SUBMITTED TO

UNIVERSITY OF MUMBAI.

SHREE SHANKAR NARAYAN COLLEGE

OF PROFESSIONAL COURSES.

NAVGHAR ROAD, BHAYANDER (E), THANE-401 105.

ACADEMIC YEAR - 2015-2016.

T.Y.BBI

PROJECT STUDY OFCONSUMER FINANCE

SUBMITTED BY

KAMLESH VAISHNAV

GUIDED BY

PROF. VIVEK WANKHEDE

1
 Declaration
I Kamlesh Vaishnav student of T.Y.BBI hereby declare
that I have completed this project on FRAUDS IN
COMMERCIAL BANK. All The information submitted is
true and original to the best of my knowledge.

Signature of Student
KAMLESH VAISHNAV

2
 Name

KAMLESH R. VAISHNAV

Roll Number

50

Title of Project

FRAUDS IN COMMERCIAL BANKS

Subject Area

BANKING & INSURANCE

Sign Of Student

Sign Of Guide With Date

Signature of Coordinator with date

For Office Use Only

3
 ACKNOWLEDGEMENT

I would like to take this opportunity to thank

everybody who helped through the successful
completion of this project. Many people have
contributed to my achievements during the project
and take this opportunity to thank each one of them
at end of the project durations.

First I would like to thank the UNIVERSITY OF

MUMBAI to include this project in the curriculum
which brings out our observity analyzing and
interpreting skills to the maximum.

I extend my sincere gratitude to the honorable

Principal Dr. V.N Yadavfor the work that I am; able
to present would just not have been possible without
her guidelines.

4
 I would also like to thank the co-coordinator and
the project guide Mr. Vivek Wankhedefor their
constant encouragement, intellectual solution and
valuable suggestions throughout the making of this
project. I thank him for spending his valuable time
and efforts towards my cause.

I would like to thank to my friends and

colleagues, librarians for providing some valuable
tips. I would also like to thank all those whose name
may not have appeared here but whose contribution
has not gone unnoticed.

Last but not the list, I would like to thank my

parents for helping me in the completion of this
project

5
TABLE OF CONTENT

6
 Title Page
Certificate
Declaration
Acknowledgeme
nt
Table of Content
Chapter No. Topic
Frauds In
1
Banking Sector
Frauds in
2 Commercial
Bank
3 Banking Fraud
Banking Fraud
4 Survey-
2012
5 Case Study
6 News About Banking
Fraud

7
Questionnaire
8 Conclusion
9 Bibliography

Chapter 1

FRAUDS IN BANKING SECTOR

7
1.1 Introduction of Bank

1.2 Definition of Bank

1.3 Definition of Commercial Bank

1.4 Importance of Commercial Bank

1.5 Banking Fraud

1.6 Banking Fraud

8
1.1 INTRODUCTION TO BANK

A bank is a financial institution and a financial intermediary

thatAccepts deposits and channels those deposits into
lending into activities, either directly by loaning or indirectly
through capital markets. A bank is the connection between
customer that have capital deficits and customers with
capital surpluses.

Due to their influence in financial system and the economy

banks are highly regulated in most countries. Most banks
operate under a system known as fractional reserve banking
where they hold only a small reserve of the funds deposited
and lend out the rest for profit. They are generally subject to
minimum capital requirements which are based on an
international set of capital standards, known as the Basel
Accords.

Banking in its modern sense evolved in 14 th century in

the rich cities of Renaissance Italy but in many ways was a
continuation of ideas and concepts of credit and lending that
had its roots in the ancient world. In the history of banking, a
number of banking dynasties have played a central role over
many centuries. The oldest existing bank founded in 1472.

1.2 Definitions of banks:

THE BANKING COMPANIES ACT -1949 of India defines bank:

A BANK is a financial institution which accepts money from
the public for the purpose of lending or investment
repayable on demand or otherwise withdrawals by cheques
or order or otherwise.

An organization usually a corporation chartered by a state or

federal government which does most or all of the following:
receives demand deposits and time deposits, honors
instruments drawn on them, and pays interest on them;

9
discounts notes, makes loans, and invests in securities;
collects cheques, drafts, and notes, makes loans, and invests
in securities; collects cheques, drafts and notes; certificate
depositors checks; and issue drafts and cashiers checks.

1.3 Commercial Banks:

Commercial banks are those banks which perform all kinds

of banking functions such as accepting deposits, advancing
loans, credit creation, and agency functions. They are also
called joint stock banks because they are organized in the
same manner as joint stock companies.

They usually advance short-term loans to customers. Of late,

they have started giving medium term and long-term loans
also. In India 20 major commercial banks have been
nationalized, whereas in developed countries they are run
like joint stock companies in the private sector. Some of the
commercial banks in India are Andhra Bank, Canara Bank,
Indian Bank, Punjab National Bank, etc.

