PREFACE

It was a pleasurable experience for me to work on this project report “FRAUDS AND SCAMS IN
BANKING SECTOR IN INDIA”
It has not only helped me to enhance my knowledge about various strategies followed by the
company but also reviewed my knowledge about training & job opportunities for the management students.
In this project report every possible effort has been made to highlight the major aspects related to the topic
by a comprehensive study of literature and by survey information. .
To make it easier different tabular and diagrammatic approach has been used which help in
understanding the theme. It gives brands, a market image as well as depicts phase of their life cycle to
understand the company value in a better way. Survey report and secondary data are an important document
and contains information that can be used to find out what are the findings of the research. I have tried my
best to explore the truth in my project reality regarding the survey and understanding practical way of
working.

EXECUTIVE SUMMARY

The project scans the risky nature of banking with reference to various types of transactions and their
vulnerability to fraud. Prevention is better than cure. In bank administration, one feels that not much
attention is paid to preventive measures. Bank managements must direct their orientation towards preventive
rather than detective or punitive measures. Preventive vigilance must be the prime agenda to bring down the
occurrence of fraud in banks.
Bankers must be properly educated and trained on the effect and consequences of dilution and distortion of
the prescribed norms. Retention and deployment of experienced and specialized staff in the respective fields
of operation will minimize fraud. Bankers have to overcome the inertia that prevents them from learning
new and effective technology. Means and Modes of Frauds and RBI’s Guidelines for the detection and
registration of the same and their dynamics should be made familiar to the employees of a Bank so as to
bring about awareness and at the same time create vigilance amongst the employees, so as to equip them
with the resources required to deal with such frauds, as and when they happen.
The Major Banking Frauds that were bought into the limelight by the authorities and other relevant
departments, which saw banking frauds, and revealed the loop holes in the already laid down strategy to deal
with the frauds should be made familiar to the public at large and the bankers at the same time.

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 OBJECTIVES
 To understand the meaning of banking frauds and scams.
 To understand the various types of banking frauds and scams.
 To ascertain the factors which encourages the fraudulent activities in banks.
 To understand the categories of banking frauds and scams.
i.e. Frauds and scams done by insiders and outsiders.
 To determine the effects of banking frauds and scams on the society.
 To suggest the measures and techniques for reducing the incidence of banking frauds and scams.
 To understand the Reserve Bank of India (RBI) rules to prevent banking fruds and scams and
responsibility of bankers in banking frauds and scams.

RESEARCH METHODOLOGY

 Primary Data:
My primary data consists information from banking customers.

 Secondary data:
My secondary data consists of the information collected from various, Internet sites, newspapers.

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 CHAPTER NO-1
INTRODUCTION TO FRAUD

Fraud can be seen as the intentional misrepresentation, concealment, or omission of the truth for the purpose
of deception or manipulation to the financial detriment of an individual or an organization (such as a bank)
which also includes embezzlement, theft or any attempt to steal or unlawfully obtain, misuse or harm the
asset of a bank. Fraud and its management have been the main factor. In the distress of banks, and as much
as various measures have been taken to minimize the incidence of fraud, it still rises by the day because
fraudsters always device strategic ways of committing fraud. This has become a point of great attention in
the Srural banking sector as well as every organization in Ghana. Although this phenomenon is not unique to
the rural banking industry or peculiar to Ghana alone, the high incidence of fraud within the banking
industry has become a problem to which solution must be provided in view of the large sums of money
involved and its adverse implications on the economy. Fraud in its effects reduces the assets and increases
the liability of any company. In the case of rural banks, this may result in the loss of potential customers or
crisis of confidence of banking public and in the long run end up in another failed bank situation. It is
instructive to know that many banking operatives have different reasons for joining various banks. Many
have the intention of working for a short time in the banking industry (get whatever they could and find
another job that is less demanding), some are in the industry because of their love for banking and all it
stands for, while majority are there to enrich themselves by fraudulent means.
Due to the upsurge of great viability in the rural banking sector, its dynamic and fast expanding level of
activities, rural banks are faced with different kinds of challenges, among which is trying to prevent various
fraudulent intentions of both staff and customers As it were frauds seem to have increased as new
technology is born and more advanced techniques of enhancing business transactions have been developed.
Fraudsters are constantly devising new plans, updating old methods and trying out new techniques of
bypassing these electronic systems meant to ensure high security of banking operations. The introductions of
automated systems that lose handwriting and fingerprint trails have not helped matters either. In view of the
staggering sums lost to fraudsters by the Ghanaian financial sector, in these recent times and the rate at
which fraudsters appear to have shifted their attention and directed their energies to banks, devising all
unimaginable tactics to exploit loopholes in the control measures and capitalize on carelessness of the staff
and customers, fraud in the industry has prevented many banks from achieving their goals. Some banks were
just seen in the physical as body and building whilst in reality they were already liquidated and many were

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already into distress. Taking a walk down memory lane. The banking sector plays a very significant role in
the development of any economy. Banks in most economies are the principal depositories of the
public’s monetary savings, the nerve centre of the payment system, the vessel endowed with the
ability of money creation and allocation of financial resources and conduit through which monetary
and credit policies are implemented. The success of monetary policy, to a large extent, depends on
the health of the banking institutions through which the policies are implemented. Whatever
problems which militate against the proper functioning of the banking sector will invariably have
multiplier effects on the other sectors of the economy. This is one of the reasons why it is essential
to quickly diagnose any factor which may hamper the smooth functioning of the rural banking sector
and urgently address such issues.

SCOPE OF THE STUDY

It was a pleasurable experience for me to work on this project report “FRAUDS AND SCAMS IN
BANKING SECTOR IN INDIA”
It has not only helped me to enhance my knowledge about various strategies followed by the
company but also reviewed my knowledge about training & job opportunities for the management students.
In this project report every possible effort has been made to highlight the major aspects related to the topic
by a comprehensive study of literature and by survey information. .

To make it easier different tabular and diagrammatic approach has been used which help in
understanding the theme. It gives brands, a market image as well as depicts phase of their life cycle to
understand the company value in a better way. Survey report and secondary data are an important document
and contains information that can be used to find out what are the findings of the research. I have tried my
best to explore the truth in my project reality regarding the survey and understanding practical way of
working.

MEANING OF FRAUD:

The progress of business is depends upon expansion & diversification. The indicators of growing economy
are acceleration in per capita income, standard of living & national wealth, national income etc. In the
growing economy some unethical practices has been observed. Nowadays scams, frauds & corruptions etc.
has entered in every sector. Fraudulent practices are like slow poisoning which destroy the system of faith ,
loyalty, & reliability confidence of the people & help to proceed towards under developed society. Fraud
is any dishonest act and behavior by which one person gains or intends to gain advantage over another
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person. Fraud causes loss to the victim directly or indirectly. Fraud has not been described or discussed
clearly in the Indian penal code but sections dealing with cheating. Concealment, forgery counterfeiting and
breach of trust has been discusses which leads to the act of fraud. In contractual term as described in the
Indian contract act, sec 17 suggests that a fraud means and includes any of the acts by a party to a contract or
with his connivance or by his agents with the intention to deceive another party or his agent or to induce him
to enter in to a contract.

DEFINITION OF FRAUD

 “Deceit, trickery, sharp practices or breach of confidence , perpetrated for profit or gain some
unfair or dishonest advantages”.

-Collins English dictionary.

 “Deliberate fraud committed by management that injures investors and creditors through materially
misleading financial statements”.

-Elliot and Willingham,(1980).

 “Fraud is a false representation or concealment of material fact to persuade someone to part with
something valuable”.

-Laurence Sawyer (1988).

 “Fraud” in relation to affairs of a company or any body corporate to include any act, omission,
concealment of any factor abuse of position committed by any person or any other person with

the connivance in any manner, with intend to deceive, to gain undue advantage from or to injure
the interests of, the company or its shareholders its creditors or any other person, whether or not
there is any wrongful gain or wrongful loss”.

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 -Section 447 of the Companies Act,2013.

