The word ‘bank’ is a derivation of the word ‘banco’ which in Italian means a bench. In earlier times moneylenders and money changers display their coins and carry out their business transaction on a bench.
In the recent years we have seen a disturbing trend in rise of bank fraud cases, this maybe due to the rapid development in science and technology in the past few decades. According to a survey it is found that about 95% of transections in India are done in cash but with development in the field of technology like computers, smartphones, and easy access to internet, people are depending more on digital channels to carry out their banking works. This increases the risk of cyber crime upto a great extent.
In India, the banking laws are regulated by the Reserved Bank of India. According to the laws of banking, in India banks are made mandatory to maintain records and details of the customer’s information but, these informations are to be kept, confidential. In addition banks are not allowed to discriminate against any customer.With massive technological growth and the existence of several banking laws in India; online banking has become a promising means of banking. With the provision of comprehensive guidelines of the Reserve Bank of India and the introduction of the Information Technology Act, 2000 the online security concerns have been minimised to a great extent.
Bank- The dictionary defines banking as the business conducted or the services offered by a bank.
According to the Banking Regulations Act 1949, banking is defined as follows- ‘banking’ means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise.
Fraud- fraud is defined under section 17 of the Indian Contract Act 1872.
Fraud means any act/ acts committed by a person with intent to deceive another person and it includes knowingly suggesting something untrue as true in order to mislead someone, concealing any facts, making false promises, any act of deceiving people or to do or failure to do something which is declared by the law to be fraudulent.
Fraud under IPC- Although the Indian Penal Code does not give a definite definition of fraud, it envisages certain acts which amount to fraud such as cheating, concealment of facts, forgery, counterfeiting and the punishment breach of trust and the punishment for the same.
Fraud in other words can be defined as any act or omission by a person with intent to gain advantage over another by means of dishonesty, concealment of facts and or by intentionally making false statement.
Bank Fraud- bank fraud refers to obtaining by illegal means money, assets or any other property which is owned or held by any financial institution. In other words, bank fraud is any act by which a person by use of illegal means receive assets or money from a bank or attempts to get money from depositors of a bank by misleading them into thinking or pretending to be a bank. It is a criminal offence where the person carrying out such act secretly engages in some sort of a secret scheme or deception in order to deceive a bank or the depositors of a bank.
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3. Different Types of bank fraud.
Banking Frauds comprise a significant proportion of white-collar offences being probed by police.Unlike normal thefts and robberies; the sum misappropriated in these crimes goes upto lakhs and crores of rupees. Bank fraud is a criminal offence in many countries, which is defined as planning to get hold of assets or money from any financial institution. It is considered considered a white collar crime.The amount of bank frauds in India is extensive. It is escalating with the course of time. Almost all the major operational areas in banking present an excellent prospect for fraudsters with growing numbers being reported in deposits, loans and other accounting transactions.
Bank fraud is an increasing trend in today’s world. With development in technological field and the easy access to internt, banking has become impersonal and this increases the risk to white collar crime. In a survey, upto 1997, bank frauds in nationalised banks amounts to about Rs.497.60 crore.There are a number of ways in which bank fraud can be committed. Some of the most common bank frauds are as under:
i. Rogue traders
A rogue trader is a well positioned insider supposedly authorized to invest ample funds on behalf of the bank who secretly makes aggressive and risky investments progressively by using the bank’s money. When some investment goes wrong, the rogue trader employ in additional market assumption for a quick profit that would cover or hide the loss. However, when investment losses are piled against another, the costs to the bank can reach into the hundreds of millions of rupees. There are cases where a bank goes out of business owing to market investment losses.
ii. Fraudulent loans and fraudulent loan applications
The thieves or fraudsters obtain false information in order to cover credit history having financial problems and due loans to companies who use accounting fraud so as to overstate their profit so as to lure the banks into thinking of risky loan as sound investment.
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 Parmalat, leaving banks exposed to massive losses from bad loans.
Another way to take out money from a bank is to take out loan, bankers would welcome it if they have assurance that the money will be paid back with interest on time. However, a fraudulent loan is one where the borrower belongs to a business entity which is controlled by a corrupt bank officer or collaborator. The person taking out the loan then declares insolvency and vanishes and along with it the money. In some cases the borrower may also be a fictional entity where the loan is merely a ploy to cover up a theft of the money
iii. Wire fraud
Wire transfer networks like the international or inter-bank fund transfer system are alluring targets to fraudsters because once a transfer is made it is complicated or unfeasible to undo. As such networks are being used by banks in order to settle accounts among each other, quick or sudden wire transfer consisting of a large amount of money is commonplace. While there is the system of checks and balances, there is still a risk where the insiders might try to exploit fraudulent or forged information or documents to claim for a depositor’s money to be wired to another bank, more frequently to an offshore account located in some foreign country.