10
1.4DEFINITION of 'Commercial Bank'

A financial institution that provides services, such as

accepting deposits, giving business loans and auto loans,
mortgage lending, and basic investment products like
savings accounts and certificates of deposit. The traditional
commercial bank is a brick and mortar institution with
tellers, safe deposit boxes, vaults and ATMs. However, some
commercial banks do not have any physical branches and
require consumers to complete all transactions by phone or
Internet. In exchange, they generally pay higher interest
rates on investments and deposits, and charge lower fees.

11
1.5 IOMORTANT OF COMMERICAL BANK

The business significance of banks to a developing economy

may be as follows:

Capital formation is the basis requirement of economic

development.
For implementation of effective monetary policy.
The development of commercial banking strengthens
the links between the organized and the unorganized
sectors of the money market

1.6DEFINITION OF FRAUD

Fraud can be defined as any behavior by which one

person intends to gain dishonest advantages 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, under section
17 of the Indian Contract Act, 1872, includes any of the
following acts of the following acts committed by party
to a contract, or with his connivance, or by his agents,
with intent to deceive another party thereto or his
agent, or to induce him to enter into the contract:

The suggestion as a fact, of that which is not true, by

one whodoes not believe it to be true;
The active concealment of a fact by one having
knowledge or belief of the fact;
A promise made without any intention of performing
it;
Any another act fitted to deceive;
Any such act or omission as the law specially
declares to be fraudulent.

12
 RBI had, not defined the term form in its
guidelines on frauds. A definition of fraud was, however,
suggested in the context of electronic banking in the Report
of RBI Working Group on Information Security, Electronic
Banking, Technology Risk Management and Cyber Frauds,
which reads as under:-
A deliberate act of omission or commission by any
person, carried out in the course of a banking transaction or
in the books of accounts maintained manually or under
computer system in banks, resulting into wrongful gain to
any person for a temporary period or otherwise, with or
without any loss to the bank.

1.7 BANKING FRAUD

Over the few years, India has been one of the

worldsfastest growing economics with banking and financial
services companies experience significant growth both in
size and profitability. In the last decade, the Indian banking
sector grew at an average of 18% compared toOver 7%GDP
growth. So frauds in the financial services industry pose a
significant risk to institutions, as well as to the integrity of
capital markets.
Its effect can be widespread, causing long financial and
reputational damage

India cannot have a healthy economy without a sound and

effective banking system. The banking system should be
hassle free and able to meet the new Challenges posed by
technology and other, both internal and external.

In the past three decades, Indias banking system

has earned several outstanding achievements to its credit.
The most striking isitsextensive each. It is no longer confined
to metropolises or in India. In fact, India banking system has
reached even to the remote corners of the country. This is
one of the main aspects of Indias growth story.
13
Frauds in the banking sector:

Though RBI had not given a specific definition of the term, it

has, for quite some time now, been monitoring the nature,
volume and magnitude of frauds in certain sections of the
financial sector that fall under its jurisdiction. The reporting
of fraud cases by banks was prescribed by the RBI way back
in July 1970. In 2005-06, the prescription of reporting of
fraud cases was extended to urban cooperative banks and
deposit taking NBFCs registered with RBI. While online
reporting and
Monitoring of frauds cases by banks has been in place since
May 2004. The reporting by UCBs and NBFCs is still in
manual format.

A comparative picture of total of fraud cases and

amount
Involved as on March 31, 2013, for scheduled commercial
banks, NBFCs,Urban cooperative banks and financial
institutions are as under:

No. of frauds cases reported by RBI regulated entities

(No. of cases in absolute terms and amount involved

in Rs.
Crore)

Category No. of cases Amount

Involved
Commercial 169190 29910.12
Banks

14
 As is evident from the above table, the cumulative
number of frauds reported by the banking sector and the
total amount involved inThese fraud cases have a major
share in the frauds reported by all entities Under RBIs
supervisory jurisdiction.

A year- wise break up fraud cases reported by the banking

Sector together with the amount involved is given below:

Year-wise no. and amount of fraud cases in the banking

sector

(No. of cases in absolute terms and amount involved in Rs.

Crore)

Year No. of Total

Cases Amount
2009-10 24791 2037.81
19827 3832.08
2011-12 14735 4491.54
2012-13 13293 8646.00
Total 169190 29910.12
frauds
Reported
as of
March
2013

It may be observed that while the number of fraud cases has

shown a decreasing trend from 24791 cases in 2012-13 i.e. a
decline of 46.37%, the amount involved has increased
15
substantially from Rs. 2037.81 crore to Rs. 8646.00 crore i.e.
an increase of 324.27%.

