SocioEconomic Offences: Nature and Dimensions Bank Fraud- Types and Prevention.

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1 Criminology SocioEconomic Offences: Nature and Dimensions Bank Fraud- Types and Prevention. Role Name Affiliation Principal Investigator Prof. (Dr.) G.S. Bajpai Registrar, National Law University Delhi Paper Coordinator Dr. Kavita Singh Associate Professor, West Bengal National University of Juridical Sciences, Kolkata. Content Writer/Author Ms. Vaneeta Patnaik Assistant Professor, West Bengal National University of Juridical Sciences, Kolkata. Content Reviewer Prof. N.K. Chakraborty Director, KIIT School of Law, Odisha.

2 DESCRIPTION OF MODULE Items Subject Name Paper Name Module Name/Title Module Id Objectives Description of Module Criminology Socio-Economic Offences Bank Fraud- Types and Prevention Learning Outcome: To understand the nature of bank frauds commited; Understand the procedure of commission of bank frauds; Laws involved to deal with Bank Frauds; Impact of Bank Fraud Prerequisites Negotiable Instruments Act, 1881, Indian Penal Code. Reserve Bank of India Act, Key words Types of Bank frauds, cheque, debit card, credit card, Act. Name of the Module : Bank Fraud- Types and Prevention TABLE OF CONTENTS INTRODUCTION:... 3 WHAT IS A FRAUD?... 5 Bank Frauds and elements:... 7 LEGAL REGIME TO CONTROL BANK FRAUDS:

3 IMPACT OF FRAUD IN INDIA... 9 CLASSIFICATION OF FRAUD AND PREVENTION DEPOSIT ACCOUNT FRAUDS: PURCHASED BILL FRAUDS: HYPOTHECATION FRAUD: LOAN FRAUD: COMPUTER RELATED FRAUDS: CHEQUE FRAUDS: DISHONOUR OF CHEQUES CREDIT AND DEBIT CARD FRAUD: CONCLUSION INTRODUCTION: Banks are considered as necessary equipment for the Indian economy. This particular sector has been tremendously growing in the recent years after the nationalisation of Banks in 1969 and the liberalisation of economy in 1991.Due to the nature of their daily activity of dealing with money, and even after having such a supervised and well regulated system it is very tempting for those who are either associated the system or outside to find faults in the system and to make personal gains by fraud. A bank fraud includes a considerable proportion of white collar crimes being investigated by the authorities. These frauds, unlike ordinary crimes, the amount misappropriated in these crimes runs into lakhs and crores of rupees. Bank fraud is a federal crime in many countries, defined as planning to obtain property or money from any federally insured financial institution. It is sometimes considered a white collar crime. 3

4 Banking has been defined under section 5(b) of the Banking Regulations Act According to it banking means accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise. To understand the concept of Bank Fraud, we need to understand the concept of fraud and the various types of frauds and the ways to detect the same and the prevention of the same

5 2. LEARNING OUTCOMES: On completion of this module, the reader will be able to : Define Fraud and understand the ingredients of Bank Fraud Understand the Legal Regime to deal with Bank Frauds Assess the impact of such Frauds on India Classify Fraud and Prevention of the Frauds 5

6 3. WHAT IS A FRAUD? Generally, A dishonest act or behaviour through which one person gains or tries to gain an advantage over another which results in the loss of the victim, directly or indirectly is called as fraud. Under the IPC, fraud has not been defined directly under any particular section, but it provides for punishments for various acts which lead to commission of fraud. However, sections dealing with cheating, concealment, forgery, counterfeiting, misappropriation and breach of trust cover the same adequately. The contract Act under section 17states fraud means and includes any of the acts by a party to a contract or with his connivance or by his agents with the intention to deceive another party or his agent or to induce him to enter in to a contract 2 : 1. The suggestion, as a fact of that which is not true or by one who doesn t believe it to 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; and 5. Any such act or omission as the law specially declares to be fraudulent. By reading the relevant IPC provisions and Contract Act, the essential requirements for fraud are 3 : Banking System, Frauds and Legal Control, RP Nainta 6

7 Essentials of Fraud: 1 Representation of an Act 2 Fact 3 Believed to be False 4 Inducement to Act Bank Frauds and elements: As stated earlier, the amount of loss sustained as outcome fraud exceeds the losses due any other crime(s) put together. With the rising banking business, cheats in banks are additionally expanding and the fraudsters are turning out to be increasingly complex and shrewd. In an offer to keep pace with the evolving times, the banking segment has differentiated its business complex. Substitution of the theory of class banking with mass banking in the post-nationalization period has tossed a great deal of difficulties to the administration on accommodating the social duty with financial reasonability The four most important elements for constituting fraud are; the active involvement of the staff, failure to follow the instructions and guidelines of the bank by the staff, collusion between businessman, executives and politicians to bend the rules and regulations and any other external factors. 7

