Frauds in Banking

FRAUDS IN BANKING

T.Y B.COM (BANKING AND INSURACE) – SEM V

“PROJECT ON FRAUDS IN BANKING”

Bachelor of Commerce

(Banking & Insurance)

Semester Vth

(2011-2012)

Submitted

In partial Fulfillment of the requirements

For the award of degree of

B.Com----Banking & Insurance

BY

ARORA ROBIN RUPINDER

Seat No: _________

TOLANI COLLEGE OF COMMERCE, 150-151, Sher-e- Punjab society,

Guru Gobind Singh road, Andheri (E),

Mumbai-400093.

FRAUDS IN BANKING


CERTIFICATECERTIFICATECERTIFICATECERTIFICATE

This is to certify that Mr.ARORA ROBIN RUPINDER of B.com Banking & Insurance Semester V

th (2011-2012) has

successfully completed the project on “FRAUDS IN

BANKING” Under the guidance of PROFESSOR AMIT

RAJAWAT.

Principal ____________ Course Co-ordinator_______________

Project Guide/Internal Examiner _________________

External Examiner __________

FRAUDS IN BANKING


DECLARATION

I ARORA ROBIN RUPINDER the Student of B.com Banking & Insurance Semester V

th (2011-2012) hereby declared that I have

completed the project on “FRAUDS IN BANKING”

The Information Submitted is True & Original to the Best of my

knowledge.

Signature of Student

Name of the Student

ARORA ROBIN RUPINDER

SEAT NO:

FRAUDS IN BANKING


Acknowledgement

In preparing this project, I feel great pleasure because it gives me

extensive practical knowledge in my career. I got idea about Frauds in Banking.

I express my deep sense of gratitude to My Guide PROFESSOR AMIT

RAJAWAT for his valuable guidance during my project work.

I am thankful to PROFESSOR AMIT RAJAWAT (Faculty Guide) for

valuable inspiration and guidance provided me throughout the course of this

project. He has been patient and has critically gone through the subject matter.

I would like to take this opportunity to express my gratitude towards all

who have contributed directly or indirectly to my project work.

I would firstly like to thank our principal Sir Dr. Raju Chandnani.

I would like to take this opportunity to express my gratitude to my God,

Parents that have supported me and my friends who have helped me for my

project work.

FRAUDS IN BANKING


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.

Besides, the pressure of customers and their demands are increasing in

the post-VRS scene prevailing in banks. There is comparatively less staff to do

the increased quantum of business. More work load means neglecting

systematic adherence to procedure in the routine transactions.

Motivating the staff in the lower rung by proper promotional processes

will help. A rational HRD policy has to be evolved to meet the pressing

demands of customers.

Are the Bankers concentrating on the preventive front of checking the

frauds in banking or is the traditional approach still used.

The Application of IT in Banking Frauds, and presence of banking frauds

in the finance industry and their correlation, is it an essential element of

preventive measures to be adopted by the Bankers?

FRAUDS IN BANKING


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.

FRAUDS IN BANKING


TOPIC PAGE NO

INTRODUCTION 1

DEFINITION OF FRAUD 2

CLASSIFICATION BY RESERVE BANK OF INDIA

• INTRODUCTION

• CLASSIFICATION OF FRAUDS

• REPORTING OF FRAUDS TO RESERVE BANK OF INDIA

• QUARTERLY RETURNS

• REPORTS TO THE BOARD

• RESERVE BANK OF INDIA GUIDELINES

• GUIDELINES FOR REPORTING FRAUDS TO POLICE / CBI

• REPORTING CASES

5

6

6

7

9

12

14

17

19

CLASSIFICATION BY BANKS

• FRAUDS BY INSIDERS

• FRAUDS BY OTHERS

20

20

23

REVELANT ISSUES TO TACKLE BANK FRAUDS IN INDIA

• EXPECT FRAUD

• DEVELOP A FRAUD POLICY

• ASSESS RISK

• SEGREGATE DUTIES IN CRITICAL AREAS

• MAINTAIN THE TONE OF ETHICS AT THE TOP

• REVIEW AND ENFORCE PASSWORD SECURITY

• PROMOTE THE WHISTLE BLOWING CULTURE

• CONDUCT PRE-EMPLOYMENT SCREENING

• SCREEN AND MONITOR BORROWERS

32

33

33

34

34

35

35

35

36

36

TOP BANKING FRAUDS AS PER IBN LIVE (BUSINESS)

• JEROME KERVIEL

• VATICAN’S GOD BANKERS

• NORDEA BANK FRAUD

37

37

37

37

CONTENTS

FRAUDS IN BANKING


TOPIC PAGE NO

• CITIBANK GURGAON

• ZOOM DEVELOPERS

• CHINA CONSTRUCTION BANK

• JOHN RUSNAK

• NICHOLAS LEESON

39

39

39

40

40

NEWS ARTICLES ON MODES OF FRAUDS AND FRAUDS IN

BANKING • ARTICLE FROM MONEY CONTROL (MSN)

• ARTICLE FROM JAGRAN POST

41

41

43

INFORMATION BY CANARA BANK FOR THEIR CUSTOMERS

WHILE OPERATING ACCOUNT BY E-MAIL SERVICE

45

CONCLUSION 51

BIBLIOGRAPHY 52

FRAUDS IN BANKING

1 | P a g e T.Y B.COM (BANKING AND INSURACE) – SEM V

INTRODUCTION

THE three threats which have become a major nightmare for all banks, in

general, and the public sector banks, in particular, are ballooning NPAs, high

transaction costs and a sharp increase in the incidence of bank frauds.

The rising graph of frauds does not seem to have activated any serious

effort by the banks' top management to restructure controls, improve systems

and institute better preventive measures. 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.

Broad analyses of various frauds that have taken place throw up the

following high-risk areas in committing frauds:

- Misappropriation of cash by fudging accounts.

- Unauthorized withdrawal, mostly from long dormant accounts.

- Opening of fictitious accounts to misappropriate funds from stolen

instruments.

- Use of interbank clearing for accommodation, kite-flying and

misappropriation.

- Cheating in foreign exchange transactions by flouting exchange control

provisions.

- Pawning of fake jewellery and misappropriation under jewel loans.

- Withdrawal from deposit accounts through forged documents.

- Misutilisation of credit facilities through diversion.

- Fraud in collusion with bank staff in emerging areas and services under the

computerized environment.

FRAUDS IN BANKING


Frauds take place in a financial system only when safeguards and

procedural checks are inadequate or when they are not scrupulously adhered to,

leaving the system vulnerable to the perpetrators. Anecdotal evidence shows

that whether the agency or individual committing the fraud works for the bank

or deals with it, careful planning is done by the culprit before he attacks the

system at its most vulnerable point.

The most effective defense banks could have against fraud is to

strengthen their operational practices, procedures, controls and review systems

so that all fraud-prone areas are fully sanitized against internal or external

breaches. The huge expansion in banking transactions consequent to the

transition of banks to mass banking has played a major role in creating a culture

of mechanical disposal from the level of the counter staff to the supervisors in

charge of various transactions. The culprit is invariably someone who has

transacted regularly with the bank and is closely watching to detect the soft

under-belly in various customer operations.