A granular analysis revels that nearly 80% of all

fraud cases involved amounts less than Rs.
One lakh while on an aggregated basis, the amount involved
in such cases was only around 2% of the
Total amount involved. Similarly, the large value fraud cases
involving amount of Rs. 50 crore and
Above, has also increased more than tenfold from 3 cases in
FY 2009-10 (involving an amount of Rs. 404.13 crore) to 45
cases in FY 2013 (involving an amount of Rs. 5334.75 crore).

Further, a bank group wise analysis of frauds reveals

that while the private sector and the foreign bank groups
accounted for a majority of frauds by number (82.5%), the
public sector banks (including SBI Group) accounted for
nearly 83% of total amount involved in all reported frauds.

Bank Group wise fraud cases

(No. of cases in absolute terms and amount involved

in Rs. Crore)

Bank No. % to Amoun % to

Group of tota t total
Cases l Involv Amou
Cas ed nt
es
Nationaliz 29653 17.5 24828. 83.01
ed 3 01
Banks
Including
SBI Group

16
Old 2271 1.34 1707.7 5.71
Private 1`
Sector
Banks
new 91060 53.8 2140.4 7.16
private 2 8
Sector
Banks
Sub Total 93331 55.1 3848.1 12.87
(Private 6 9
Banks)
Foreign 46206 27.3 1233.9 4.12
Banks 1 2
Total 16919 100 29910. 100
0 12

While the sheer number of frauds and the amount involved,

when seen in isolation, may appear Overwhelming, it is
important to view the incidence of frauds in the banking
sector in the context of The massive increase in the number
of deposit and credit accounts in banks and the staggering
volume And value of transactions that are processed by the
banks every day.

The number of deposit accounts in banks over the last ten

years (between end 2002 and end 2012) has gone up from
43.99 crore to 90.32 crore while the number of loan accounts
in the same period has also more than doubled from 5.64
crore to 13.08 crore. A quick estimate puts the average
number of all transactions that happen every day in the
banking system at approximately 10 cores, which is
enormous. The number of frauds per million banking
transaction was about 0.4, which is not a very
17
Figure.Likewise, besides increase in the number of brick and
mortar branches, additional services delivery Point of Sale
(POS) terminals have also gone up significantly. While the
number of ATM machines has grown from 34789in March
2008 to 114014 in March 2013, the number of POS
terminalshas also more than doubles (from 423667 to
845653) during the same period. The point I am trying to
drive home here is that on standalone basis the quantum of
frauds, both in terms of number and amount involved, may
appear to be very high, but when one weights it against the
sheer magnitude ofaccounts and transaction handled by the
banking system, they are nit alarming.

Chapter 2

BANKING FRAUD

2.1 Mechanics of Bank Fraud against Banks

2.2 Employee Level Fraud

2.3 Management Level Fraud

18
2.1 Mechanics of Bank Fraud against Banks

Stolen Cheques
Accounting Fraud
Demand Draft Fraud
Fraudulent Loan
Payment Loan Application
Internet Fraud

19
 Fraudsters
Wire Transfer Fraud
Identity Theft
Phishing

StolenCheques: -cheques fraud refers to a category of

criminal acts that involve making the unlawful use of
chequesin orders to illegally acquire or borrow funds that not
exist within the account balance or account-holder legal
ownership.

Accounting Fraud :-in order to hide serious financial

problems, some businesses have been known to use
fraudulent book keeping to overstate sales and income,

20
inflate the worth of the companys assets or state a profit
when the company is operating at a loss.

Demand Draft Fraud:-Demand draft fraud refers to a type

of fraud in which dishonest bank employees will remove a
few demand draft leaves or DD books from the stock of a
bank and then they will write on such DD so that it looks like
regular DD.

Fraudulent Loans: -A fraudulent loan, however, is one in

which the borrower is a business entity controlled by a
dishonest bank officer an accomplice; the borrower then
declares bankruptcy or vanishes and the money is gone.

Fraudulent Loan Application:-These take a number of

forms varying from individual using false information to hide
a credit history filled with financial problems and unpaid
loans to corporations using accounting fraud to make a risky
loan appear to be sound investment for the bank.

Credit Card Fraud:-credit card fraud is a wide ranging

term for theft for and fraud committed using credit card or
any similar payment mechanism as fraudulent source if
funds in a transaction. The purpose may be obtaining goods
without paying, or to obtain unauthorized funds from an
account.

Internet Fraud:- the use of internet services or software

with internet access to defraud victims or to otherwise
access to defraud victims or to otherwise take advantage of
them, for example by stealing personal information, which
can even lead to identify theft. Internet services can be used
to conduct fraudulent transaction, or to transmit the
proceeds of fraud to financial institutions.

21
Fraudsters:- Fraudsters may seek access to facilities such
as mailrooms, post offices, offices of tax authority, a
corporate payroll or a social or veterans, benefit office, which
process cheques in large numbers. The fraudsters then may
open account under assumed names and deposit the
cheques, which they may first alter in order to appear
legitimate, so that they can subsequently withdraw
unauthorized finds.

