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BANK FRAUDS: CONCEPT AND DIMENSIONS 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 competitiveness based lending in the context of India's economic liberalization policies and the process of linking with the global economy. While the operations of the bank have become increasingly significant banking frauds in banks are also increasing and fraudsters are becoming more and more sophisticated and ingenious. In a bid to keep pace with the changing times, the banking sector has diversified it business manifold. And the old philosophy of class banking has been replaced by mass banking. The challenge in management of social responsibility with economic viability has increased. 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. BANK FRAUDS Losses sustained by banks as a result of frauds exceed the losses due to robbery, dacoity, 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. Goods hypothecated to a bank are found to contain obsolete stocks packed in between goods stocks and case of shortage in weight is not uncommon. 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. FRAUDS-PREVENTION AND DETECTION A close study of any fraud in bank reveals many common basic features. There may have been negligence or dishonesty at some stage, on part of one or more of the bank employees. One of them may have colluded with the borrower. The bank official may have been putting up with the borrower's sharp practices for a personal gain. The proper care which was expected of the staff, as custodians of banks interest may not have been taken. The bank's rules and procedures laid down in the Manual instructions and the circulars may not have been observed or may have been deliberately ignored. Bank frauds are the failure of the banker. It does not mean that the external frauds do not defraud banks. But if the banker is upright and knows his job, the task of defrauder will become extremely difficult, if not possible. Detection of Frauds 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. 3. The probable order of events should thereafter be reconstructed by the officer, in his own mind. 4. It is advisable to keep the central office informed about the fraud and further developments in regard thereto. Classification of Frauds and Action Required by Banks The Reserve Bank of India had set-up a high level committee in 1992 which was headed by Mr. A... Ghosh, the then Dy. Governor Reserve Bank of India to inquire into various aspects relating to frauds malpractice in banks. The committee had noticed/observed three major causes for perpetration of fraud as given hereunder:

1. Laxity in observance of the laid down system and procedures by operational and supervising staff. 2. Over confidence reposed in the clients who indulged in breach of trust. 3. Unscrupulous clients by taking advantages of the laxity in observance of established, time tested safeguards also committed frauds. In order to have uniformity in reporting cases of frauds, RBI considered the question of classification of bank frauds on the basis of the provisions of the IPC. Given below are the Provisions and their Remedial measures that can be taken. 1. Cheating (Section 415, IPC) Remedial Measures. The preventive measures in respect of the cheating can be concentrated on cross-checking regarding identity, genuineness, verification of particulars, etc. in respect of various instruments as well as persons involved in encashment or dealing with the property of the bank. 2. Criminal misappropriation of property (Section 403 IPC). Remedial Measure Criminal misappropriation of property, presuppose the custody or control of funds or property, so subjected, with that of the person committing such frauds. Preventive measures, for this class of fraud should be taken at the level the custody or control of the funds or property of the bank generally vests. Such a measure should be sufficient, it is extended to these persons who are actually handling or having actual custody or control of the fund or movable properties of the bank. 3. Criminal breach of trust (Section 405, IPC) Remedial Measure Care should be taken from the initial step when a person comes to the bank. Care needs to be taken at the time of recruitment in bank as well. 4. Forgery (Section 463, IPC) Remedial Measure Both the prevention and detection of frauds through forgery are important for a bank. Forgery of signatures is the most frequent fraud in banking business. The bank should take special care when the instrument has been presented either bearer or order; in case a bank pays forged instrument he would be liable for the loss to the genuine costumer. 5. Falsification of accounts (Section 477A)

