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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:
Source- BIS central bankers; speeches
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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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Source- BIS central bankers; speeches
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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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Source- BIS central bankers; speeches
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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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Source- BIS central bankers; speeches
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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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$able (5
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Source- BIS central bankers; speeches
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/IBI3
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It is a company of checking the credit history.
Fraudulent borro!ers could still seek credit from the
banking system een after defrauding one bank.
Worth!hile to consider setting up a fraud registry on the
lines of credit information bureau.
.
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/onclusion
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$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