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Bank fraud is the use of fraudulent means to obtain money, assets, or other property owned orheld by a financial institution. In many instances, bank fraud is a criminal offense. While thespecific elements of a particular banking fraud law vary between jurisdictions, the term bankfraud applies to actions that employ a scheme or artifice, as opposed to bank robbery or theft. Forthis reason, bank fraud is sometimes considered a white-collar crime.

DEFINITION OF FRAUD

Fraud is defined as "any behavior by which one person intends to gain a dishonest advantageover another". In other words , fraud is an act or omission which is intended to cause wrongfulgain to one person and wrongful loss to the other, either by way of concealment of facts orotherwise.

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.[edit] Banking fraud by country

[edit] Bank fraud in the United States

Under federal law, bank fraud in the United States is defined, and made illegal, primarily by the

Bank Fraud Statute in Title 18 of the U.S. Code. 18 U.S.C. 1344 (Bank Fraud Statute) states:

Whoever knowingly executes, or attempts to execute, a scheme or artifice(1) to defraud a financial institution; or(2) to obtain any of the moneys, funds, credits, assets, securities, or other property ownedby, or under the custody or control of, a financial institution, by means of false orfraudulent pretenses, representations, or promises;shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

State law may also criminalize the same, or similar acts.

The Bank Fraud Statute was passed following the Supreme Court's decision in Williams v.United States, 458 U.S. 279 (1982), in which the Court held that cheque-kiting schemes did notconstitute making false statements to financial institutions (18 U.S.C. 1014). Congressresponded by passing the Bank Fraud Statute (18 U.S.C. 1344). Section 1344 has subsequentlybeen bolstered by the Financial Institutions Reform, Recovery and Enforcement Act of 1989(FIRREA), Pub. L. No. 101-73, 103 Stat. 500.

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The Bank Fraud Statute criminalizes federally cheque-kiting, cheque forging, non-disclosure onloan applications, diversion of funds, unauthorized use of automated teller machines (ATMs),credit card fraud, and other similar offenses. Section 1344 does not cover certain forms of moneylaundering, bribery, and passing bad checks. Other provisions cover these offenses.

[edit] Bank fraud in China

China has executed bankers for fraudulent activity; some recent cases (Sept 2004) which endedin capital punishment include:

y Wang Liming, former accounting officer, China Construction Bank, Henan, with othersstole 20 million yuan ($2.4 million in U.S. Currency) from the bank using fraudulentpapers, executed.

y Miao Ping, an accomplice in the same case, executed.y Wang Xiang, same bank in an unrelated case, also executed for taking 20 million yuan

from the bank.y Liang Shihan, Bank of China, Zhuhai, executed for helping cheat his bank out of $10.3million US.

[edit] Mechanics of bank fraud

This section may require cleanup to meet Wikipedia's quality standards. Pleaseimprove this section if you can. The talk page may contain suggestions. (October 2008)

[edit] Stolen Checks

Some fraudsters obtain access to facilities handling large amounts of checks, such as a mailroomor post office or the offices of a tax authority (receiving many checks) or a corporate payroll or asocial or veterans' benefit office (issuing many checks). A few checks go missing; accounts arethen opened under assumed names and the checks (often tampered or altered in some way)deposited so that the money can then be withdrawn by thieves. Stolen blank checkbooks are alsoof value to forgers who then sign as if they were the depositor.

[edit] Cheque kiting

Cheque kiting exploits a system in which, when a cheque is deposited to a bank account, themoney is made available immediately even though it is not removed from the account on which

the cheque is drawn until the cheque actually clears.

[edit] Forgery and altered cheques

Main article: Forgery

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Thieves have altered cheques to change the name (in order to deposit cheques intended forpayment to someone else) or the amount on the face of a cheque (a few strokes of a pen canchange $100.00 into $100,000.00, although such a large figure may raise some eyebrows).

Instead of tampering with a real cheque, some fraudsters will attempt to forge a depositor's

signature on a blank cheque or even print their own cheques drawn on accounts owned by others,non-existent accounts or even alleged accounts owned by non-existent depositors. The chequewill then be deposited to another bank and the money withdrawn before the cheque can bereturned as invalid or for non-sufficient funds.

[edit] Accounting fraud

In order to hide serious financial problems, some businesses have been known to use fraudulentbookkeeping to overstate sales and income, inflate the worth of the company's assets or state aprofit when the company is operating at a loss. These tampered records are then used to seekinvestment in the company's bond or security issues or to make fraudulent loan applications in a

final attempt to obtain more money to delay the inevitable collapse of an unprofitable ormismanaged firm. Examples of accounting frauds: Enron and WorldCom. These two companies"cooked the books" in order to appear as they had profits each quarter when in fact they weredeeply in debt.

