You are on page 1of 39

CHAPTER 1

INTRODUCTION TO FROUD
Fraud can be seen as the intentional misrepresentation, concealment, or omission of the
truth for the purpose of deception or manipulation to the financial detriment of an
individual or an organization (such as a bank) which also includes embezzlement, theft or
any attempt to steal or unlawfully obtain, misuse or harm the asset of a bank. Fraud and
its management have been the main factor. In the distress of banks, and as much as
various measures have been taken to minimize the incidence of fraud, it still rises by the
day because fraudsters always device strategic ways of committing fraud. This has
become a point of great attention in the Srural banking sector as well as every
organization in Ghana. Although this phenomenon is not unique to the rural banking
industry or peculiar to Ghana alone, the high incidence of fraud within the banking
industry has become a problem to which solution must be provided in view of the large
sums of money involved and its adverse implications on the economy. Fraud in its effects
reduces the assets and increases the liability of any company. In the case of rural banks,
this may result in the loss of potential customers or crisis of confidence of banking public
and in the long run end up in another failed bank situation. It is instructive to know that
many banking operatives have different reasons for joining various banks. Many have the
intention of working for a short time in the banking industry (get whatever they could and
find another job that is less demanding), some are in the industry because of their
love for banking and all it stands for, while majority are there to enrich themselves by
fraudulent means.
Due to the upsurge of great viability in the rural banking sector, its dynamic and fast
expanding level of activities, rural banks are faced with different kinds of challenges,
among which is trying to prevent various fraudulent intentions of both staff and
customers As it were frauds seem to have increased as new technology is born and more
advanced techniques of enhancing business transactions have been developed. Fraudsters
are constantly devising new plans, updating old methods and trying out new techniques
of bypassing these electronic systems meant to ensure high security of banking
operations. The introductions of automated systems that lose handwriting and fingerprint
trails have not helped matters either. In view of the staggering sums lost to fraudsters by
the Ghanaian financial sector, in these recent times and the rate at which fraudsters
appear to have shifted their attention and directed their energies to banks, devising all
unimaginable tactics to exploit loopholes in the control measures and capitalize on
carelessness of the staff and customers, fraud in the industry has prevented many banks
from achieving their goals. Some banks were just seen in the physical as body and
building whilst in reality they were already liquidated and many were already into
distress. Taking a walk down memory lane. The banking sector plays a very significant
role in the development of any economy. Banks in most economies are the principal
depositories of the public’s monetary savings, the nerve centre of the payment
system, the vessel endowed with the ability of money creation and allocation of
financial resources and conduit through which monetary and credit policies are
implemented. The success of monetary policy, to a large extent, depends on the
health of the banking institutions through which the policies are implemented.
Whatever problems which militate against the proper functioning of the banking
sector will invariably have multiplier effects on the other sectors of the economy.
This is one of the reasons why it is essential to quickly diagnose any factor which
may hamper the smooth functioning of the rural banking sector and urgently
address such issues.
OBJECTIVES
 To understand the meaning of banking frauds and scams.
 To understand the various types of banking frauds and scams.
 To ascertain the factors which encourages the fraudulent activities in banks.
 To understand the categories of banking frauds and scams.
i.e. Frauds and scams done by insiders and outsiders.
 To determine the effects of banking frauds and scams on the society.
 To suggest the measures and techniques for reducing the incidence of banking frauds
and scams.
 To understand the Reserve Bank of India (RBI) rules to prevent banking fruds and
scams and responsibility of bankers in banking frauds and scams.
MEANING OF FRAUD:

The progress of business is depends upon expansion & diversification. The indicators
of growing economy are acceleration in per capita income, standard of living & national
wealth, national income etc. In the growing economy some unethical practices has been
observed. Nowadays scams, frauds & corruptions etc. has entered in every sector.


