fraud in banking sector

8/17/2019 Fraud in Banking Sector

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“Fraud in the Banking Sector – causes,

concerns and cures”

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Presented by

Venkatesh, M.

Sr. MBA (ABM)


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Introduction

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Banks are an essential part of the Indian economy. While the primary responsibility for preenting frauds lies !ith

banks themseles.

Banks are dealing !ith public"s money and hence it is imperatie

that employees should e#ercise due care and diligence in handlingthe transactions in banks.

$he %BI has been adising banks from time to time about the

ma&or fraud prone areas and the safeguards necessary for

preention of frauds.


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'efinition of fraud

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Fraud can loosely be defined as “any behaiour by !hich one

person intends to gain a dishonest adantage oer another“

fraud, under section () of the Indian contract act, (*)+,

%BI not defined the term “fraud” in its guidelines on frauds

!hich reads as under.

“ 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 !rongful gain to any person for

temporary period or other!ise, !ith or !ithout any monetaryloss to the bank”.


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$able (- umber of frauds cases reported by %BI

regulated entities

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Sl. No. Category No. of cases Amount involve

( /0112%/I3 B4S 169190 29910.12

+ BF/s 935 154.78

5 6/Bs 6345 1057.03

7 FIs 77 279.08

8 $otal176547 31401.01

9o. of cases in absolute terms and amount inoled in %s. crore:

Source- BIS central bankers; speeches +< =uly +>(5.


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$ypes of frauds

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Account o!ening frau" this inoles a deposit and cashing of

fraudulent che?ues.

Che#ue kiting" is a method !here by a depositor utili@es the

time re?uired for che?ues to dear to obtain an unauthori@ed

loan !ithout any interest charge.

Che#ue frau" most common cases of this kind of fraud are

through stolen che?ues and forged signatures.

Counterfeit securities" documents, securities, bonds and

certificate could be forged, duplicated, ad&usted or altered and

presented for loan collection.


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Com!uter frau" hacking, tampering !ith a diskette to gain

access to unauthori@ed areas and gie credit to an account for

!hich the funds !ere not originally intended.

$oan frau" !hen funds are lent to a nonAborro!ing customer

or a borro!ing customer that has e#ceeded his credit limit.

1oney laundering fraud- this is a means to conceal the

e#istence, source or use of illegal obtained money by conerting

the cash into untraceable transactions in banks.

Money transfer frau" alteration of a genuine Funds transfer

re?uest.

e.g 1ail, telephone, electronic process, tele#.

3atest technology of using S1 phones.


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%ele& 'rau- $he messages that are passed through tele# in

form of codes could be altered to diert the funds to another

account

$etters of Creit" 1ost common in international trading,

these are instruments used across borders ads can be forged,

altered, ad&usted and take longer to identify.

Avance 'ees 'rau" Copularly kno!n as D7(E;, adancedfees fraud may inole agent !ith an offer of a business

proposition !hich !ould lead to access often for a long term.


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$able +- earA!ise and amount of fraud cases in

the banking sector

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9o. of cases in absolute terms and amount inoled in %s. crore:

Sl. No. ear No. of cases %otalamount

( +>>EA(> +7)E( +>5).*(

+ +>(>A (( (E*+) 5*5+.>*

5 +>((A (+ (7)58 77E(.87

7 +>(+A (5 (5+E5 *

8 $otal frauds reported as of march +>(5 ( +EE(>.(+

Source- BIS central bankers; speeches


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$able 5- Bank roup !ise fraud cases

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Sl.No.

Bank grou! No. of cases

%o totalcases

Amount*nvolve

%o totalAmount

( ationalised banksincluding SBI group

+E( *5.>(

+a 0ld Ct. Sector banks ++)( (.57 ()>).)( 8.)(

+b e! Ct. Sector Banks E(> 85.*+ +(7>.7* ).(<

5 Sub total 9priate banks: E555( 88.(< 5*7*.(E (+.*)

7 Foreign banks 7< +).5( (+55.E+ 7.(+

< $otal ( (>> +EE(>.(+ (>>

9o. 0f cases in absolute terms and amount inoled in %s. /rore:



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/ategory of frauds

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(. $echnology related

+. 4/ related 9mainly in deposit accounts:

5. dances related

. %echnology relate" $he $echnology related fraud around


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$he aboe eident that incidence of cyber frauds is e#tremely

high, the actual amount inoled is generally ery lo!.

%BI has adised banks in February +>(5 to introduce t!o

factor authentication in case of “card not present” transactions,

conerting all strip based cards to chip based cards for better

security.

$he electronic modes of payment like 2F$ and %$S are

introduce. %BI has adised banks to introduce preentie measures such

as putting a cap on the alueH number of beneficiaries, elocity

checks on number of transactions effected per dayH per

beneficiary, and introduction of digital signature for large alue payments.


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$able 7-Bank roup !ise $echnology %elated Frauds

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4/ related fraud

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4/ 94no! our /ustomer: is a frame!ork for banks !hichenables them to kno! H understand the customers and their

financial dealings to be able to sere them better.

%BI has adised banks to make the 4/ procedures

mandatory !hile opening and operating the accounts.

Issued the 4/ guidelines under section 58 9: of the banking

regulation act, (E7E.

For this purpose, the fraudsters generally use deposit accounts

in banks !ith la# 4/ drills.

$herefore, customers to guard against such temptations for

easy money but should also ensure that deposit accounts

maintained !ith them are fully 4/ compliant.


