Thursday, January 5, 2012

Banking Fraud - arresting and control

Banking Fraud is posing threat to Indian Economy. Its vibrant supervene can be understood be the fact that in the year 2004 amount of Cyber Crime were 347 in India which rose to 481 in 2005 showing an increase of 38.5% while I.P.C. Class crime stood at 302 in 2005 along with 186 cases of cyber fraud and 68 cases cyber forgery. Thus it becomes very prominent that occurrence of such frauds should be minimized. More upsetting is the fact that such frauds are entering in Banking Sector as well.

In the present day, Global Scenario Banking law has acquired new dimensions. Banking did spread in India. Today, the banking law has entered into contentious markets in areas exterior resource mobilization, human resource development, buyer services and prestige supervision as well.

Health Care Reforms

Indian's banking law has any excellent achievements to its credit, the most striking of which is its reach. In fact, Indian banks are now spread out into the remotest areas of our country. Indian banking, which was operating in a highly comfortable and protected environment till the starting of 1990s, has been pushed into the choppy waters of intense competition.

Banking Fraud - arresting and control

A sound banking law should possess three basic characteristics to protect depositor's interest and collective faith. Theses are (i) a fraud free culture, (ii) a time tested Best institution Code, and (iii) an in house immediate grievance remedial system. All these conditions are their missing or highly weak in India. Section 5(b) of the Banking Regulation Act, 1949 defines banking... "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 inquire or otherwise and withdraw able by cheque, draft, order or otherwise." But if his money has fraudulently been drawn from the bank the latter is under precise obligation to pay the depositor. The bank therefore has to ensure at all times that the money of the depositors is not drawn fraudulently. Time has come when the safety aspects of the banks have to be dealt with on priority basis.

The banking law in our country has been taking care of all segments of our socio-economic set up. The article contains a argument on the rise of banking frauds and assorted methods that can be used to avoid such frauds. A bank fraud is a deliberate act of omission or commission by any man carried out in the course of banking transactions or in the books of accounts, resulting in wrongful gain to any man for a temporary duration or otherwise, with or without any monetary loss to the bank. The relevant provisions of Indian Penal Code, Criminal course Code, Indian ageement Act, and Negotiable Instruments Act relating to banking frauds has been cited in the present Article.

Evolution Of Banking law In India

Banking law occupies an prominent place in a nation's economy. A banking institution is needful in a contemporary society. It plays a pivotal role in economic development of a country and forms the core of the money store 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 6 more on 15 April 1980. The Indian banking law is unique and perhaps has no parallels in the banking history of any country in the world.

Reserve Bank Of India-Economic And collective Objective

The support Bank of India has an prominent role to play in the maintenance of the change value of the rupee in view of the close interdependence of international trade and national economic increase and well being. This aspect is of the wider responsibly of the central bank for the maintenance of economic and financial stability. For this the bank is entrusted with the custody and the supervision of country's international reserves; it acts also as the agent of the government in respect of India's membership of the international monetary fund. With economic development the bank also performs a variety of developmental and promotional functions which in the past were registered being exterior the normal purview of central banking. It also acts an prominent regulator.

Bank Frauds: concept And Dimensions

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 collective 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.

While the operations of the bank have come to be increasingly needful banking frauds in banks are also expanding and fraudsters are becoming more and more sophisticated and ingenious. In a bid to keep pace with the changing times, the banking sector has diversified it enterprise manifold. And the old religious doctrine of class banking has been supplanted by mass banking. The challenge in supervision of collective accountability with economic viability has increased.

Definition Of Fraud

Fraud is defined as "any behavior by which one man intends to gain a dishonest benefit over another". In other words , fraud is an act or omission which is intended to cause wrongful gain to one man 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 ageement Act. Thus needful elements of frauds are:

1. There must be a representation and assertion;

2. It must retell to a fact;

3. It must be with the knowledge that it is false or without trust in its truth; and

4. It must induce an additional one to act upon the assertion in inquire or to do or not to do definite act.

Bank Frauds

Losses sustained by banks as a supervene of frauds exceed the losses due to robbery, dacoity, burglary and theft-all put together. Unauthorized prestige facilities are extended for illegal gratification such as case prestige 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 extraction of goods with the knowledge and connivance of in negligence of bank staff, pledging of goods belonging to a third party. Goods hypothecated to a bank are found to contain obsolete stocks packed in in the middle of goods stocks and case of shortage in weight is not uncommon.

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 supervene 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 in the middle of 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.

