
Total fraud loss to Indian Banks in year 2005- 06 was Rs. 1381
crores according to the report published by Reserve Bank of
India.
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Case Studies
1) Supposed ATM Fraud
Saturday, August 13, 2005
I did some snooping around the internet and found that even though this
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kind of ATM fraud those occur there has been no indication that this is
prevailant in India or Pune for a matter of fact
Therefore the letter was either a warning from ICICI Bank to it's
customers or an attempt by someone to spread rumours or create a
popular email forward. Since no such warning is listed on the ICICI Bank
website I would think it's the latter.
A team of organized criminals are installing equipment on legitimate
bank ATM's in at least 2 regions to steal both the ATM card number and
the PIN. The team sits nearby in a car receiving the information
transmitted wirelessly over weekends and evenings from equipment they
install on the front of the ATM.
If you see an attachment, do not use the ATM and report it, immediately
to the bank using the 800 number or phone on the front of the ATM.
The equipment used to capture your ATM card number and PIN are
cleverly disguised to look like normal ATM equipment. A "skimmer" is
mounted to the front of the normal ATM card slot that reads the ATM card
number and transmits it to the criminals sitting in a nearby car.
The thieves copy the cards and use the PIN numbers to withdraw
thousands from many accounts in a very short time directly from the bank
ATM.
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The equipment as it appears installed over the normal ATM bank slot.
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W E D N E S D A Y, D E C E M B E R 2 6 , 2 0 0 7 ,
SOURCE TIMES OF INDIA
Card crooks tap into data wires:
First, it was skimmers. Now, credit card crooks in Kolkata may be getting
more tech savvy, using wire-tapping gadgets to cash in on unsuspecting
card
users.
It's a new cause of worry for city police and CID. Wire-tapping is a
complicated scheme and much more difficult to track down. It's a
technical maze that involves telephone wires, receiving-terminals and a
cable line parallel with telephone cables to copy the card details when it
is
swiped
for
transaction.
The first time that the city police got an inkling of fake credit card rackets
in Kolkata was when three Bangladeshis were arrested for using a card
whose owner was in Singapore.
Wire-tapping is the most likely method, they now say. Though they have
not identified a racket as yet, cyber sleuths are sure the card racketeers are
running a hi-tech operation in the city. Their suspicions were strengthened
when a private bank recently held a workshop for CID to discuss fraud
techniques.
"We haven't got any case where wire-tapping was used to dupe somebody
but we are sure the racketeers are out there. We are trying to find the right
technique to detect such crimes and also adopting safe-guard measures,"
said a senior CID officer.
Wiretapping works in three phases. The first phase involves tapping into
the wires of the main server to capture card data as it is processed for a
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Investigations:
Upon a complaint of the vice president, UTI Bank, a case registered and
taken up for investigation by a special team. Investigations revealed that
Sanjit Chowdhary, Account No 111010100023959 with UTI Bank,
Noida, had received a disputed credit entry totaling Rs 1.3 lakh through
Internet banking from the account of Lakshmi Narayan Sarkar of
Kolkata, who has an account at UTI Bank, Salt Lake, Kolkota, and from
the account of Makaran H Pundalik, who has an account with the
Standard Chartered Bank, Delhi.
It was further revealed that the misappropriated funds had been
transferred in the account of accused Sanjit Chowdhary. The police team
laid a trap at UTI Bank in Noida and the accused Sanjit Chowdhary, who
came to the branch to make enquiries regarding the inactive status of his
account, was arrested on December 7, 2006.On being interrogated, the
accused disclosed that he had received money in his bank account
consequent to phishing mails sent to various customers of UTI Bank.
Various transaction slips pertaining to the UTI Bank and ICICI Bank
were recovered from his possession. A scrutiny of these slips revealed
that Sanjit Chowdhary had withdrawn funds and deposited the same in
accounts of his other associates, who had accounts in UTI and ICICI
Bank at Mumbai and Trichy.
Till December 2006, a total of twenty complainants had registered their
complaints. All the six beneficiary accounts are in Delhi for these twenty
complainants. Further, ten complaints had been received by UTI branches
in Vishakapatnam, Ahmedabad, Nasik, and Thane, where the beneficiary
accounts are being maintained. An analysis of the accounts of the four
arrested Nigerian nationals revealed that financial transactions worth over
Rs 1 crore took place in an eight-month period.