Wire Transfer Fraud: - Wire transfer networks such as the

international swift 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 common place; while banks
have put checks and balances in place, there is the risk that
insiders may attempt to use fraudulent or forget documents
which claim to request a bank depositors money be wired to
another bank, often an offshore account in some distant
foreign country.

There is very high risk if fraud when dealing with unknown or

uninsured institutions.

Identity Theft:- Impersonation has become an incasing

problems; the scam operates by obtaining information about
an individual, then using the information to apply for
identity cards, accounts and credit in that persons name.

Phishing: - itoperates by sending forged e-mail,

impersonating an online bank, auction or payment site; the
email directs the user to a web site which is designed to look
22
like the login to the legitimate site but which claims that the
user must update personal info. The information thus stolen
is then used to another frauds, such theft of identity or
online auction fraud.

2.2 Employee Level Fraud

23
 Scale of employee level fraud
Many ways for bank employee to commit fraud
Loan fraud is the area of highest risk
But embezzlement remains high on the list
Two categories of employee fraud for banks

Looting customer accounts

Exploiting weaknesses in operations

Looting customer accounts

Cashiertheft of cash or skimming

Cheques fraud
Employee divert funds from
customers accounts
Fraud is then concealed with false
record

Exploiting weaknesses in operations

Theft of consignment items
Invoicing fraud

EMPLOYEE LEVEL FRAUD- CASE STUDY

Milton Pereira, former management of Hudson Citibank, was

convicted on charges of embezzling more than $ 650000
from his former employee to fraud his gambling and credit
card debts.

24
Over seven years, Pereira tempered with more than 60
customer accounts by executing thousands of fraudulent
debits and credited.

HOW HE DID IT: -

Pereira repeatedly withdrew funds from customer accounts

and transferred them to accounts he had created and
controlled and from which he illegally withdrew funds.

He evaded detection by moving funds between

accounts and preventing customers from receiving
statements.

HOW HE WAS FOUND OUT:-

When a few customers became aware of unauthorized

activity on their accounts, Pereira corrected the errors by
transferring funds from other customers accounts.

Then he sent letters to the customers to tell them there

had been an error in the banks system that caused the error
and that this had subsequently been corrected.

Some of the customers remained suspicious and the ensuing

police and FBI investigation uncovered Pereiras fraudulent
scheme.

Pereira was tried and sentenced to two years prison.

25
2.3MANAGEMENT LEVEL FRAUD

Sources of Frauds

External Fraud; 40%

Internet Fraud(Employee and Insiders); 60%

Fraud at senior management level

Occurs less frequently than employee level fraud
But when it occurs losses tend to be greater
Management has greater authority
Possibility better knowledge of system
Better equipped to execute complex frauds

Types of Management Level Fraud

Same as employee fraud but on a larger scale

Cheques Fraud
Skimming
Looting Customer Accounts
Loan Fraud-Approving Loans To Oneself
Loan Fraud-Kickback Schemes And Bribery

26
 Illegal Financial Transactions And Corruption

Financial statement fraud causes a decrease in

market value of stock of approximately 500 to 1000
times the amount of the fraud.

Chapter 3

BANKING FRAUD SURVEY -2012

27
1.1 About the Survey

1.2 Size of the Issue

1.3 Future Trends

1.4 Frauds in Retail Corporate Banking

1.5 Frauds in Priority Sector Bank

1.6 Impact on Bank

1.8 Prevention from Banking Fraud

BANKING FRAUD SURVEY _ 2012

1.1 About the survey

28
 The survey was conducted over three months from
November 2011 To January 2012, to gather the views of key
people responsible for fraud risk management in banks.

Institutions who participated in the survey included

private, public, multinational and co-operative banks in
India.

The asset base of the participants varied from less than

RS 500 crore to greater than Rs 5000 crore.

The majority of respondents were primarily with asset

base of more than Rs 5000 crore.

The customer base of the institutions who participated

in the Survey included those who had less than lO lacks to a
sizeable proportion with more than 50 lacks number of
customers.

Responses were received from head of fraud risk

management for banks or key people responsible for
managing fraud risk in the organization.

The survey covers this topic:-

1. What is happening?

current perception of fraud in the

country/industry
Fraud incidents encountered by the banks
Average loss and ability to recover

2. What is the Issue?

29
 Fraud prone areas

Root cause analysis

400

300

200
2011 Column1

100

0
SBI Bank of India PNB IDBI Bank United Bank

PSU banking fraud remain at high levels

1.2 Size of the issue

An overwhelming 93% of the respondents indicated

that there has been an increase in fraud incidents in the
banking industry during the last year.