Frauds-Prevention And Detection

A close study of any fraud in bank reveals many Common basic features. There may have been negligence or dishonesty at some stage, on part of one or more of the bank employees. One of them may have colluded with the borrower. The bank official may have been putting up with the borrower's sharp practices for a personal gain. The allowable care which was anticipated of the staff, as custodians of banks interest may not have been taken. The bank's rules and procedures laid down in the hand-operated instructions and the circulars may not have been observed or may have been deliberately ignored.

Bank frauds are the failure of the banker. It does not mean that the external frauds do not defraud banks. But if the banker is upright and knows his job, the task of defrauder will come to be highly difficult, if not possible.

Detection of Frauds

Despite all care and vigilance there may still be some frauds, though their number, periodicity and intensity may be considerably reduced. The following course would be very helpful if taken into consideration:

1. All relevant data-papers, documents etc. Should be right away collected. Traditional vouchers or other papers forming the basis of the investigation should be kept under lock and key.

2. All persons in the bank who may be knowing something about the time, place a modus operandi of the fraud should be examined and their statements should be recorded.

3. The probable order of events should thereafter be reconstructed by the officer, in his own mind.

4. It is advisable to keep the central office informed about the fraud and additional developments in regard thereto.

Classification of Frauds and activity Required by Banks

The support Bank of India had set-up a high level committee in 1992 which was headed by Mr. A... Ghosh, the then Dy. Governor support Bank of India to inquire into assorted aspects relating to frauds malpractice in banks. The committee had noticed/observed three major causes for perpetration of fraud as given hereunder:

1. Laxity in observance of the laid down law and procedures by operational and supervising staff.

2. Over trust reposed in the clients who indulged in breach of trust.

3. Unscrupulous clients by taking advantages of the laxity in observance of established, time tested safeguards also committed frauds.

In order to have uniformity in reporting cases of frauds, Rbi determined the inquire of classification of bank frauds on the basis of the provisions of the Ipc.
Given below are the Provisions and their remedial measures that can be taken.

1. Cheating (Section 415, Ipc)

Remedial Measures.

The preventive measures in respect of the cheating can be concentrated on cross-checking concerning identity, genuineness, verification of particulars, etc. In respect of assorted instruments as well as persons involved in encashment or dealing with the property of the bank.

2. Criminal misappropriation of property (Section 403 Ipc).

Remedial Measure

Criminal misappropriation of property, guess the custody or control of funds or property, so subjected, with that of the man committing such frauds. Preventive measures, for this class of fraud should be taken at the level the custody or control of the funds or property of the bank generally vests. Such a quantum should be sufficient, it is extended to these persons who are really handling or having actual custody or control of the fund or movable properties of the bank.

3. Criminal breach of trust (Section 405, Ipc)

Remedial Measure

Care should be taken from the preliminary step when a man comes to the bank. Care needs to be taken at the time of recruitment in bank as well.

4. Forgery (Section 463, Ipc)

Remedial Measure

Both the stoppage and detection of frauds through forgery are prominent for a bank. Forgery of signatures is the most frequent fraud in banking business. The bank should take extra care when the instrument has been presented either bearer or order; in case a bank pays forged instrument he would be liable for the loss to the genuine costumer.

5. Falsification of accounts (Section 477A)

Remedial Measure

Proper diligence is required while filling of forms and accounts. The accounts should be rechecked on daily basis.

6. Theft (Section 378, Ipc)

Remedial Measures

Encashment of stolen' cheque can be prevented if the bank clearly specify the age, sex and two illustrated recognize activity marks on the body of the man traveler's cheques on the back of the cheque leaf. This will help the paying bank to really recognize the cheque holder. Theft from lockers and safe deposit vaults are not easy to commit because the master-key remains with the banker and the personel key of the locker is handed over to the costumer with due acknowledgement.

7. Criminal conspiracy (Section 120 A, Ipc)

In the case of State of Andhra Pradesh v. Ibs Prasad Rao and Other, the accused, who were clerks in a cooperative Central Bank were all convicted of the offences of cheating under Section 420 read along with Section 120 A. All the four accused had conspired together to defraud the bank by manufacture false inquire drafts and receipt vouchers.

8. Offences relating to currency notes and banks notes (Section 489 A-489E, Ipc)
These sections supply for the safety of currency-notes and bank notes from forgery. The offences under section are:

(a) Counterfeiting currency notes or banks.

(b) Selling, buying or using as genuine, forged or counterfeit currency notes or bank notes. Knowing the same to be forged or counterfeit.

(c) proprietary of forged or counterfeit currency notes or bank-notes, knowing or counterfeit and intending to use the same as genuine.

(d) manufacture or passing instruments or materials for forging or counterfeiting currency notes or banks.

(e) manufacture or using documents resembling currency-notes or bank notes.