[edit] Uninsured deposits

There are a number of cases each year where the bank itself turns out to be uninsured or notlicensed to operate at all. The objective is usually to solicit for deposits to this uninsured "bank",although some may also sell stock representing ownership of the "bank". Sometimes the namesappear very official or very similar to those of legitimate banks. For instance, the "Chase Trust

Bank" ofWashington D.C. appeared in 2002 with no license and no affiliation to its seeminglyapparent namesake; the real Chase Manhattan Bankis based in New York. Accounting fraud hasalso been used to conceal other theft taking place within a company.

[edit] Demand draft fraud

Demand draft fraud is usually done by one or more dishonest bank employees. They remove fewDD leaves or DD books from stock and write them like a regular DD. Since they are insiders,they know the coding, punching of a demand draft. These Demand drafts will be issued payableat distant town/city without debiting an account. Then it will be cashed at the payable branch.For the paying branch it is just another DD. This kind of fraud will be discovered only when the

head office does the branch-wise reconciliation, which normally will take 6 months. By that timethe money is unrecoverable.

[edit] Rogue traders

A rogue trader is a highly placed insider nominally authorised to invest sizeable funds on behalfof the bank; this trader secretly makes progressively more aggressive and risky investments

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using the bank's money, when one investment goes bad, the rogue trader engages in furthermarket speculation in the hope of a quick profit which would hide or cover the loss.

Unfortunately, when one investment loss is piled onto another, the costs to the bank can reachinto the hundreds of millions of dollars; there have even been cases in which a bank goes out of

business due to market investment losses.

Some of the largestbankfrauds ever detected were perpetrated by currency traders John Rusnak,andNick Leeson. Jrme Kerviel, allegedly defrauded Socit Gnrale of 4.9 billion euros($7.1 billion) us dollars, while trading stock derivatives.

[edit] Fraudulent loans

One way to remove money from a bank is to take out a loan, a practice bankers would be morethan willing to encourage if they know that the money will be repaid in full with interest. Afraudulent loan, however, is one in which the borrower is a business entity controlled by a

dishonest bank officer or an accomplice; the "borrower" then declares bankruptcy or vanishesand the money is gone. The borrower may even be a non-existent entity and the loan merely anartifice to conceal a theft of a large sum of money from the bank.

[edit] Fraudulent loan applications

These take a number of forms varying from individuals using false information to hide a credithistory filled with financial problems and unpaid loans to corporations using accounting fraud tooverstate profits in order to make a risky loan appear to be a sound investment for the bank.

[edit] Forged or fraudulent documents

Forged documents are often used to conceal other thefts; banks tend to count their moneymeticulously so every penny must be accounted for. A document claiming that a sum of moneyhas been borrowed as a loan, withdrawn by an individual depositor or transferred or invested cantherefore be valuable to a thief who wishes to conceal the minor detail that the bank's money hasin fact been stolen and is now gone.

[edit] Wire fraud

Main article: Wire fraud

Wire transfer networks such as the international SWIFT interbank fund transfer system aretempting as targets as a transfer, once made, is difficult or impossible to reverse. As thesenetworks are used by banks to settle accounts with each other, rapid or overnight wire transfer oflarge amounts of money are commonplace; while banks have put checks and balances in place,there is the risk that insiders may attempt to use fraudulent or forged documents which claim torequest a bank depositor's money be wired to another bank, often an offshore account in somedistant foreign country.

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The actual origin of these forms is neither the bank nor the taxman - they're sent by would-beidentity thieves and W-8888 doesn't exist, W-9095 is also fictitious (the real W-9 asks much lessinfo) and W-8BEN is real but may have been tampered to add intrusive additional questions. Theoriginal forms on which these fakes were based are intended to collect information for incometax on income from deposits and investment.

In some cases, a name/SIN pair is needed to impersonate a citizen while working as an illegalimmigrant but often the identity thieves are using the bogus identity documents in thecommission of other crimes or even to hide from prosecution for past crimes. The use of a stolenidentity for other frauds such as gaining access to bank accounts, credit cards, loans andfraudulent social benefit or tax refund claims is not uncommon.

Unsurprisingly, the perpertators of such fraud have been known to take out loans and disappearwith the cash, quite content to see the wrong persons blamed when the debts go bad or the policecome calling.

Some corporations have engaged in over-expansion, using borrowed money to finance costlymergers and acquisitions and overstating assets, sales or income to appear solvent even afterbecoming seriously financially overextended.

