This document provides an introduction to fraud, including definitions, types of fraud, who can commit fraud, potential triggers of fraud, reasons for fraud, and impacts of fraud. It defines fraud as any dishonest act or omission intended to gain advantage. Common types of fraud include cheating, forgery, misappropriation, and fraudulent transactions. Employees, customers, and outsiders can all perpetrate fraud. Triggers may include lifestyle changes or high-risk transactions. Fraud is often committed due to financial problems, knowledge of weaknesses, and rationalization. Impacts include financial, regulatory, and reputational risks for institutions, as well as punishments for individuals.

1. Introduction to Frauds
 What is Fraud? Any behavior by which one person intends to gain a dishonest advantage over another may be called as
‘Fraud’
• It may either be an ‘Act’ or ‘Omission’
 Section 17 of the Indian Contract Act, 1872 defines Fraud as any of the following acts committed by a party to
a contract, or with his connivance, or by his agents, with intent to deceive another party thereto, or his agent,
or to induce him to enter into the contract.
• the suggestion as a fact, of which is not true, by one which does not believe it to be true
• the active concealment of a fact by one having knowledge or belief of the fact
• a promise made without any intention of performing it
• any other act fitted to deceive
• any such act or omission as the law specially declares to be fraudulent
 The Working Group on IS Security, Electronic Banking, Technology Risk Management and Cyber Frauds has
suggested the below definition:
‘A deliberate act 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 in wrongful gain to any person for a
temporary period or otherwise, with or without any monetary loss to the Bank’

2. Who can Perpetrate Frauds
• Ss
 Frauds maybe perpetrated by any of the below entities (either singly or jointly in connivance with
other entities),
• Employee/s of the institution
• Customer/s of the institution
• Outsiders
We will discuss on this topic further in the subsequent slides..!
 Frauds encompasses all industries and are not just restricted to Banking Sector.
Few Sectors where Frauds with high Financial impact are commonly observed,
• Insurance
• Foreign Exchange
• Stock Market

3. Potential Triggers which may lead to/be indicative of Frauds
Internal Frauds or Frauds perpetrated by Employee (being the perpetrator himself or for having nexus with the actual
perpetrator):
• Sudden change in lifestyle / Disproportionate increase in personal assets
• Significant increase in borrowings beyond his declared financial capacity
• Frequent non-salary credits received in salary account
• High / frequent usage of branch petty cash / expenses GL
Customer Frauds:
• Frequent Cheque Bounces or bouncing of a high value cheque
• Delay in payments of outstanding dues
• Early defaults in servicing EMIs
• High value transactions in newly opened accounts / transactions not in line with the profile of the customer
• Immediate HV Cash Withdrawal subsequent to credited into account through (NEFT/RTGS/FT)
External Frauds or Frauds perpetrated by outsiders:
• Posing as an employee of the institution to gain trust of unsuspecting individuals to access their account/s
• Individual/s loitering outside the ATM offering to help the customer to withdraw money
• Any protruding device fixed on the ATM machine externally (fixed to Skim/Clone the card)
• Account operated by a third party using the mandate of the account holder.

4. Why are Frauds committed
By a Freudian construct, there are primarily three drivers of fraudulent behavior:
• A non-shareable financial problem (Motive)
• Knowledge of weakness in the structure and workings of a corporation which would allow the perpetrator to
commit the fraud and escape detection (Opportunity)
• Ability to justify to oneself that the fraudulent action are not necessarily wrong. It also includes the aspect of ability
to carry out such acts with confidence (Rationale)
These aspects can be better understood with the below diagram which is widely acknowledged in the industry as
‘Fraud Triangle’.

5. Nature & Type of Frauds
In order to have uniformity, Frauds have been majorly classified as under the provisions of IPC
 Cheating & Forgery
 Misappropriation & Criminal Breach of Trust
 Fraudulent transactions involving Forex
 Un-authorized credit facility extended for a reward/illegal gratification
 Fraudulent encashment through forged instruments
On a case to case basis the frauds of the above nature are further classified into different types, (a few common
types are listed below)
 Clandestine selling of hypothecated asset/mortgaged property
 Defective title deeds / fabricated title deeds or SOA/ Multiple hypothecation
 Diversion of funds
 Fake FD receipts, Fake LC
 Identify theft
 Phishing / Vishing / Skimming

