Bank Frauds: by Sanya Agrawal

Bank Frauds
By Sanya Agrawal
Meaning
RBI defines fraud as:
➔ “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”
➔ The robustness of a country’s banking and financial system helps determine its
production and consumption of goods and services
➔ It is a direct indicator of the well-being and living standards of its citizens
➔ According to N. Vittal, Ex-Central Vigilance Commissioner, our system encourage
corruption/fraud due to the following factors-
◆ Scarcity of goods and services
◆ Lack of transparency
◆ Delay and red tape
◆ Cushions of safety that have been built for the corrupt on the principle that
everybody is innocent till proven guilty
◆ Tribalism and the tendency to shield the corrupt

➔ The Reserve Bank of India has classified frauds into the following categories
for the purpose of uniformity of reporting by the banks to the RBI and in
keeping with the provision of the IPC
◆ Misappropriation and criminal breach of trust
◆ Forging of documents and instruments and manipulation of the books of
accounts
◆ Negligence and cash shortages
◆ Cheating
◆ Irregularities in extension of credit facilities against illegal gratification
◆ Cases of frauds not covered above
Important provisions under IPC
➔ Section 403 of IPC-Dishonest misappropriation of property
➔ Section 405 of IPC-Criminal breach of trust
➔ Section 415 of IPC –Cheating
➔ Section 463-Forgery
➔ Section 489-A – Counterfeiting of currency notes

Major bank Frauds and Preventive Measures
Deposit Account Frauds
Following types of frauds are normally committed-
(a) Value of cheque deposited is inflated by inserting numbers
(b) Nature of cheque is altered by deleting words. For example, crossed cheques are made
bearer cheques
(c) Name of the payee in the cheque/draft is altered and money is withdrawn by the fraudster
(d) A dormant account is fraudulently operated by forging signature
(e) Collections of the Mini Deposit Account are not deposited with the bank and
misappropriated by the agent
➔ Following preventive measures may be resorted to-
◆ The cheques/drafts should be examined under strong light and preferably
under ultra violet lamp. In case of material alterations, it will be noticed that
the surface of the document is not uniform, there are stains visible
background printing is disturbed, different inks have been used, handwriting
is not uniform and flow of writing is disturbed
◆ There should be surprise checks on cashier’s cash and the cashiers should be
rotated at frequent intervals

◆ Cash handling operations and book-keeping operations should be divorced
◆ Balancing of day books should be done every day in the evening
◆ Bank statements should be issued and pass books should be updated at
frequent intervals
◆ The customers should be asked to confirm their balances appearing in the
bank statements /pass books

Frauds relating to loans and advances
Following types of frauds are generally committed-
➔ A large number of loans advanced under the priority sector lending schemes turn NPAs
because either the loans are taken by ineligible persons or used for some social or
consumption purpose rather than utilizing it for agricultural operations
➔ Proper appraisal of the project for which loan is advanced is not done by the staff for a
consideration
➔ Collaterals lodged with the bank are inadequate or valueless
➔ Value of Hypothecated /pledged stocks is inflated
➔ Goods pledged with the bank are removed with the connivance of the bank staff
➔ Hypothecated stock is sold but the godown is set on fire to show loss of stock
due to fire
➔ False title deeds of immovable property lodged with the bank
➔ Duplicate title deeds lodged with several banks simultaneously
Suggested preventive measures are-

◆ There should be random and regular checking of the pledged and hypothecated
goods
◆ The personnel deployed for the purpose should be men of proved integrity and
honesty and such persons should be subjected to frequent rotation.
◆ Trained personnel should scrutinize loan applications and check the quantity
and value of goods pledged/hypothecated
◆ Project should be properly appraised. Factory site should be inspected before
sanction of loan
◆ It is preferable to disburse loan by way of direct payment to the supplier of plant
and machinery to ensure that loan is not diverted for any other purpose
◆ Verification of title of the immovable property should be done by obtaining
proper search report from the empanelled lawyer of the bank
◆ Where loan is advanced against hypothecation of vehicles, lien of the bank
should be registered with the RTO office
◆ The hypothecated/pledged goods should be insured jointly with the borrower for
fire and burglary
Frauds relating to computers
Normally following types of frauds are committed-
(a) Spy software are devised by the cyber criminals to crack the passwords. They enter into the
computer system of the banks and manipulate the data to transfer the money from others’ accounts.
(b) Computer virus are created by the mischief mongers which find way into the computer system
by way of e-mails
These virus destroy the data stored in the computers and slow down the entire computer system
Sometimes, the manufacturers of anti-virus software themselves create virus so that their product
may be sold in the market
➔ Hackers are computer experts who steal the passwords and access the classified
information stored in the computer system
◆ Such acts are committed normally not for any material gain but to derive mental
satisfaction out of other’s sufferings
➔ Wire tapping is a crime committed by tapping the wire of the ATMs of the banks to
withdraw money out of other person’s account
◆ The fraudster, in this case, attaches a wireless microphone to the telephone line
connecting the ATM with the bank’s computer and records signals through wire
tapping while a customer is using the ATM
◆ These signals are later on utilized for withdrawing money
Bank Fraud - PNB Scam - Nirav Modi
➔ Buyer’s Credit
➔ Letter of Undertaking
➔ SWIFT - Society for worldwide interbank financial telecommunication
➔ NOSTRO Account
➔ Case:
➔ Core Banking Solutions (CBS) + SWIFT

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Bank Frauds

RBI defines fraud as:

➔ “A deliberate act of omission or commission by any person, carried out in the

corruption/fraud due to the following factors-

◆ Scarcity of goods and services

◆ Delay and red tape

everybody is innocent till proven guilty

◆ Tribalism and the tendency to shield the corrupt

➔ Section 403 of IPC-Dishonest misappropriation of property

➔ Section 405 of IPC-Criminal breach of trust

➔ Section 415 of IPC –Cheating

➔ Section 489-A – Counterfeiting of currency notes

Following types of frauds are normally committed-

(a) Value of cheque deposited is inflated by inserting numbers

(d) A dormant account is fraudulently operated by forging signature

◆ The cheques/drafts should be examined under strong light and preferably

background printing is disturbed, different inks have been used, handwriting

is not uniform and flow of writing is disturbed

rotated at frequent intervals

◆ Balancing of day books should be done every day in the evening

◆ Bank statements should be issued and pass books should be updated at

◆ The customers should be asked to confirm their balances appearing in the

bank statements /pass books

Following types of frauds are generally committed-

Suggested preventive measures are-

➔ SWIFT - Society for worldwide interbank financial telecommunication

➔ Core Banking Solutions (CBS) + SWIFT

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