MEANING OF BANK  FRAUD

Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or held by
a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial
institution. In many instances, bank fraud is a criminal offence. While the specific elements of particular
banking fraud laws vary between jurisdictions, the term bank fraud applies to actions that employ a scheme
or artifice, as opposed to bank robbery or theft. For this reason, bank fraud is sometimes considered a white-
collar crime. Banking frauds constitute a considerable percentage of white-collar offences being probed by
the police. Unlike ordinary thefts and robberies, the amount misappropriated in these crimes runs into lakhs
and crores of rupees. Bank fraud is a federal crime in many countries, defined as planning to obtain property
or money from any federally insured financial institution. it is sometimes considered a white collar crime.
The number of bank frauds in India is substantial. it in increasing with the passage of time. All the major
operational areas in banking represent a good opportunity for fraudsters with growing incidence being
reported under deposit, loan and inter-branch accounting transactions, including remittances. Bank fraud is a
big business in today’s world. with more educational qualifications, banking becoming impersonal and
increase in banking sector have gave rise to this white collar crime. in a survey made till 1997 bank frauds in
nationalized banks was of rs.497.60 crores. The occurrence of frauds in the banks is not a recent observable
fact; in fact the misdemeanor of forgery is perhaps as old as writing itself. Of the inestimable types of
financial offences that our nation and all countries across the globe have had to eyewitness and undergo
from, a major one is financial frauds caused in the banks popularly know as “bank frauds”. Any organization
which deals with money is always vulnerable to frauds and this is more so in the case of financial institutions
like banks which are dealing only in money and that to as a business commodity. Bank frauds are on the
augment. The graph of fraud money is mounting steeply. The reasons for increase in number of frauds in the
post nationalization period is attributed to a numerous reasons, the most likely ones are the widespread
branch network, lack of trained staff for the expanding network and a shift from the security oriented lending
to the development oriented approach i.e. advances to the priority sectors. Frauds in Indian banks only
prove that financial liberalization aggravates the inherent tendency of shallow markets to foster excessive
speculation and worsens the systemic consequences of such speculative activity. Revelations of fraud,
evidence of insider trading and a consequent collapse of investor interest have led to an almost unstoppable
downturn in Indian banks. Bank frauds concern all citizens. It has become a big business today. Bank frauds
are the creation of professional criminals, desperate customers or of errant bankers or their collusion inter

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se. However the prima donna in the drama is the insider or the banker. He opens the purse. He is often the
target and at times the tool. Occasionally, he is the victim of the temptations. Other contributory factors are
incompetence, lethargy, negligence, connivance and ignorance. Situational pressures and permissive
attitudes of the society promote them. High gains and low stakes encourage the incidence. The rising trend
makes it more and more important that ways and means are found to combat the menace.

Bank frauds can be explained through following diagram:

Bank fraud means obtaining money or property held by bank or customer of the bank in order to make more
money. So generally there are two factors of frauds: Complexity of bank transactions and failure in
observance or procedures and norms laid down in branch operations. Fraud is any dishonest act and
behavior by which one person gains or intends to gain an advantage over other person. The gain may accrue
to the person himself or to someone’s. Fraud causes loss to the victim, directly or indirectly. In earthly
terms bank frauds include all sorts of misappropriations, embezzlements, manipulations of negotiable
instruments (cheques, drafts, handiest, bills or statements of accounts, securities etc.). Also included are
misrepresentations, cheating, thefts, undue favors and irregularities. The frauds may be intentional or
incidental and can be committed by (I) the bank employees themselves, (ii) the staff members of the banks in
collusion or connivance with the customers or outsiders, and (iii) the customers or outsiders.

The word “fraud” has been defined in the Indian contract act. In short fraud is dishonesty leading to loss to
someone. Dishonesty is never accidental. Therefore there is always a swindler behind each bank fraud. The

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number of bank frauds in india is substantial. It is increasing with the passage of time. Bank frauds are due
to the bunko and the bungler bankers, situational pressures and permissive attitudes. Fraud has not been
defined in the indian penal code directly. However sections dealing with cheating, concealment, forgery,
counterfeiting, misappropriation and breach of trust cover the same adequately. Hence what this paper
fundamentally tries to focus on is on the banker’s responsibility vis-à-vis the reach of deception therein,
consequences of such incident and tries to look into the entire possible panacea to such a menace in the
society.

CHAPTER NO-2
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 LITERATURE REVIEW

In legal terms, fraud is seen as the act of depriving a person underhandedly of something, which such a person
would or might be entitled to, but for the perpetration of fraud. In its lexical meaning, fraud is an act of trickery
which is intentionally practiced in order to gain illegitimate advantage. Therefore, for any action to constitute a
fraud there must be deceitful objective to benefit (on the part of the perpetrator) at the disadvantage of another
person or group. Fraud typically requires stealing and manipulation of accounts, frequently accompanied by
cover up of the theft. It also involves the translation of the stolen resources or property into own resources or
property. Young, (2002) says that, ample evidence exists that individual integrity of those running the banks
today has never been at a higher level. Never before have we seen attention to the actual steps; procedures and
control of monetary transactions. Employees’ as well as firms in all industries engage in fraudulent practices all
over the world. Although the existence of fraud in our banks is not an uncommon or unexpected behavior, its
prevalence is what is worrying because of all the various problems confronting the most untraceable and Kindle.
Frauds in banks lead to loss of monies that ordinarily belong to someone other than the banks. The loss results in
some cases, in reducing the level of resources available for use in the operations of the banks. In very bad cases
where frauds occur with crippling frequency and in wholesomeness, the bank may be forced to close down as a
result. When the bank loses money and is wound up, the customers lose money. This leads to loss of confidence
and eventually reduced patronage. Another reason for worrying in the banking industry is the vast variety of
nature, character and methodology employed in fraud. Moreover, the control of identified specie seems to give
birth to another that is invariably more sophisticated and complex. Thus each case can be said to be a variant of
another and undoubtedly an instructive study in human negative use of ingenuity and endowment.

There is a common agreement amongst criminologists that fraud is caused by three Elements:

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 Elements of Fraud

Will

Opportunity

Exit

called “WOE” . For any fraud to take place there must be a Will, an Opportunity and Exit (escape route). A fraud
will only come about if the perpetrators have the will to commit the fraud, if the occasion to commit the fraud is
presented and if there is a way out or escape means from appropriate sanctions or institutions that are against
fraud or related abnormal behavior .. Fraud is a global occurrence; it is not peculiar to the banking industry. With
the collapse of foremost international corporations together with high level allegations and real cases of business
fraud, a lot of organizations in their effort to advance their image have resorted to developing ethical guiding
principles and codes of moral values. The whole essence of these is to guarantee that all organizational members
irrespective of position or rank, complies with the least standard of ethical responsibility in order to encourage
the reputation of such firms in their selected industry, earn the goodwill of clients and thus improve their
competitive advantage. As logically anticipated, fraud is perpetrated in several forms and guises, and usually
have insiders (staff) and outsiders conniving together to effectively execute the act.

CHAPTER NO-3
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 CATEGORIES OF BANKING FRAUDS

Categories of Banking Frauds

Frauds done by Insiders

Frauds Done by Frauds Done by

Insider Outsiders

Rogue Trading

Fradulent Loans

Wire fraud

Demand draft fraud

Theft of identity

Forged or fraudulent documents

Uninsured deposits

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 1. Rogue Trading:

A rogue trader is a highly placed insider nominally authorized to invest sizeable funds on behalf of the bank;
this trader secretly makes progressively more aggressive and risky investments using the bank's money,
when one investment goes bad, the rogue trader engages in further market 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 reach into the hundreds of millions of rupees; there have even been cases in which a
bank goes out of business due to market investment losses.

2. Fraudulent loans:

One way to remove money from a bank is to take out a loan, a practice bankers would be more than willing
to encourage if they know that the money will be repaid in full with interest. A fraudulent 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 vanishes and the money is gone. The borrower may even be a non-
existent entity and the loan merely an artifice to conceal a theft of a large sum of money from the bank.

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3. Wire fraud:

Wire transfer networks such as the international, interbank fund transfer system are tempting as targets as a
transfer, once made, is difficult or impossible to reverse. As these networks are used by banks to settle
accounts with each other, rapid or overnight wire transfer of large 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 to request a bank depositor's money be wired to another bank,
often an offshore account in some distant foreign country. Wire fraud is defined as attempting to defraud
using electronic means, such as a computer or telephone. What must be proved is that the person knowingly
and willfully devised or intended to devise a scheme to defraud. Since the advent of the internet, there are
literally thousands of crimes that fall under the definition of wire fraud. Here we’re going to take a look at
some of the more common forms of wire fraud, why they occur, and how you can protect yourself.

While security measures have certainly increased over the years, banks still fall victim to wire fraud, costing
them millions of dollars or more every year. Since banks are constantly wiring extremely large sums of
money back and forth between accounts, it may take them awhile to notice when a large sum of money goes
missing. This type of fraud is usually perpetrated by insiders who forge documents wire money to foreign
accounts. Other common ways this can occur is via the internet, through fraudulent activity such as stolen
identities, stolen credit card numbers, and hacked internet banking accounts

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 Wire Fraud on the Internet

There are many other forms of wire fraud that may occur on the internet. A few common ones are:

 Email Phishing:
 The practice of sending out fake emails that look legitimate, in order to steal information such as
passwords, credit card numbers, or personal information.

 Identity Theft: 
Usually perpetrated by people who set up legitimate looking websites designed to trick users into
submitting personal information, similar to a loan or insurance application.. Other methods may include
hacking databases containing business information, or accessing a personal hard drive illegally to steal
personal information.

 Fraudulent Business Sales: 

This is a common scam targeting webmasters and potential investors. When valuing an internet business,
revenue, traffic, and the future potential value of the website are used to estimate the value. By faking
revenue and traffic proof, a con artist can inflate perceived value of the website, sometimes scamming
victims out of thousands of dollars. Wire Fraud On The Phone Wire fraud commonly occurs over the
telephone as well. A con artist will call your house, and try to talk you out of personal information.
Common scams involve criminals posing as salesmen, loan officers, and other business professionals in
order to collect personal information such as credit card numbers or social security numbers.