iv. Forged or fraudulent documents
As mentioned earlier, fraudsters often use forged documents to cover up someother thefts.since banks keep a meticulous account of every penny, any document stating that a certain sum of money has been taken as a loan or withdrawn by a depositor or that it has been transferred or invested can be valuable for a thief wishing to hide some minor detail about the bank’s money which has been stolen.
v. Uninsured deposits
There are also cases where the bank turns out to be unlicensed or uninsured. The purpose is to seek deposits to such uninsured banks, even though in some cases it may also be to sell stock on behalf of ownership of the bank. There are instances where the names are shown to be official or have very close resemblence to some legitimate banks.
vi. Identity theft
Corrupt bank workers are known to disclose a depositor’s personal information in order to use for identity frauds or thefts. The theif then makes use of such information in order to obtain identity cards and credit cards by using the name and personal information of the victim.
vii. Demand draft fraud
Demand Draft fraud is generally done or carried out by bank employees. They take out some DD leaves or books and fill them up like a normal DD. As it is done by insiders, they have knowledge about the coding and punching of the DD. As a result, these DD’s will then be issued payable at some distant place without debiting the account and it will then be cashed at some other payable branch. Such kind of fraud will be exposed only when a branch-wise reconciliation is carried out by the head of the Bank, and it will normally take about 6 months by which time the money becomes unrecoverable.
viii. Fraud by Forgery and stolen cheques
This occurs when the fraudsters alters a cheque illegally by changing the names or information in the cheque or forging signatures in order to cash or deposite a cheque or steals cheques and uses fake names to open account in order to dep;osite the cheque.
They distorted cheques to modify the name so as to deposit cheques meant to make payment to someother person.
However, Instead of altering a real cheque, there are some fraudsters who will make an attempt to forge the signature of a depositer on a blank cheque or print their own cheques which is drawn on accounts which is owned by other person or non-existing accounts or even accounts owned by non-existing depositors. Then the cheque will be deposited to a different bank and before the cheque is returned for non-sufficiency of funds or as invalid the money will be withdrawn.
Stolen cheques-Some fraudsters get access to those facilities managing huge amount of cheques, like a mailroom, post office or offices of tax authorites or a corporate payroll etc who are receiving many cheques. They then steal a few cheques and open accounts using fake names and the cheques which are often altered or tampered are deposited in order to withdraw the money. Blank cheque books which are stolen are also used by the forgers who sign on such stolen cheques by impersonating the depositor or by acting as a depositer themselves.
ix. Accounting fraud
Some businesses use fraudulent book keeping so as to exaggerate sales and income, increase a company’s assets or show a profit when the company is undergoing a loss in order to conceal or bury severe financial problems . These altered records are used to look for investment for a company’s bond, security concerns and even to make fraudulent application of loan in order to gain more money or to holdup expected collapse of an unbeneficial or mismanaged company or firm.
x. Bill fraud
Basically, a fraudster makes use of a company to gain assurance from a bank, by emerging as an authentic, lucrative customer. The company frequently and continually uses a bank to get payment from its customers. The payments are made because those customers are also a part of the fraud that is actively paying bills raised by the bank. After the bank is satisfied with the company, the company will request the bank to settles its balance before the customers are billed. When the outstanding balance between thecompany and the bank becomes sufficiently bulky, the company will take the payment from the particular bank, afterwhich both the company and the customers vanishes, and there is no-one to pay the bills which is issued by the bank.
xi. Cheque kiting
Whenever a cheque is deposited in an account, the money is immediately made available although it is not taken out from the account from which the cheque has been drawn until after the cheque clears.The cash or money which is in transit or which is non-existent is briefly recorded in several accounts.When a cheque is cashed and before the bank get the money by paying the cheque, that money is deposited in a different account or is withdrawn after writing more cheques. In a number of cases the original cheque which has been previously deposited turns out to be forged.Sometimes the fraudsters swap checks between different banks daily by using the other to cover the deficit for the previous cheque.This is known as check kiting; like a kite, it flies for a moment but at the end of the day it comes back to the ground.
xii. Credit card fraud
Credit card fraud is one of the most common means of stealing money from banks and clients. With the development of e-commerce and internet banking facilities on a colossial scale there is also an increase in fraud using credit card among other things. There are a number of ways by which credit card fraud is being committed-
i. Card manipulation
ii. Card alteration
iii. Counterfeiting of card which is also known as white plastic
iv. Telemarketing fraud
v. Fraudulent application of card by forgery
xiii. Skimming of card
There are number of ways by which credit card skimming is carried out. For example, a merchant copying a clients’ card numbers to misuse it, a thief using mechanical card imprint devices to steal information, tampering credit card readers by copying the magnetic stripe from a card with hidden camera capturing the pin numbers on the card. Even public ATM’s are not spared from this; they use fraudlent card readers and then use a hidden camera to obtain the pin of the card.
xiv. Impersonation and theft of identity
Impersonation of banks- This is one of the most common types of bank fraud where the individual/s commiting the act impersonates a bank to deceive people by falsely luring people to make deposits, creating websites, or by setting up fake companies.