8 LEGAL REGIME TO CONTROL BANK FRAUDS: The Indian Penal Code,1860 Criminal Procedure Code, 1973 The Negotiable Instruments Act, 1881 The Reserve Bank of India Act, 1934 SARFAESI Act, 2002 The Banking Regulations Act,

9 4. IMPACT OF FRAUD IN INDIA Offences related to banking activities are not only confined to banks but have a harmful impact on their customers and society at large 4 Many recent fraud incidents reported are related to fix deposits, loan disbursements, and credit and debit card frauds and ATM based frauds. All these frauds show that not only they undermine the profits, reliability of services and operating efficiencies but can also have an impact on the society and the organisation itself. With the increase in the gravity of such instances it is impacting the profitability of the sector and there is an increase in the NPAs. This rise in the NPA is a serious threat to the Indian Banking Industry as the sturdiness of a country s banking and financial sector determines the quality of products and services. It is also a direct indicator of the living standards and well being of people. Thus if there is high level of NPAs in the banking system, then it reflects the distress of borrower and the inefficiencies in the transmission mechanism. The Indian economy suffers greatly due to these incidents. Fraud has also hampered the growth of this establishment/ industry. It is a huge killer for the business sector and underlying factor to all human endeavours. It also increases the corruption level of a country. Even after there are various measures taken by the RBI to limit or decrease the frequency of frauds, the amount of money lost is still on the rise

10 5. CLASSIFICATION OF FRAUD AND PREVENTION To maintain uniformity in fraud reporting, frauds have been classified on the basis of types and provisions of the Indian Penal Code, and the reporting guidelines for the same has been prescribed by RBI The Reserve Bank of India classifies Bank frauds in the following categories 5 : 1. Misappropriation and criminal breach of trust. 2. Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property. 3. Unauthorised credit facilities extended for reward or for illegal gratification. 4. Negligence and cash shortages. 5. Cheating and forgery. 6. Irregularities in foreign exchange transactions. 7. Any other type of fraud not coming under the specific heads as above. 6. MECHANICS OF BANK FRAUDS 6.1. DEPOSIT ACCOUNT FRAUDS: The following types of frauds are generally committed; a) Value inflation of cheques deposited b) Changing the nature of the cheques (Crossed to bearer) c) Operating a dormant account fraudulently d) Non deposition and misappropriation by agents Preventive Measures: a) Careful and systematic examination procedures of cheques and other transactions. b) Separation of book keeping and Cash handling operations

11 c) Using Black light, adhesive tapes and pathfinders to ensure that originality and prevent material alteration PURCHASED BILL FRAUDS: These are generally expensive and can take the following forms: a) Discount on Stolen or Fake Railways Receipts and motor receipts along with other necessary bills. b) Forged/ fake bills with inflated value, drawn on sister concern are discounted. c) Fake/ Forged bills for valueless goods are discounted. Preventive Measures: a) Examining the receipts properly and strictly by confirming from the concerned authorities. b) In case of auction, inform the authorities regarding the interest of the bank in the property so as to get information incase of non collection of goods. c) Establishing a better connection between the purchaser and the seller in case of dispatch of proceeds. d) Strict examination before discounting the bill HYPOTHECATION FRAUD: Cash advances, against pledged goods, as security are fertile field for frauds. a) Unauthorized removal of hypothecated good from the godowns. b) Some of the stocked goods in large quantity may have less value c) Inflation of stock statements. d) Valueless and meaningless stocks are offered as security. e) Hypothecating same goods in favour of different banks. Preventive Measures: a) Strict examination of the bank representative s and borrower s credential b) Only marketable goods to be accepted as security 11

12 c) Proper evaluation of stocks d) Verification of statements of stocks 6.4. LOAN FRAUD: The following types of frauds are generally committed; a) Two different person taking loan on the same item or product b) People taking loan without a providing actual address and disappearing at the time of repayment. c) Loan taken for one purpose but used for a different purpose i.e loan taken for agriculture but used for personal purposes d) Borrowing is denied when the particular person is alleged of non payment. Prevention: a) Proper verification of documents and the purpose for taking the loan b) Including the local authorities as to verify the authencity of the loan purpose and authentication c) Incase of a substantial amount of loan taken, it should be checked by the competent authority COMPUTER RELATED FRAUDS: To provide efficient and fast service, most of the branches of the banks except the ones in the rural and remote areas have been computerized. Not many frauds relating to computers have yet been reported so far as computerization in the Indian banks is of recent origin. But in the western countries where virtually everything is computerized, a large number of cyber crimes in the banking sector are reported on a regular basis. There is a need to analyse the nature of such crimes so that appropriate preventive measures may be devised. Normally following types of frauds are committed- 12