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Measures from protecting the Wire frauds

Wire fraud is a very real threat in the world today. By using a little bit of common sense, you can avoid
becoming a victim yourself. Don’t give out personal information over the telephone to unsolicited callers
without doing an extensive check on their background. Be careful what kind of websites you use to conduct
financial transactions. There are many legitimate websites where doing credit card transactions, or even loan
applications are extremely secure. Be wary of any unknown websites. Bottom line; don’t give out your
personal information to strangers. With just a little bit of common sense you can avoid becoming a victim of
wire fraud yourself.

4. Demand draft fraud:

DD fraud is usually done by one or more

dishonest bank employees that is the Bunko
Banker. They remove few DD 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 payable at
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 time the money is unrecoverable.

5. Theft of identity:

Dishonest bank personnel have been known to disclose depositors' personal information for use in theft of

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identity frauds. The perpetrators then use the information to obtain identity cards and credit cards using the
victim's name and personal information.

Impact of Identity Fraud

The growth in identity fraud victimization rates over the past year is harmful not only because of the dollar
losses caused from identity fraud, but also because of the emotional impact on the victims. Identity Fraud
victimization and the accompanying fear it generates lowers faith in the safety of the system and causes
secondary effects, which are demonstrated by changes of behavior, such as avoidance of certain merchants,
altered usage of payment types and channels, and severed relationships with primary card companies and
banks. The increased fraud incidence is being driven by the poor economy coupled with an increasingly
global, hierarchal and sophisticated criminal enterprise that specializes in developing new weapons of attack.
Meanwhile the consumer costs, the dollar amounts the victim pays on average out-of-pocket, reached an all
time low.

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 The relation of identity fraud is explained through following the following diagram:

6. Forged or fraudulent documents:

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

7. Uninsured deposits:

There are a number of cases each year where the bank itself turns out to be uninsured or not licensed 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 names appear very official or very
similar to those of legitimate banks. For instance, some banks with no license and no affiliation to its
seemingly apparent namesake; the real Chase Manhattan bank, New York. There is a very high risk of fraud

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when dealing with unknown or uninsured institutions. The structure of uninsured deposits is given as

follows:

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 Frauds done by Outsiders
Bill Discounting Fraud

Booster Cheques

Stolen Cheques

Credit Card Fraud

Accounting Fraud

Cheque Kiting

Stolen Payment Cards

Duplication Or Skimming Of Card Information

Impersonation And Theft Of Identity

Fraudulent Loan Applications

Phishing And Internet Fraud

Money Laundering

Forged Currency Notes

Advance Fee Fraud

Fund Diversion

Account Opening Fraud

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Counterfeit Securities
 Money Transfer Fraud

Letter of Credit Fraud

Computer Fraud

Clearing Fraud

Unofficial Borrowing

Voucher Manipulation

1. Bill discounting fraud:

Essentially a confidence trick, a fraudster uses a company at their disposal to gain confidence with a bank,
by appearing as a genuine, profitable customer. To give the illusion ofs being a desired customer, the
company regularly and repeatedly uses the bank to get payment from one or more of its customers. These
payments are always made, as the customers in question are part of the fraud, actively paying any and all
bills raised by the bank. After certain time, after the bank is happy with the company, the company requests
that the bank settles its balance with the company before billing the customer. Again, business continues as
normal for the fraudulent company, its fraudulent customers, and the unwitting bank. Only when the
outstanding balance between the bank and the company is sufficiently large, the company takes the payment
from the bank, and the company and its customers disappear, leaving no-one to pay the bills issued by the
bank.

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2. Forgery and altered cheques:

Thieves have altered cheques to change the name (in order to deposit cheques intended for payment to

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someone else) or the amount on the face of a cheque (a few strokes of a pen can change 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 cheque will then be deposited to another bank and the money withdrawn before the
cheque can be returned as invalid or for non-sufficient funds.

3. Booster cheques:

A booster cheque is a fraudulent or bad cheque used to make a payment to a credit card account in order to
"bust out" or raise the amount of available credit on otherwise-legitimate credit cards. The amount of the
cheque is credited to the card account by the bank as soon as the payment is made, even though the cheque
has not yet cleared. Before the bad cheque is discovered, the perpetrator goes on a spending spree or obtains
cash advances until the newly-"raised" available limit on the card is reached. The original cheque then
bounces, but by then it is already too late.

4. Stolen cheques:

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

5. Credit card fraud:

Credit card fraud is widespread as a means of stealing from banks, merchants and clients. A credit card is
made of three plastic sheet of polyvinyl chloride. The central sheet of the card is known as the core stock.
These cards are of a particular size and many data are embossed over it. But credit cards fraud manifest in a
number of ways. They are:

„« Genuine cards are manipulated.

„« Genuine cards are altered.
„« Counterfeit cards are created.
„« Fraudulent telemarketing is done with credit cards.
„« Genuine cards are obtained on fraudulent applications in the names/addresses of other persons and used.

It is feared that with the expansion of E-Commerce, M-Commerce and Internet facilities being available on
massive scale the fraudulent fund freaking via credit cards will increase tremendously.

6. Accounting fraud:

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In order to hide serious financial problems, some businesses have been known to use fraudulent
bookkeeping to overstate sales and income, inflate the worth of the company's assets or state a profit when
the company is operating at a loss. These tampered records are then used to seek investment 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 or mismanaged firm.

7. Cheque kiting:

Cheque kiting exploits a system in which, when a cheque is deposited to a bank account, the money is made
available immediately even though it is not removed from the account on which the cheque is drawn until
the cheque actually clears. Deposit 1000 in one bank, write a cheque on that amount and deposit it to your
account in another bank; you now have 2000 until the cheque clears. In-transit or non-existent cash is briefly
recorded in multiple accounts.

A cheque is cashed and, before the bank receives any money by clearing the cheque, the money is deposited
into some other account or withdrawn by writing more cheques. In many cases, the original deposited
cheque turns out to be a forged cheque. Some perpetrators have swapped checks between various banks on a
daily basis, using each to cover the shortfall for a previous cheque. What they were actually doing was check
kiting; like a kite in the wind, it flies briefly but eventually has to come back down to the ground.

8. Stolen payment cards:

Often, the first indication that a victim's wallet has been stolen is a 'phone call from a credit card issuer
asking if the person has gone on a spending spree; the simplest form of this theft involves stealing the card
itself and charging a number of high-ticket items to it in the first few minutes or hours before it is reported as
stolen. A variant of this is to copy just the credit card numbers (instead of drawing attention by stealing the
card itself) in order to use the numbers in online frauds.

9. Duplication or skimming of card information:

This takes a number of forms, ranging from a dishonest merchant copying clients' credit card numbers for
later misuse (or a thief using carbon copies from old mechanical card imprint machines to steal the info) to
the use of tampered credit or debit card readers to copy the magnetic stripe from a payment card while a
hidden camera captures the numbers on the face of the card. Some thieves have surreptitiously added
equipment to publicly accessible automatic teller machines; a fraudulent card stripe reader would capture the
contents of the magnetic stripe while a hidden camera would sneak a peek at the user's PIN. The fraudulent

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equipment would then be removed and the data used to produce duplicate cards that could then be used to
make ATM withdrawals from the victims' accounts.

10. Impersonation and theft of identity:

Theft of identity has become an increasing problem; the scam operates by obtaining information about a
victim, then using the information to apply for identity cards, accounts and credit in that person's name.
Often little more than name, parents' name, date and place of birth are sufficient to obtain a birth certificate;
each document obtained then is used as identification in order to obtain more identity documents.
Government-issued standard identification numbers such as "Social security numbers, PAN numbers" are
also valuable to the identity thief. Unfortunately for the banks, identity thieves have been known to take out
loans and disappear with the cash, quite content to see the wrong persons blamed when the debts go bad.

11. Fraudulent loan applications:

These take a number of forms varying from individuals using false information to hide a credit history filled
with financial problems and unpaid loans to corporations using accounting fraud to overstate profits in order
to make a risky loan appear to be a sound investment for the bank. Some corporations have engaged in over-
expansion, using borrowed money to finance costly mergers and acquisitions and overstating assets, sales or
income to appear solvent even after becoming seriously financially overextended. The resulting debt load
has ruined entire large companies, such as Italian dairy conglomerate Parma at, leaving banks exposed to
massive losses from bad loans.

12. Phishing and Internet fraud:

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Phishing operates by sending forged e-mail, impersonating an online bank, auction or payment site; the e-
mail directs the user to a forged web site which is designed to look like the login to the legitimate site but
which claims that the user must update personal info. The information thus stolen is then used in other
frauds, such as theft of identity or online auction fraud. A number of malicious "Trojan horse" programmers
have also been used to snoop on Internet users while online, capturing keystrokes or confidential data in
order to send it to outside sites.

13. Money laundering:

The term "money laundering" dates back to the days of Al Capone Money laundering has since been 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 assets used as collateral for a loan at another bank.
The borrower would then default on the loan. The securities, however, would still be worth their full amount.
The transaction served only to disguise the original source of the funds.