Most of the above provisions are Cognizable Offences under Section 2(c) of the Code of Criminal Procedure, 1973.

Fraud Prone Areas In separate Accounts

The following are the inherent fraud prone areas in Banking Sector. In expanding to those areas I have also given kinds of fraud that are Common in these areas.

Savings Bank Accounts

The following are some of the examples being played in respect of savings bank accounts:

(a) Cheques bearing the forged signatures of depositors may be presented and paid.

(b) Specimen signatures of the depositors may be changed, particularly after the death of depositors,

(c) Dormant accounts may be operated by dishonest persons with or without collusion of bank employees, and

(d) Unauthorized withdrawals from customer's accounts by worker of the bank maintaining the savings ledger and later destruction of the modern vouchers by them.

Current list Fraud

The following types are likely to be committed in case of current accounts.

(a) occasion of frauds in the names of exiguous clubs or firms by unauthorized persons;

(b) Presentation and cost of cheques bearing forged signatures;

(c) Breach of trust by the employees of the clubs or firms possessing cheque leaves duly signed by the authorized signatures;

(d) Fraudulent alteration of the amount of the cheques and getting it paid either at the counter or though an additional one bank.

Frauds In Case Of Advances

Following types may be committed in respect of advances:

(a) Spurious gold ornaments may be pledged.

(b) Sub-standard goods may be pledged with the bank or their value may be shown at inflated figures.
(c) Same goods may be hypothecated in favour of separate banks.

Legal Regime To control Bank Frauds

Frauds constitute white-collar crime, committed by unscrupulous persons deftly benefit of loopholes existing in systems/procedures. The ideal situation is one there is no fraud, but taking ground realities of the nation's environment and human nature's fragility, an institution should always like to keep the overreach of frauds at the minimum occurrence level.

Following are the relevant sections relating to Bank Frauds

Indian Penal Code (45 of 1860)

(a) Section 23 "Wrongful gain".-

"Wrongful gain" is gain by unlawful means of property to which the man gaining is not legally entitled.

(b) "Wrongful loss"

"Wrongful loss" is the loss by unlawful means of property to which the man losing it is legally entitled.
(c) Gaining wrongfully.

Losing wrongfully-A man is said to gain wrongfully when such man retains wrongfully, as well as when such man acquires wrongfully. A man is said to lose wrongfully when such man is wrongfully kept out of any property, as well as when such man is wrongfully deprived of property.

(d) Section 24. "Dishonestly"

Whoever does anyone with the intention of causing wrongful gain to one man or wrongful loss to an additional one person, is said to do that thing "dishonestly".

(e) Section 28. "Counterfeit"

A man is said to "counterfeit" who causes one thing to look like an additional one thing, intending by means of that resemblance to institution deception, or knowing it to be likely that deception will thereby be practiced.

Breach Of Trust

1. Section 408- Criminal breach of trust by clerk or servant.

2. Section 409- Criminal breach of trust by collective servant, or by banker, merchant or agent.

3. Section 416- Cheating by personating

4. Section 419- Punishment for cheating by personation.

Offences Relating To Docments

1) Section 463-Forgery

2) Section 464 -Making a false document

3) Section 465- Punishment for forgery.

4) Section 467- Forgery of needful security, will, etc

5) Section 468- Forgery for purpose of cheating

6) Section 469- Forgery for purpose of harming reputation

7) Section 470- Forged document.

8) Section 471- Using as genuine a forged document

9) Section 477- Fraudulent cancellation, destruction, etc., of will, authority to adopt, or needful security.

10) Section 477A- Falsification of accounts.

The support Bank Of India Act, 1934

Issue of inquire bills and notes Section 31.

Provides that only Bank and except in case,granted by Central Government shall be authorized to draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the cost of money payable to bearer on demand, or borrow, owe or take up any sum or sums of money on the bills, hundis or notes payable to bearer on inquire of any such person

The Negotiable Instruments Act, 1881

Holder's right to double of lost bill Section 45A.

1. The finder of lost bill or note acquires no title to it. The title remains with the true owner. He is entitled to recover from the true owner.

2. If the finder obtains cost on a lost bill or note in due course, the payee may be able to get a valid extraction for it. But the true owner can recover the money due on the instrument as damages from the finder.

Section 58

When an Instrument is obtained by unlawful means or for unlawful consideration no holder or indorse who claims through the man who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such holder or indorse is, or some man through whom he claims was, a holder thereof in due course.

Section 85:

Cheque payable to order.

