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Frauds & Scams in Banks
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Fraud in the Banking Sector

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Fraud in the Banking Sector

  1. 1. “Fraud in the Banking Sector – causes, concerns and cures” 1 Presented by Venkatesh, M.K. Sr. MBA (ABM)
  2. 2. Introduction  Banks are an essential part of the Indian economy.  While the primary responsibility for preventing frauds lies with banks themselves.  Banks are dealing with public's money and hence it is imperative that employees should exercise due care and diligence in handling the transactions in banks.  The RBI has been advising banks from time to time about the major fraud prone areas and the safeguards necessary for prevention of frauds. 2
  3. 3. Definition of fraud  Fraud can loosely be defined as “any behaviour by which one person intends to gain a dishonest advantage over another“ fraud, under section 17 of the Indian contract act, 1872,  RBI not defined the term “fraud” in its guidelines on frauds which reads as under.  “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 into wrongful gain to any person for A temporary period or otherwise, with or without any monetary loss to the bank”. 3
  4. 4. Table 1: Number of frauds cases reported by RBI regulated entities (No. of cases in absolute terms and amount involved in Rs. crore) Sl. No. Category No. of cases Amount involved 1 COMMERCIAL BANKS 169190 29910.12 2 NBFCs 935 154.78 3 UCBs 6345 1057.03 4 FIs 77 279.08 5 Total 4 176547 31401.01 Source: BIS central bankers’ speeches 26 July 2013.
  5. 5. Types of frauds  Account opening fraud: this involves a deposit and cashing of fraudulent cheques.  Cheque kiting: is a method where by a depositor utilizes the time required for cheques to dear to obtain an unauthorized loan without any interest charge.  Cheque fraud: most common cases of this kind of fraud are through stolen cheques and forged signatures.  Counterfeit securities: documents, securities, bonds and certificate could be forged, duplicated, adjusted or altered and presented for loan collection. 5
  6. 6.  Computer fraud: hacking, tampering with a diskette to gain access to unauthorized areas and give credit to an account for which the funds were not originally intended.  Loan fraud: when funds are lent to a non-borrowing customer or a borrowing customer that has exceeded his credit limit.  Money laundering fraud: this is a means to conceal the existence, source or use of illegal obtained money by converting the cash into untraceable transactions in banks.  Money transfer fraud: alteration of a genuine Funds transfer request.  e.g Mail, telephone, electronic process, telex.  Latest technology of using GSM phones. 6
  7. 7.  Telex Fraud: The messages that are passed through telex in form of codes could be altered to divert the funds to another account  Letters of Credit: Most common in international trading, these are instruments used across borders ads can be forged, altered, adjusted and take longer to identify.  Advanced Fees Fraud: Popularly known as ‘419’, advanced fees fraud may involve agent with an offer of a business proposition which would lead to access often for a long term. 7
  8. 8. Table 2: Year-wise and amount of fraud cases in the banking sector (No. of cases in absolute terms and amount involved in Rs. crore) Sl. No. Year No. of cases Total 8 amount 1 2009-10 24791 2037.81 2 2010- 11 19827 3832.08 3 2011- 12 14735 4491.54 4 2012- 13 13293 8646.00 5 Total frauds reported as of march 2013 169190 29910.12 Source: BIS central bankers’ speeches
  9. 9. Table 3: Bank Group wise fraud cases (No. Of cases in absolute terms and amount involved in Rs. Crore) Sl. No. Bank group No. of 9 cases % To total cases Amount Involved % To total Amount 1 Nationalised banks including SBI group 29653 17.53 24828.01 83.01 2a Old Pvt. Sector banks 2271 1.34 1707.71 5.71 2b New Pvt. Sector Banks 91060 53.82 2140.48 7.16 3 Sub total (private banks) 93331 55.16 3848.19 12.87 4 Foreign banks 46206 27.31 1233.92 4.12 6 Total 169190 100 29910.12 100 Source: BIS central bankers’ speeches
  10. 10. Category of frauds 1. Technology related 2. KYC related (mainly in deposit accounts) 3. Advances related  Technology related: The Technology related fraud around 65% 10 of the total fraud cases reported by banks. (covering frauds committed through /at internet banking channel, ATMs and other alternate payment channels like credit/debit/prepaid cards)  Banks are adopt newer service delivery platforms like mobile, internet and social media, for enhanced efficiency and cost-cutting.  Banks’ customers have become tech savvy and started using online banking services and products. .