Fraudulent practices are like slow poisoning which destroy the system of faith , loyalty,
& reliability confidence of the people & help to proceed towards under developed
society. Fraud is any dishonest act and behavior by which one person gains or intends
to gain advantage over another person. Fraud causes loss to the victim directly or
indirectly. Fraud has not been described or discussed clearly in the Indian penal code but
sections dealing with cheating. Concealment, forgery counterfeiting and breach of trust
has been discusses which leads to the act of fraud. In contractual term as described in the
Indian contract act, sec 17 suggests that a fraud means and includes any of the acts by a
party to a contract or with his connivance or by his agents with the intention to deceive
another party or his agent or to induce him to enter in to a contract.
DEFINITION OF FRAUD

 “Deceit, trickery, sharp practices or breach of confidence , perpetrated for profit


or gain some unfair or dishonest advantages”.

- Collins english
dictionary.

 “Deliberate fraud committed by management that injures investors and creditors


through materially misleading financial statements”.

–Elliot and
Willingham,(1980).
MEANING OF BANK FRAUD
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 particular banking fraud laws 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. Banking frauds constitute a considerable percentage of white-collar offences
being probed by the police. Unlike ordinary thefts and robberies, the amount
misappropriated in these crimes runs into lakhs and crores of rupees. Bank fraud is a
federal crime in many countries, defined as planning to obtain property or money from
any federally insured financial institution. it is sometimes considered a white collar
crime. The number of bank frauds in India is substantial. it in increasing with the
passage of time. All the major operational areas in banking represent a good opportunity
for fraudsters with growing incidence being reported under deposit, loan and inter-branch
accounting transactions,
including remittances. Bank fraud is a big business in today’s world. with more
educational qualifications, banking becoming impersonal and increase in banking sector
have gave rise to this white collar crime. in a survey made till 1997 bank frauds in
nationalized banks was of rs.497.60 crores. The occurrence of frauds in the banks is not a
recent observable fact; in fact the misdemeanor of forgery is perhaps as old as writing
itself. Of the inestimable types of financial offences that our nation and all countries
across the globe have had to eyewitness and undergo from, a major one is financial frauds
caused in the banks popularly know as “bank frauds”. Any organization which deals with
money is always vulnerable to frauds and this is more so in the case of financial
institutions like banks which are dealing only in money and that to as a business
commodity. Bank frauds are on the augment. The graph of fraud money is mounting
steeply. The reasons for increase in number of frauds in the post nationalization period is
attributed to a numerous reasons, the most likely ones are the widespread branch
network, lack of trained staff for the expanding network and a shift from the security
oriented lending to the development oriented approach i.e. advances to the priority
sectors. Frauds in Indian banks only prove that financial liberalization aggravates the
inherent tendency of shallow markets to foster excessive speculation and worsens the
systemic consequences of such speculative activity. Revelations of fraud, evidence of
insider trading and a consequent collapse of investor interest have led to an almost
unstoppable downturn in Indian banks. Bank frauds concern all citizens. It has become a
big business today. Bank frauds are the creation of professional criminals, desperate
customers or of errant bankers or their collusion inter se. However the prima donna in the
drama is the insider or the banker. He opens the purse. He is often the target and at times
the tool. Occasionally, he is the victim of the temptations. Other contributory factors are
incompetence, lethargy, negligence, connivance and ignorance. Situational pressures and
permissive attitudes of the society promote them. High gains and low stakes encourage
the incidence. The rising trend makes it more and more important that ways and means
are found to combat the menace.

