BANKING FRAUDS DISRUPTING THE ECONOMY
Himanshu Gupta,
CPJ COLLEGE OF HIGHER STUDIES AND SCHOOL OF LAW
INTRODUCTION
Banks are a type of financial institution that provides and governs a country's financial services. These services are provided to business entities, governments, citizens, etc. A good financial system is said to be the backbone of the nation, as it serves the whole nation. several types of banks form part of the banking system in India, such as the central bank (Reserve Bank of India), commercial banks, cooperative banks, local area banks, specialized banks, etc.
Banks create a safe environment in society by keeping safe the hard-earned money of the people. Also, by providing interest on the deposits made by the general public, it creates a sense of trust and polishes the customer-bank relationship, and it also encourages people to deposit their savings and get interest on them so that the money increases over time rather than decreasing. Providing loans to needy people is one of the key purposes for which banks were established in the past. Anyone having the necessary documents can obtain loans from the bank, followed by giving some valuable property to the bank as security, also called collateral in banking terms. Earlier, no one even thought of frauding banks; there was a sense of responsibility people felt for repaying their loans in due time and with due interest. But nowadays people don’t show any interest in repaying their debts, even some people obtain loans from the banks with the core intention[1] to defraud the banks and escape with the money. These kinds of loans are obtained with false or forged documents. Most of the time, a bank's employees are also involved in the act of fraud. An employee can help the fraudster obtain loans through false or forged documents by sharing the loopholes in the process of obtaining loans.
Banking fraud is the intentional dishonest or illegal act of acquiring money or assets from financial institutions through fraud, coercion, or misrepresentation. Banking frauds are a major threat to the economy of any nation, as they affect the economy adversely and reduce the trust of the people and business entities in the financial system. Fraudsters find new ways to explore and exploit the loopholes in the financial system to commit bank fraud. Banking fraud is treated as a criminal offense, and anyone convicted will be punished accordingly.
With the rapid spread of technology and smartphones reaching every hand. It becomes important to spread awareness about banking frauds, as new users are the primary target of these fraudsters. Due to this type of activity, cybercrimes are also increasing every day.
TYPES OF BANKING FRAUDS
BANK FRAUD BY INSIDERS
In most cases, the bank fraud comes out in the public domain. One of the main reasons why fraudsters can carry out such types of activities is the involvement of insiders of the banks who help fraudsters undertake such activities and defraud the bank. Insiders have all the relevant information about the workings of banks and also know how to exploit the loopholes in the system, and these are enough help for the fraudsters, which led them to successfully obtain loans and eventually defraud the banks.
ROGUE TRADERS
A rogue trader is a high-ranking insider who is authorized by the bank to invest large sums of money on behalf of the bank. All commercial banks are involved in this process of investing their money to earn profits. This authorized trader can misuse his authorized powers to secretly make high-risk investments with the bank’s fund for bigger short-term gains to cover or hide the previous losses, which ultimately leads to a chain of losses and banks losing their hefty amount of money in this process. This kind of fraudulent act creates a negative impact on the bank’s reputation.
FRAUDULENT LOANS
Lending money, i.e., giving loans, is the major source of income for all the banks. Banks are happy to lend money if they know that it will be repaid. however a fraudulent loan is taken with the intention to not return the money in the name of dishonest business entities and even sometimes to non-existing organizations. This is done by bribing the bank officials to pass the loan without proper verification. In these types of frauds, when caught, the borrower usually files bankruptcy or disappears. These kinds of acts of negligence of banks are the sole reasons why people nowadays are losing their trust in banks, as when someone defrauds any bank and to a huge amount that not only impacts the bank but also impacts the money of other people who have their accounts in that particular bank.
WIRE FRAUD
Wire transfer networks are used by banks to transfer large amounts of money daily to settle their accounts with other banks. These transactions are the target because, once done, they are almost impossible to reverse. The insiders who have proper information about this transaction can show fake documents to transfer the money into an offshore account owned by them. When these types of transactions are caught in the audit, it is of no use as the money has already been stolen.