The Reserve Bank of India, as the regulatory body, has not lost time in

constituting an Advisory Board for banking, commercial and financial frauds.

The moot question is: To what extent has this expertise translated into

enlightened fraud-prevention measures at the public sector banks? The record

of meaningful interventionist action is not at all inspiring. The Indian Banks'

Association has been performing a very good post-office role in periodically

circulating the history and modus operandi of various frauds committed to

banks all over India. This red alert is faithfully re-copied by the head offices of

the banks and sent to their branches in various corners of the country. At the

branches and controlling offices, the circular containing the red alert is

perfunctorily looked at and promptly filed till a similar very big fraud takes

place in the same office!

FRAUDS IN BANKING


The advent of large-scale computerization in banks has opened a new

dimension to the concept of fraud and brought about a compelling need for the

wholesale review and adoption of a comprehensive fraud prevention control

system. The potential for fraud in a computerized transaction environment is

not only greater, but much more difficult to track down and, when successfully

committed, can multiply the financial losses of banks to unimaginable levels.

The recently-reported loss of Rs 100 crore to a broker in the Bombay

Stock Exchange arising from a wrong quote and a careless press of the button

underscores the manifold dangers of the electronic world. The password

controls at the operators' level, the exception controls at the supervisors' level

and the master controls at the managers' level represent critically vulnerable

points in an automated environment that have to be validated by manual

scrutiny of printed audit reports to prevent them from being hacked into or

infringed.

Preventive fraud management is, therefore, infinitely superior to post-

fraud containment or recovery of losses. Bank managements would do well to

commission their Organization and Methods Departments (all banks are

required to have an O&M department) to study

a) operational level documentation;

b) work practices;

c) working procedures;

d) accounting of transactions;

e) level and periodicity of supervisory control;

f) Post-transaction review and, most importantly, regular balancing of all

books of accounts under exclusive manual/exclusive computerized and

hybrid-manual-cum computerized working environments if the threat of

fraud is to be effectively countered.

FRAUDS IN BANKING


A large number of banking frauds also take place on account of active

employee-outsider partnerships, in which the bank staff concerned facilitate the

crime and are often its undiscovered beneficiaries. Such cases are more difficult

to track down, particularly when the area targeted for the operation is different

from that in which the guilty staff is officially working.

A not insignificant portion of NPAs is also a fallout of the unrecorded

frauds committed under credit sanctions and disbursements, where tax-payers

money is generously handed over under tax-payers money under the approved

nomenclature of sanctioning credit. Target-based credit lending, which began in

the early 1980s under the legendary loan melas, spawned this culture of

irresponsible mass lending and opened the eyes of officials of thin integrity to

the possibility of making a fast buck. This genre of fraud is committed by

taking advantage of the volume of loans and by colluding with the borrower,

whereby rapid sanction of limits is done, sanctioned amounts are enhanced and

disbursement/monitoring requirements grossly violated. The widespread

availability of professionally-constructed project reports and computerized cash

flows give the credit proposals an acceptable flavor, making the sanctioning

authority immune to any roving enquiry.

The dividing line between operational neglect and the perpetration of a

fraud is rather thin, considering the growing aspiration for effortless money

which is always sweet, because it is not hard-earned but belongs to the sweating

tax-payer. If financial systems and their large financial resources, drawn from

public money, are to be protected, the occurrence of fraud -- big and small --

has to be stamped out. What is needed is not another piece of complex

legislation or another high-powered expert body of the RBI, but analysis and

concerted application of controls by bank managements and their operational

staff.

FRAUDS IN BANKING


DEFINITION OF FRAUD

A Fraud is:

• A representation (usually of fact)

• About a material point (important enough to make a difference)

• which is False as Truth or Correct

• Intentionally and knowingly so (some cases recklessly)

• Which is believed

• Acted upon by the victim

• Caused Damage (Financially or otherwise)

Regulator of Banks in INDIA is RESERVE BANK OF INDIA

Responsibility of regulators for prevention and detection of fraud has

increased.

Role of Regulators should be

• Understand the need for creation / modification of laws to curb /

eliminate opportunities for scams / frauds based on the study of global

scenario

• Ensure appropriate powers to law enforcement agencies

• Provide facility for 2/3 levels of appeal before any one approach the

judiciary

• Ensure time bound completion for the cases / designating case officer

• Announce very severe punishment for committing the crime

• Introduction of Compulsory Operations Audit on a periodical basis.

FRAUDS IN BANKING


CLASSIFICATION BY RESERVE BANK OF INDIA

INTRODUCTION

1. Incidence of frauds, dacoities, robberies, etc., in banks is a matter of

concern. While the primary responsibility for preventing frauds lies with

banks themselves, the Reserve Bank of India has been advising banks from

time to time about the major fraud prone areas and the safeguards necessary

for prevention of frauds. The Reserve Bank has also been circulating to banks,

the details of frauds of an ingenious nature not reported earlier so that banks

could introduce necessary safeguards by way of appropriate procedures and

internal checks. Banks are also being advised about the details of

unscrupulous borrowers and related parties who have perpetrated frauds on

banks so that banks could exercise caution while dealing with them. To

facilitate this ongoing process, it is essential that banks report to the Reserve

Bank full information about frauds and the follow-up action taken thereon.

Banks may, therefore, adopt the reporting system for frauds.

2. It has been observed that frauds are, at times, detected in banks long after

their perpetration. The fraud reports are also submitted to the Reserve Bank,

many a time, with considerable delay and without the required information.

On certain occasions, the Reserve Bank comes to know about frauds involving

large amounts only through press reports. Banks should, therefore, ensure that

the reporting system is suitably streamlined so that frauds are reported without

any delay. Banks must fix staff accountability in respect of delays in reporting

fraud cases to the Reserve Bank.

3. Delay in reporting of frauds and the consequent delay in alerting other

banks about the modus operandi and issue of caution advices against

FRAUDS IN BANKING


unscrupulous borrowers could result in similar frauds being perpetrated

elsewhere. Banks may, therefore, strictly adhere to the timeframe fixed in this

circular for reporting fraud cases to the Reserve Bank failing which banks

would be liable for penal action as prescribed under Section 47(A) of the

Banking Regulation Act, 1949.

4. Banks should specifically nominate an official of the rank of General

Manager who will be responsible for submitting all the returns referred to in

this circular.

CLASSIFICATION OF FRAUDS

1. In order to have uniformity in reporting, frauds have been classified as

under based mainly on the provisions of the Indian Penal Code:

a. Misappropriation and criminal breach of trust.

b. Fraudulent encashment through forged instruments, manipulation

of books of account or through fictitious accounts and conversion

of property.

c. Unauthorized credit facilities extended for reward or for illegal

gratification.

d. Negligence and cash shortages.

e. Cheating and forgery.

f. Irregularities in foreign exchange transactions.

g. Any other type of fraud not coming under the specific heads as

above.

