Nature of Banking Frauds

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Introduction

In today’s world crimes which are committed by the criminals are more technical & complex. To solve those crimes we need our technologies to improve. Crimes affects banking business also. Banks need to improve their system.

Definition of Fraud

Fraud can be defined as any act by which one person gains advantages over the other person. It is an act by which wrongful gain is caused to one person and wrongful loss to another person. It can be done by either concealing some facts or otherwise.

A definition of the term Fraud is given under Section-421 of IPC, as
“whoever dishonestly or fraudulently, removes, conceals or delivers to any person, or transfer of cause to be transferred to any person, without adequate consideration, any property, intending thereby prevent, the distribution of that property according to law among his creditors or the creditors of any other person, shall be punished with imprisonment of either description for a term which may extend to two years, or with fine or with both”

Under Section 17 of ICA Fraud is defined as follows:

Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
  1. The suggestion, as fact of that which is not true, by one who does not believe it be true;
  2. the active concealment of a fact by one having knowledge or belief of the fact; 
  3. a promise made without any intention of performing it; 
  4. any other act fitted to deceive:
  5. any such act or omission as the law specially declares to be fraudulent
Explanation: Mere silence as to facts likely to affect the willingness of person to enter into a contract is not fraud, unless the circumstances of case are such that, regard being had to them, it is the duty of the per keeping silence to speak, or unless his silence, is, in itself, equivalent to speech.

From the above two definitions. The essential elements of “fraud" can determined as follows:
  1. There must be a representation.
  2. The representation must refer to a fact.
  3. The person asserting the fact or making that representation mu have knowledge that it is false or he believes it not to be true.
  4. Assertion of the fact by the person must induce another person to act upon the assertion in question or to do or not to do a certain act.

Banking Frauds 

The common ways by which fraud is committed upon a banking institution are!
  • Robbery 
  • Dacoity 
  • Burglary
  • Theft 
  • Extention of Unauthorised credit facilities 
  • Opening of bogus accounts 
  • Forging signatures 
A large number of fraud is committed through bank drafts, mail transfer and telegraphic transfers.

Reasons for Banking Fraud

  • Involvement of the staff of the bank itself.
  • Bank lay down certain instructions which must be followed employees when these instructions are not followed it may result into fraud
  • Outsiders can also commit fraud on bank by manipulating cheques, draft or other instruments.
  • Collusion between businessmen, top bank executors, civil servants and politicians in power to defraud the bank. 

Components of Banking Frauds 

There are two components of banking frauds. They are as follows:
  1. The intention of the person committee fraud
  2. The opportunity available to the person committing fraud.

Fraud Prone Area In Banks

  • Savings Bank Account
  • Current Bank Account Account
  • Advances by the Bank
  • Inter Branch Account
  • Remittances

Savings Bank Account 

A savings bank account is mainly meant for non-trading customers have some potential for saving and who do not have numerous transactions entering their account.

People who generally open such accounts are 
  • Salaried classes of the lower and middle income group.
  • Small traders
  • Farmers
Some of the examples of frauds which can be committed in case of savings bank account are:
  • Cheques bearing forged signature of depositors.
  • Specimen signature of the depositor may get changed such as in case of death.
  • Accounts being operated by dishonest persons.
  • Accounts being operated by dishonest persons with collusion of bank employees
  • Even the bank employees can commit fraud by withdrawing from the account of any customer without any authority
Various measures which can be taken by banks to prevent such frauds are:
  1. The signature on the cheques and other instruments must be examined carefully
  2. In case of people who are unable to read and write i.e. illiterate depositors, the identity of the person must be properly scrutinized 
  3. Presentation of pass book must be insisted in case of non-cheque book saving accounts. 
  4. Employees must follow the procedure which is laid down by the bank before allowing any transaction.
  5. Measures should be taken to prevent material alteration of the specimen signature and other vital spots.

Current Accounts 

A current account is a running and active account which may be operate upon any number of times during a working day.