Identity theft is becoming an increasing problem in the recent years. The personal information of a victim is obtained and is the used to make fake Identity cards, create false accounts and credits.By using such information and creating false accounts they take out loans in the name of the victim and vanish without trace which causes loss to the banks and also might land the victim in trouble.
xv. Money laundering
Money laundering is a term used to describe the way by which the origin or the source of the fund is kept hidden or concealed.It includes acquiring securities i.e.,stocks and bonds for cash and then placing them in one bank for safe deposit and claiming on the assets used as a collateral for loan from another bank. The borrower then default on the said loan. However, the securities will still be worth their full amount. Such transections are made to disguise the source of the fund.
4. Some famous cases of Bank fraud in India.
• The Punjab National Bank or the PNB bank fraud as it is more infamously known as is one of the biggest fraud in the Indian banking history. It is the India’s second major state run lender which was defrauded early this year. About Rs. 12,954 crore was said to be defrauded by Mr. Nirav Modi, a jeweler and Mr. Mehul Choksi, of Gitanjali Gems. They were alleged to have raised credit fromforeign banks based on fraudlent guarantees in agreement with PNB staff. Earlier in January this year both Mr Choksi and Mr Modi fled the country before complaint has been filed against them by PNB. The location of both the so-called fraudsters is not known even after their passports have been revoked by the government.
• Again, the Punjab National Bank revealed another credit-guarantee fraud in its Mumbai branch which is also related the Nirav Modi scam. The suspected misappropriation of around Rs. 9 crore concerned executives of a company known as Chandri Paper and Allied Products, as per the complaint filed with the Central Bureau of Investigation (CBI).
• The State Bank of India (SBI) is also at the top of a fraud amounting to a whooping Rs. 824.15 crore relating to Kanishk Gold Pvt Ltd. An investigation was launched by the Enforcement Directorate into the fraud and the hunt is on at the place of the company staff. A case has been registered against Kanishk Gold, alledging them of defrauding a conglomerate of 14 banks led by State Bank of India. A loan of Rs. 824.15 crore was taken from the consortium and the loan account had gone bad.
• Another case is that of Canara Bank fraud.the said bank is said to have been defrauded by one of its own former Chairman of about Rs. 1 crore. Charges has been filed by the CBI against the said person. Here also there were allegations that it was carried out with the help of the officials.
5. Reasons why it is difficult to trace and investigate bank fraud
Information technology is rapidly changing at present. Most often the ordinary investigator does not have proper background or knowledge to deal with the cases. Most of the high profile criminal activities related to banking are carried out by people having money and power and they have access to all the special means to carry out their act without being detected. If at all they are being detected also, it is difficult to find evidences and proof. Sepecial investigations have to be carried out to crack such cases.Since; they carry out their crimes easily with the help of information technology, it maybe difficult to trace their activities as it can be done easily from any part of the world. l may be anywhere and the criminal need not indicate the place, most often the only evidence left behind is the loss to crime.Bank computer offense have a distinctive feature, the data relating to such crime is insubstantial. The evidences are easily erased or tampered making it more difficult for the investigators to find proof. Furthermore it is not easy to detect and the evidence linking the criminal with the crime is seldom available. A computer crime is unlike other crimes largely because there usually is no eyewitness to the crime, no clues and no evidence.
In India, computerization of banks started around 1994 and upto the year2000, almost 4000 banks have been wholly computerised and 9000 other branches partially computerised. Almost around 1000 branches have facilities to carry outr International banking transaction. The Reserve Bank of India has evolved its operational pattern for Local area Network and wide area Network by introducing stations so that transactions can be carried out quickly and more safely.
Internet facilities have transformed the whole system of international banking for transfer of fund and to exchange datas involving banking andfor carrying out other functions and also to provide security to the customers by assigning different pin numbers and passwords.
In most of the cases the person responsible for the fraud either remains undetected or they take shelter in foreign countries. The big fishes are let off like that because the law cant do anything and the smaller frys are made to be scapegoats.