Seventy-Jive percent of the indicated that banking

industry has seen an increase in hand incidents by at least
5% as compared to the last one year.

An analysis it the survey findings for respondents who

have disclosed the number of fraud incidents encountered
by them indicated that nearly one in every two institutions
had encountered more than 50 incidents of fraud within the
Organization in the last one year. Similarly, one in every four
institutions has witnessed at least 100+ fraud incidents
in the last one youre, Hanks with higher asset size appear to
have encountered more hand incidents.

30
 The average loss per incident for nearly half of the
respondents is more than Rs 10 lack.

The average value of recovery for more than half of the

respondents is less than 25% of the reported fraud losses.

The Issue

What happened?

Banks have encountered the maximum number of

fraud Incidents in retail banking followed by corporate
Banking. A majority of the respondents who are actively
involved in priority sector have also encountered significant
number of fraud incidents in this area.

"Fraudulent documentation and "overvaluation/non-

existence of collateral" are the types of fraud incidents which
appear to rank high to "very high" for all the areas of
banking operations, i.e. retail, corporate and priority sector

Frauds in private banking are attributed primarily to

"identity theft and "misuse of power of attorney account
takeover. However, interestingly incidents involving miss-
selling have not been identified by banks as a major
contributor of frauds in private banking. Treasury and
Administration/procurement operations appear to have
encountered least number of fraud incidents according to
the respondents.

31
How was it discovered?

It appears that a majority of the incidents are still

detected through a formal and informal complaint
mechanism. A significant 43% of the respondents
detected frauds through anonymous complaints by external
third party and another 37% through a whistle-blower
mechanism. More than half the respondents indicated that
they have detected fraud through internal audit reviews.
However the worrying sign is that 20% of the respondents
indicated that they still detect fraud by accident.

Technology appears to be gaining prominence in fraud

detection. Forty percent of the respondents indicated that
they detected fraud using a fraud detection/analytics tool.

According to more than half of the respondents, the

average time taken to discover a fraud incident is more
than six months and 23% of them indicated it to be greater
than a year.

1.3 Future Trends

32
 With the current economic scenario, an
overwhelming 83% of the respondents have indicated that
the fraud incidents will increase with 64% of them indicating
that the increase will be between 6-25%.

Of the respondents who indicated that frauds will rise

in the coming years, an overwhelming 96% of respondents
indicated that retail banking will continue to be the most
vulnerable to fraud. The surprising revelation is that
respondents feel that in the coming years priority sector will
contribute to increased fraud incidents with a small decrease
in the corporate banking as compared to the current
scenario. Surprisingly, a few respondents indicated
administration/procurement as the new areas vulnerable to
fraud, which is not reflected in the current environment.

Today financial institutions operate in an increasingly

competitive environment with complex products, slowing
economy, tidal wave of new regulations coupled with new
technology, leading to avenues for fraudsters to exploit
loopholes. We asked the respondents about the general
scenario in the banking industry and their individual
organizations experience on frauds.

What is the industry View?

Ninety-three percent of the people indicated that

fraud has been on the rise in the industry in the last one
year. A breakdown of their response that 75% of the
respondents who perceived an increase in the fraud in the
industry believed that the fraud incidents had risen by more
than 5%, with nearly one in every two of them believing that

33
it had risen by 5 to 10% and one in every four indicating it to
be more than 10%.

What is the banks Individual experience?

A significant 76% of all institutions surveyed have

encountered more than two incidents of fraud within the
organization in the last one year, with 40% of them
indicating that they have encountered more than leases of
fraud within the last one year. Larger organizations are more
likely to experience increased fraud incidents. This is true for
banks as well. A comparison of the fraud incidents
experienced by the
organization indicates that banks with larger asset size have
been encountering more fraud cases with public, private and
MNC banks equally affected by it.

Why did it happen?

Due to, lack of oversight by line managers or senior

management on deviations from existing process/controls
along with difficult business scenarios and business
pressure to meet targets appear to be some of the
significant factors contributing to the fraud incidents. It is
interesting to note that 37% respondents have also identified
lack of
tools to identify Red Flags. as one of the factors which
appears to contrast with the responses in Section 6.3 where
half the respondents have indicated that they have
implemented a fraud analytics solution and an overwhelming
73% of them are completely satisfied with it. Analysis
of the responses for those who responded that they were
satisfied with their data analytics solution indicated that only

34
50% of these respondents detected frauds using technology
solutions.

This variance could be because of the fact that banks

may possibly be using their existing transaction
monitoring system or have implemented a limited fraud
detection solution for certain areas of their banking
operations only. This brings into question, the adequacy of
these solutions for fraud detection across the banking
operations.

Why did it happen?

DifficulT business scenario 47%

Lack of tolls to identify potential red 37%

Change ti business strategy without 27%

Lack of oversight by line managers or 73%

Business pressure to meet targets 50%

Lack of fraud risk framework within the 23%

Collusion between employees and 33%

Not Disclosed 7%

How much did they lose?