Bank frauds can be explained through following diagram:


Bank fraud means obtaining money or property held by bank or customer of the bank in
order to make more money. So generally there are two factors of frauds: Complexity of
bank transactions and failure in observance or procedures and norms laid down in branch
operations. Fraud is any dishonest act and behavior by which one person gains or intends
to gain an advantage over other person. The gain may accrue to the person himself or to
someone’s. Fraud causes loss to the victim, directly or indirectly. In earthly terms bank
frauds include all sorts of misappropriations, embezzlements, manipulations of negotiable
instruments (cheques, drafts, handiest, bills or statements of accounts, securities etc.).
Also included are misrepresentations, cheating, thefts, undue favors and irregularities.
The frauds may be intentional or incidental and can be committed by (I) the bank
employees themselves, (ii) the staff members of the banks in collusion or connivance
with the customers or outsiders, and (iii) the customers or outsiders.
The word “fraud” has been defined in the Indian contract act. In short fraud is dishonesty
leading to loss to someone. Dishonesty is never accidental. Therefore there is always a
swindler behind each bank fraud. The number of bank frauds in india is substantial. It is
increasing with the passage of time. Bank frauds are due to the bunko and the bungler
bankers, situational pressures and permissive attitudes. Fraud has not been defined in
theindian penal code directly. However sections dealing with cheating, concealment,
forgery, counterfeiting, misappropriation and breach of trust cover the same adequately.
Hence what this paper fundamentally tries to focus on is on the banker’s responsibility
vis-à-vis the reach of deception therein, consequences of such incident and tries to look
into the entire possible panacea to such a menace in the society.
CHAPTER-2

RESEARCH METHODOLOGY
Research design is a systematic way of collecting information which can be

statistically analyzed to find a solution to a problem statement. Kerlinger (1973) states

research as: the systematic, controlled, empirical and critical investigation of

hypothetical propositions about the presumed relations among natural phenomena.

Leedy & Ormrod, (2005) defined research from a more utilitarian point of view: It is a

procedure by which we attempt to find systematically, and with the support of

demonstrable fact, the answer to a question or the resolution to a problem.

In the present study, the researcher has adopted exploratory research method to

identify the problem statement after reviewing the literature on CG, cases of corporate

frauds reported and published in the banking sector, a discussion with the subject

matter experts, CG guidelines recommended by SEBI and RBI, reviewing the report

on CG from the annual reports of public and private sector banks. In addition to this

the researcher has reviewed newspaper articles and peer reviewed journals to gather

in-depth insight about the subject matter as a result the scope of conducting research in

this framework has emerged.

SOURCE OF INFORMATION
 Primary Data: - Primary data was collected from the city of Mumbai. The

questionnaires were responded by the bank employees and the stakeholders associated

with public and private sector banks.

 Secondary Data: - The secondary data was collected from the website of

public and private sector banks wherein the report on CG was studied from the annual

reports of the selected banks for the financial year 2011-12, 2012-13, 2013-14. The
data related to history, growth and development of Indian banking sector and selected

banks were collected mainly from the books, magazines relating to the banking sector,

published paper by RBI, reports, articles, news papers, speeches and other journals

like monthly review of Economy and RBI & NFCG websites.

 Research Technique Used for Data Collection

Research technique for collecting primary data: The researcher has used survey

method for collection of primary data. Contact method was used wherein the

respondents were contacted personally and through email for filling the responses.

Research technique for collecting secondary data: For collecting secondary data,

CG disclosure practices were analyzed from the report on CG from the annual reports

of public and private sector banks. So, the researcher has used content analysis for

collecting secondary data.

 Research Instrument

A research instrument is a survey, questionnaire, test, scale, rating, or tool designed to

measure the variable(s), characteristic(s), or information of interest, often a behavioral

or psychological characteristic. Research instruments are helpful tools to in

conducting research study.

In the present
research study TYPE OF BANK BANK EMPLOYEE STAKEHOLDERS TOTAL
questionnaire was
Public sector 105(63%) 62(32%) 176
designed using
private sector 70(64%) 40(26%) 110
dichotomous, scales
TOTAL 175(63%) 102(37%) 277
and ranks for
collection of primary data.

 Sampling Design

Sampling can be defined as a means of selecting a subset of units from a target


population for the purpose of collecting information. This information is used to draw

inferences about the population as a whole. The subset of units that are selected is

called a sample. The sample design encompasses all aspects of how to group units on

the frame, determine the sample size, allocate the sample to the various classifications

of frame units, and finally, select the sample.