FRAUDS IN BANKING


2. Cases of negligence and cash shortages' referred to in item (d) above are

to be reported as fraud if the intention to cheat/defraud is

suspected/proved. Cases of cash shortage up to Rs. 1,000/- reported on

the same day by persons handling the cash and where there is no

suspicion of fraud need not be reported as fraud. However, cases of cash

shortage involving more than Rs. 1,000/- and those detected by the

management/ inspecting officer, irrespective of the amount, may be

reported as fraud.

3. To ensure uniformity and to avoid duplication, frauds involving

negotiable instruments may be reported only by the paying banker and

not by the collecting banker.

4. Banks (other than foreign banks) having overseas branches/offices should

report all frauds perpetrated at such branches/offices also to the Reserve

Bank as per the format and procedure.

5. Cases of theft, burglary, dacoity and robbery should not be reported as

fraud. Such cases may be reported separately.

FRAUDS IN BANKING


REPORTING OF FRAUDS TO RESERVE BANK OF INDIA

1. Frauds involving Rs. 1 lakh and above

a. Fraud reports should be submitted in all cases of fraud of Rs. 1 lakh

and above where banks have been put to loss through

misrepresentation, breach of trust, manipulation of books of account,

fraudulent encashment of instruments like cheques, drafts and bills of

exchange, unauthorised handling of securities charged to the bank,

misfeasance, embezzlement, misappropriation of funds, conversion of

property, cheating, shortages, irregularities, etc.

b. Fraud reports should also be submitted in cases where central

investigating agencies have initiated criminal proceedings and/or

where the Reserve Bank has directed that they be reported as frauds.

c. Wherever information is available, banks may also report frauds

perpetrated in their subsidiaries and affiliates/joint ventures. Such

frauds should, however, not be included in the report on outstanding

frauds and the quarterly progress reports

d. The fraud reports should be sent to the concerned Regional Office of

the Reserve Bank, Department of Banking Supervision, under whose

jurisdiction the Head Office of the bank falls, in the format given in

FMR – 1, within three weeks from the date of detection.

FRAUDS IN BANKING


2. Frauds committed by unscrupulous borrowers

a. It is observed that a large number of frauds are committed by

unscrupulous borrowers including companies, partnership

firms/proprietary concerns and/or their directors/partners by various

methods including the following:

- Fraudulent discount of instruments or kite flying in clearing effects.

- Fraudulent removal of pledged stocks/disposing of hypothecated

stocks without the bank’s knowledge/inflating the value of stocks in

the stock statement and drawing excess bank finance.

- Diversion of funds outside the borrowing units, lack of interest or

criminal neglect on the part of borrowers, their partners, etc. and also

due to managerial failure leading to the unit becoming sick and due to

laxity in effective supervision over the operations in borrowal

accounts on the part of the bank functionaries rendering the advance

difficult of recovery.

b. In respect of frauds in borrowable accounts involving an amount of

Rs. 5 lakh and above, additional information as prescribed under Part

B of FMR – 1 may also be furnished. In such cases, a copy of the

above fraud report should also be forwarded separately to the Central

Office of the Reserve Bank, Department of Banking Supervision.

FRAUDS IN BANKING


3. Frauds involving Rs. 100 lakh and above

a. In respect of frauds involving Rs. 100 lakh and above, in addition to

the requirements given at paragraphs 3.1 and 3.2 above, banks may

report the fraud by means of a D.O. letter addressed to the Chief

General Manager in charge of the Department of Banking

Supervision, Reserve Bank of India, Central Office, within a week of

such frauds coming to the notice of the bank’s Head Office. The letter

may contain brief particulars of the fraud such as amount involved,

nature of fraud, modus operandi in brief, name of the branch/office,

names of parties involved (if they are proprietorship/ partnership

concerns or private limited companies, the names of proprietors,

partners and directors), names of officials involved, and whether the

complaint has been lodged with the Police/CBI.

b. A copy each of the fraud report should also be sent directly to the

Central Office of the Reserve Bank, Department of Banking

Supervision, and to the Regional Office of the Reserve Bank under

whose jurisdiction the bank’s branch, where the fraud has been

perpetrated, is functioning.

4. Cases of attempted fraud

Cases of attempted fraud, where the likely loss would have been

Rs. 100 lakh or more, if the fraud had taken place, should be reported to

the Central Office of the Reserve Bank, Department of Banking

Supervision, indicating the modus operandi and how the fraud was

detected. Such cases should not be included in the other returns to be

submitted to the Reserve Bank.

FRAUDS IN BANKING


Quarterly Returns

A. Report on Frauds Outstanding

a. Banks should submit a copy each of the Quarterly Report on Frauds

Outstanding in the format given in FMR – 2 to the Central Office and the

Regional Office of the Reserve Bank under whose jurisdiction the Head

Office of the bank falls within 15 days of the end of the quarter to which

it relates. Banks which may not be having any fraud outstanding as at the

end of a quarter should submit a nil report.

b. Part – A of the report covers details of frauds outstanding as at the end of

the quarter. Parts B and C of the report give category-wise and

perpetrator-wise details of frauds reported during the quarter respectively.

The total number and amount of fraud cases reported during the quarter

as shown in Parts B and C should tally with the totals of columns 4 and 5

in Part – A of the report.

c. Banks should furnish a certificate, as part of the above report, to the

effect that all individual fraud cases of Rs. 1 lakh and above reported to

the Reserve Bank in FMR – 1 during the quarter have also been put up to

the bank’s Board and have been incorporated in Part – A (columns 4 and

5) and Parts B and C of FMR – 2.

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B. Progress Report on Large Value Frauds

1. Banks should furnish case-wise quarterly progress reports on frauds

involving Rs. 100 lakh and above in the format given in FMR – 3 directly

to the Central Office of the Reserve Bank, Department of Banking

Supervision, within 15 days of the end of the quarter to which it relates.

2. In the case of frauds where there are no developments during a quarter, a

list of such cases with a brief description including name of branch and

date of reporting may be furnished in Part – B of FMR – 3.

Banks which do not have any fraud involving Rs. 100 lakh and above

outstanding may submit a nil report.

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Reports to the board

1. Reporting of Frauds

1. Banks should ensure that all frauds of Rs. 1 lakh and above are reported

to their Boards promptly on their detection.

2. Such reports should, among other things, take note of the failure on the

part of the concerned branch officials and controlling authorities, and

consider initiation of appropriate action against the officials responsible

for the fraud.

2. Quarterly Review of Frauds

1. Information relating to frauds for the quarters ending March, June and

September may be placed before the Board of Directors/Executive

Committee/Local Advisory Board during the month following the quarter

to which it pertains, irrespective of whether or not these are required to

be placed before the Board/Management Committee in terms of the

Calendar of Reviews prescribed by the Reserve Bank.

2. These should be accompanied by supplementary material analysing

statistical information and details of each fraud so that the

Board/Committee/Local Advisory Board would have adequate material

to contribute effectively in regard to the punitive or preventive aspects of

frauds.

3. A separate review for the quarter ending December is not required in

view of the Annual Review for the year-ending December prescribed

below.