14. Forged currency notes

Paper currency is the usual mode of exchange of money at the personal level, though in business, cheques
and drafts are also used considerably. Bank note has been defined in Section 489A.If forgery of currency
notes could be done successfully then it could on one hand made the forger millionaire and the other hand
destroy the economy of the nation. A currency note is made out of a special paper with a coating of plastic

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laminated on both sides of each note to protect the ink and the anti forgery device from damage. More over
these notes have security threads, water marks. But these things are not known to the majority of the
population. Forged currency notes are in full circulation and its very difficult to catch hold of such forgers as
once such notes are circulated its very difficult to track its origin. But the latest fraud which is considered as
the safest method of crime without making physical injury is the Computer Frauds in Banks.

Computerization of banks had started since 1994 in India and till 2000 4000 banks were completely and
9000 branches have been partially computerized. About 1000 branches had the facilities for International
bank Transaction. Reserve Bank Of India has evolved working pattern for Local area Network and wide area
Network by instituting different microwave stations so that money transactions could be carried out quickly
and safely.

The main banking tasks which computers perform are maintaining debit-credit records of accounts,
operating automated teller machines, and carry out electronic fund transfer, print out statements of accounts
create periodic balance sheets etc. Internet facilities of computer have revolutionized international banking
for fund transfer and for exchanging data of interest relating to banking and to carry out other banking
functions and provides certain security to the customers by assigning different pin numbers and passwords.

15. Advance Fee Fraud

This may involve an agent approaching a bank, a company or individual with another to access large funds
at below market interest rates often for long term. This purported source of funds is not specifically
identified as the only way to have access to it through the agent who must receive a commission “in
advance”. As soon as the agent collects the especially distressed banks and banks needing large funds to bid
for foreign exchange can easily fall victim of this type of fraud. When the deal fails and the fees paid in
advance are lost, these victims are not likely to report the losses to the police or to the authorities.

16. Fund Diversion

In this case, bank staff sometimes diverts customers’ deposits and loan repayment for personal use. Another
case of this is the tapping of funds from interest in suspense accounts in banks.

17. Account Opening Fraud

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This involves the deposit and subsequent cashing of fraudulent cheques. It usually starts when a person not
known to the bank asks to open a transaction account such as current and savings account with false
identification but unknown to the bank.

18. Counterfeit Securities

Counterfeiting of commercial financial instruments is one of the oldest forms of crime. Modern
photographic and printing equipment has greatly aided criminals in reproducing good quality forged
instruments. The documents may be total counterfeit or may be genuine documents that are copied, forged or
altered as to amount, payout date, pay or terms of payment. A common fraud is to present the counterfeit
stocks or bonds as collateral for loan. The presenter would draw out the proceeds and disappear before the
financial instruments are found to be counterfeit.

19. Money Transfer Fraud

Money transfer services are means of moving to or from a bank to beneficiary account at any bank point
worldwide in accordance with the instructions from the banks’ customers. Some common means of money
transfer are mail, telephone, over-the-counter, electronic process and telex. Fraudulent money transfer may
result from a request created solely for the purpose of committing a fraud or altered by changing the
beneficiary’s name or account number or changing the amount of the transfer.

20. Letter of Credit Fraud

This generally arises out of international trade and commerce. They stimulate trade across national borders
providing a vehicle for ensuring prompt payment by financially sound institutions. Overseas suppliers
continue to receive spurious letters of credit, which are usually accompanied by spurious bank drafts with
fake endorsements which guarantee
payments.

21. Computer Fraud

Computer Frauds involves the deceptive manipulation of the banks’ computer, either at the data collection
stage, the input processing stage or even the data dissemination stage. Computer frauds could also occur due
to improper input system, virus, program manipulations, transaction manipulations and cyber thefts. It can
also take the form of corruption of the programmed or application packages and even breaking into the
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system through remote sensors. A banks’ data can also be tampered with at the data centre to gain access to
unauthorized areas or even give credit to accounts for which the funds were not originally intended. This
kind of fraud can remain undetected for a long time. In this epoch of enormous deployment of automated
teller machines (ATMs) and online real time e-banking and commerce; computer frauds arising from cyber
thefts and crimes has assumed a very threatening dimension . No bank seems to be invulnerable to it, and a
considerable percentage of the enormous amount of money spent annually in the banking sector to help
reduce fraud usually are channeled towards fighting computer frauds and cyber crimes and theft.

22. Clearing Fraud

Most clearing frauds hinge on suppression of an instrument so that at the expiration of the clearing period
application to the instrument, the collecting bank will give value as though the paying bank had confirmed
the instrument good for payment. Clearing cheques can also be substituted to enable the fraudster divert the
fund to a wrong beneficiary. Misrouting of clearing cheques can also assist fraudsters to complete a clearing
fraud. Askew, a local clearing item can be routed to an up country branch; the delay entailed will give the
collecting bank the impression that the paying bank had paid the instrument.

23. Unofficial Borrowing

This occurs when bank employees borrow from the vaults and teller tills off the record. Such unauthorized
borrowings are done in exchange of the staff post-dated cheque or nothing. These borrowings are more
rampant on weekends and during the end of the month when salaries have not been paid. Some of the
unauthorized borrowings from the vault, which could run into thousands of cedes, are used for fast
businesses lasting a few hours or days after which the resources are replaced without any substantiation in
place that they were taken in the first place. Such a practice when done recurrently and with no official
records, soon very easily becomes prone to manipulations, whereby they resort to other means of balancing
the cash in the bank’s vault without ever having to replace the sums of money collected.

24. Voucher Manipulation

Manipulation of Vouchers involves the replacement or alteration of entries of one account to another account
being used to commit the fraud. This account would obviously be a fabricated account into which the funds
of unsuspecting clients of the banks are transferred. The amounts taken are usually in small amounts so that
it will not easily be noticed by top management or other unsuspicious staff of the bank. Manipulation of
vouchers can thrive in a banking system saddled with inadequate checks and balances such as poor job
segregation and lack of detailed daily examination of vouchers and all bank records.

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 CHAPTER NO-4
TYPES OF BANKING FRAUDS

Types of Banking Frauds

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 Credit / Debit
Card Frauds
Fictitious
entries made
Hypothecation
in book/
Frauds
manipulation
of record

Purchased Identity
Bill Frauds Frauds
Type of
Banking
Frauds

ATM Frauds Loan Frauds

Deposit
Cheque Frauds Account
Frauds

As a customer you may be seen as a potential target for fraudulent activities. However by arming yourself
with information and tools you can protect yourself from becoming a victim of fraud. Do you know the four
biggest fraud threats you face Credit card and debit card fraud is a crime whereby your credit or debit card
can be reproduced in order to use the credit balance to obtain a financial advantage. The creation and/or
alteration of a credit/debit card occurs when the information contained on the magnetic strip is reproduced.
This type of crime is known as ‘skimming’. Credit or debit card fraud can also occur when your card is lost
or stolen and used by a third party to purchase goods with those cards or to remove cash from the cards.
Credit or debit cards can also be intercepted in transit while being sent to you. Your cards can also be
compromised by a dishonest merchant who undertakes unauthorized duplicate transactions on your card.
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Protect your credit / debit card:

Memories your personal identification number (PIN). Don't use the same PIN for all your cards, and don't
choose your birth date or other easily identifiable numbers that might be on something else in your wallet.
Check statements and call your credit card issuer immediately if you see anything suspicious on your bill.
You could help the company uncover fraud—and save yourself from paying unauthorized charges. Do not
let your credit card out of your sight at anytime for example, at a restaurant go with the card. Card fraud is
not applicable in Australia only be just as vigilant when travelling overseas, credit card skimming is an
international crime. Always sign your card in ink as soon as you receive it. Keep track of when new and
reissued cards should arrive, and call the credit card issuer if they don't come on time.

2. Cheque Fraud:

Cheque fraud is the use of a cheque to get financial advantage by:

altering the cheque (payee/amount) without authority theft of legitimate cheques and then altering them
duplication or counterfeiting of cheques using false invoices to get legitimate cheques depositing a cheque
into a third party account without authority depositing a cheque for payment knowing that insufficient funds
are in the account to cover the deposited cheque.

How to protect yourself from cheque fraud:

1. Reconcile your accounts promptly and regularly.

2. Never sign blank cheques, and only sign cheques after all details have been completed.
3. Limit the number of signatures to your account to ensure control.
4. Ensure that your signature is not with documents that can be accessed by the general public.
5. Keep all cheques secure when not in use to deter theft.
6. Don’t leave any gaps in the completion of the payee name, amount in words and in figures.
7. If cheques are lost or stolen contact ANZ immediately and ask them to stop payment on the cheque.

3. ATM FRAUD

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Has your ATM got the ‘Jitters’?  More and ATMs now have in-built skimming prevention software. You
may have noticed that your card enters and exits the card reader slowly, or jumps like it has the 'jitters'.
That's a sign that the ATM is helping to protect you against card skimming.

Card skimming:

 Card skimming is the illegal copying of a card's magnetic strip that can later be used to access your account
and make unauthorized purchases using those details.
In the case of ATMs, this typically occurs when the would-be thief places a device over the card entry point
that scans the cards as they enter and exit the ATM, combined with a hidden camera to record you while you
enter your PIN. The scanning device and camera can be cleverly disguised so that you don't even notice the
ATM has been modified.