 Population

Population sampling is a subset of subjects that is representative of the

entire population. The sample must have sufficient size to warrant statistical analysis.

The population in the present research includes public and private sector banks listed

on Bombay Stock Exchange (BSE).

 Commercial Banks

A commercial bank is a type of bank that provides services such as accepting deposits,

making business loans, and offering basic investment products. It refers to both

scheduled and non-scheduled commercial banks, which are regulated under Banking

Regulation Act, 1934.

(a) Scheduled banks: All banks which are included in the Second Schedule to the RBI

Act, 1934 are Scheduled banks. These banks comprise Scheduled Commercial banks

and Scheduled Co-operative banks. Scheduled Commercial banks in India are

categorized into five different groups according to their ownership and / or nature of

operation. These bank groups are (i) State Bank of India and its Associates, (ii)

Nationalized Banks, (iii) Private Sector banks, (iv) Foreign banks, and (v) Regional

Rural banks. In the bank group-wise classification, IDBI Bank Ltd. has been included

in Nationalized Banks.

1. State Bank of India and its Associates

2. Nationalized Banks
3. Foreign banks

4. Regional Rural banks

5. Other Scheduled Commercial banks.

(b) Non-Scheduled Commercial Banks

Non-scheduled banks are also subject to the statutory cash reserve requirement. Banks

with a reserve capital of less than 5 lakh rupees qualify as non-scheduled banks. But

they are not required to keep them with the RBI; they may keep these balances with

themselves. They are not entitled to borrow from the RBI for normal banking

purposes, though they may approach the RBI for accommodation under abnormal

circumstances.

Note: Banks in the groups (1) & (2) above are known as public sector banks whereas,

other scheduled commercial banks mentioned at group (5) above are known as private

sector banks.

Private sector banks are categorized into two old private sector bank which were not

nationalized at the time of bank nationalization that took place during 1969 and 1980

are known to be the “old private-sector banks” and the banks, which came in operation

after 1991, with the introduction of economic reforms and financial sector reforms are

called "new private-sector banks.16"

There are currently 27 public sector banks in India out of which 21 are nationalized

banks and six are SBI and its associate banks. And 20 private sector banks out of

which 13 are old private sector banks and 7 are new private sector banks.

 Sample Size

The universe of the study consists of 47 Commercial banks operating in India, out of

which 27 are public sector banks and 20 Private Sector banks which were listed on

BSE. Initially, 300 Questionnaires were delivered to all commercial banks (public &
private sector banks total 47) through email and by personally visiting them. The

respondent sample size was categorized into two public sector banks which were 27 in

number and private sector banks which were 20 in number. The respondents were

further divided into bank employees and stakeholders. From public sector banks 105

bank employees and 62 stakeholders have responded, the total representation was 167

questionnaires. From private sector banks 70 bank employees and 40 stakeholders

have responded, the total representation was 110 questionnaires. So, the total

responses received were 277 in number from both public and private sector banks.
CHAPTER-3

LITERATURE REVIEW
In legal terms, fraud is seen as the act of depriving a person underhandedly of something,
which such a person would or might be entitled to, but for the perpetration of fraud. In its
lexical meaning, fraud is an act of trickery which is intentionally practiced in order to gain
illegitimate advantage. Therefore, for any action to constitute a fraud there must be deceitful
objective to benefit (on the part of the perpetrator) at the disadvantage of another person or
group. Fraud typically requires stealing and manipulation of accounts, frequently
accompanied by cover up of the theft. It also involves the translation of the stolen resources
or property into own resources or property. Young, (2002) says that, ample evidence exists
that individual integrity of those running the banks today has never been at a higher level.
Never before have we seen attention to the actual steps; procedures and control of monetary
transactions. Employees’ as well as firms in all industries engage in fraudulent practices all
over the world. Although the existence of fraud in our banks is not an uncommon or
unexpected behavior, its prevalence is what is worrying because of all the various problems
confronting the most untraceable and Kindle. Frauds in banks lead to loss of monies that
ordinarily belong to someone other than the banks. The loss results in some cases, in reducing
the level of resources available for use in the operations of the banks. In very bad cases where
frauds occur with crippling frequency and in wholesomeness, the bank may be forced to
close down as a result. When the bank loses money and is wound up, the customers lose
money. This leads to loss of confidence and eventually reduced patronage. Another reason for
worrying in the banking industry is the vast variety of nature, character and methodology
employed in fraud. Moreover, the control of identified specie seems to give birth to another
that is invariably more sophisticated and complex. Thus each case can be said to be a variant
of another and undoubtedly an instructive study in human negative use of ingenuity and
endowment.
There is a common agreement amongst criminologists that fraud is
caused by three Elements:

called “WOE” . For any fraud to take place there must be a Will, an Opportunity and Exit
(escape route). A fraud will only come about if the perpetrators have the will to commit the
fraud, if the occasion to commit the fraud is presented and if there is a way out or escape
means from appropriate sanctions or institutions that are against fraud or related abnormal
behavior .. Fraud is a global occurrence; it is not peculiar to the banking industry. With the
collapse of foremost international corporations together with high level allegations and real
cases of business fraud, a lot of organizations in their effort to advance their image have
resorted to developing ethical guiding principles and codes of moral values. The whole
essence of these is to guarantee that all organizational members irrespective of position or
rank, complies with the least standard of ethical responsibility in order to encourage the
reputation of such firms in their selected industry, earn the goodwill of clients and thus
improve their competitive advantage. As logically anticipated, fraud is perpetrated in several
forms and guises, and usually have insiders (staff) and outsiders conniving together to
effectively execute the act.
CATEGORIES OF BANKING FRAUDS
1. Rogue Trading:

A rogue trader is a highly placed insider nominally authorized 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 rupees; there have even been cases in
which a bank goes out of business due to market investment losses.

2. 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.

3. Wire fraud:
Wire transfer networks such as the international, 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. Wire fraud is defined as
attempting to defraud using electronic means, such as a computer or telephone. What
must be proved is that the person knowingly and willfully devised or intended to devise a
scheme to defraud. Since the advent of the internet, there are literally thousands of crimes
that fall under the definition of wire fraud. Here we’re going to take a look at some of the
more common forms of wire fraud, why they occur, and how you can protect yourself.

Wire Fraud on the Internet


 Email Phishing:
The practice of sending out fake emails that look legitimate, in order to steal
information such as passwords, credit card numbers, or personal information.
 Identity Theft:
Usually perpetrated by people who set up legitimate looking websites designed to
trick users into submitting personal information, similar to a loan or insurance
application.. Other methods may include hacking databases containing business
information, or accessing a personal hard drive illegally to steal personal information.

 Fraudulent Business Sales:


This is a common scam targeting webmasters and potential investors. When valuing
an internet business, revenue, traffic, and the future potential value of the website are
used to estimate the value. By faking revenue and traffic proof, a con artist can inflate
perceived value of the website, sometimes scamming victims out of thousands of
dollars. Wire Fraud On The Phone Wire fraud commonly occurs over the telephone as
well. A con artist will call your house, and try to talk you out of personal information.
Common scams involve criminals posing as salesmen, loan officers, and other business
professionals in order to collect personal information such as credit card numbers or
social security numbers.

Measures from protecting the Wire frauds

Wire fraud is a very real threat in the world today. By using a little bit of common sense,
you can avoid becoming a victim yourself. Don’t give out personal information over the
telephone to unsolicited callers without doing an extensive check on their background. Be
careful what kind of websites you use to conduct financial transactions. There are many
legitimate websites where doing credit card transactions, or even loan applications are
extremely secure. Be wary of any unknown websites. Bottom line; don’t give out your
personal information to strangers. With just a little bit of common sense you can avoid
becoming a victim of wire fraud yourself.