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3. Annual Review of Frauds

1. Banks should conduct an annual review of the frauds and place a note

before the Board of Directors/Local Advisory Board for information. The

reviews for the year-ended December may be put up to the Board before

the end of March the following year. Such review notes may be

preserved for verification by the Reserve Bank’s inspecting officers.

2. The main aspects which may be taken into account while making such a

review may include the following:

a. Whether the systems in the bank are adequate to detect frauds, once

they have taken place, within the shortest possible time.

b. Whether frauds are examined from staff angle and, wherever

necessary, the cases are reported to the Vigilance Cell for further

action in the case of public sector banks.

c. Whether deterrent punishment is meted out, wherever warranted, to

the persons found responsible.

d. Whether frauds have taken place because of laxity in following the

systems and procedures and, if so, whether effective action has been

taken to ensure that the systems and procedures are scrupulously

followed by the staff concerned.

e. Whether frauds are reported to local Police or CBI, as the case may

be, for investigation, as per the guidelines issued in this regard to

public sector banks by Government of India.

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3. The annual reviews should also, among other things, include the

following details:

a. Total number of frauds detected during the year and the amount

involved as compared to the previous two years.

b. Analysis of frauds according to different categories detailed in

Paragraph 2.1 and also the different business areas indicated in the

Quarterly Report on Frauds Outstanding (vide FMR – 2).

c. Modus operandi of major frauds reported during the year along with

their present position.

d. Detailed analyses of frauds of Rs. 1 lakh and above.

e. Estimated loss to the bank during the year on account of frauds,

amount recovered and provisions made.

f. Number of cases (with amounts) where staff are involved and the

action taken against staff.

g. Region-wise/Zone-wise/State-wise break-up of frauds and amount

involved.

h. Time taken to detect frauds (number of cases detected within three

months, six months and one year of their taking place).

i. Position with regard to frauds reported to CBI/Police.

j. Number of frauds where final action has been taken by the bank and

cases disposed.

k. Preventive/punitive steps taken by the bank during the year to

reduce/minimise the incidence of frauds.

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Reserve Bank of India Guidelines

Supervisory Process

A high powered Board of Financial Supervision (BFS), comprising the

Governor of RBI as Chairman, one Deputy Governor as Vice Chairman, other

Deputy Governors and four Directors f the Central Board of RBI as members

were constituted in November 1994 with the mandate to exercise the power of

supervision and inspection in relation to the banking companies, financial

institutions and non-banking financial companies. Presently, BFS exercises

supervision not only over banks but also over selected Developmental Financial

Institutions (DFI’s), Non –Banking Financial Companies (NBFC’s), Primary

Dealers (PD’s), and Urban Cooperative Banks (UCB’s).

Supervisory Strategy

The Department of Banking Supervision has formulated and put in place a

supervisory strategy which, besides retaining the importance of on-site

inspections which has been the main plank of banking supervision, also focuses

on three other areas:

(1) off-site monitoring through introduction of a set of returns

(2) strengthening of the internal control systems in banks

(3) increased use of external auditors in banking supervision

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Guidelines for reporting frauds to Police/CBI

1. Private sector banks should follow the following guidelines for reporting of

frauds such as unauthorised credit facilities extended by the bank for illegal

gratification, negligence and cash shortages, cheating, forgery, etc. to the

State Police authorities:

a. In dealing with cases of fraud/embezzlement, banks should not merely be

actuated by the necessity of recovering expeditiously the amount

involved, but should also be motivated by public interest and the need for

ensuring that the guilty persons do not go unpunished.

b. Therefore, as a general rule, the following cases should invariably be

referred to the State Police:

i. Cases of fraud involving an amount of Rs. 1 lakh and above,

committed by outsiders on their own and/or with the connivance of

bank staff/officers.

ii. Cases of fraud committed by bank employees, when it involves bank

funds exceeding Rs. 10,000/-.

2. Public sector banks should note that, as a general rule, all the cases of fraud,

whether committed by outsiders on their own or with the connivance of bank

officials and cases of fraud committed by bank officials themselves, should

invariably be reported to the investigating agencies or criminal cases filed

with Courts where appropriate, immediately after the bank has concluded

that a fraud has been perpetrated.

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Reporting Cases of Theft, Burglary, Dacoity and Bank Robberies

1. Banks should arrange to report instances of bank robberies, dacoities, thefts

and burglaries to the following authorities immediately on their occurrence

by fax/telegram. The report should include details of modus operandi and

other information as at columns 1 to 10 of FMR – 4.

a. Reserve Bank of India, Department of Banking Supervision, Central

Office, Mumbai.

b. The concerned Regional Office of the Department of Banking

Supervision, Reserve Bank of India, under whose jurisdiction the

affected bank branch is located.

c. The Security Adviser, Central Security Cell, Reserve Bank of India,

Central Office Building, Mumbai – 400001.

d. Ministry of Finance, Department of Economic Affairs, (Banking

Division), Government of India, New Delhi.

2. Banks should also submit to the Reserve Bank, Department of Banking

Supervision, Central Office, a quarterly consolidated statement in the format

given in FMR – 4 covering all cases pertaining to the quarter. This may be

submitted within 15 days of the end of the quarter to which it relates.

3. Banks which do not have any instances of theft, burglary, dacoity and/or

robbery to report during the quarter, may submit a nil report.

FRAUDS IN BANKING


CLASSIFICATION BY BANKS

Fraud by insiders

Rogue traders

A rogue trader is a highly placed insider nominally authorised 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 dollars; there have even

been cases in which a bank goes out of business due to market investment

losses.

Some of the largest bank frauds ever detected were perpetrated by

currency traders John Rusnak and Nick Leeson.

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.

FRAUDS IN BANKING


Wire fraud

Wire transfer networks such as the international SWIFT 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.

Forged or fraudulent documents

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.

Theft of identity

Dishonest bank personnel have been known to disclose depositors'

personal information for use in theft of identity frauds. The perpetrators then

use the information to obtain identity cards and credit cards using the victim's

name and personal information.

FRAUDS IN BANKING


Demand draft fraud

Demand draft fraud is usually done by one or more dishonest bank

employees. 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.

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 of 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

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.

FRAUDS IN BANKING


Fraud by others

Forgery and altered cheques

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

cheques intended for payment to 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.

Stolen cheques

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 chequebooks are also of value to forgers who then sign as if they

were the depositor.

FRAUDS IN BANKING


Accounting fraud

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.

Accounting fraud has also been used to conceal other theft taking place

within a company.

Payment card fraud

Credit card fraud is widespread as a means of stealing from banks,

merchants and clients.

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.

FRAUDS IN BANKING


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.

But what of the securities themselves? Perfectly good and worth the full

amount.

The transaction accomplished nothing except to disguise the original

source of the funds.

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.

FRAUDS IN BANKING


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.

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.

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

FRAUDS IN BANKING


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 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.

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 Parmalat, leaving banks exposed to massive losses

from bad loans.

Prime bank fraud

The "prime bank" operation which claims to offer an urgent, exclusive

opportunity to cash in on the best-kept secret in the banking industry,

guaranteed deposits in "prime banks", "constitutional banks", "bank notes and

FRAUDS IN BANKING


bank-issued debentures from top 500 world banks", "bank guarantees and

standby letters of credit" which generate spectacular returns at no risk and are

"endorsed by the World Bank" or various national governments and central

bankers sounds too good to be true?