Since the developments in the 1990s .the entire

banking products structure has undergone a major change.

35
With de-regulation, increased competition and IT revolution
making it possible to provide ease and flexibility in
operations to customers, banks are also evolving and trying
to become one stop financial supermarkets. However, the
entire range of banking operations can be segmented into
four broad heads - retail, wholesale or corporate banking
businesses, treasury operations and other banking activities
including advisory services termed as _private banking_ to
"high relationship value" clients. Fraud follows opportunity
and attacks weakness in the system. It is important to know
the areas
which are vulnerable to fraud before organizations can start
working towards controlling them. With banks operating in
various we specifically asked the respondents on the areas
where they gave encountered fraud and the root cause
analysis of the incidents.

Where did it happen?

an overwhelming 77% of people indicated that they have

suffered from frauds in retail banking. The other major area
appear to be corporate banking as indicated by 57% of the
respondents. Even though, only 33% of the respondents
have indicated that they have experienced frauds in priority
sector lending, a deeper analysis of the results indicated
that a significant number of banks active in this area have
faced frauds which are not truly reflected in the overall
percentages above. Treasury and
administration/procurement appear to be the areas least
prone to frauds as per the respondent of the survey.

Areas Prone To Be Fraud

36
 77%

57%

33%

10% 13%
3% 3%

HOW did it happen?

With banking operations spanning across multiple areas from

retail to corporate, treasury and private banking, the types
of fraud will vary considerably depending on the areas and
processes applicable. Fraudulent documentation appears
to rank as the most common fraud Scheme across all the
areas of banking operations except treasury operations
where it may not be applicable. this bring into question, the
process followed by the banks in verifying documents
/information before entering into a relationship with their
customers.

Fraudsters intercepting one-time

passwords by obtaining Duplicate SIM
cards

RBI to refer the issue to the telecom

Regulatory Authority of India

37
 Largest chunk of cpmplaints (29.22per
cent) to ATM/Debit card/Credit card
disputes

Public sector banks account for 72 per cent

of the complaints

1.4 Frauds in retail banking

With retail banking appearing to be the most vulnerable to

fraud, it is interesting to see that the respondents have
indicated high to very high incidents of fraud encountered by
them involving multiple finding, documentation. Frauds due
to incorrect sanctioning processes and external vendor fraud
are also some of the fraud prone areas. An intriguing
revelation of this survey is that even though many of the
banks outsource the verification and valuation to process to
third party vendors, the percentage of respondents
identifying external vendor induced fraud appears to be
relatively low.

1.5 Frauds in Corporate Banking

Overvaluation/nonexistence of collateral and

siphoning of funds are some of the areas where banks have
encountered high to very high incidents of fraud. Incorrect

38
financial statements along with asset stripping and incorrect
sanctioning, besides fraudulent documentation, are
Some of the other types of frauds increasingly encountered
by the respondents in corporate banking area. Since banks
are encountering frauds which encompass the whole
spectrum of corporate banking process from incorrect
sanctioning to siphoning of funds, it is important that banks
not only review their sanctioning, but also enhance
disbursement and their post disbursement monitoring
process. A good practice could be to undertake a closer
monitoring of accounts where early signals of stress are
seen. The RBI circular of 15 January 2011,
provides illustrative steps for banks which may be followed
to ensure effective monitoring of end use by the corporate
for the credit facilities granted to them.

1.5 Frauds in Priority Sector Bank

The government of India identified certain sectors as

priority sectors and banks were directed to set aside a
definite portion of their credit facilities to these sectors. RBI
fixes the target for priority sector credit by commercial
banks. As per RBI rules, if there is any shortfall in priority
sector lending from the above targets and sub targets, the
conceded bank should deposit an amount equivalent to the
shortfall in certain schemes. We wanted to understand from
the banks their experience of priority sector lending, as it
has been identified as one which has encountered increased
fraud incidents by those who are actively involved in this

39
area. Siphoning of funds and overvaluation/ non-existence of
collateral are some of the frauds where the most incidents
have happened, apart from fraudulent documentation. High
to very high incidents of frauds involving Identity theft is also
identified by 26% of respondents. Since many of the priority
sector customers may face challenges in providing the
requisite KYC documents, this loophole may be exploited by
fraudsters to steal the identity of gullible people and defraud
banks. This brings us to the question of customer due
diligence process adopted by the banks for this segment.
Since standard identity documents like PAN cards, etc., may
not be available with these customers, this problem may
continue to persist for some time to come. Hopefully, the
Aadhar program should provide some relief to banks in the
future to contain this risk.

