“Lapses in system make easy the job of offenders to dupe banks”
Fraud is any dishonest act and behaviour by which one person gains or intends to gain advantage over another 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.
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 nationalised banks was of Rs.497.60 crore.
This banking fraud can be classified as:
- Fraud by insiders
- Fraud by others
Fraud By Insiders
- Rogue traders:
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.
- 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.
- 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.
- 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.
- 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, the “Chase Trust Bank” of Washington DC appeared in 2002 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 when dealing with unknown or uninsured institutions.
- 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.
- 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.
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 cheque books are also of value to forgers who then sign as if they were the depositor.
- 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.