[edit] Prime bank fraud

The "prime bank" operation which claims to offer an urgent, exclusive opportunity to cash in onthe best-kept secret in the banking industry, guaranteed deposits in "prime banks", "constitutionalbanks", "bank notes and bank-issued debentures from top 500 world banks", "bank guaranteesand standby letters of credit" which generate spectacular returns at no risk and are "endorsed bythe World Bank" or various national governments and central bankers. However, these official-

sounding phrases and more are the hallmark of the so-called "prime bank" fraud; they may soundgreat on paper, but the guaranteed offshore investment with the vague claims of an easy 100%monthly return are all fictitious financial instruments intended to defraud individuals.

[edit] The fictitious 'bank inspector'

This is an old scam with a number of variants; the original scheme involved claiming to be abank inspector, claiming that the bank suspects that one of its employees is stealing money andthat to help catch the culprit the "bank inspector" needs the depositor to withdraw all of his or hermoney. At this point, the victim would be carrying a large amount of cash and can be targeted forthe theft of these funds.

Other variants included claiming to be a prospective business partner with "the opportunity of alifetime" then asking for access to cash "to prove that you trust me" or even claiming to be a newimmigrant who carries all their money in cash for fear that the banks will steal it from them - iftold by others that they keep their money in banks, they then ask the depositor to withdraw it toprove the bank hasn't stolen it.

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Impersonation of officials has more recently become a way of stealing personal information foruse in theft of identity frauds.

[edit] Phishing and Internet fraud

Main article: Phishing

Phishing operates by sending forged e-mail, impersonating an online bank, auction or paymentsite; the e-mail directs the user to a forged web site which is designed to look like the login to thelegitimate site but which claims that the user must update personal info. The information thusstolen is then used in other frauds, such as theft of identity or online auction fraud.

A number of malicious "Trojan horse" programmes have also been used to snoop on Internetusers while online, capturing keystrokes or confidential data in order to send it to outside sites.

[edit] Money laundering

Main article: Money laundering

The term "money laundering" dates back to the days ofAl Capone; Money laundering has sincebeen used to describe any scheme by which the true origin of funds is hidden or concealed.

The operations work in various forms. One variant involved buying securities (stocks and bonds)for cash; the securities were then placed for safe deposit in one bank and a claim on those assetsused as collateral for a loan at another bank. The borrower would then default on the loan. Thesecurities, however, would still be worth their full amount. The transaction served only todisguise the original source of the funds.

FRAUDS-PREVENTION AND DETECTION

A close study of any fraud in bank reveals many common basic features. There may have beennegligence or dishonesty at some stage, on part of one or more of the bank employees. One ofthem may have colluded with the borrower. The bank official may have been putting up with theborrower'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 laiddown in the Manual instructions and the circulars may not have been observed or may have beendeliberately ignored.

Bank frauds are the failure of the banker. It does not mean that the external frauds do not defraudbanks. But if the banker is upright and knows his job, the task of defrauder will becomeextremely difficult, if not possible.

Detection of Frauds

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Despite all care and vigilance there may still be some frauds, though their number, periodicityand intensity may be considerably reduced. The following procedure would be very helpful iftaken 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 modusoperandi 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 ownmind.

4. It is advisable to keep the central office informed about the fraud and further developments inregard 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 relatingto frauds malpractice in banks. The committee had noticed/observed three major causes forperpetration of fraud as given hereunder:

1. Laxity in observance of the laid down system and procedures by operational and supervisingstaff.

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, timetested safeguards also committed frauds.

In order to have uniformity in reporting cases of frauds, RBI considered the question ofclassification 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-checkingregarding identity, genuineness, verification of particulars, etc. in respect of various instrumentsas well as persons involved in encashment or dealing with the property of the bank.

2. Criminal misappropriation of property (Section 403 IPC).

Remedial Measure

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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 classof fraud should be taken at the level the custody or control of the funds or property of the bankgenerally vests. Such a measure should be sufficient, it is extended to these persons who areactually 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 betaken 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 ofsignatures is the most frequent fraud in banking business. The bank should take special carewhen the instrument has been presented either bearer or order; in case a bank pays forgedinstrument 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 berechecked 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 twovisible identify action marks on the body of the person traveler's cheques on the back of thecheque leaf. This will help the paying bank to easily identify the cheque holder. Theft fromlockers 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 dueacknowledgement.

7. Criminal conspiracy (Section 120 A, IPC)

In the case of State of Andhra Pradesh v. IBS Prasad Rao and Other, the accused, who wereclerks in a cooperative Central Bank were all convicted of the offences of cheating under Section

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420 read along with Section 120 A. all the four accused had conspired together to defraud thebank 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 andintending 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 ofCriminal Procedure, 1973.

ReferencesBooks:Bank Frauds prevention and detention By B.R.Sharma

Website:www.cyberfraudsources.com