1.6 Frauds in Private Sector Bank

The frauds in private banking and 3% in treasury

operations and administration/procurement functions.
Amongst various areas in private banking,
respondents identified fraudulent
documentation followed by identity theft as being the
highest number of fraud incidents. It is very surprising o note

40
that miss selling is considered as a low risk, especially in
view of the recent incidents highlighted in the media.

Frauds incidents in Private Banking

very high

high
account takeover misselling Identity Theft

medium

low
Fradulent Documentation

very low

0 10 20 30 40 50 60 70 80 90

Fraud Incidents in Treasury

41
 very high
others-business target
high

medium Overriding of controls

low
Collussion with external parties
very low

0 Un-accounted
10 20 traders in error accounts
30 40
50 60
70 80
90 100

How was it discovered?

A well designed fraud control mechanism should

enable organizations to identify frauds proactively. According
to 53% of the respondents, frauds were detected through
internal audit reviews and significant majority of the
incidents were still detected through a formal or informal
complaint mechanism. The complaint mechanism consisted
of 43% respondents detecting frauds through anonymous
complaints by external third party and another 37% through
a whistle-blower mechanism. With the advent of technology,
banks are at the forefront of leveraging technology to fight
frauds. Forty percent of respondents were identifying frauds
using a fraud analytics solution. This is an encouraging sign
as a proactive fraud detection solution will not only enable
banks to identify frauds before they occur, but can also be
leveraged to improve their internal control mechanism. Even
though 37% of the respondents indicated that they detected
frauds through a whistle blower mechanism, the number of
frauds discovered by anonymous complaints is more at 43%.
This could possibly be (has to the fact that either the whistle-
blower mechanism is probably not implemented fully or the
complainants are not comfortable rising the whistle blowing

42
hotline. However, the disturbing part 20% of the cases were
detected by accident and another 43% whereby anonymous
complaints by third parties, indicating that despite various
anti-fraud measures adopted by banks, a significant number
of frauds were

detected By means other than the organizations

fraud control framework.

53%
43% 40%
37%

20% 20% 17%

According to RBI-released data, banking-related frauds have

doubled in the five-year period between 2004 and 2009.

In2009, the total number of bank frauds was recorded

at
23,914, amounting to a loss of 18.83 billion, where less
than 1% of the fraud cases amounted to 10 million each or
even more.

The last reported count of online fraud cases was 269,

amounting to 590 million.

43
 With acquisitions and expansions spurring the growth
in size and customer base, banks are witnessing a
substantial rise in the numbers and complexity of fraud
scenarios. As such, there is a stringent need for robust
monitoring.

The regulator has directed financial institutions to

continuously monitor transactions and establish an
integrated
fraud risk management framework.

There is an increasing need to identify early warning

signals to capture frauds close to their occurrence.

A centralized framework can address fraud risks

associated with various business units and products and
provide insights to stakeholders to take preventive action at
the right
time.

This also eliminates uncertainty around losses due to

fraud and helps the management have a more focused
strategy to address fraud-related risks.

1.7 What is the impact on banks?

There are instances of fraud that adversely impact

banks
on a regular basis and go unnoticed or unattended. All these
cases of fraud result in sizable monitory losses for the banks
once they go undetected

Fraud events raise questions around the credibility of

the

44
fraud deterrent processes and the technological capabilities
of
the institution.

The external attacks on relatively newer channels such

as
internet banking, SMS banking and mobile banking result in
customer losses and hamper the brand image of the
concerned
entities.

Regulatory non-compliance constitutes another oft-

witnessed outcome due to the lack of necessary efforts and
capabilities to proactively monitor frauds.

45
1.8 Prevention from Banking Fraud

Risk Mitigation Tools:-

In order to mitigate risk associated with online

banking, financial institution policies and systematic controls
should create
An environment in which fraud can be prevented, detected,
monitored against industry standards. These policies and
controls
Should:-

Require Reasonable efforts to be made to ascertain the

true identity of individual customers and the stated business
purpose of each commercial enterprise with which the bank
conducts business.

Have a know your customer (KYC) policy that

includes
The following for personal account opening:

2. Proper identification of the customer,

3. Validation of the customers residence or place of

Business,

46
 4. Consideration of the source of funds used to open
an Account

5. Checking with s service bureau, if applicable, for

undesirable customer behavior such as insufficient
funds or check kitting.

Consumer Education

Most of individual will take action if they believe it will

decrease their chances if being victimized by fraud, as long
the action does not significantly by fraud, as long as the
action does not significantly inconvenience them. By
educating customers, financial institution can decrease their
fraud losses.

When you use your bank account, bank card or cheque

book, you need to make sure your information and identity is
secure. This will help to protect you from fraud.

The following are consumer tips to prevent fraud.

Institutions can channels, such as positing at the branches,
flyers sent with monthly statement, emails, through a web
site, and/or by request to a call centre.