It is too good to be true.

These official-sounding phrases and more are the hallmark of the so-

called "prime bank" fraud; they may sound great on paper, but the guaranteed

offshore investment with the vague claims of an easy 100% monthly return

simply does not exist... these are all fictitious financial instruments and your

money is gone forever.

The fictitious 'bank inspector'

This is an old scam with a number of variants; the original scheme

involved claiming to be a bank inspector, claiming that the bank suspects that

one of its employees is stealing money and that to help catch the culprit the

"bank inspector" needs the depositor to withdraw all of his or her money. At

this point, the victim would be carrying a large amount of cash and can be

targeted for the theft of these funds.

Other variants included claiming to be a prospective business partner

with "the opportunity of a lifetime" then asking for access to cash "to prove that

you trust me" or even claiming to be a new immigrant who carries all their

money in cash for fear that the banks will steal it from them - if told by others

that they keep their money in banks, they then ask the depositor to withdraw it

to prove the bank hasn't stolen it.

FRAUDS IN BANKING


Impersonation of officials has more recently become a way of stealing personal

information for use in theft of identity frauds.

Phishing and Internet fraud

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" programmes have also been used

to snoop on Internet users while online, capturing keystrokes or confidential

data in order to send it to outside sites.

Counterfeit Cheques.... a Criminal Offence.

Counterfeit cheques are becoming a huge problem for the Banking

Industry because of the sheer numbers that are deposited into accounts and

because of the naiveté and greed of Individuals who are account holders.

Many counterfeit cheques are made to look like authentic Company

cheques and are drawn on accounts of legitimate Companies; these counterfeits

in most instances come from Organized Crime and willing participants are

recruited to deposit these cheques into their own accounts for a commission.

The participants are usually substance abusers, fraudsters and naïve and/or

greedy people who think that this is an easy way to make money. In some

instances Individuals are not told that the cheque is counterfeit, and in most

instances they don't even know who gave them the cheque.

FRAUDS IN BANKING


Many of the counterfeit scams are run by Organized Crime and they

manage to convince Individuals that the mother lode has just fallen into their

lap..."yes we will give you a huge commission for doing nothing", etc. They

neglect to mention that you will be the fall guy when the Police come knocking

because it's your account which was used to commit the fraud.

Whatever the circumstance, counterfeit cheques are leaving their mark on

Financial Institutions because one cheque can result in a write-off worth tens of

thousands of dollars. There are literally thousands of counterfeit cheques that

are deposited into Customers' accounts at Financial Institutions every day

resulting in substantial losses when the Customer is unable to make restitution

when the funds have been withdrawn.

The consequences for a naive or greedy person depositing a counterfeit

cheque to his/her account can be devastating as they will be on the hook for the

chargeback and will also have to convince local Police Authorities that they did

not have the intent to commit fraud.

Forging signatures and altering cheques.... is a Criminal Offence.

Company cheques, personal information, credit card applications and

many other items which criminals use to commit fraud are stolen from remote

mailboxes and apartment mailboxes every day. The payee name is changed on

the cheque and the dollar amount is raised substantially. These cheques are

deposited via bank machine and a bank employee is not able to inspect them.

When they are deposited over the counter, the bank employee may be too busy

to notice that anything is wrong with the cheque.

FRAUDS IN BANKING


Many of these fraudsters are even so bold as to use their own name. The

money is usually gone before the bank is notified that the cheque has been

altered. Someone has to pay, either the fraudster or the bank, depending on the

circumstances. And in most cases the bank will end up absorbing the loss

because the fraudster has no money.

Sometimes naïve and/or greedy Individuals are recruited to deposit these

items into his/her account with promises of a huge commission. There are

consequences, and even though you may plead your innocence it will affect you

in some way. You will have to pay the money back, your credit history may be

affected, and your explanation may or may not be believed. After all, you can

only be so naïve, and either your credibility or your intelligence will be

questioned, having a negative impact on some aspects of your life. i.e. family,

job, friends, future employment if it results in criminal charges or bad credit

history, etc. etc. The list is endless.

What you have just read are the most common types of fraud that are

perpetrated against Financial Institutions on a daily basis, and account for a

significant loss for them. Awareness and education are key elements to

prevention.

Suffice it to say that having a criminal record and a bad credit history is

like an anchor around your neck which will hamper family life, career

opportunities, bank loans and travel outside the Country, among many other

repercussions.

FRAUDS IN BANKING


Relevant Issues to tackle Bank Frauds in India

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.

Broad analyses of various frauds that have taken place throw up the

following high-risk areas in committing frauds:

o Misappropriation of cash by fudging accounts.

o Unauthorized withdrawal or transfers of funds, mostly from long dormant

accounts.

o Opening of fictitious accounts to misappropriate funds from illegal

activities i.e. Laundering through the fictitious accounts

o Use of interbank clearing for accommodation, kite-flying and

misappropriation.

o Cheating in foreign exchange transactions by flouting exchange control

provisions.

o Withdrawal from deposit accounts through forged documents.

Fraud in collusion with bank staff in emerging areas and services under

the computerized environment. Frauds take place in a financial system only

when safeguards and procedural checks are inadequate or when they are not

scrupulously adhered to, leaving the system vulnerable to the perpetrators.

Anecdotal evidence shows that whether the agency or individual committing

the fraud works for the bank or deals with it, careful planning is done by the

culprit before he attacks the system at its most vulnerable point.

The most effective defense banks could have against fraud is to

strengthen their operational practices, procedures, controls and review systems

FRAUDS IN BANKING


so that all fraud-prone areas are fully sanitized against internal or external

breaches. However, the huge expansion in banking transactions consequent to

the transition of banks to mass banking and the large scale computerization

have played a major role in the perpetration of the frauds. Hence mere reliance

on the internal controls is of no use. The tenfold”INDIA FORENSIC” approach

to tackle the bank fraud will definitely play a crucial role in coming days.

Expect fraud:

Nowhere in the world the fraud can be avoided hence can the banks be no

exceptions. It is a human tendency of taking the risk to commit the frauds if he

finds suitable opportunities. So it is wise to expect the occurrence of the fraud.

If the fraud is expected, efforts can be concentrated on the areas, which are

fraud prone. Fraud is the game of two. The rule makers and rule breakers.

Whoever is strong in the anticipation of the situations wins the game of frauds.

Fraud is a phenomenon, which cannot be eliminated, but it needs to be

managed.

Develop a fraud policy:

The policy should be written and distributed to all employees, Borrowers

and depositors. This gives a moral tension to the potential Fraudster. Maintain a

zero tolerance for violations. The Indian bank needs to roar against the action

that is taken against the Fraudsters. The media publicity against the fraudsters at

all the levels is necessary. The announcement by US president George W. Bush

that the “Corporate crooks will not be spared” gave the deep impact to the

Corporate America. In India also we need to consider it as a severe problem and

need to fight against it.