4. Demand draft fraud:

DD fraud is usually done by one or more dishonest bank employees that is the Bunko
Banker. They remove 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.
These Demand drafts will be issued payable at distant town/city without debiting an
account. Then it will be cashed at the payable branch. For the paying branch it is just
another DD. This kind of fraud will be discovered only when the head office does the
branch-wise reconciliation, which normally will take 6 months. By that time the money is
unrecoverable.

5. Theft of identity:
Dishonest bank personnel have been known to disclose depositors' personal information
for use in theft of identity frauds. The perpetrators then use the information to obtain
identity cards and credit cards using the victim's name and personal information.

Impact of Identity Fraud


The growth in identity fraud victimization rates over the past year is harmful not only
because of the dollar losses caused from identity fraud, but also because of the emotional
impact on the victims. Identity Fraud victimization and the accompanying fear it
generates lowers faith in the safety of the system and causes secondary effects, which are
demonstrated by changes of behavior, such as avoidance of certain merchants, altered
usage of payment types and channels, and severed relationships with primary card
companies and banks. The increased fraud incidence is being driven by the poor economy
coupled with an increasingly global, hierarchal and sophisticated criminal enterprise that
specializes in developing new weapons of attack. Meanwhile the consumer costs, the
dollar amounts the victim pays on average out-of-pocket, reached an all time low.
6. 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 a thief who wishes to conceal the minor detail
that the bank's money has in fact been stolen and is now gone.

7. Uninsured deposits:

There are a number of cases each year where the bank itself turns out to 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, some banks with no license and no affiliation to its seemingly
apparent namesake; the real Chase Manhattan bank, New York. There is a very high risk
of fraud when dealing with unknown or uninsured

institutions. The structure of uninsured deposits is given as follows:

FRADUS DONE BY OUTSIDERS


1. 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 ofs 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 certain 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.

2. Forgery and altered cheques:

Thieves 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 a cheque (a few strokes of a
pen can change 100.00 into 100,000.00, although such a large figure may raise some
eyebrows). Instead of tampering with a real cheque, some fraudsters will 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 or even alleged accounts owned by non-
existent depositors. The cheque will then be deposited to another bank and the money
withdrawn before the cheque can be returned as invalid or for non-sufficient funds.

3. 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.

4. Stolen cheques:

Some fraudsters obtain access to facilities handling large amounts of cheques, such as a
mailroom or post office or the offices of a tax authority (receiving many cheques) or a
corporate payroll or a social or veterans' benefit office (issuing many cheques). A few
cheques go missing; accounts are then opened under assumed names and the cheques
(often tampered or altered in some way) deposited so that the money can then be
withdrawn by thieves. Stolen blank cheque books are also of value to forgers who then
sign as if they were the depositor.

5. Credit card fraud:


Credit card fraud is widespread as a means of stealing from banks, merchants and
clients. A credit card is made of three plastic sheet of polyvinyl chloride. The central
sheet of the card is known as the core stock. These cards are of a particular size and many
data are embossed over it. But credit cards fraud manifest in a number of ways. They are:


„« Genuine cards are manipulated.
„« Genuine cards are altered.
„« Counterfeit
cards are created.
„« Fraudulent telemarketing is done with credit cards.
„« Genuine
cards are obtained on fraudulent applications in the names/addresses of other persons and
used.

It is feared that with the expansion of E-Commerce, M-Commerce and Internet facilities
being available on massive scale the fraudulent fund freaking via credit cards will
increase tremendously.

6. 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.

7. 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 1000
in one bank, write a cheque on that amount and deposit it to your account in another
bank; you now have 2000 until the cheque clears. In-transit or non-existent cash is briefly
recorded in multiple accounts.
A cheque is cashed and, before the bank receives any money by clearing the cheque, the
money is deposited into some other account or withdrawn by writing more cheques. In
many cases, the original deposited cheque turns out to be a forged cheque. Some
perpetrators have swapped checks between various banks on a daily basis, using each to
cover the shortfall for a previous cheque. What they were actually doing was check
kiting; like a kite in the wind, it flies briefly but eventually has to come back down to the
ground.