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.Survey Report
Findings:
According the survey conducted by me most of the customers know
about bank frauds. They have a computational idea of frauds taking place
in banks.
There are very few, those are not aware of bank frauds.
The survey also revealed the types of bank frauds that the customers
know about. The survey included ATM Fraud, Credit card fraud and
Online fraud.
The following is the graph revealed:
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The suggestions that the survey reveal is that there must be some strict
actions take against the fraudsters. Banks should provide the necessary
information regarding the frauds that the customers can come across.
Awareness among the customers regarding frauds is must.
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Conclusion:
The Indian Banking Industry has undergone tremendous growth since
nationalization of 14 banks in the year 1969. There has an almost eight
times increase in the bank branches from about 8000 during 1969 to mote
than 60,000 belonging to 289 commercial banks, of which 66 banks are in
private sector.
However, with the spread of banking and banks, frauds have been on a
constant increase. It could be a natural corollary to increase in the number
of customers who are using banks these days. In the year 2000 alone we
have lost Rs 673 crores in as many as 3,072 number of fraud cases. These
are only reported figures. There were nearly 65,800 bank branches of a
total of 295 commercial banks in India as on June 30, 2001 reporting a
total of nearly 3,072 bank fraud cases.
The most important feature of Bank frauds is that ordinarily they do not
involve an individual direct victim. They are punishable because they
harm the whole society. It is clear that money involved in Bank belongs
to public.
There must be certain preventive and curative measures to control frauds.
The higher authority of bank must follow strict rules against such
fraudsters. The various new technologies must be adapted by the bank to
overcome such frauds.
Thus, a fraud is the game of two, the rule makers and the rule breakers.
Fraud is a phenomenon that cannot be eliminated but can be managed.
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ANNEXURES
58
Questionnaires:
To Understand Frauds in Indian Banking Sector, their prevention and
detection and security against them I visited two different banks:
i) ICICI BANK
time to explain in brief about the various mechanics of fraud and their
prevention and answered to some of my questions.
ICICI BANK:
1) What are the major types of frauds conducted?
Phising, Forgery altered cheques, fraudulent loans application.
2) What are the general preventive measures taken?
There is a department which looks after fraud and their prevention
i.e. Risk Content Unit (RCU). They go through the fraud conducted and
take necessary steps. Know Your Customer (KYC) is an important tool to
prevent frauds in banks.
3) Do you think that computerization have increased frauds? Why?
No. Because due to computers there has been increase in work. A
work which would take 3hrs is done in 11/2hrs, thus providing better
service. More over out of entire customers 2% conduct frauds. Because of
this 2%, we cant avoid providing better services to 98% customers.
4) Effect of fraud on banks?
The customers are affected. The banks reputation is shattered.
Many customers try to avoid the bank branch. Negative views are spread
to the customers.
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AXIS BANK:
1) What are types of frauds you have come across?
Property mortgaging in different bank with the help of duplicate
document, Money laundering, credit card fraud, Debit card fraud, DD
fraud Bill discounting fraud.
2) What are the measures taken against frauds?
i) Core Banking Solutions (EXEL report) to find out fraud.
ii) Know the Introducer while opening the account
iii) Account should not be opened those coming with DD, Cheques.
iv) Internal Checkings
3) What are the steps taken after the fraud is detected?
Several steps are taken:
In case of Accounts fraud higher authority is reported.
In case of cash authority is consulted and if necessary FIR is registered.
4) How a customer can be made aware the frauds they can come
across?
Customers are asset to the banking company. They can be made
aware through E-mails, Advertisements, Posters, etc.
5) Which frauds are more conducted Internal or by others?
Most of the frauds conducted are by others. Whereas, internal fraud
can be controlled through strict supervision, daily check of the
documents, etc. External frauds are threat to the public as well as banks.
SURVEY FORM
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AGE:-
No
No
4) If Yes/ No Why?
No
Suggestions if any:-
Project Guide:Urmila
By:
Signature- ___________
Niddhi K Lakhani
TyBBI Roll no. 24.
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to
e-mails
that
request
personal
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BIBLOGRAPHY
www.google.co.in
www.yahoo.com
www.fraudsinindianbankingsector.com
www.icicibank.com
www.axisbank.com
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