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$hey proide an essential part of sound risk management

system 9basis for identifying, limiting and controlling risk

e#posures in assets liabilities.+ key elements of KC !olicies

customer acceptance policy

customer identification procedures

monitoring of transactions risk management


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Frauds in banks; adances portfolio

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Frauds related to the adances portfolio accounts for the largest Share of the total amount inoled in frauds in the banking

sector. 9Inoling amount of %s. 8> crore and aboe:

nother point that public sector banks account for a substantial

chunk of the total amount inoled in such cases. 'eclaration of frauds by arious banks in cases of consortiumH

multiple financing !e hae on occasions obsered more than (+–

(8 months lag in declaration.

$he large alue adance related frauds, !hich pose a significantchallenge to all stakeholders, are mainly concentrated in the

public sector banks.


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1a&ority of the credit related frauds are on account of deficientappraisal system, poor post disbursement superision and

inade?uate.

%esere bank has also adised banks to audit periodically so

that cases of multiple financing may be detected in the initial

stages itself.


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$able 7- Bank roup !ise dance %elated Frauds

%s. ( /rore aboe in alue

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/ase (

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'ate of 'etection- >8H>5H+>(+

ame of the Branch- 'huri Branch, State Bank of Catiala.

mount inoled in %s- *.)8 crores

Brief facts of the case- $he branch had financed agriculture business.

/ash /redit limits to 58+) sugar cane gro!ers under tie up

arrangement !ith 1Hs Bag!anpura Sugar 1ills, !ho stood as a

guarantor.

s per the tie up arrangement the antecedents of the borro!ers !ere

to be erified by the company.

only ((*< borro!ers !ere resident of the illages and they !ere

found to be agricultural labourers not cane gro!ers.

Source- Banking 'iision, 1inistry of Finance, e! 'elhi.


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/ase +

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'ate of 'etection- >5H>+H+>(( ame of the Branch- haryala, Cun&ab ational Bank

mount inoled in %s- (.(7 crores

Brief facts of the case- $he manager along !ith shri gurmeet

singh, and clerk in collusion !ith a group of persons in the areamisappropriated Bank"s funds.

housing loans, on fabricated H fictitious reenue record,

disbursed fictitious loans under small business H transport H dairy

!ithout creating any security as a conduit to siphonAoff the funds

Source- Banking 'iision, 1inistry of Finance, e! 'elhi


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$able )-ear !ise details of fraud cases closed

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%eporting of frauds to %BI

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'raus involving amounts of less than s -. lakh" less than %s (.>> lakh are not to be reported indiidually to the

%BI.

Statistical data in respect of such frauds should, be

submitted to %BI in a ?uarterly statement.'raus involving amounts of s -. lakh an a/ove /ut

less than s 01. lakh"

Frauds inoling amounts of %s(.>> lakh and aboe but less than

%s +8.>> lakh should be reported to the regional office of urban banks department of %BI .

In the format gien in F1%A(, and !ithin three !eeks from the

date of detection.


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'raus involving amounts of s 01. lakh an a/ove -

frauds inoling amounts of %s +8.>> lakh and aboe should

be reported to central frauds monitoring cell, department of banking superision, %BI.

copy of F1%A( should also be submitted to the regional

office of urban banks department of %BI.

In addition banks may report the fraud by means of '.0. 3etteraddressed to the principal chief general manager of the

department of banking superision, %BI, central office.

$he letter may contain brief particulars of the fraud.

3etter should also be endorsed to the regional office of urban banks department of %BI under the bank"s branch.


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2#pectations of the superisor

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%BI has clearly indicated that fraud risk management, fraud

monitoring and fraud inestigation function must be o!ned

by the bank;s /20, audit committee of the board.

In respect large alue frauds, the special committee of the

board are /1's, /20s, audit committee and the special

committee eoling robust fraud risk management systems.

$hey are responsible for effectie inestigation of fraud

cases and accurate reporting to appropriate regulatory and

la! enforcement authorities.

$op management puts in place targeted fraud a!areness

training for its employees focusing on preention and

detection of fraud.


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udit systems prealent in banks hae not proed effectie in

detecting fraud cases.

Croiding indiiduals a means to report suspicious actiity is a

critical part of an antiAfraud program.

system of protected disclosure scheme has been eoled!hich is regulated by /J/ in case of public sector banks.

%BI in case of priate and foreign banks.

$ bl < B k i f d d


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$able (5

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/IBI3

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It is a company of checking the credit history.

Fraudulent borro!ers could still seek credit from the

banking system een after defrauding one bank.

Worth!hile to consider setting up a fraud registry on the

lines of credit information bureau.

.

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/onclusion

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$he impact of frauds on entities like banks, and the economic

cost of frauds can be huge in terms of likely disruption in the!orking of the markets, financial institutions, and the payment

system. Besides, frauds can hae a potentially debilitating

effect on confidence in the banking system and may damage

the integrity and stability of the economy. It can bring do!n banks, undermine the central bank;s superisory role and een

create social unrest, discontent and political upheaals. $he

ulnerability of banks to fraud has been heightened by

technological adancements in recent times.


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%eference

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Inaugural address by 'r 4 / /hakrabarty, deputy goernor of

the resere bank of India, during the national conference on

financial fraud organised by SS0/K1, ne! 'elhi, +< =uly

+>(5.

BIS central bankers; speeches.

/F2 (ssociation of /ertified Fraud 2#aminers; ssociation

of /ertified Fraud 2#aminers’)

Banking 'iision, 1inistry of Finance, e! 'elhi

Int. =ournal of Business Science and pplied 1anagement HBusinessAandA1anagement.org


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$hank youL

fraud in banking sector

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