8. 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 aspending 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.

9. Duplication or skimming of card information:



This takes a number of forms, ranging from a dishonest merchant copying clients'
credit card numbers for later misuse (or a thief 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 thieves have surreptitiously added equipment to
publicly accessible automatic teller machines; a fraudulent card stripe reader would
capture the contents of the magnetic stripe while a hidden camera would sneak a peek at
the user's PIN. The fraudulent equipment would then be removed and the data used to
produce duplicate cards that could then be used to make ATM withdrawals from the
victims' accounts.

10. Impersonation and theft of identity:



Theft of identity has become an increasing problem; the scam operates by obtaining
information about a victim, 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 identity thief. Unfortunately for the banks, identity thieves 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.

11. 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 corporations using
accounting fraud to overstate profits in order to make a risky loan appear to be a sound
investment for the bank. Some corporations have engaged in over-expansion, using
borrowed money to finance costly mergers and acquisitions and overstating assets, sales
or income to appear solvent even after becoming seriously financially overextended. The
resulting debt load has ruined entire large companies, such as Italian dairy conglomerate
Parma at, leaving banks exposed to massive losses from bad loans.

12. Phishing and Internet fraud:



Phishing operates by sending forged e-mail, impersonating an online bank, auction or
payment site; the e-mail directs the user to a forged web site which is designed to look
like the login to the legitimate site 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. A number of malicious "Trojan horse" programmers have also been
used to snoop on Internet users while online, capturing keystrokes or confidential data in
order to send it to outside sites.

13. Money laundering:


The term "money laundering" dates back to the days of Al Capone Money laundering has
since 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.

14. Forged currency notes



Paper currency is the usual mode of exchange of money at the personal level, though in
business, cheques and drafts are also used considerably. Bank note has been defined in
Section 489A.If forgery of currency notes could be done successfully then it could on one
hand made the forger millionaire and the other hand destroy the economy of the nation. A
currency note is made out of a special paper with a coating of plastic laminated on both
sides of each note to protect the ink and the anti forgery device from damage. More over
these notes have security threads, water marks. But these things are not known to the
majority of the population. Forged currency notes are in full circulation and its very
difficult to catch hold of such forgers as once such notes are circulated its very difficult to
track its origin. But the latest fraud which is considered as the safest method of crime
without making physical injury is the Computer Frauds in Banks.

Computerization of banks had started since 1994 in India and till 2000 4000 banks were
completely and 9000 branches have been partially computerized. About 1000 branches
had the facilities for International bank Transaction. Reserve Bank Of India has evolved
working pattern for Local area Network and wide area Network by instituting different
microwave stations so that money transactions could be carried out quickly and safely.

The main banking tasks which computers perform are maintaining debit-credit records of
accounts, operating automated teller machines, and carry out electronic fund transfer,
print out statements of accounts create periodic balance sheets etc. Internet facilities of
computer have revolutionized international banking for fund transfer and for exchanging
data of interest relating to banking and to carry out other banking functions and provides
certain security to the customers by assigning different pin numbers and passwords.
15. Advance Fee Fraud
This may involve an agent approaching a bank, a company or individual with another to
access large funds at below market interest rates often for long term. This purported
source of funds is not specifically identified as the only way to have access to it through
the agent who must receive a commission “in advance”. As soon as the agent collects the
especially distressed banks and banks needing large funds to bid for foreign exchange can
easily fall victim of this type of fraud. When the deal fails and the fees paid in advance
are lost, these victims are not likely to report the losses to the police or to the authorities.
16. Fund Diversion
In this case, bank staff sometimes diverts customers’ deposits and loan repayment for
personal use. Another case of this is the tapping of funds from interest in suspense
accounts in banks.