USE OF FORGED/FRAUDULENT DOCUMENTS
Banks handle a large number of transactions on a daily basis, with each transaction leading to an inflow or outflow of money from their accounts. They have to keep a regular account of every cent that is transacted through their systems. So, forged documents are frequently used to mask other frauds. A forged document may be used to show the stolen money as a loan, withdrawal by customers, transfers, etc.
THEFT OF IDENTITY
In this, the fraudsters try to get the personal information of the depositors from the dishonest bank employees for using it for fraud and theft. This information is used to get identity cards and credit cards in the victim’s name and personal details, which is thereby used to scam the depositors.
DEMAND DRAFT (DD) FRAUD
This type of fraud is undertaken by one or more dishonest bank insiders that commit demand draft fraud. The insiders know the coding and punching of demand drafts as they are involved in the functioning of the bank. They take a few demand drafts from the stock and use them as normal demand drafts. These demand drafts will be presented without debiting an account and will be payable in a faraway town and will be cashed at the payment branch, and as they are treated as normal demand drafts, the payment branch will cash them in the ordinary course of business. This fraud will be caught when the branch-by-branch audit is done by the bank, which usually takes six months.
FORGERY AND ALTERED CHEQUES
Cheques are often tampered with to modify the name on the cheque to deposit cheques intended for someone else or the amount on the face. Fraudsters may also use fake signs on blank cheques to withdraw money from the victim’s account. They print their cheque in the name of other people’s accounts, non-existing accounts, or accounts held by non-existing depositors, and before the cheque is rejected, the amount is already withdrawn. Forgers also cherish stolen bank cheque books because they may sign as if they are the owner of that cheque book.
CHEQUE KITTING
In this method, the fraudsters use the system loophole in which money is made accessible as soon as the cheque is presented before the bank without actually debiting the bank account of the cheque holder. The fraudsters use this time to cash the cheque and transfer the actual funds from the account. The initial deposited cheque is frequently discovered to be a counterfeit cheque.
FRAUDULENT LOAN APPLICATIONS
Individuals and organizations use forged documents while obtaining loans from banks, which are used to hide their past credit history full of defaults and financial issues. The bank, looking at the documents, sees their loan as a solid investment, but actually it is a hazardous loan. Some companies, to obtain loans, tamper with their books of account and inflate the assets of the company to make the company look trustworthy. Later, these organizations default on the loans and file bankruptcy, which leads to huge losses for banks.
PHISHING AND INTERNET FRAUD
In phishing, the victim receives a forged email imitating their original bank asking them to update their information on the link provided by them; otherwise, the bank account will be suspended. The link takes the victim to a forged website that looks the same as the original site of the bank. When the victim uploads the details on the forged website, it reaches the hands of fraudsters, and this information is used by them to scam the victim. Such links may also add viruses to the device, which steal the personal data from the victim’s device.
LAWS AND POLICY RELATED TO BANK FRAUDS
The term ‘fraud’ is defined under Section 17 of the Indian Contract Act, 1872. Any of the following activities undertaken by a contracting party, their connivance, or their agent with the purpose of deceiving or encouraging another party or their agent to join into the agreement are considered fraud. The situations leading to fraud have been provided hereunder:
The assertion as a fact of something that is not true by someone who does not believe it is true.
The deliberate hiding of a fact by someone who knows or believes it.
A commitment made with no intention of following through.
Any other conduct that is designed to deceive.
Any act or omission that is expressly declared fraudulent by the law.
Ingredients of fraud
There should be a suggestion as to a fact.
The fact suggested should not be true.
The suggestion should have been made by someone who does not believe it to be true, and
The suggestion should be made with intent either to deceive or to induce the other party to enter into the contract.
Punishment for fraud
The penalty for perpetrating fraud is non-compoundable, as it includes both a fine and a period of imprisonment. Online fraud has increased as technology has progressed, and as a result, committing fraud has become a serious legal infraction.