 What we are doing

To help prevent card skimming, more ANZ ATMs have been fitted with skimming prevention software that
'shakes' the card as it enters and exits the ATM. The shaking interrupts the scanning process and renders any
skimming attempt ineffective All ANZ ATMs across Australia have skimming prevention software. You
will notice on our newer ATMs there is either a green or blue plastic cover where you insert your card. This
device is installed to alter the shape of the card reader and making it difficult for the would-be thief to install
a skimming device on the ATM. ANZ are constantly looking at new technology for ensuring that customer
information and cash are secure at all times.

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 Along with the skimming prevention software, ANZ ATMs include the use of ink- staining technology to
deter theft.

4. Identity Fraud
Identity fraud can occur in many ways—from somebody using your credit card details illegally to make
purchases to having your entire identity assumed by another person to open bank accounts, take out loans
and conduct illegal business under your name.

How to protect yourself from identity theft:

 Never send money or give personal details to people you don’t know and trust.
 If you receive a call from your bank or any other organization, don’t provide your personal details—
instead ask for their name and a contact number. Check with the organization in question before calling
back.
 Never rely on a number provided in an email or click on the provided link—instead find the contact
number through an internet search or check the back of your ATM card.
 Regularly check your credit card and/or bank statements to ensure that suspicious transactions are
detected.
 Shred all documents containing personal information, such as credit card applications and bank
statements.
 Log directly onto websites you are interested in rather than clicking on links provided in an email.
 Always get independent advice if you are unsure whether an offer or request is genuine.
 Lock your letterbox securely to avoid your mail being stolen.
 Ensure you choose passwords that are not easy for someone to guess, such as your date of birth, pet’s
name etc.

Signs of identity fraud

These can vary, but some typical signs that your identity is being used unlawfully are:
 A financial institution informs you they have received an application for credit that you have not applied
for.
 You receive phone calls or letters advising that you have been denied credit that you have not applied
for.
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 You receive bank, mobile phone or credit card statements or notices in your name, of which you have no
knowledge.
 You notice that you no longer receive your bank or credit card statement or you notice that not all your
mail is being delivered.

What can you?

You should also advise any other financial institution that you bank with so they are aware of the situation.
Any instance of identity fraud should also be immediately reported to your local police. It is also a good idea
to advise close family and friends as identity theft rings will often target more than one member of a
household. In addition, consider contacting Veda Advantage, a credit agency, to obtain your credit history
report so that you are kept fully informed of any unauthorized activity on your own file.

5. Deposit Account Frauds:

A Accounts opened without introduction or with improper introduction, frauds under this head are generally
attempted t the time of opening of new branch when such emphasis is not paid on abstention of introduction.
Once the account is opened, the miscreant deposits, stolen/materially altered cheques for collection/payment
etchant dormant account is fraudulently operated by a forger on forged signatures. Specimen signature card
or signatures on letters are utilized as models:

1. Joint accounts are operated by one of the signatories (forger) by forging the signatures of others.

2. Mini deposit collections are not deposited by the collecting banker.

3. The banker becomes joint account holder and withdraws the money.

4. The banker manipulates the depositor’ Pass Book.

6. Purchased Bill Frauds:

the frauds in this area are often costly. They can take the following forms:

1. Bogus or stolen railway receipts and motor transport receipts accompanied by counterfeit bills are
discounted.

2. Fake bills with inflated value, drawn on sister concerns, for discounts.

3. Genuine bills and railway are presented and got discounted from the bank but the material is got
released from the railways on indemnity bond.
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 4. Bogus bills for worthless goods are discounted on the strength of dispatch papers

.7. Hypothecation Frauds:

Cash advances, against pledged goods, as security are fertile fields for frauds.

1. Stocks or part thereof, are removed unauthorized from the god owns.

2. Advance against pledge/hypothecation of securities, pledging inferior quality of goods, overvaluation

of stocks.

8. Loan Fraud:

The general policy of the government is to encourage loans to agriculturists or to small artisans and
businessmen. In fact, certain targets for these purposes are fixed for the banks. In the initial stages, it resulted
in losses to the banks due to lack of expertise in the field. The following types of fraud were perpetrated.

1. Loans are taken by different persons on the same time.

2. Nomadic artisans obtain loans and vanish from the scene.

3. False firms appear everywhere and obtain loans.

4. Loans taken for agricultural development were later used as marriage celebrations.

5. In connivance with the suppliers, farm machinery bills were inflated for accessories which wee never
supplied and included in the bills.

6. Farm machinery purchased with loans and hypothecated to banks is sold without informing the banks
or returning the loans.

9. Fictitious entries made in book/ manipulation of record:

These frauds normally take place with the active involvement of staff or where the books are exposed to
the members of public. In such cases, subsequently the record is destroyed.

I. Cash shortages:

Cash the most sensitive asset of the bank is prone to fraud. The shortages of fraud there is generally due to
carelessness/negligence of the concerned staff who are the joint custodians of cash.

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 I. Frauds in Borrower Accounts:

1. Advance against clean/documentary bills purchased/discounted. The borrower committed frauds by

tendering fake bills/accommodation bills/cheques for discounting. Later when the bills/cheques are
received unpaid, the banks find it difficult to recover the amount.

2. Advance under some priority sector schemes.

3. Advance granted in haste or at the behest of top management or any pressure or some consideration.

4. Incomplete credit information.

5. Lack of post disbursement supervision.

6. Miss-use of discretionary powers or exceeding discretionary powers by Managers/Officers.

II. Frauds in Investment Portfolios:

Investment portfolio which constitutes a big chunk of the total assets of a bank is another fraud prone
area. The dealer in securities in the absence of proper policy, direction and adequate system of checks
and balances may misuse the position for his personal gains to the detriment of Banka€™s interest by
putting through deals for passing on business to the brokers which are otherwise not warranted by
business considerations.

III. Frauds in Foreign Exchange Areas:

1. Frauds in this area are perpetrated in the dealing room operations, documentary credits, export-
import transactions, packing credit etc.

2. Some of the dealers have been put through fictitious deals with the help of brokers due to lack of
back-up functions.

IV. Frauds in computerized environment:

Hardware errors disable the working of any of the component of hardware with a view to
creating/temporary/permanent malfunction to either destroy the data or present its disclosure for
security. Pregame errors are created by miscreants to cripple the system or to siphoned off the funds to

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 unauthorized accounts or to prevent/reduce charges to select accounts. Data entry errors are created by
staff to give undue gain to interested accounts. Errors are made to give a wrong picture of sanative data
such as balances, classification of advances, outstanding dues, interest rate applied etc.

VI. Frauds in inter branch and inter bank accounts:

1. Debiting bank accounts without remitting cash.

2. Debiting branch adjusting account without remitting cash.

3. Adjusting branch books-clean cash.

4. Fraudulently debiting/crediting Head office account.

5. Debiting/Crediting various deposit accounts without authority.

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 CHAPTER NO-6
EFFECTS OF BANK FRAUDS ON BANKS

EFFECTS OF FRAUDS ON BANKS

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 Loss of Public
Confidence in Banks

Loss of Money

Increased Operating
Cost

Low Asset Quality

Reduced the amount of

profit

Unattended

Creditability

1. Loss of Public Confidence in Banks

Fraud is perhaps the most fatal of all the risks confronting banks. The enormity of bank frauds in Ghana can
be inferred from its value, volume and actual loss. A good number of banks’ frauds never get reported to the
appropriate authorities, rather they are suppressed partly because of the personalities involved or because of
concern over the negative image effect that disclosure may cause if information is leaked to the banking

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public The banks’ customers may lose confidence in the bank and this could cause a setback in the growth of
the bank in particular.

2. Loss of Money

Fraud leads to loss of money, which belong to either the bank or customers. Such losses may be absorbed
by the profits for the affected trading period and this consequently reduces the amount of profit, which
would have been available for distribution to shareholders. Losses from fraud which are absorbed to equity
capital of the bank impairs the bank’s financial health and constraints its ability to extend loans and advances
for profitable operations. In extreme cases rampant and large incidents of fraud could lead to a bank’s
failure.

3. Increased Operating Cost

Fraud can increase the operating cost of a bank because of the added cost of installing the necessary machinery
for its prevention, detection and protection of assets. Moreover, devoting valuable time to safeguarding its asset
from fraudulent men distracts management. Overall, this unproductive diversion of resources always reduces
outputs and low profits which in turn could retard the growth of the bank.

4. Low Asset Quality

It also leads to a diminishing effect on the asset quality of banks. The problem is more dangerous when
compounded by insider loan abuses. Indeed, the first generation of liquidated banks (Co-operative Bank and
Bank for Housing and Construction) by the Bank of Ghana was largely a consequence of frauds perpetrated
through insider loan abuses. If this problem is not adequately handled, it could lead to distress and bank
failure.

5. Reduced the amount of profit

Banking frauds reduce the profit of banks. Because of the frauds there is decrease in the profit of the banks.
If there is no frauds in banks so bank is able to give maximum return on the investment of the customers.
Fraud leads to loss of money, which belong to either the bank or customers, so there is decrease in the profit
margin of the company.