FRAUDS IN BANKING


Assess Risk:

Look at the ways fraud can happen in the organization. It is very

important to study the trend and the style of frauds in the bank. Some of the big

nationalized banks maintain the databases of the fraud cases reported in their

banks. But the databases are dumb. They yield nothing unless they are analyzed

effectively. Establish regular fraud-detection procedures. It could be in the form

of internal audit or it could also be in the form of inspections. These procedures

alone discourage employees from committing fraud. In addition to this the

Institute of Chartered Accountants of India has issued a “Accounting and

Assurance standard on internal controls which is a real guideline to test internal

controls. Controls break down because people affect them, and because

circumstances change.

Segregate duties in critical areas:

It is the absolutely basic principle of auditing a single person should not

have the control of the books of accounts and the physical asset. Because this is

the scenario which tempts the employee to commit the fraud. Hence it becomes

essential to see that no one employee should be able to initiate and complete a

critical transaction without involving someone else.

Most of the banks in India have the well-defined authorization

procedures. The allocation of the sanctioning limits is also observed in most of

the cases. But still the bankers violate the authorities very easily. They just need

to collude with the outside parties. However the detection of the collusions is

possible in most of the cases if the higher authorities are willing to dig the

frauds.

FRAUDS IN BANKING


Maintain the tone of Ethics at the top:

The subordinates have the tendency to follow their superiors. When the

signals are passed on to the middle management about the unethical behavior of

the top management the fear of punishment gets reduced and the tendency of

following the superior dominates. Fear vanishes when the tendency of “If I have

to die I’ll take along the superior and die” tendency rises.

Review and enforce password security:

The incidences of hacking and the Phishing have troubled the Indian

Private sector banks to a great extent. In addition to this most of the Indian

banks are running behind the ATM and credit cards to compete with each other

but have conveniently forgone the fact that ATM cards and the credit cards are

the best tools available in the hands of the fraudsters. Inappropriate system

access makes it possible to steal large amounts of money very quickly and, in

many cases, without detection. Hence the review and the enforcement of the

security policy is going to be a crucial.

Promote the Whistle blowing Culture:

Many of the surveys on Frauds have shown that the frauds are unearthed

by the “TIPS” from insider or may be from outsiders. Internal audits and

internal controls come much later. The message about contacting the vigilance

officers is flashed in most of the branch premises. However the ethics lines are

very rarely seen. The ethics lines are the help lines to the employees or the well-

wishers of the bank which tells them whether a particular activity constitutes a

fraud or not.

FRAUDS IN BANKING


Conduct pre-employment screening:

Since the raw material of the Banks is cash the banker needs to be more

alert than any other employer before they recruit. Only testing the aptitude of a

person is not of any use. Know whom you are hiring. More than 20 percent of

resumes contain false statements. Most employers will only confirm dates of

employment. Sometimes post employment condition might create the greed in

the minds of employee, hence at least the bankers should test check the

characters of their subordinates by creating real life scenarios such as offering

the bribes by calling on some dummy borrower.

Screen and monitor Borrowers:

Bad borrowers cause the biggest losses to the banks. What are they? Who

they represent themselves to be? Look at their ownership, clients, references,

and litigation history. In many cases the potential fraudsters have history of

defaulting in some other bank or Financial Institution.

Though this is not the foolproof solution to the disease of the frauds to

some extent it helps to combat the frauds.

FRAUDS IN BANKING


TOP BANKING FRAUDS AS PER IBN LIVE (BUSINESS)

Business

1. Jerome Kerviel

Jerome Kerviel is a French trader who was convicted in 2008 for causing

trading loss, breach of trust, forgery and unauthorized use of bank Societe

Generale's computers, resulting in losses valued at 4.9 billion pounds. The bank

said Kerviel was a rogue trader and claimed he worked these trades alone, and

without its authorization, assertions that have been met with skepticism from

expert commentators and analysts alike.

Kerviel had told investigators that such practices are widespread and that

getting a profit makes the hierarchy turn a blind eye. Kerviel published a book

in May 2010, in which he alleges that his superiors knew of his trading

activities, and that the practice was very common.

2. Vatican's God Bankers

Roberto Calvi was the chairman of Italy's second largest private bank, Banco

Ambrosiano when it went bankrupt in 1982. A financial advisor to the Vatican,

Calvi headed the Banco Ambrosiano, which collapsed in one of Italy's largest

fraud cases following the disappearance of $1.3 billion in loans the bank had

made to dummy companies in Latin America.

The Vatican had provided letters of credit for the loan. After the collapse in

1982, Calvi suddenly disappeared from Italy. He was found a short time later

hanging from scaffolding on Blackfriar's Bridge, his suit pockets loaded with 11

pounds of bricks and $11,700 in various currencies stuffed in his pocket.

FRAUDS IN BANKING


London investigators first ruled that Calvi committed suicide, but his family

pressed for further investigation. Eventually murder charges were filed against

five people, including a major Mafia figure, but they were all acquitted after a

trial in 2007. While denying any wrongdoing, the Vatican bank agreed to pay

$250 million to Ambrosiano's creditors.

In past decades, two Vatican financial advisers died in the strangest of

circumstances. The scandals blackened the bank's reputation, raised suspicions

of ties with the Mafia, and cost the Vatican hundreds of millions of dollars in

legal clashes with Italian authorities. Now the bank is back under harsh scrutiny

- in a case involving money laundering allegations that caused police to seize

$30 million in Vatican assets.

3. Nordea Bank Fraud

Internet fraudsters stole around ($1.1m; £576,000) from account holders at

Swedish bank Nordea. The theft, described by Swedish media as the world's

biggest online fraud, took place over three months. The criminals siphoned

money from customers' accounts after obtaining login details using a malicious

program that claimed to be anti-spam software.

Nordea said it had now refunded the lost money to all 250 customers affected

by the scam. Police have said they suspect organised criminals from Russia

used a Trojan (a programme that installs malware on computers), affecting

more than 250 customers, leaving a log of information sent to servers in Russia.

The attack started when the trojan sent in the name of the bank to the bank’s

clients. The sender encouraged clients to download a spam fighting application.

Users who downloaded the attached file raking.zip or raking.exe were infected

by the trojan haxdoor.ki.

FRAUDS IN BANKING


4. Citibank Gurgaon

A banking fraud which could run into a whopping Rs 400 crore was unearthed

at Citibank's Gurgaon (Haryana) branch. Funds amounting to Rs 400 crore of

20 high networth customers was allegedly siphoned off by bank executive

Shivraj Puri.

Puri is accused of selling investment products to high networth clients claiming

that they would generate unusually high returns. It is also alleged that Puri, who

is named in the FIR, showed a forged notification of market regulator Securities

and Exchange Board of India for obtaining funds from customers. He is also

accused of claiming that these products were authorised by the bank's

investment product committee.

5. Zoom Developers

Termed as one of the largest banking scams in India, the CBI is investigating

the disbursement by 27 banks to Zoom Developers. The ministry of finance has

questioned Punjab National Bank, who is the lead banker to Zoom Developers.