Fraud is punishable under Section 447 of the Companies Act of 2013. About 20 sections of the Act are dedicated to exposing frauds committed by an organization’s/directors, an entity's auditors, key managerial staff, and/or corporate officers. There are dedicated sections for the punishments of people who are directly involved in the institutions or organizations and play a vital role in the working and decision-making process of that institution because when these people are involved in such defrauding acts that demolish the institution’s reputation and also affects the core functioning of that institution.
If a person is found guilty of fraud under Section 447 of the Companies Act, 2013, he may be sentenced to jail for a period ranging from six months to ten years.
Remedies available to the aggrieved party against fraud
In the event of a fraud, the plaintiff has two options:
The plaintiff has the right to retract, or terminate, the contract and seek reimbursement for his/her losses.
Confirm the contract and file a lawsuit against the defendant for damages.
The defendant’s criminal intent can be proven depending on the facts and circumstances of the case. The defendant can then face criminal proceedings, which might result in fines or perhaps a prison sentence for the defendant.
WELL KNOWN BANK FRAUDS IN INDIA
● NIRAV MODI – PNB SCAM, 2011
This is one of the most famously known banking frauds in India, which unfolded in 2018. Nirav Modi was a well-known jeweler, was famous for his diamond necklaces. Nirav Modi, along with his associates, managed to pull a bank fraud of Rs 11,400 crore, which shook the whole financial system of India. Due to this fraud, Punjab National Bank (PNB) suffered huge financial losses, which also harmed its reputation and lost the trust of people and business entities.
● VIJAY MALYA- KING FISHER AIRLINES SCAM, 2016
Vijay Malya was a pretty famous businessman who was behind the operation of Kingfisher Airlines. Vijay Malya succeeded in obtaining loans from several different banks for operating the airlines but is accused that he did not use the loan for operating the airlines instead he used that money to finance his personal needs. His loan default was of approximately Rs 9,000 crore, which shook the entire nation when it came out in the public domain. He also succeeded in leaving India before his scam came out in the public domain and flew to London to protect himself from the Indian authorities. Since then, the authorities have been trying to bring him back from London but have failed.
● ROTOMAC PENS FRAUD 2008-2018
The incident is famously known as the PEN FRAUD, as the Vikram Kothari and his family took out a loan from various banks for their pen manufacturing business, but they allegedly used the funds for every purpose other than the purpose for which they took the loan. The banks that gave the loan to the Kothari family faced major financial losses and a big dent in their reputation. The default was said to be of Rs 3,696 crore.
CONCLUSION
The Central Bank of India and the government of India have been making continuous efforts to spread awareness about online frauds like phishing and internet fraud to prevent citizens from losing their wealth.
There are several reforms done in the financial system to overcome the issue of banking fraud, but the fraudsters still succeed in finding loopholes in the system and exploiting them for their benefit, due to which people nowadays are losing trust in the banking system.
The laws to punish fraudsters should be made stricter, and any person found guilty should be punished accordingly. The system to catch these types of fraudsters should be improved and made more efficient so that these laws and punishments could discourage the people, which will help in preventing such types of activities.
Everyone should be made aware not to share OTP’s (ONE TIME PASSWORD) with anyone, also not to share any other details of their bank accounts, and not to tap on any fishy links. There are no ways to earn money easily and quickly; all these schemes that claim to give you a huge sum of money in return are just shady scams.
The government should launch various awareness campaigns to stop all these scams happening with the general public, and in case of protection of banks from such frauds, monitoring the bank’s employees and accounts regularly will be helpful, as will doing the verifications properly whenever someone wants to obtain loans from the bank.
REFERENCES
● https://www.aubank.in/blogs/beware-of-banking-frauds
● https://www.canarabank.com/pages/Online-Banking-Frauds
● https://groww.in/blog/types-of-banking-frauds
● https://www.bankofbaroda.in/banking-mantra/digital/articles/common-internet-banking-frauds-and-prevention-tips#:~:text=9)%20Automatic%20Transfer%20System%20(ATS,occur%20at%20regular%20intervals%20automatically.