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6. Unattended

There are instances of fraud that adversely impact banks on a regular basis and go unnoticed or unattended.
All these cases of fraud result in sizeable monitory losses for the banks once they go undetected.

7. Creditability

Fraud events raise questions around the credibility of the fraud deterrent processes and the technological
capabilities of the institution.

CHAPTER NO-7
BANK RULES REGARDING BANKING FRAUDS AND SCAMS

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After receiving Xerox papers (which were actually forged by the offenders) of the property, the bank passed
the same on to the legal section. After scrutiny, the legal consultant told the bank that the Xerox documents
were `perfect' and to release loan after execution of sale deed. The bank rules state that loan applications can
be examined "even with Xerox copies of documents. The alleged greediness of employees to give their
salary slips and other documents on payment of some money made the job of the cheats easier. The police
opine that unless bankers evolve a foolproof system, the offenders continue to take advantage of the lapses.

Though computer based banking crimes are yet limited but it is increasing with a huge pace. Their
investigation is highly intricate and daunting. Prevention is the best alternative. It is comparatively easier,
though even with the best laws, efficient investigation team the successful conclusion of most cyber crimes
will remain a remote possibility .Therefore emphasis is more on prevention. In bank administration, one
feels that not much attention is paid to preventive measures. Bank managements must direct their orientation
towards preventive rather than detective or punitive measures. Preventive vigilance must be the prime
agenda to bring down the occurrence of fraud in banks.

CHAPTER NO-8
ROLE OF BANKERS IN A BANK FRAUD

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Bank frauds crop up in all spheres of banking dealing, like: Cheque frauds, Deposit account frauds,
Purchased bill frauds, Hypothecation frauds, Loan frauds etc. A dishonest banker can play havoc with the
banks money. The bank has therefore to sentinel itself and its customer against the deceitful employee. The
vicinity of business of the banker is extensive. The following operational avenues have been noticed time
and again. Manipulation of cash by those handling cash, misappropriation of customer deposit accounts,
misappropriation of money in telegraphic transfers, clearing forged cheques and other instruments,
fraudulently while working in clearing departments, creaming of the sundry accounts, tinkering with the
central accounts, accepting counterfeit currency for a consideration, helping the bank robber, by giving
information etc. An analysis of frauds reported by banks to RBI broadly indicated that frauds perpetrated on
banks could be classified into the following categories:-

1· Misappropriation of cash tendered by the banks constituents and misappropriations of cash remittance.

2· Withdrawal from deposit accounts through forged documents/instruments.

3· Fraudulent encashment of negotiable instruments by opening an account in fake/fictitious name.

4· Perpetration of frauds through clearing transactions.

5. Misutilisation/overstepping of lending/discretionary powers, non-observance of prescribed norms/

procedures in credit dispensation etc.

6. Opening/Issue of Letters of Credit, Banks Guarantees Co-acceptance of bills without proper authority and
consideration.

CHAPTER NO-9
REGULATIONS RESERVE BANK OF INDIA (RBI)
Reserve Bank of India (RBI) rules to prevent Bank frauds
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The Reserve Bank of India (RBI) has drawn up new rules for banks aimed at preventing fraud and
irregularities which is given as follows:

 The regulator has asked banks to immediately frame staff rotation and mandatory leave policies for
employees in sensitive areas such as treasury and for relationship managers handling high-value
clients.
 Staff rotations and leave are international practices that help banks keep track of decisions and
businesses handled by a particular employee.
 Reserve Bank of India has introduced the rules following forensic studies at certain banks due to the
“occurrence of large value frauds or sharp increase in number of frauds at such banks”.
 In another notification, RBI directed private and foreign banks to appoint chief of internal vigilance
(CIV) officers, with responsibilities similar to those of chief vigilance officers in public sector banks.
 It was observed that the practices vary widely among banks. It has, therefore, been decided to lay
down detailed guidelines for private sector and foreign banks on similar lines so that all issues arising
out of lapses in the functioning of the private sector and foreign banks, especially relating to
corruption, malpractices, frauds, etc., can be addressed uniformly by the banks for timely and
appropriate action.”
 Banks need to implement an internal vigilance system by and submit a compliance report.
 RBI’s directive on staff rotation and mandatory leave comes a few months after a multi crores fraud
involving a relationship manager at the Gorgon branch of Citibank India came to light.
 To prevent frauds, banks should have prescribed procedures and criteria to analyze and assess
irregularities, RBI said. Banks should be able to understand the nature of an irregularity or fraud. For
instance, whether it has taken place because of negligence in duty as a result of“collusion” by
employees.
 “Any action taken in collusion to derive undue/unjust benefit or advantage should be termed as
fraud,” RBI said.
 It has asked banks to examine the “intent to defraud, irrespective of whether or not actual loss takes
place.
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  If an irregularity is detected, banks should immediately assess if it was a result of human or system
failure.
 This exercise is the first critical step towards corrective action in the sense that it would lead to
expeditious filing of police complaints, blocking/freezing of accounts and salvaging funds from the
blocked/frozen accounts in due course.
 Banks asked to frame a “fit and proper” criteria for posting employees in critical positions such as
in dealing rooms and treasury, or as relationship managers for high-value customers and heads of
specialized branches.
 RBI has allowed banks a free hand in appointing CIVs, but has fixed the initial tenure at a maximum
of six years.

CHAPTER NO-10
FACTORS OF FRAUDS

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 INSTITUTIONAL
FACTOR

EXTERNAL
FACTOR

INTERNAL FACTORS

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 Poor Management

Inexperienced Personnel

Overstretching

Job Rotation

Poor Remuneration

Frustration

Inadequate Training and Re-Training

Poor Book-keeping

Weak Accounting
The institutional factors or causes are those that can be traced to the in-house environment of an banks. They are
to a great extent factors within the control of the management of the bank.
Major institutional cause’s fraud can be categorized as follows:

1. Poor Management

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This comes in a form of inadequate supervision. A junior staff with fraudulent tendencies that is not
adequately supervised would get the impression that the environment is safe for the perpetration of fraud.
Poor management would also manifest in ineffective policies and procedures, which a fraudulent minded
operator in the system will capitalize on. Even where there are effective policies and procedures in place,
fraud could still occur with sometimes deliberate skipping of these tested policies and procedures.

2. Inexperienced Personnel

Inexperienced personnel are susceptible to committing unintentional fraud by falling for numerous tricks of
fraudsters. Inexperienced personnel are unlikely to notice any fraud attempts and take necessary
precautionary measures to checkmate the fraudster or set the detection process in motion.

3. Overstretching

Overstretching is another reflection of poor management. This can aid perpetration of fraud to a large extent.
A staff who is overstretched is not likely to perform at optimum level of efficiency.

4. Job Rotation

Ordinarily, the longer a man stays on a job, the more proficient he is likely to be. An operator who has spent
so long on a particular job may be encouraged to think that no one else can uncover his fraud. The existence
of this kind of situation in a bank is clear evidence of poor management and such situations encourage
fraudulent practices.

5. Poor Remuneration

Poor salaries and poor conditions of service can also cause and encourage fraud. Employees that are poorly
paid are often tempted to fraudulently convert some of the employers’ monies to their own use in order to
meet their personal and social needs. This temptation is even stronger on bank employees who on daily basis
have to deal with cash and near cash instruments. In our society, it is argued that greed rather than poor
working conditions or poor salaries is what lures most people into fraudulent acts. This explains why fraud
would still exist in the banking sector, which is reputed to be one of the highest paying sectors. Some people
have an insatiable appetite to accumulate wealth and would therefore steal irrespective of how good their
earnings are.

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6. Frustration

Frustration could also lead to fraud. Where a staff feels short-changed in terms of promotion and other
financial rewards, they become frustrated and such frustration could lead to fraud as such employee would
attempt to compensate himself in his own way.

7. Inadequate Training and Re-Training

Lack of adequate training and retraining of human resources both on the practical and theoretical aspects of
banking activities and operations more often than not leads to poor performance. Such inefficient
performance creates a loophole which can very easily be exploited by fraudsters.

8. Poor Book-keeping

Inability to maintain appropriate books of accounts together with failure to reconcile the various accounts of
the bank on daily, weekly or monthly basis more often than not will attract fraud. This loophole can very
easily be exploited by bank staff that is fraudulent. The prevalence of fraud and forgeries are an indication of
weakness in a bank’s internal control systems. Aside the above-mentioned causes of fraud, the following
factors greatly contribute to fraud:
 Inadequate compensation, salaries and fringe benefits which are accruable to bank staff.
 Refusal to comply with laid-down procedures without any penalty or sanction.
 Conspiracy between interacting agents charged with the responsibility of protecting
the assets and other interest of the bank;
 Poor working conditions;
 Poverty and infidelity of employees.

9. Weak Accounting
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 The weak accounting is one of the important internal factor which causes to the banking frauds and scams.