Nearly 27 Indian banks, with a majority of public sector banks have lent close

to Rs 2,700 crore to Zoom Developers. This debt has been admitted in the

corporate debt restructuring cell.

6. China Construction Bank

China executed bankers Wang Liming and Miao Ping for fraudulent activity in

2004. Wang Liming, a former accounting officer with the China Construction

Bank in Henan, stole 20 million yuan ($ 2.4 million) from the bank using

fraudulent papers. Miao Ping was an accomplice in the same case.

FRAUDS IN BANKING


7. John Rusnak

John Rusnak was a former currency trader at Allfirst bank, then part of AIB

Group, in Baltimore, MD, United States. In 2003 he was sentenced to seven and

half years in prison for hiding USD 691 million in losses at the bank, after bad

bets snowballed in one of the largest ever cases of bank fraud.

He was transferred from prison to a halfway house in June 2008, to home

confinement in September 2008, and ultimately released from home

confinement on January 5, 2009, serving just less than 6 years.

8. Nicholas Leeson

Nicholas Leeson is a former derivatives broker whose fraudulent, unauthorized

speculative trading caused the collapse of Barings Bank, the United Kingdom's

oldest investment bank, for which he was sent to prison.

T.Y B.COM (BANKING AND


BANKING

Article from the Money Central (MSN)

MONEY

Bank Fraud? There’s an app for that

Mobile banking once entailed little beyond the ability to receive a text message

with your account balance. But these days, it's finally starting to live up to its

name. Virtually every large bank and many regional banks and credit unions

have rolled out applications that allow their clients to use a mobile phone for

fund transfers, bill payments and even check deposits.

But with the increasing popularity and convenience of

comes a big caveat: the risk of downloading and installing a fraudulent

application that could steal your account information and, potentially, any other

data stored on your mobile device. In other words, the next generation

of phishing scams is about to explode, and it has the potential to do much more

damage than earlier versions.

The trend is still in its infancy, but there have already been instances of

potential fraud. In January, Google

Market in response to concerns that they might be malicious. All apps were

uploaded by the same developer and claimed to offer access to bank accounts

from a variety of institutions, from big names such as JPMorgan Chase, HSBC,

U.S. Bank, USAA and ING to local

FRAUDS IN BANKING

D INSURACE) – SEM V


Article from the Money Central (MSN)

MONEY

Bank Fraud? There’s an app for that

once entailed little beyond the ability to receive a text message


every large bank and many regional banks and credit unions


fund transfers, bill payments and even check deposits.

But with the increasing popularity and convenience of mobile




scams is about to explode, and it has the potential to do much more

damage than earlier versions.


potential fraud. In January, Google pulled 50 applications from its

in response to concerns that they might be malicious. All apps were



U.S. Bank, USAA and ING to local credit unions.

FRAUDS IN BANKING

41 | P a g e


once entailed little beyond the ability to receive a text message


every large bank and many regional banks and credit unions


mobile-banking apps




scams is about to explode, and it has the potential to do much more


from its Android

in response to concerns that they might be malicious. All apps were



FRAUDS IN BANKING


"Smart phones are extremely prolific right now, and there is opportunity there

for criminals to be seeding stores with applications intended to capture personal

information," says Nick Holland, a senior analyst at Aite Group, a market

research firm. "We're on the tip of an explosion in terms of bad apps."

Even more worrisome, fraudulent apps may be more difficult to spot than were

the fake Web sites used by phishing scammers. An unusual Web address, or

URL, could easily flag a Web site as fake, but that's not the case with smart-

phone applications. And the fact that an application is available through an app

store gives it an aura of credibility, Holland says.

Google declined to comment on the incident, and it isn't known just how many

consumers have downloaded those apps. Scott Moeller, the chief executive

officer of mShift, a company that develops applications for about 200 banks and

credit unions, estimates that number to be below 1,000. (At least one of mShift's

clients was among the affected institutions.)

The apps were priced in U.K. pounds (at 0.99 each, or about $1.50), which must

have kept U.S. consumers at bay, Moeller says. That would probably not have

been the case if they had been free or priced in U.S. dollars.

"There's a yearning for mobile applications," Moeller says. "You could put out

50 apps at once, and people would start downloading them immediately."

FRAUDS IN BANKING


The issue has already gotten the attention of banks' fraud departments, which

are charged with monitoring for such incidents and warning customers. And it

works both ways: Sometimes it's customers who flag potential fraud. Paul

Berry, a spokesman for USAA, says the bank found out about the December

2009 Android incident "almost immediately" from a bank member.

"We have a fraud department that covers the vast range of banking fraud and

insurance fraud -- and we have members who'll call us and let us know," he

says.

Companies that own the application marketplaces say they, too, are on the

watch for fraudulent apps. At Apple, the policy is to vet each application before

it appears in the App Store. But no system is foolproof. For example, there are

apps for so-called jail-broken iPhones, which are unlocked in order to allow the

use of other networks besides AT&T or to download applications sold on third-

party marketplaces. The practice makes the compromised phones more prone to

fraud. Apple spokeswoman Trudy Muller says the company takes security

"very seriously and has a great track record of addressing potential

vulnerabilities before they can affect users."

FRAUDS IN BANKING


Article from the Jagran Post.

Banks lost Rs 2,017 crore in fraud in 2009-10: CBI

New Delhi: Country’s banking sector lost over Rs 2000 crore in frauds during

2009-10 with more than 200 of these incidents involving cheating of above one

crore each, according to CBI Director A P Singh.

The CBI chief has warned the banks of latest trends emerging in banking frauds

in areas like electronic payments, technology-related payments like RTGS,

credit cards, ATM, cell banking, internet banking among others.

"Banking Sector has lost as much as Rs 1,883 crore and Rs 2,017 crore during

2008-09 and 2009-2010, respectively. These include over 200 frauds of above

Rs one crore during each year," he said during the 'Third Conference of Central

Vigilance Officers of 31 Public Sector Banks and Financial Institutions' at the

CBI headquarters here.

Singh said CBI's role was to investigate the criminality in bank frauds and it

does not interfere in cases of prudent commercial judgment, even if such

decisions involve risks or have resulted in losses to banks.

He called upon banks to adapt to changing technology and to sensitize its

officers to new areas of fraud being used by scamsters.

(Agencies)

FRAUDS IN BANKING


Information by Canara Bank for their customers while operating account by E-mail

Privacy Policy:

Canara Bank (“Bank”) understands that our

relat ionship is s trongly buil t on trust and fai th. Any

personal information that we seek f rom you would

only be aimed at providing you quali ty service and

would be kept conf idential . This information would

not be used in any way detr imental to your interest .

We may however be required to disclose your personal information to

Government, judic ial bodies, and our regulators or to any person to whom

the Bank is under an obligation to make disclosure under the requirements

of any law binding on the Bank or any of i ts branches, when si tuation so

demands.