6. Areas of Operations vulnerable to Frauds
 Advances (Personal Loans, HL, LAP, Micro Finance under the JLG model)
 Cards / Digital products (Debit Cards, Credit Cards, Prepaid/Gift Cards, Internet banking,
Mobile Banking)
 Deposits (Fixed Deposits, Recurring Deposits, Investment instruments – Insurance/wealth
management products)
 Cash (Cash deposits, payments, collection, CRL)
 Cheque / DD (fake / altered instruments)
 Forex (fake LC/BG)

7. Case Study 1
Case Details / Modus Operandi:
Mr. SNN was posted as Assistant Branch Manager (ABM) of TNR branch. His primary role is to source business, conduct Personal
Discussion (PD) with prospective borrowers and furnish a PD report as a part of the pre-sanction loan process.
Borrower Ms. KRI visited the branch to pre-close her retail loan. Mr. SNN collected the cash and provided a pre-closure statement along
with his sign and branch stamp as acknowledgement (fake receipt). Instead of accounting the cash into the borrowers account, ABM
handed over this cash to Mr. PTM posted as Receivables Officer (RO). ABM and RO colluded and mis-utilized the pre-closure amount
received from the borrower.
Branch Manager (BM) Mr. VGN having known the facts of the case, did not escalate the incidence to their supervisors/Head Office.
Ms. KRI raised a complaint through our customer support about non-receipt of SMS towards the pre-closure of loan account.
What went wrong / Lapses, which enabled the perpetration of fraud?
Action taken ?

8. Case Study - 2
Mr xyz, is the Business Development Officer (BDO) of ABC branch. He has been working in this role since
01/01/2018 with the primary responsibility to source new business to the branch. During his tenure, he had
sourced many accounts viz., Current Account & Savings Account.
All these account were opened through the “Cash” mode for Initial Payment (IP).
What is the trigger here??
What could be the Modus Operandi of the Fraud ?
Opportunity?
Motive?
Rationale?

9. Who watches over these Frauds and establish
accountability ??
• Internal Vigilance Function
• Risk Containment Units
• Internal Audit Function
Apart from the above, there are various Regulatory and Statutory agencies that continuously monitors the
industry and brings about accountability and enforces punitive actions namely,
• The Reserve Bank of India
• Law Enforcement Agencies
• Other statutory bodies like NPCI, SEBI, etc.
There are also global watchdog agencies like FATF and UNSC which monitors the flow of fraudulent funds
which may be routed for terrorist financing.
( *The above list is only indicative and not exhaustive )

10. Mechanism for prevention, early identification and
detection of Frauds
 Whistle Blower
Who can be a Whistle Blower ?
Any employee of the bank branch, stakeholders (including customers) or an outsider
Is it safe to report a Complaint through the WB mechanism ?
As stated in the CVC guidelines and practiced in the Industry, Whistle Blowers identity will be protected and no
adverse action viz. demotion, transfers, termination etc. will effected as a result of the WB complaint.
Each employee of the institution is a Vigilance Official for the institution. It is the obligation of every
employee who witnesses a wrong doing, to report it to the Management immediately either through the
WB machinery or through his reporting manager. Officials who fail to escalate such
irregularities/anomalies are termed as “by-standers” and may be referred for a Disciplinary action based
on the veracity of the incident & its impact on the institution.

11. Mechanism for prevention, early identification and
detection of Frauds
 Internal Vigilance Function, Risk Containment Unit, Transaction Monitoring Unit and Internal
Audit Department
These functions within the institution work in tandem continuously round the year with the common goal of
safeguarding the interest of the institution and its stakeholders.
A Few indicative activities performed by these units are listed below,
• Preventive Vigilance
• Detective Vigilance
• Punitive Vigilance
• Sampling Checks
• Field Inspection (FI)/ Contact point verification (CPV)/ Back ground verification (BGV)
• Rule based transaction monitoring
• Concurrent Audits
• Risk Based Audits
• Thematic Studies
• Snap Audits
• Compliance Audit

12. Impacts of Frauds
 On the Institution:
Financial Risk, Regulatory Risk, Reputational Risk
 On the Employee:
Punitive actions by the employer, Punishments through LEA, Career / Personal Life
 On the Society:
Erosion of Trust on the System (banking in this case), Increase in Taxes (against
investment for mitigations, both corrective & preventive)

13. Thank You..!!
• Ss
Sathyananda Prabhu, MBA, LLB, CEH, DTIRM, CISA, CISM, CGEIT, ISO 27001
certified lead IS Auditor,
Chief Audit Executive & Chief of Internal Vigilance – Equitas Small Finance Bank
Governing Member of the IIA, Madras Chapter