2. EXTERNAL FACTORS

Environmental factors are those that can be traced to the banks immediate and remote environment. If the
whole society of which the bank is a part is morally bankrupt it will be difficult if not impossible to expect
the banks to be insulated from the effects of such moral bankruptcy. The banking industry is not immune
from the going on in its external environment. Our present society is morally bankrupt. Little or no premium
is put on things like honesty, integrity and good character. The society does not question the source of
wealth. Any person who stumbles into wealth is instantly recognized and honored. It is a fact of our
time that fraud has its root firmly entrenched in the social setting where wealth is honored without questions.
Ours is a materialistic society which to a large extent encourages fraud. The desire to be with the high and
mighty caliber of the society, extreme want that is often characterized by need, cultural demands or the
cultivation of a life too expensive for the legitimate income of the individual. Our societies have debased the
entire old moral standards and appear to be unconcerned with probity, honesty, integrity and “good name”.
The family friends, the religious houses and society at large seem not to care how you come about your
riches but accept, accommodate and even respect you for your wealth, however, dishonestly it has been
acquired. All these encourage fraud as the end seems to justify the means, and no means seems to be morally
unacceptable. With reference to fraud, criminal motivation is said to be pathological when the state of mind
of the criminal disposes and impels him to commit fraud even though he is not in dire need of the resources.
Bank frauds seriously endanger the organizational growth of a bank as it leads to bank distress. This is
because fraud reduces the deposits of depositors and ultimately leads to the erosion of the capital base of
banks. The cost of fraud is also usually difficult to estimate because not all frauds are discovered or even
reported since most banks have a propensity to cover up the frauds emanating from their banks, all in a bid
to continue to gain customers goodwill and stimulate their clients’ confidence all the time.

EXTERNAL FACTORS
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 Slow and Tortuous Legal Process

Poverty

Widening Gap between the Rich and the Poor

Job Insecurity

Peer Group Pressure

Increased financial burden on Individuals

Lack of Proper Training

Lack of Sufficient Staff

1. Slow and Tortuous Legal Process

In Banks there is a slow legal process which is one of the reasons for occurring the frauds. If in every bank
there is a strong measures and fast legal process to deal with the frauds then chances of will be less or
minimize. So every bank there should be strong procedures to handling this type of baking frauds.

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2. Poverty

The reason for banking frauds is poverty. In India there is so much poverty so that people are makes the
frauds for removing there poverty because some peoples wants the all type of facilities in their life and
wants to improve their standard of living. So they started the illegal activities for earning money. So poverty
is also leads to banking frauds.

3. Widening Gap between the Rich and the Poor

In India there is so much gap between the rich and poor people. Because of money some peoples are
behaving different .In most of sectors there is a partiality between the rich and poor peoples. So this gap is
increasing by day –today and this leads to the banking frauds and scams.

4. Job Insecurity:

Nowadays job insecurity is one of the serious problems that leads to banking frauds. Permanent jobs are
very less. So for living the money is so much important. The needs and wants of the people are increasing so
money is become necessary to satisfied that needs and wants. Because of the job insecurity some peoples
want to reserve money that in future they can use. So for satisfying the future needs and wants he is
undertake the baking frauds.

5. Peer Group Pressure:

The another reason for happening the frauds is that there is peer group pressure in some of the banks. So
because of that people are doing this illegal activities which are very harmful to all the society.

6. Increased financial burden on Individuals:

There is so much financial burden on each and every individual so because of that financial burden people
are stated to earning from doing the bank frauds

7. Lack of Proper Training

There is lack of properly trained and experienced person. There is a sudden and tremendous increase in
banking business. The sudden expansive explosion has created a vacuum of personnel. New recruits often do
not have adequate training or experience before they are put in responsible positions. The findings reveal
that 68.77% of respondents have not undergone any formal training in prevention of bank frauds.

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8. Lack of Sufficient Staff

Moreover bank staff feels overburdened. The life has become too fast. The banker does not have enough
time to scrutinize documents thoroughly. About two thirds of the respondents feel that they do not have
sufficient staff to carry out the work meticulously. The overburdened staff was given the highest weight age
as the reason responsible for bank frauds.

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 CHAPTER NO-11
FRAUD DETECTION IN REAL-TIME FOR BANKS

Statutory requirements clearly show that bank fraud poses a serious threat to banks. While retrospective
fraud detection was top priority in the past, the focus is now on early detection or prevention. Prevention
measures aim at the early detection and handling of fraud risks to prevent financial and reputational damage.
There are offers bank an integrated anti-fraud solution that not only detects bank fraud but assesses and
thwarts transaction and process alerts in real-time. Apart from the bank's database-founded risk analysis, the
solution offers initial and continual risk classification for new and existing customers and provides due
diligence functionality in the attached research system. The alerts generated by the system are based on
customer and transaction data, event patterns and correlations, and on custom user settings. The imbedded
real-time module grants minimal response times with high decision quality and aims at fraudulent activities
with a high damage potential. Clear-structured dashboards visualize cases of bank fraud, suspicious activities
reports, and detected alerts.

Some solutions offer:

 Coverage of all statutory requirements
 Real-time analysis of data and events to trigger alerts
 Comprehensive check of system access by employees, customers and their transactions, and of
events
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 Simulation options (what–if analyses)
 Multi-clients and multi-lingual user interfaces
 Standard modules and flexible adjustment options
 Best-practice check scenarios from a large number of customer installations
 Easy integration with banking systems through standardized and flexible interfaces
 100% audit-proof documentation

CHAPTER NO-12
ACTIONS TAKEN BY BANK TO MINIMIZE THE BANK FRAUDS

Banks should adopt the following actions for minimize the bank frauds:

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 ACTIONS TAKEN BY BANK

Assess Fraud Implictions

of Bank’s Strategy

Model Customer Behaviors

and Situations

Develop Dynamic Analytical

Models

Develop Pan-Channel Customer

Authentication

Develop the IT Strategy for

Holistic Decisioning

1. Assess fraud implication of banks Strategy

The fraud function has an opportunity to transform its role and status by thinking and acting more like a
stakeholder in the business. This involves assessing the risk factors and their relative volatility, adopting a
more commercial and customer-focused approach and using technology innovation to provide customer-
centric solutions. Understanding the risks will enable capability or knowledge gaps to be identified and
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mitigating actions to be taken. Our research has found that the innovation agenda is central to banks strategic
growth plans and therefore will open up new risks for banks in the areas of fraud management and IT
security. Experience also shows that business units in many organizations elect for point solutions. When
this occurs, there is a clear risk that a lack of coordination and integration will seriously undermine the
effectiveness and efficiency of enterprise-wide fraud management.

2. Model customer behaviors and situations

Fraud solutions and offerings should be developed and refined to address the risks of individual customers or
customer segments. Fraud interventions which impact the customers should be based on individual customer
behavior and circumstance. This positions the fraud management function as an insightful guide to the
business, enabling the design and implementation of robust fraud mitigation as part of the overall customer
offering. For example, gaining a better understanding of current and future customer demographics provides
the opportunity to predict future vulnerabilities thereby turning fraud management into a competitive
advantage by developing products and services that meet the needs of customers.

3. Develop Dynamic Analytical models

Our experience is that banks have historically deployed anti-fraud and anti- AML solutions without the
appropriate capabilities for dynamic optimization. Fraud management must be highly responsive, as
criminals are more sophisticated and increased processing power is available through cloud
technologies. Organizations that fail to maintain and optimize their systems are likely to be targets for
fraudsters. Typically, to optimize analytical models, banks need to interact more closely both with
internal and external analytical resources and with software suppliers. Fraud teams need to be
equipped with the skills and processes to manage this. Governance of models, analytics and rules
changes is coming under increasing regulatory interest and therefore, as part of developing this
capability, proper governance should also be established. In the past, fraud managers would have a
hypothesis which they would test with analytics (often calling on credit risk resources to perform the
analysis). Going forward, fraud managers will start with a business outcome or goal rather than a
hypothesis. They will use analytics to gather historical data that will help them find the answer. They
will then reuse analytics to create statistical or machine-learning models of the data to answer their
question. This will create an increasing need to bring various data sources together, particularly if an
organization has deployed a number of non-integrated point fraud solutions.

4. Develop Pan-Channel Customer Authentications

Customer on-boarding and ongoing authentication policy are no longer the preserves of the compliance
function or of the individual channel owner. These are essential elements of the customer’s experience and
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therefore key to business growth and customer retention. The fraud management team, as trusted advisor,
needs to work with the business to develop a pan-channel, customer-centric authentication strategy that
provides consistency of customer experience and reduced cost for deployment while managing risk. The
authentication strategy will shape the IT strategy, and the development of strategy should cover the
following four key elements to optimize the business value derived: first, define authentication; second,
develop the authentication solutions; third, mobilize the change, and fourth, communicate the strategy.

5. Develop the IT Strategy for Holistic Decision

The first step revising the IT strategy to incorporate Customer Authentication Strategy and Analytical
Capability Requirements is considered very important. Second, banks should consider what changes would
need to be made to effect decisions based on a holistic overview of the many different aspects of a
transaction, whether such aspects involve a customer, member of staff, retailer, device or anything else.