Current Accounts are generally kept by:
  • Big Businessmen 
  • Joint Stock Companies 
  • Institutions 
  • Public Authorities 
  • Public Corporation 
The examples of fraud which can be committed in case of current account are as follows:
  • Accounts can be opened and operated by unauthorized persons. These accounts can be opened in the name of limited companies or by firms by unauthorized persons.
  • Presentation of forged cheques.
  • Breach of trust by the employees of the bank.
  • Fraudulent alteration of the cheques or other instruments which are to be presented at the counter.
Various measures which can be taken by the banks to prevent such frauds are:
  1. The signature which is there on the instrument must be verified
  2. A new account holder should be allowed to open another account only after the expiry of reasonable period of time.
  3. In case a cheque is dishonoured and a fresh piece of specimen signature is given by the customer then the new signature must be recorded immediately.
  4. Cheques must be kept in proper custody.
  5. Unused cheques must be destroyed immediately.
  6. Statement of accounts, confirmation of letters, acknowledgement of 'stop' instruction should be sent invariably.

Advances by the Bank 

Fraud can be committed in cases of advances given by the bank. Some of the examples of fraud which can be committed in this area are:
  • Pledging of fake gold cremated
  • Sub-standard goods may be pledged
  • Employees of bank may fraudulently sell the goods are equipment charged by the banks
  • The borrower may also fraudulently sell the goods or equipments charged by the banks,
  • Some goods may be again hypothecated by the borrower to a different bank.
The various measures which can be taken up by the bank to prevent fraud in this area are:
  1. The credential of the borrower must be checked.
  2. The credentials of the employees must be checked.
  3. Regular inspection of all the books and accounts.
  4. Proper control must be exercised over receipt of goods as security by the bank.

Inter Branch Accounts 

This type of fraud can be committed only by the employees of the bank. The dishonest employee may credit his personal account by debiting the account of some branch of the bank. The various ways by which such fraud can be prevented are:
  • Reconciliation of inter-branch balance must be done at regular intervals 
  • Reversal of entry should be done only with the authority of the branch manager
  • The outsiders should seek confirmation of outstanding balances from the concerned branches.

Remittances 

Fraud can be committed through mail transfer, telegraphic transfers and demand drafts also, This can be committed by forging the signature of the authorized person on these instruments or by altering the draft for a higher amount with the help of chemicals etc.

The various measures by which such a fraud can be prevented are:
  • Instruments such as blank bank draft forms, blank mail transfer forms etc. must be kept in safe custody.
  • The bank manger must verify the drawing officials signature
  • Particular care should be taken of demand draft of high which are to be deposited in any new account.
  • The paper and the water mark on the demand draft should be checked.

Preventive Measures which are to be taken to Prevent Banking Frauds 

  • While recruiting staff the bank must be vigilent.
  • Bank must not rely on any person unduly 
  • Bank officials must not accept any presents or gifts from the borrowers.
  • There is a particular procedure which must be followed during banking transaction.
  • The bank must thoroughly check the background of a borrower especially before sanctioning a very heavy loan amount 
  • Banks must pay particular attention whenever any irregularity appears in the account no matter how small the irregularity is.
  • Banking business must be conducted with proper plans and system 
  • Personal accounts of the employees must be maintained in the same branch where they work
  • Records must regularly be updated.
  • Periodical job rotation of every employee must be done
  • Bank officers must not be lethargic or negligent in their work 
  • Transactions must be properly authorized
  • A climate of honesty should be there, 
  • Employees must be given proper training and education
  • If any fraud occurs it must be reported and investigated thoroughly 
The criteria which is to be followed by the bank for reporting any fraud is as follows:
  1. Amount Less than one lakh need not be reported individually in the Reserve Bank of India instead they are shown as quarterly statement of the bank and will be shown before the RBI.
  2. Amount more than one lakh but less than 25 lakh will be reported the regional office of the urban bank department of the Reserve Bank of India under whose jurisdiction the head office of the bank The fraud must be reported within three weeks to the regional bra of the Reserve Bank of India.
  3. Fraud of Rs. 25 lakh and above will be reported to the fraud monitoring cell, department of supervision, Mumbai, within three weeks of detection.
  4. In case of negligence and cash shortage if it is more than Rs. 10,000 then it will be reported however, if it is less than Rs. 10,000 then it should be reported on the day of occurrence by the person handling the cash.
The Reserve Bank of India has constituted a vigilant department to control these frauds in those departments. They do a surprise visit to keep a check. There is a chief Vigilance Officer and a Chief Vigilance Commission who co-ordinate the functioning of this department.

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