1. By this section, bankers are placed in privileged position. It provides that if an order cheque is indorsed by or on behalf of the payee, and the banker on whom it is drawn pays it in due course, the banker is discharged. He can debit his buyer with the amount so paid, though the endorsement of the payee might turn out to be a forgery.

2. The claim safety under this section the banker has to prove that the cost was a cost in due course, in good faith and without negligence.

Section 87. supervene of material alteration

Under this section any alteration made without the consent of party would be void. Alteration would be valid only if is made with Common intention of the party.

Section 138. Dishonour of cheque for insufficiency, etc., of funds in the account.

Where any cheque drawn by a man on an list maintained by him with a banker for cost of any amount of money to an additional one man from out of that list for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid. either because of the amount of money standing to the prestige of that list is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that list by an bargain made with that bank, such man shall be deemed to have committed an offence and shall, without prejudice.

Section 141(1) Offences by companies.

If the man committing an offence under Section 138 is a company, every man who, at the time the offence was committed, was in payment of, and was responsible to, the enterprise for the escort of the enterprise of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Security Regime In Banking System

Security implies sense of safety and of free time from danger or anxiety. When a banker takes a collateral security, say in the form of gold or a title deed, against the money lent by him, he has a sense of safety and of free time from anxiety about the inherent non-payment of the loan by the borrower. These should be communicated to all strata of the society through approved means. Before staff managers should analyze current practices. safety course should be stated explicitly and agreed upon by each user in the definite environment. Such practices ensure data safety and enhance availability. Bank safety is essentially a defense against unforced attacks by thieves, dacoits and burglars.

Physical safety Measures-Concept

A large part of banks safety depends on collective safety measures. Corporeal safety measures can be defined as those definite and extra protective or defensive measures adopted to deter, detect, delay, defend and defeat or to perform any one or more of these functions against culpable acts, both covert and covert and acclamations natural events. The protective or defensive, measures adopted involve construction, premise and deployment of structures, equipment and persons respectively.

The following are few guidelines to check malpractices:

1. To rotate the cash work within the staff.

2. One man should not continue on the same seat for more than two months.

3. Daybook should not be written by the Cashier where an other man is available to the job

4. No cash seclusion should be allowed within passbook in case of seclusion by pay order.

5. The subject boss should ensure that all staff members have recorder their nearnessy in the attendance registrar, before starting work.

Execution of Documents

1. A bank officer must adopt a precise pro arrival in the doing of documents. The ink and the pen used for the doing must be maintained uniformly.

2. Bank documents should not be typed on a typewriter for execution. These should be invariably handwritten for execution.

3. The doing should always be done in the nearnessy of the officer responsible for regain them,
4. The borrowers should be asked to sign in full signatures in same style throughout the documents.

5. Unless there is a definite requirement in the document, it should not be got attested or witnessed as such attestation may convert the character of the instruments and the documents may subject to ad volrem stamp duty.

6. The paper on which the bank documents are made should be pilfer proof. It should be unique and available to the banks only.

7. The printing of the bank documents should have highly artistic intricate and involved graphics.

8. The documents executed in the middle of Banker and Borrowers must be kept in safe custody,

Changes In Legislations After Electronic Transactions

1. Section 91 of Ipc shall be amended to contain electronic documents also.

2. Section 92 of Indian Evidence Act, 1872 shall be amended to contain commuter based communications

3. Section 93 of Bankers Book Evidence Act, 1891 has been amended to give legal sanctity for books of list maintained in the electronic form by the banks.

4. Section 94 of the support Bank of India Act, 1939 shall be amended to facilitate electronic fund transfers in the middle of the financial institutions and the banks. A new clause (pp) has been inserted in Section 58(2).

Recent Trends Of Banking law In India

In the banking and financial sectors, the introduction of electronic technology for transactions, community of accounts, book-keeping and all other linked functions is now an imperative. Increasingly, either we like it or not, all banking transactions are going to be electronic. The thrust is on commercially prominent centers, which list for 65 percent of banking enterprise in terms of value. There are now a large amount of fully computerized branches across the country.

A switchover from cash-based transactions to paper-based transactions is being accelerated. Magnetic Ink character recognition clearing of cheques is now operational in many cities, beside the four metro cities. In India, the design, supervision and regulation of electronically-based payments law are becoming the focus of course deliberations. The imperatives of developing an effective, sufficient and speedy cost and community systems are getting sharper with introduction of new instruments such as prestige cards, telebanking, Atms, retail Electronic Funds change (Eft) and Electronic Clearing Services (Ecs). We are enthralling towards smart cards, prestige and financial Electronic Data Interchange (Edi) for level through processing.