CHAPTER NO-13

PRESENT NEW FRAUD PREVENTION CHALLENGES

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prevention
60 challenges
 Changing customer demographics

Market expansion

Adoption of new technologies and

channels

1. Changing customer demographics

Populations are aging; creating a large group that has assets but is vulnerable to attack. Whilst some
financial crime committed against the elderly is committed by strangers, this group can also be vulnerable to
exploitation by relatives and caregivers. And 2.5 million of those people were fraud victims. It is found that
many victims are unlikely to tell anyone about it, and that there is still a feeling of embarrassment related to
being scammed. Only 8% went to the police, 9% got advice from organizations such as the Citizens Advice
Bureau, and 72% did not tell friends or family about it. The research also found that the most common type
of scam people fell for was online fraud, with 34% of scams occurring via the internet. As the numbers of
people using family or other caregivers to help them manage their finances rises, banks may want to re-think
their approach to how customers identify themselves as the customer’s “team” will require access to funds in
this environment. To do this successfully, Banks would have to look at each customer as an individual and,
by extension, look at each individual transaction holistically.

2. Market expansion
Banks’ expansion into emerging markets is likely to continue as they represent circa 50 of GDP and only
30% of the global consumer banking revenue pool. However, fraud management and prevention techniques
in emerging markets are not fully mature and a rush to expand into these markets could lead to significant

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fraud losses. Know Your Customer (KYC) data in emerging markets pose specific problems for banks
seeking to limit fraud losses. In addition, international cyber-criminals will be tempted to operate in markets
where they feel fraud controls are less sophisticated and local criminals may migrate to bank fraud from
other crimes. Rapid urbanization accelerates the trend toward increased fraud, putting criminals in closer
proximity to each other and encouraging the sharing of information as well as the recruitment of allies and
accomplices. Among the top 150 cities worldwide, 116 are in emerging markets. The volume of
international payments traffic will also increase in line with growth in emerging markets, which makes it
easier for perpetrators of fraud to conceal their activities. This creates the risk of volumes overwhelming
existing (often manual) fraud controls. Large migrant communities may need transfer and payment systems
to support the flow of remittances to home countries. Indeed, remittances sent home from migrant workers
are estimated to be three times the flow of aid sent from rich countries to poorer countries. While much of
this money is used for immediate family needs, there is a significant portion available for savings and
investment and banks have targeted this market with new products
and offerings.

3. Adoption of new technologies and channels

Broad adoption of new technologies such as social media and mobile internet has created new
channels for transfers and purchases, along with numerous new opportunities for fraud. Social networks can
be used by fraudsters to secure customer data, share methodologies and recruit new accomplices. Over 600
million individuals were on Face book by early 2011, and nearly 3 billion consumers worldwide will be
global 3G subscribers by 2015. New payment channels such as mobile phones create technical risks for the
banking sector to manage. Remote banking access, presenting low personal risk, is attractive to criminals,
and attacks on remote access points are likely to continue to grow in value, speed and sophistication. The
opportunities to do so, will also grow as more people become comfortable with the digital environment and
bank online; for example, said they preferred to bank online in a recent survey, including 57% of those over
the age of 55. As the customer experience is transformed, banks should consider combining two previously
distinct functions—IT Security and Fraud Management—to address the increasingly technical nature of
fraud attacks. Clients across geographies lead us to believe that direct channels to the consumer will see
continued large-scale attacks, with criminals sharing and even jointly developing new methodologies. Banks
that are slow to adapt new protective measures may find themselves ruthlessly attacked. Customers typically
prefer to interact with their bank through their chosen channel with simple and convenient on-boarding and
ongoing identity and verification procedures. The growth of new markets and the proliferation of channels,
means that banks must explore innovations in, including biometrics, to secure both themselves and their
customers from identity and verification procedures new kinds of attack.

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 CHAPTER NO-14
CASE STUDY OF BANKING FRAUDS IN INDIA
PUNJAB NATIONAL BANK SCAM:

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On 14th February 2018, one of the biggest scams happened which shocked the entire PNB industry. Fraud
Case relates to alleged fraudulent Letter of Undertaking worth Rs. 11,600 crore (USD 1.77 billion dollars)
that took place at its branch in Brady House, Mumbai, making Punjab National Bank potentially liable for
the amount

The fraudulent transactions are allegedly linked to designer and Jeweler Nirav Modi of Firestar Diamonds,
against whom a complaint has been filed with the Central Bureau of Investigation. The transactions were
first noticed by a new employee in the bank.

The bank said that two of its employees at the branch were involved in the scam, when the bank’s core
banking system was bypassed to raise to overseas branches of other indian banks, including Allahabad Bank,
and Union Bank of India, using the international financial communication system, SWIFT.

Three Jewellers-Gitanjali Gem Ltd and its subsidiaries Gili and Nakshatra are also under the scanner of
investigation agencies.

HASSAN ALI KHAN SCAM:

Pune-based real estate consultant Hassan Ali Khan was the main accused in a case involving alleged money
laundering to the tune of $8 billion (Rs.39,210 crore), and suspected tax evasion.

The Mumbai Income-Tax department had sent him a notice demanding Rs.40,000 crore for not disclosing
funds in several foreign bank accounts, including $8 billion in an account in UBS AG, Zurich.

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HARSHAD MEHTA SCAM:

He triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in shares at a premium across
many segments.

Taking advantages of the loopholes in the banking system, Harshad and his associates triggered a securities
scam diverting funds to the tune of about Rs.5000 crore (Rs.50 billion) from the banks to stockholders
between April 1991 to May 1992.

Harshad Mehta worked with the New India Assurance Company before he moved ahead to try his luck in
the stock markets. Mehta soon mastered the tricks of the trade and set out on dangerous game plan.

Mehta has siphoned off huge sums of money from several banks and millions of investors were conned in
the process. His scam was exposed, the markets crashed and he was arrested aand banned foe life from
trading in the stock markets.

He was charged with 72 criminal offences.

As a result of this scam (Odisha and W. B), Rajya Sabha MP Kunal Ghosh (All India Trinamool Congress)
is in jail since November 2013 for interrogations.

Odisha MP Ramchandra Hansda (Biju Janata Dal) MLA Pravat Tripathy (Biju Janata Dal) and former
Odisha MLAs Subarna Naik (Biju Janata Dal) and Hitesh Kumar Bagarti (Bharatiya Janata Party) have also
been arrested for ponzi scam.

Rajya Sabha MP from West Bengal Srinjay Bose (All India Trinamool Congress) has also been arrested.
West Bengal transport minister and All India Trinamool Congress MLA Madan Mitra was also arrested.

UTI SCAM:

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Former UTI chairman P S Subramanyam and two executive directors M M Kanpur and S K Basu and
stockbroker Rakesh G Mehta, were arrested in connection with the ‘UTI Scam’.

UTI had purchased 40,000 shares of Cyberspace between September 25, 2000, and September 25, 2000
there were no buyers for the scrip. The market price was around ` 830.

The CBI said it was the conspiracy of these four people which resulted in the loss of Rs.32 crore (Rs.320
million). Subramanyam, Kapur and Basu has changed their stance on an investment advice of the equities
research cell of UTI.

The promoter of Cyberspace Infosys, Arvind Johari was arrested in connection with the case. The officials
were paid ` 50 lakh (Rs.5 million) by Cyberspace to promote its shares.

He also received Rs.1.18 crore (Rs.1108 million) from the company through a circuitous route for possible
rigging the cyberspace counter.

TELGI SCAM:

Abdul Karim Telgi had mastered the art of forgery in printing duplicate stamp papers and sold them to banks
and other institutions.

The tentacles of the fake stamp and stamp paper case had penetrated 12 states and was estimated at a
whooping Rs.2000 crore plus.

The Telgi clearly had a lot of support from government departments that were res[ponsible for the
production and sale of high security stamps.
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 CHAPTER NO-15

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 CONCLUSION

Bank frauds are done to make money by cheating the banks. There are several loopholes in banking system
that has been used by fraudsters. The number of bank frauds has been increasing year on year along with
that, RBI also engaged in making the banking system accurate and secure. IT in banking sector is much
more advanced than the traditional banking. Online transactions are widely used than the manual
transactions. Due to the frauds the profit of the company is getting affected.

Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or held by
a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial
institution. Bank frauds concern all citizens. It has become a big business today. Bank frauds are the creation
of professional criminals, desperate customers or of errant bankers or their collusion inter se.  However
the prima donna in the drama is the insider or the banker. He opens the purse. He is often the target and at
times the tool. Occasionally, he is the victim of the temptations. There are internal factors and external
factors which are responsible for banking frauds and scams. There are two categories of banking frauds i.e.
banking frauds done insiders and frauds done outsiders. There are some effects of these frauds on banks like
public loss confidence in banks, loss of bank money, it helps to increase the operating cost of banks, low
asset quality, reduced the amount of profit, creditability etc. But there are also bank rules to prevent the
banking frauds and scams. The Reserve Bank of India (RBI) has drawn up new rules for banks aimed at
preventing frauds and irregularities. Banks take actions to minimize these bank frauds. There are always new
challenges in banking sector but they are competent to deals with that challenge.

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 WEB BIBLIOGRAPHY

WEBSITES:

1. www.rbi.org

2. www.cyberfraudsources.com

3. www.canarabank.in

SEARCH ENGINES:

1. www.google.in

2. www.wikipedia.in

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