Remedial Measure Proper diligence is required while filling of forms and accounts. The accounts should be rechecked on daily basis. 6. Theft (Section 378, IPC) Remedial Measures Encashment of stolen' cheque can be prevented if the bank clearly specify the age, sex and two visible identify action marks on the body of the person traveler's cheques on the back of the cheque leaf. This will help the paying bank to easily identify the cheque holder. Theft from lockers and safe deposit vaults are not easy to commit because the master-key remains with the banker and the individual key of the locker is handed over to the costumer with due acknowledgement. 7. Criminal conspiracy (Section 120 A, IPC) In the case of State of Andhra Pradesh v. IBS Prasad Rao and Other, the accused, who were clerks in a cooperative Central Bank were all convicted of the offences of cheating under Section 420 read along with Section 120 A. all the four accused had conspired together to defraud the bank by making false demand drafts and receipt vouchers. 8. Offences relating to currency notes and banks notes (Section 489 A-489E, IPC) These sections provide for the protection of currency-notes and bank notes from forgery. The offences under section are: (a) Counterfeiting currency notes or banks. (b) Selling, buying or using as genuine, forged or counterfeit currency notes or bank notes. Knowing the same to be forged or counterfeit. (c) Possession of forged or counterfeit currency notes or bank-notes, knowing or counterfeit and intending to use the same as genuine. (d) Making or passing instruments or materials for forging or counterfeiting currency notes or banks. (e) Making or using documents resembling currency-notes or bank notes. Most of the above provisions are Cognizable Offences under Section 2(c) of the Code of Criminal Procedure, 1973. LEGAL REGIME TO CONTROL BANK FRAUDS Frauds constitute white-collar crime, committed by unscrupulous persons deftly advantage of loopholes existing in systems/procedures. The ideal situation is one there is no fraud, but taking ground realities of the nation's environment and human nature's fragility, an institution should always like to keep the overreach of frauds at the minimum occurrence level.

Following are the relevant sections relating to Bank Frauds Indian Penal Code (45 of 1860) (a) Section 23 "Wrongful gain"."Wrongful gain" is gain by unlawful means of property to which the person gaining is not legally entitled. (b) "Wrongful loss" "Wrongful loss" is the loss by unlawful means of property to which the person losing it is legally entitled. (c) Gaining wrongfully. Losing wrongfully-A person is said to gain wrongfully when such person retains wrongfully, as well as when such person acquires wrongfully. A person is said to lose wrongfully when such person is wrongfully kept out of any property, as well as when such person is wrongfully deprived of property. (d) Section 24. "Dishonestly" Whoever does anything with the intention of causing wrongful gain to one person or wrongful loss to another person, is said to do that thing "dishonestly". (e) Section 28. "Counterfeit" A person is said to "counterfeit" who causes one thing to resemble another thing, intending by means of that resemblance to practice deception, or knowing it to be likely that deception will thereby be practiced. BREACH OF TRUST 1. Section 408- Criminal breach of trust by clerk or servant. 2. Section 409- Criminal breach of trust by public servant, or by banker, merchant or agent. 3. Section 416- Cheating by personating 4. Section 419- Punishment for cheating by personation. OFFENCES RELATING TO DOCMENTS 1) Section 463-Forgery 2) Section 464 -Making a false document 3) Section 465- Punishment for forgery. 4) Section 467- Forgery of valuable security, will, etc

5) Section 468- Forgery for purpose of cheating 6) Section 469- Forgery for purpose of harming reputation 7) Section 470- Forged document. 8) Section 471- Using as genuine a forged document 9) Section 477- Fraudulent cancellation, destruction, etc., of will, authority to adopt, or valuable security. 10) Section 477A- Falsification of accounts. PHYSICAL SECURITY MEASURES-CONCEPT A large part of banks security depends on social security measures. Physical security measures can be defined as those specific and special protective or defensive measures adopted to deter, detect, delay, defend and defeat or to perform any one or more of these functions against culpable acts, both covert and covert and acclamations natural events. The protective or defensive, measures adopted involve construction, installation and deployment of structures, equipment and persons respectively. The following are few guidelines to check malpractices: 1. To rotate the cash work within the staff. 2. One person should not continue on the same seat for more than two months. 3. Daybook should not be written by the Cashier where an other person is available to the job 4. No cash withdrawal should be allowed within passbook in case of withdrawal by pay order. 5. The branch manager should ensure that all staff members have recorder their presence in the attendance registrar, before starting work. 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. The execution should always be done in the presence of the officer responsible for obtain them, 4. The borrowers should be asked to sign in full signatures in same style throughout the documents.

5. Unless there is a specific requirement in the document, it should not be got attested or witnessed as such attestation may change the character of the instruments and the documents may subject to ad volrem stamp duty. 6. The paper on which the bank documents are made should be pilfer proof. It should be unique and available to the banks only. 7. The printing of the bank documents should have highly artistic intricate and complex graphics. 8. The documents executed between Banker and Borrowers must be kept in safe custody,

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