Causes, Effects and Management of Fraud: A Study with reference to Indian Banking Sector

1. CAUSES, EFFECTS AND MANAGEMENT OF
FRAUD: A STUDY WITH REFERENCE TO
THE INDIAN BANKING SECTOR
Presented By: URVI SINGH
Research Scholar
Enrollment Number : 2014PHDCOM003
Supervisor: Dr. RUCHITA VERMA
Assistant Professor
Department of Commerce
School of Commerce and Management
Central University of Rajasthan
October 2015

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

3. Introduction
 Fraud is a wrongful or criminal deception intended to result in
financial or personal gain. It is an aspect of corruption & it occurs in
organization where governance structure is weak.
Fraud is rising across the banking product range and surfacing in
different forms across the globe.
Banking Frauds constitute conscious misrepresentation, obtaining
possessions, money or other property which is owned or held by a
financial institution or depositors by using those means which are
against the law.
 Reserve Bank of India defines it as,
“A deliberate action of omission or commission by any person,
carried out in the course of a banking transaction or in the books of
accounts maintained manually or under computer system in banks,
resulting into wrongful gain to any person for a temporary period or
otherwise, with or without any monetary loss to the bank.”

4. (No. of cases in absolute terms and amount involved in Rs. Crore)
Year No. of cases Total Amount
2009-10 24791 2037.81
2010-11 19827 3832.08
2011-12 14735 4491.54
2012-13 13293 8646.00
Total frauds reported as of March 2013 169190 29910.12
Year-wise no. and amount of fraud cases in the
banking sector
SOURCE: - The Journal for CMAs , The management Accountant , JULY 2014 VOL 49
NO. 7

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

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

7. S.No. Types Description
1. Rogue Traders Employee making unauthorized trades on behalf of its employer.
2. Fraudulent
Loans
Loan borrowed by dishonest or non-existent entity controlled by
a dishonest bank officer.
3. Wire Fraud Fraudulent pretences for obtaining money by means of wire,
radio or television etc.
4. Forged
documents
Documents used by fraud to conceal the minor detail.
5. Uninsured
deposits
Asking for deposits by a bogus bank.
6. Theft of identity Employees of fictitious bank use personal information of
customers & misuse it.
7. Demand Draft
fraud
Fraud caused by deceptive Demand Draft by insincere bank
employees.
Classification of fraud (fraud by Insiders)
Source: - http://www.legalserviceindia.com/article/l261-Bank-Frauds.html

8. S.No. Types Description
1. Forgery & altered
cheques
Changing the entries of cheque& misusing it.
2. Stolen cheques Stealing cheque of hefty amount & misusing it.
3. Accounting Fraud Concealing of original financial status by creative accounting & cheat while
dealing with bank.
4. Bill Discounting fraud Fraudulently discounting bill of huge amount from bank after gaining confidence
with bank.
5. Cheque Kiting Taking advantage of the float to make use of non-existent funds in bank account.
6. Credit Card fraud Fraud committed by use of payment card in a transaction.
7. Counterfeit Credit Cards Fraud by making copies of legitimate credit cards by copying or skimming the
data on the card’s magnetic stripe.
8. Stolen Payment Cards Misusing credit or debit cards after stealing it from others.
9. Skimming of card
information
Fraud by attaching card stripe reader to ATMs etc. to gain unauthorized access to
the contents of magnetic stripe.
10. Theft of identity &
impersonation
By obtaining information of customers & using it for withdrawing cash from
bank.
11. Fraudulent Loan
applications
Using false information to hide a credit history filled with financial problems &
obtaining risky loans as sound investment for a bank.
12. Internet fraud & phishing Fraud by the way of internet by impersonating.
13. Money Laundering Any scheme by which true origin of funds is hidden.
14. Fake Currency Notes Forgery of currency notes.
15. Cyber Fraud Frauds committed by technology like computer etc.
Classification of different types of fraud (fraud by others)
Source: - http://www.legalserviceindia.com/article/l261-Bank-Frauds.html

9. S. No. Institutional Factors Environmental Factors
1. Incompetent database management &
IT
Slothful legal process
2. Awful personnel policies Job insecurity
3. Frail accounting Displeased expectations of society
4. Less enthusiastic reporting of frauds Get-quick-rich desire
5. Greenness in staff Economic disparity
6. Feeble administration Financial load on everyone
7. Unaccomplished KYC scheme Peer pressure
8. Growing frustration Safe & easy existence of fraud
9. Less training & seminars
10. Fragile infrastructure
11. Less transparency
12. Red-tapism
Factors Causing Banks’ Fraud
Source: - http://incometaxparaskochar.com/Image/BANKING%20FRAUDS.pdf

10. Effects of fraud in Banks
 Erodes public confidence in banking system.
Diminishing the profitability of bank and thus
reduces firm value.
 Depletion of stakeholders and bank capital base.
 Dismissal and retrenchment of staff.
 Also, sometime threaten the going concern of
the commercial banks and forces a closedown.
Destroy the economy of the nation and its
sovereignty.

11. Fraud Management
Classical Fraud Motivation Model Kingsley (2012)
Why Fraud is committed?
PERCEIVED
OPPORTUNITIES
PERCEIVED
RATIONALIZATIONS
PERCEIVED PRESSURES

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

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

14. Other Techniques for dealing with fraud
Rahman(2014)
 Ethics training
Inventory observations
Fraud hotline
 Password protection
 Continuous auditing
Increased role of audit committee
 Reference check on employees
Data mining

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

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

17. References
 Adeyemo Kingsley, A. (2012). Frauds in Nigerian banks: Nature, deep-seated
causes, aftermaths and probable remedies. Mediterranean Journal of Social
Sciences, 279.
 Babatunde, G. (2009). Precipitating factors in fraud and criminal motivation.
International Journal of Bank Marketing, 10(3), 232-250.
 Subha V, (2012). “Retail Banking Fraud Management - Challenges and
Emerging Alternatives”
 Rahman, R. A., & Anwar, I. S. K. (2014). Effectiveness of Fraud Prevention
and Detection Techniques in Malaysian Islamic Banks. Procedia-Social and
Behavioral Sciences, 145, 97-102.
 Shongotla, I.O, (1994).“Fraud Detection and control” Nigeria institute of
Bankers Lagos July- December VOi.30, NO.4 PP16-19.
 Soni R.R., Neena S, (2013) “An Investigative Study of Banking Cyber Frauds
with Special Reference to Private and Public Sector Banks” Vol. 2(7), 22-27,
2319–1171
 Wells, J.T. (2000, October). Fraud comes in many shapes and sizes- and it’s
growing faster than ever: So that’s why it’s called a pyramid Scheme. Journal of
Accountancy.
 https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=621

18. Thank You all