17. Account Opening Fraud


This involves the deposit and subsequent cashing of fraudulent cheques. It usually starts
when a person not known to the bank asks to open a transaction account such as current
and savings account with false identification but unknown to the bank.

18. Counterfeit Securities


Counterfeiting of commercial financial instruments is one of the oldest forms of crime.
Modern photographic and printing equipment has greatly aided criminals in reproducing
good quality forged instruments. The documents may be total counterfeit or may be
genuine documents that are copied, forged or altered as to amount, payout date, pay or
terms of payment. A common fraud is to present the counterfeit stocks or bonds as
collateral for loan. The presenter would draw out the proceeds and disappear before the
financial instruments are found to be counterfeit.
19. Money Transfer Fraud
Money transfer services are means of moving to or from a bank to beneficiary account at
any bank point worldwide in accordance with the instructions from the banks’ customers.
Some common means of money transfer are mail, telephone, over-the-counter, electronic
process and telex. Fraudulent money transfer may result from a request created solely for
the purpose of committing a fraud or altered by changing the beneficiary’s name or
account number or changing the amount of the transfer.

20. Letter of Credit Fraud

This generally arises out of international trade and commerce. They stimulate trade across
national borders providing a vehicle for ensuring prompt payment by financially sound
institutions. Overseas suppliers continue to receive spurious letters of credit, which are
usually accompanied by spurious bank drafts with fake endorsements which guarantee
payments.
21. Computer Fraud

Computer Frauds involves the deceptive manipulation of the banks’ computer, either at
the data collection stage, the input processing stage or even the data dissemination stage.
Computer frauds could also occur due to improper input system, virus, program
manipulations, transaction manipulations and cyber thefts. It can also take the form of
corruption of the programmed or application packages and even breaking into the system
through remote sensors. A banks’ data can also be tampered with at the data centre to gain
access to unauthorized areas or even give credit to accounts for which the funds were not
originally intended. This kind of fraud can remain undetected for a long time. In this
epoch of enormous deployment of automated teller machines (ATMs) and online real
time e-banking and commerce; computer frauds arising from cyber thefts and crimes has
assumed a very threatening dimension . No bank seems to be invulnerable to it, and a
considerable percentage of the enormous amount of money spent annually in the banking
sector to help reduce fraud usually are channeled towards fighting computer frauds and
cyber crimes and theft.
22. Clearing Fraud
Most clearing frauds hinge on suppression of an instrument so that at the expiration of the
clearing period application to the instrument, the collecting bank will give value as
though the paying bank had confirmed the instrument good for payment. Clearing
cheques can also be substituted to enable the fraudster divert the fund to a wrong
beneficiary. Misrouting of clearing cheques can also assist fraudsters to complete a
clearing fraud. Askew, a local clearing item can be routed to an up country branch; the
delay entailed will give the collecting bank the impression that the paying bank had paid
the instrument.
23. Unofficial Borrowing

This occurs when bank employees borrow from the vaults and teller tills off the record.
Such unauthorized borrowings are done in exchange of the staff post-dated cheque or
nothing. These borrowings are more rampant on weekends and during the end of the
month when salaries have not been paid. Some of the unauthorized borrowings from the
vault, which could run into thousands of cedes, are used for fast businesses lasting a few
hours or days after which the resources are replaced without any substantiation in place
that they were taken in the first place. Such a practice when done recurrently and with no
official records, soon very easily becomes prone to manipulations, whereby they resort to
other means of balancing the cash in the bank’s vault without ever having to replace the
sums of money collected.

24. Voucher Manipulation

Manipulation of Vouchers involves the replacement or alteration of entries of one account


to another account being used to commit the fraud. This account would obviously be a
fabricated account into which the funds of unsuspecting clients of the banks are
transferred. The amounts taken are usually in small amounts so that it will not easily be
noticed by top management or other unsuspicious staff of the bank. Manipulation of
vouchers can thrive in a banking system saddled with inadequate checks and balances
such as poor job segregation and lack of detailed daily examination of vouchers and all
bank records.