Banking system occupies an important place in a nations economy. A banking institution is indispensable in a modern society. It plays a pivotal role in economic development of a country and forms the core of the money market in an advanced country. Banking industry in India has traversed a long way to assume its present stature. It has undergone a major structural transformation after the nationalization of 14 major commercial banks in 1969 and 5 more on 15 April 1980. Banks are the engines that drive the operations in the financial sector, which is vital for the economy. With the nationalization of banks in 1969, they also have emerged as engines for social change. After Independence, the banks have passed through three stages. They have moved from the character based lending to ideology based lending to today competitiveness based lending in the context of India's economic liberalization policies and the process of linking with the global economy. A sound banking system should possess three basic characteristics to protect depositors interest and public faith. Theses are (i) a fraud free culture, (ii) a time tested Best Practice Code, and (iii) an in house immediate grievance remedial system. All these conditions are their missing or extremely weak in India. Section 5(b) of the Banking Regulation Act, 1949 defines banking as Banking is the accepting for the purpose of lending or investment, deposits of money from the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise. In the present day, Global Scenario Banking System has acquired new dimensions. Banking did spread in India. Today, the banking system has entered into competitive markets in areas covering resource mobilization, human resource development, customer services and credit management as well. With the rising banking business, frauds in banks are also increasing and the fraudsters are becoming more and more sophisticated and ingenious. In a bid to keep pace with the changing times, the banking sector has diversified its business manifold. Replacement of the philosophy of class banking with mass banking in the post-nationalization period has thrown a lot of challenges to the management on reconciling the social responsibility with economic viability. The banking system in our country has been taking care of all segments of our socio-economic set up. A bank fraud is a deliberate act of omission or commission by any person carried out in the course of banking transactions or in the books of accounts, resulting in wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank.
Definition of Fraud: Fraud is defined as any behavior by which one person intends to gain a dishonest advantage over another. In other words , fraud is an act or omission which is intended to cause wrongful gain to one person and wrongful loss to the other, either by way of concealment of facts or otherwise. Fraud is defined u/s 421 of the Indian Penal Code and u/s 17 of the Indian Contract Act. Thus essential elements of frauds are: 1. There must be a representation and assertion; 2. It must relate to a fact; 3. It must be with the knowledge that it is false or without belief in its truth; and 4. It must induce another to act upon the assertion in question or to do or not to do certain act. A false representation of a matter of fact whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury. In law, the deliberate misrepresentation of fact for the purpose of depriving someone of a valuable possession or legal right. Any omission or concealment that is injurious to another or that allows a person to take unconscionable advantage of another may constitute criminal fraud. The most common type of fraud is the obtaining of property by giving a check for which there is insufficient funds in the signer's account. Another is the assumption of someone else's or a fictitious identity with the intent to deceive. Also important are mail and wire fraud (fraud committed by use of the postal service or electronic devices, such as telephones or computers). A tort action based on fraud is sometimes referred to as an action of deceit.
Bank Frauds: Losses sustained by banks as a result of frauds exceed the losses due to robbery, dacoit, burglary and theft-all put together. Unauthorized credit facilities are extended for illegal gratification such as case credit allowed against pledge of goods, hypothecation of goods against bills or against book debts. Common modus operandi are, pledging of spurious goods, inletting the value of goods, hypothecating goods to more than one bank, fraudulent removal of goods with the knowledge and connivance of in negligence of bank staff, pledging of goods belonging to a third party. While the operations of the bank have become increasingly significant, there is also an occupation hazard. There is a Tamil proverb, which says that a man who collects honey will always be tempted to lick his fingers. Banks are all the time dealing with money and the temptation should therefore is very high. Oscar Wilde said that the thief was an artist and the policeman was only a critic. There are many people who are unscrupulous and are able to perpetrate a fraud. We must be able to see that we devise our systems and procedures in such a way that the scope for such clever and unscrupulous people is reduced. Frauds in deposit accounts take place by opening of bogus accounts, forging signatures of introducers and collecting through such accounts stolen or forged cheques or bank drafts. Frauds are also committed in the area of granting overdraft facility in the current accounts of customers. A large number of frauds have been committed through bank draft, mail transfers and telegraphic transfers. An analysis made of cases brings out broadly the under mentioned four major elements responsible for the commission of frauds in banks. 1. Active involvement of the staff-both supervisor and clerical either independent of external elements or in connivance with outsiders. 2. Failure on the part of the bank staff to follow meticulously laid down instructions and guidelines. 3. External elements perpetuating frauds on banks by forgeries or manipulations of cheques, drafts and other instruments. 4. There has been a growing collusion between business, top banks executives, civil servants and politicians in power to defraud the banks, by getting the rules bent, regulations flouted and banking norms thrown to the winds.
Mechanics of bank frauds: By Insiders: 1. 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. 2. 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. 3. 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. 4. 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. 5. 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 D.C. appeared in 2002 with no licence and no affiliation to its seemingly apparent namesake; the real Chase Manhattan Bank is based in New York. There is a very high risk of fraud when dealing with unknown or uninsured institutions. The risk is greatest when dealing with offshore or Internet banks (as this allows selection of countries with lax banking regulations), but not by any means limited to these institutions. 6. 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. By others: 7. 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 Rs.10000 into Rs.100,000, 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.