CONSUMER TIPS TP PREVENT IDENTITIY THEFT

AND OTHER FORMS OF FRAUD

47
 Ensure you know the person /entity you are
giving information to over the Internet.

At least once a year, order copies of your credit

report from each of the three of the major credit bureau,
ensuring all of the information is accurate.

Monitor your account and monthly

statements
thoroughly, ensuring that all the activity is accurate. If
your account statements are late, immediately contact your
bank to ascertain if and when they were mailed.

Always thoroughly tear or shred personal

information,
such as pre-approved credit offers, that may contain account
information, social security numbers, date of birth etc.

Check merchant privacy policies and only

shop with those
who have published privacy policies that you agree with.

Only do business with internet companies

that use a
secure form to capture private information, such as an
account numbers or credit card numbers.

Avoid instant credit offers, ensuring they are

properly shredded/discarded.

Ensure your computer (s) is equipped with

anti-virus protection and firewalls to help keep
trespassers out. Always backup your data.

48
 Never divulged personal information to
anyone, As identity thieves often obtain information through
social engineering.

Avoid purchasing a product from a merchant

or an
auction site where the deal looks tool good to be
true because it usually is.

Always protect your account information.

Dont write your personal identification number (pin) on your
ATM/debit card.

When using your ATM, cover your hand when

entering the pin number to protect the information from
shoulders surfers.

Carry only those pieces of identification you

absolutely need, and keep them secure.

Always log off from your online banking

session.

If you suspect your identity has been stolen, contact

your financial institution and the authorities
immediately.

49
Chapter 4

Case Study

4.1 Harshad Mehta Scam

4.2 Cobbler Scam
4.3 Ketan Parekh Scam
4.4 Citi Bank India Scam

50
HARSHAD MEHTA SCAM- 4000 Cr.

He triggered a rise in BSE in the year 1992 by trading

in shares at a premium across many segments.

Taking advantages of the loopholes in the banking system.

Harshad and his associates triggered a securities

scam diverting funds to the tune of Rs. 4000 cr. (Rs.40
billion) from the banks to stock brokers between April 1991
to May 1992.

51
Mehta mastered the tricks of the trade set out on dangerous
plan.

Mehta has siphoned off huge sums of money from several

banks and millions of investors were conned in the process.

His scam was exposed, the markets crashed and he was

arrested and banned for life from trading in the stock
markets.

He was later charged with 72 criminal offences.

He died in 2002 with many litigations still pending against

him.

COBBLER SCAM

Sohin Daya, son of former Sheriff of Mumbai, was the main

accused in the multi-crore scam.

52
 Daya of Dawood shoes, Rafique Tejani of metro shoes, and
Kishore Signapur of Milano shoes were arrested for creating
leather co-operative societies which did not exist.

They availed loans of crores of rupees on behalf of these

fictitious societies. The scam was exposed 1995.

They accused created a fictitious co-operative society of

cobblers to take advantage of government loans through
various schemes.

Officials of the Maharashtra State Finance Corporation,

Citibank, Bank Of Oman, Dena Bank, Development Credit
Bank, Saraswati Co-Operative Bank, And Bank of Bahrain
and Kuwait were also charge sheeted.

Chapter 5

Questionnaire
53
1. How many percentages contributed to fraud due to
Business pressure to meet targets?

a) 73% b) 50% c) 47%

54
 Ans. (b)
50%

2. How many percentages corporate banking prone to

fraud?

a) 77% b) 33% c) 57%

Ans. (c) 57%

3. Which city is number one in Banking fraud?

A) New Delhi b) Kolkata c) Mumbai

Ans. (c)
Mumbai

4. In FY 2013-14, how many number of cases reported by

banking sector?

a) 24791 cases b) 14735 cases c) 13293

cases

Ans. (c)
13293 cases

5. How many percentages include the Internet

audit/legal/compliance in detection of fraud?

a) 53% b) 40% c) 20%

Ans. (a) 53%

55
 Chapter 6

CONCLUSION

56
 CONCLUSION

This project shows that frauds in commercial banking sector in India.

Risks are would like to deal with. But the fact is that frauds are on the rise
and organizations need to put their business affairs in order by having
effecting control mechanism internal controls can weaken over time by
having over due to technological advances or human intervention
(Management override or collusion) or because of the rise in new fraud
schemes. Implementing anti-fraud controls is not a foolproof measure
against frauds. Nonetheless, having anti-fraud measures in an organizations
Control environment can go a long way in deterring individuals from fraud
because the message going down the line is that the within the organization.

To protect your money from electronic theft, identity theft, and other forms
of fraud, its important to implement basis precautions such as shredding
account statements having complex passwords and only doing online
banking through internet connections.

57
 BIBLIOGRAPHY

www.economictimes.com

www.wikipedia.bankingfraud.com

www.timesofindia.com

DNA news

Economics Times

58