  11. 11.  The above evident that incidence of cyber frauds is extremely high, the actual amount involved is generally very low.  RBI has advised banks in February 2013 to introduce two factor authentication in case of “card not present” transactions, converting all strip based cards to chip based cards for better security.  The electronic modes of payment like NEFT and RTGS are introduce.  RBI has advised banks to introduce preventive measures such as putting a cap on the value/ number of beneficiaries, velocity checks on number of transactions effected per day/ per beneficiary, and introduction of digital signature for large value payments. 11
  12. 12. 12
  13. 13. Table 4:Bank Group wise Technology Related Frauds Source: BIS central bankers’ speeches 13
  14. 14. KYC related fraud  KYC (Know Your Customer) is a framework for banks which enables them to know / understand the customers and their financial dealings to be able to serve them better.  RBI has advised banks to make the KYC procedures mandatory while opening and operating the accounts.  Issued the KYC guidelines under section 35 (A) of the banking regulation act, 1949.  For this purpose, the fraudsters generally use deposit accounts in banks with lax KYC drills.  Therefore, customers to guard against such temptations for easy money but should also ensure that deposit accounts maintained with them are fully KYC compliant. 14
  15. 15.  They provide an essential part of sound risk management system (basis for identifying, limiting and controlling risk exposures in assets & liabilities. 4 key elements of KYC policies  customer acceptance policy  customer identification procedures  monitoring of transactions  risk management 15
  16. 16. Frauds in banks’ advances portfolio  Frauds related to the advances portfolio accounts for the largest Share of the total amount involved in frauds in the banking sector. (Involving amount of Rs. 50 crore and above)  Another point that public sector banks account for a substantial chunk of the total amount involved in such cases.  Declaration of frauds by various banks in cases of consortium/ multiple financing we have on occasions observed more than 12– 15 months lag in declaration.  The large value advance related frauds, which pose a significant challenge to all stakeholders, are mainly concentrated in the public sector banks. 16
  17. 17.  Majority of the credit related frauds are on account of deficient appraisal system, poor post disbursement supervision and inadequate.  Reserve bank has also advised banks to audit periodically so that cases of multiple financing may be detected in the initial stages itself. 17
  18. 18. Table 4: Bank Group wise Advance Related Frauds Rs. 1 Crore & above in value Source: BIS central bankers’ speeches 18
  19. 19. Case 1  Date of Detection: 05/03/2012  Name of the Branch: Dhuri Branch, State Bank of Patiala.  Amount involved in Rs: 8.75 crores  Brief facts of the case: The branch had financed agriculture business.  Cash Credit limits to 3527 sugar cane growers under tie up arrangement with M/s Bagwanpura Sugar Mills, who stood as a guarantor.  As per the tie up arrangement the antecedents of the borrowers were to be verified by the company.  only 1186 borrowers were resident of the villages and they were found to be agricultural labourers & not cane growers. 19 Source: Banking Division, Ministry of Finance, New Delhi.
  20. 20. Case 2  Date of Detection: 03/02/2011  Name of the Branch: Gharyala, Punjab National Bank  Amount involved in Rs: 1.14 crores  Brief facts of the case: The manager along with shri gurmeet singh, and clerk in collusion with a group of persons in the area misappropriated Bank's funds.  housing loans, on fabricated / fictitious revenue record, disbursed fictitious loans under small business / transport / dairy without creating any security as a conduit to siphon-off the funds Source: Banking Division, Ministry of Finance, New Delhi 20
  21. 21. Table 7:Year wise details of fraud cases closed Source: BIS central bankers’ speeches 21
  22. 22. Reporting of frauds to RBI Frauds involving amounts of less than Rs 1.00 lakh:  less than Rs 1.00 lakh are not to be reported individually to the RBI.  Statistical data in respect of such frauds should, be submitted to RBI in a quarterly statement. Frauds involving amounts of Rs 1.00 lakh and above but less than Rs 25.00 lakh:  Frauds involving amounts of Rs1.00 lakh and above but less than Rs 25.00 lakh should be reported to the regional office of urban banks department of RBI .  In the format given in FMR-1, and within three weeks from the date of detection. 22
  23. 23.  Frauds involving amounts of Rs 25.00 lakh and above : frauds involving amounts of Rs 25.00 lakh and above should be reported to central frauds monitoring cell, department of banking supervision, RBI.  A copy of FMR-1 should also be submitted to the regional office of urban banks department of RBI.  In addition banks may report the fraud by means of D.O. Letter addressed to the principal chief general manager of the department of banking supervision, RBI, central office.  The letter may contain brief particulars of the fraud.  Letter should also be endorsed to the regional office of urban banks department of RBI under the bank's branch. 23
  24. 24. Expectations of the supervisor  RBI has clearly indicated that fraud risk management, fraud monitoring and fraud investigation function must be owned by the bank’s CEO, audit committee of the board.  In respect large value frauds, the special committee of the board are CMDs, CEOs, audit committee and the special committee evolving robust fraud risk management systems.  They are responsible for effective investigation of fraud cases and accurate reporting to appropriate regulatory and law enforcement authorities.  Top management puts in place targeted fraud awareness training for its employees focusing on prevention and detection of fraud. 24
  25. 25.  Audit systems prevalent in banks have not proved effective in detecting fraud cases.  Providing individuals a means to report suspicious activity is a critical part of an anti-fraud program.  A system of protected disclosure scheme has been evolved which is regulated by CVC in case of public sector banks.  RBI in case of private and foreign banks. 25
  26. 26. Table 6:Bank group wise fraud cases reported as on march 31, 2013 Source: BIS central bankers’ speeches 26
  27. 27. CIBIL  It is a company of checking the credit history.  Fraudulent borrowers could still seek credit from the banking system even after defrauding one bank.  Worthwhile to consider setting up a fraud registry on the lines of credit information bureau.  . 27
  28. 28. Conclusion  The impact of frauds on entities like banks, and the economic cost of frauds can be huge in terms of likely disruption in the working of the markets, financial institutions, and the payment system. Besides, frauds can have a potentially debilitating effect on confidence in the banking system and may damage the integrity and stability of the economy. It can bring down banks, undermine the central bank’s supervisory role and even create social unrest, discontent and political upheavals. The vulnerability of banks to fraud has been heightened by technological advancements in recent times. 28
  29. 29. Reference  Inaugural address by Dr K C Chakrabarty, deputy governor of the reserve bank of India, during the national conference on financial fraud organised by ASSOCHAM, new Delhi, 26 July 2013.  BIS central bankers’ speeches.  ACFE (Association of Certified Fraud Examiners’ Association of Certified Fraud Examiners’)  Banking Division, Ministry of Finance, New Delhi  Int. Journal of Business Science and Applied Management / 29
  30. 30. 30 Thank you!
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