Security Policy:

We accord top priori ty to Securi ty and str ive to

provide protection to your accounts against

accidental access, unauthorized access, data

corruption or erasure by way of appropriate physical

and manager ial procedures. We use the Secured

Socket Layer protocol wi th 128bit encryption for

secure transmission of your messages to our Web Servers. This securi ty

aspect has been cert if ied by the IDRBT, an inst i tut ion of Reserve Bank of

India. Our Web Servers are securely placed behind Firewalls to prevent

unauthorized access to your account information

FRAUDS IN BANKING


About E-mail Fraud

Beware of Fraudulent E-mails requesting online banking security details!

Internet Banking is a safe way to manage your money. However, there are Internet

Fraudsters around who will try to gain access to your accounts by E-mailing you and

prompting you to disclose your on-line banking security details to them. Banks will

never send E-mails that ask for confidential information. If you receive an E-mail

requesting your Internet Banking security details, you should not respond.

How do Fraudulent E-mails work?

Typically you will receive an E-mail claiming to be from your bank, either

requesting your security details (perhaps as part of an update or confirmation

process) or asking you to follow a link to a site where you will be encouraged to

provide a range of information such as your credit card number, personal

identification number (PIN), passwords or personal information, such as mother's

maiden name.

Clicking on the link then takes you to a fake website, designed to look like that of

your bank, but operated by the Fraudster.

Fraudulent E-mails and websites can be very convincing and Fraudsters are

continually inventing new approaches to get you to divulge your security details.

How to be cautious?

Treat all unsolicited emails with caution and never click on links from such emails

and enter any personal information.

If you've replied to a suspicious E-mail and provided personal or sensitive

information about your account please

contact us immediately at [email protected]

To ensure a legitimate and safe sign on, always enter Canara Bank’s official web

site, www.canarabank.in in your browser's address field.

FRAUDS IN BANKING


ABOUT PHISHING ( POTENTIAL SECURITY THREATS )

Phishing ' is a common form of Internet piracy. I t is deployed to

steal users ' personal and conf idential information l ike bank account

numbers, net banking passwords , credit card numbers, personal

identi ty detai ls etc . Later the perpetrators may use the information

for siphoning money f rom the vict im's account or run up bi l ls on

vict im's credit cards. In the worst case one could also become the

vict im of identi ty thef t . A few customers of some other Indian

banks have been affected by the at tempt of phishing during the

early 2006. Phishing scams take advantages of sof tware and

securi ty weaknesses of the cl ients. But even the most high-tech

phishing scams work l ike old-fashioned con jobs, in which a

phisher convinces his mark that he is rel iable and trustworthy

Since most people won' t reveal their bank account, credit card

number or password to just anyone, phishers have to take extra

steps to tr ick their vict ims into giving up this information. This

kind of deceptive at tempt to get information is ca lled social

engineering.

We would l ike you to be aware of methodologies in a 'Phishing '

at tack, do 's and don'ts in sharing of personal informat ion and the

action to be taken in case you fal l prey to a phishing at tempt.

FRAUDS IN BANKING


Methodologies:

Phishing attacks use both social engineering and technical subterfuge to steal

customers' personal identity data and financial account credentials.

• Customer receives a fraudulent e-mail seemingly from a legitimate Internet

address.

• The email invites the customer to click on a hyperlink provided in the mail.

• Click on the hyperlink directs the customer to a fake web site that looks

similar to the genuine site.

• Usually the email will either promise a reward on compliance or warn of an

impending penalty on a non compliance.

• Customer is asked to update his personal information, such as passwords

and credit card and bank account numbers etc.

• Customer provides personal details in good faith. Clicks on 'submit' button.

• He gets an error page.

• Customer falls prey to the phishing attempt.

FRAUDS IN BANKING


Don'ts:

• Do not click on any link which has come through e-mail from an

unexpected source. It may contain malicious code or could be an attempt to

'Phish'.

• If you get an e-mail that you believe is a phishing attempt, you do not reply

to it, click on the links or provide your personal information.

• Do not provide any information on a page which might have come up as a

pop-up window.

• Never provide your password over the phone or in response to an

unsolicited request over e-mail.

• Always remember that information like password, PIN, TIN, etc are strictly

confidential and are not known even to employees/service personnel of the

Bank. You should therefore, never divulge such information even if asked

for.

Do's:

• Always logon to a site by typing the proper URL in the address bar.

• Give your user id and password only at the authenticated login page.

• Before providing your user id and password please ensure that the page

displayed is an https:// page and not an http:// page. Please also look for the

lock sign ( ) at the right bottom of the browser and the certificate from the

verification authorities.

• Provide your personal details over phone/Internet only if you have initiated a

call or session and the counterparty has been duly authenticated by you.

• Please remember that bank would never ask you to verify your account

information through an e-mail

FRAUDS IN BANKING


What to do if you have accidentally revealed password/PIN/TIN etc:

• If you feel that you have been phished or you have provided your personal

information at a place you should not have, please carry out following

immediately as a damage mitigation measure.

• Change your password immediately. If you use the same password at other

sites, we suggest you to change your passwords there, too.

• Report to the bank by clicking on the link 'Report Phishing' on login page.

• Check your account statement and ensure that it is correct in every respect.

• Report any erroneous entries to Bank.

Instructions for Submitting Phishing Email:

Assuming you use Outlook or Netscape:

1. Create a new mail to [email protected]

2. Drag and drop the phishing email from your inbox onto this new email

message In Netscape drop it on the 'attachment' area

3. Do not use "forward" if you can help it,

as this approach loses information and requires more manual processing.

The exception is when you use the Web interface to outlook: in that case

forward is the only solution.

FRAUDS IN BANKING


CONCLUSION

The World, including India faces a unique challenge today of Frauds in

Banking. The Concept of Frauds in Bank, although is an old and consistent

concept in the Finance Industry, its changing dynamics make it a challenge

nonetheless.

The ways to deal with such frauds are available but, somehow are not being

strongly supported by the framework or the structure of the economy as a

whole.

Increasing development in the field of Information Technology has made

detection of frauds easy, but ironically it has also opened up new gateways for

new frauds involving new dynamics altogether.

The System exists, what lacks is the awareness that shall prevent the fraud from

happening in the first place. As rightly said by Area Commander

Superintendent John Hopgood, who worked on the case involving in the

$550,550 fraud case of Federal Bank of United States “Forget about the rest,

Concentrate on the Fraud”, is the attitude the economies around the world

require.

FRAUDS IN BANKING


BIBLIOGRAPHY

BOOKS:

1. Bank Frauds Prevention and Detection by B.R Sharma

2. Frauds 101 : Techniques and Strategies for Understanding Frauds by

Stephen Pedneault

ARTICLES:

1. Marri Ramu, “Bank Fraud”, Articles of Times Of India.

2. Top Banking Frauds of All Time, Article of IBN Live India.

3. Bank Fraud? Is there an app for that?, Article Of MSN Money Control

4. CBI’s Report on Bank Frauds, Article from Jagran Post.

WEBSITES:

1. www.rbi.org

2. www.cyberfraudsources.com

3. www.canarabank.in

SEARCH ENGINES:

1. www.google.in

2. www.yahooanswers.co.in

3. www.wikipedia.in

OTHER REFRENCES:

• Mr. Gurmeet Singh Khurana, Manager, Punjab National Bank,

Chandigarh Branch.

Frauds in Banking

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