13 (a) Spy software is devised by the cyber criminals to crack the passwords. They enter into the computer system of the banks and manipulate the data to transfer the money from other s accounts. (b) Computer virus is created by the mischief mongers who find way into the computer system by way of s. These viruses destroy the data stored in the computers and slow down the entire computer system. It is sometimes alleged that the manufacturers of anti-virus software themselves create virus so that their product may be sold in the market. (c) Hackers are computer experts who steal the passwords and access the classified information stored in the computer system. They do not even fear to raid the government departments including military establishments to carryout their nefarious design to destroy and mutilate the date stored in the computer systems. Such acts are committed normally not for any material gain but to derive mental satisfaction out of other s sufferings. (d) Wire tapping is a crime committed by tapping the wire of the ATMs of the banks to withdraw money out of other person s account. The fraudster, in this case, attaches a wireless microphone to the telephone line connecting the ATM with the bank s computer and records signals through wire tapping while a customer is using the ATM. These signals are later on utilized for withdrawing money. The Government of India enacted the Information Technology Act, 2000 to provide for punishment and penalties in respect of frauds committed in respect of computers. Section 43 of the said Act provides for hefty damages upto rupees ten lakhs payable by the offender to the person affected in case there are unauthorized acts committed in respect of another person s computer system like access, downloads or taking copies of the information or data stored, introduction of computer contaminant or computer virus, damages to the computer or its system etc. Further, the said Act also provides for punishment with imprisonment upto 13

14 three years for tampering with computer source documents and for hacking the computer systems CHEQUE FRAUDS: This constitutes the biggest volume of bank frauds. This crime is done in the following forms: a) Cheques are stolen, filled and signed spuriously and encashed. b) The signed cheques are stolen and are encashed with alterations, if needed c) Cheques issued by organisations for employees are duplicated d) Alteration of cheques to increase the amount or change the beneficiary or add an additional beneficiary. e) Cheque Kitting: Cheque Kiting exploits a system in which, when a cheque is deposited to a bank account, the money is made available immediately even though it is not removed from the account on which the cheque is drawn until the cheque actually clears 6. Preventive Measure: a) The instrument must contain a proper date b) The cheque must be checked thoroughly and the character should be verified c) Checking the signatures which should be genuine. d) The amount should be checked that it should be written in both numerical and words. e) Checking cheque kitting

15 6.7. DISHONOUR OF CHEQUES Dishonour of cheques or cheque bounces are a very serious problem and it is becoming even bigger. To cope with this issue which was affecting the smooth business transactions, the Government of India has introduced the Negotiable Instruments Act, 1881 which provides for provisions to deal with cases of cheque bounce under section 138 to 142. The Supreme Court of India in a landmark judgement 7 has also provided with new guidelines to deal with cheque bounce cases. Section 138 of the Negotiable Instruments Act, 1881 Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account 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 credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for 1[a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless-- (a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier; (b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque,2[within thirty days] of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and 7 ('MANU/SC/1391/2013'); Indian Bank Association vs. Union Of India 15

16 (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice CREDIT AND DEBIT CARD FRAUD: The introduction of plastic money also brought in the frauds as a natural evil fall out. As more and more number of people using them there is more and more chances of fraud in the related sector. The case is much worse in foreign countries where the general usage is much higher than in India. The various modes of credit/ debit card fraud are: a) Abuse of genuine cards: The genuine cards are stolen while in transit from the institution to the user or from the owners and sometimes the card is stolen, and there is a misuse of the stolen cards. Even in some cases the cardholders falsely report about their card being stolen and go on a shopping spree before the acquirer bank suspends the transactions or block the card. b) Altered Cards An altered card is an original card only which is altered by the fraudsrer by giving a new name and if replaces the signature strip also then he gets genuine account number from a bunco bankster. It is very abnormal and can damage the security features of the card provided by the bank. c) White Plastics The duplicate fraudulent cards are called as white plastics. They are the copy of the original genuine cards. They have pictorial similarities but doesn t have the safety features. d) Impersonation frauds These are also called as application frauds. The fraudster assumes the name and address of some well know personality and collects the card

17 Preventive Measures: Speeding up the transmission of information about the stolen or altered card through a dedicated website. Appointing trained operators to recognise and differentiate between genuine and original cards Monitoring the working of the sale terminals periodically to detect unscrupulous merchants. 7. CONCLUSION These frauds are a creation of the experienced criminals, frantic customers or someone associated with the banking system or a bunco bankster or their collusion. Most of time with a strict vigilance and examination of various documents, their work can easily be detected. The preventive measures stated above in this module will surely help if followed correctly in combating the issue of bank frauds. Information of the conceivable avenues can keep the banker cautioned and subsequently help in battling the frauds. These Frauds are now becoming more and more frequent and can be considered as one of the main reasons for damaging the economy of the country and with such high profile frauds happening all over the country, it has become necessary to put a check to these activities and if possible to create a more stringent legislation to deal with these issues. Sticking to the rules and eternal vigilance is the basic preventive measure. 9 9 Sharma BR; Universal Law Publishing; Bank Frauds Prevention and Detection 17

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