Financial Fraud (Investigation, Prosecution, recovery and recovery of property) Bill, 2001

Further the Financial Fraud (Investigation, Prosecution, recovery and recovery of property) Bill, 2001 was introduced in Parliament to curb the menace of Bank Fraud. The Act was to prohibit, control, research financial frauds; recover and restore properties subject to such fraud; prosecute for causing financial fraud and matters linked therewith or incidental thereto.

Under the said act the term Financial Fraud has been defined as under:

Section 512 - Financial Fraud

Financial frauds means and includes any of the following acts committed by a man or with his connivance, or by his agent, in his dealings with any bank or financial institution or any other entity keeping collective funds;

1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

2. The active concealment of a fact by one having knowledge or trust of the fact;

3. A promise made with out 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.
Provided that whoever acquires, possesses or transfers any proceeds of financial fraud or enters into any transaction which is linked to proceeds of fraud either directly or indirectly or conceals or aids in the concealment of the proceeds of financial fraud, commits financial fraud.

513(a) - Punishment for Financial Fraud

Whoever commits financial fraud shall be: (a) Punished with faithful imprisonment for a term, which may expand to seven years and shall also be liable to fine.

(b)Whoever commits serious financial fraud shall be punished with faithful imprisonment for a term which may expand to ten years but shall not be less than five years and shall also be liable for fine up to double the amount involved in such fraud.

Provided that in both (a) and (b) all funds, bank accounts and properties acquired using such funds subjected to the financial fraud as may reasonably be attributed by the investigating agency shall be recovered and restored to the rightful owner agreeing to the course established by law.


The Indian Banking industry has undergone enormous increase since nationalization of 14 banks in the year 1969. There has an practically eight times increase in the bank branches from about 8000 while 1969 to mote than 60,000 belonging to 289 commercial banks, of which 66 banks are in private sector.

It was the supervene of two successive Committees on Computerization (Rangarajan Committee) that set the tone for computerization in India. While the first committee drew the blue print in 1983-84 for the mechanization and computerization in banking industry, the second committee set up in 1989 paved the way for integrated use of telecommunications and computers for applying technogical breakthroughs in banking sector.

However, with the spread of banking and banks, frauds have been on a constant increase. It could be a natural supervene to increase in the amount of customers who are using banks these days. In the year 2000 alone we have lost Rs 673 crores in as many as 3,072 amount of fraud cases. These are only reported figures. Though, this is 0.075% of Rs 8,96,696 crores of total deposits and 0.15% of Rs 4,44,125 crores of loans & advances, there are any numbers of cases that are not reported. There were nearly 65,800 bank branches of a total of 295 commercial banks in India as on June 30, 2001 reporting a total of nearly 3,072 bank fraud cases. This makes nearly 10.4 frauds per bank and practically 0.47 frauds per branch.

An devotee Committee on Bank Frauds (Chairman: Dr.N.L.Mitra) submitted its article to Rbi in September 2001. The Committee examined and recommend both the preventive and curative aspects of bank frauds.

The prominent recommendations of the Committee include:

o A need for along with financial fraud as a criminal offence;

o Amendments to the Ipc by along with a new chapter on financial fraud;

o Amendments to the Evidence Act to shift the burden of proof on the accused person;

o extra provision in the Cr. Pc for properties involved in the Financial Fraud.

o Confiscating unlawful gains; and preventive measures along with the development of Best Code Procedures by banks and financial institutions.

Thus it can be terminated that following measures should necessarily be adopted by the Ministry of Finance in order to sell out cases of Fraud.

o There must be a extra Court to try financial fraud cases of serious nature.

o The law should supply separate structural and recovery procedure. Every bank must have a domestic enquiry officer to enquire about the civil dimension of fraud.

o A fraud enthralling an amount of ten crore of rupees and above may be determined serious and be tried in the extra Court.

The Twenty-ninth article of the Law Commission had dealt some categories of crimes one of which is "offences calculated to preclude and obstruct the economic development of the country and endanger its economic health." Offences relating to Banking Fraud will fall under this category. The most prominent feature of such offences is that generally they do not involve an personel direct victim. They are punishable because they harm the whole society. It is clear that money involved in Bank belongs to public. They deposit there whole life' safety in Banks and in case of Dacoity or Robbery in banks the collective will be al lost. Thus it is prominent that enough efforts should be taken in this regard.

There exists a new kind of threat in cyber world. Writers are referring it as "Salami Attack" under this a extra software is used for transferring the amount from the list of the individual. Hence the culprits of such crimes should be found fast and should be given precise punishment. Moreover there is requirement of more amount of It professionals who will help in looking a clarification against all these safety threats.

Banking Fraud - arresting and control

No comments:

Post a Comment