Banking Fraud – Emerging Threat to Indian Economy

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“Bank” when one thought about it, that is always relating to the money whether you borrow it or deposit with bank, the financial institution which accepting deposits and granting loans can be defined as a bank. The Bank has its own significance in the economy of the any country, It is one of the major factor in the economy. It is the institution which offers great help for the economic development of the country, so in the modern time the depends on the bank for its various services has increased a lot, so the risk factor also emerge with it. Risk of depositing money in the bank, risk of giving loans of higher amount to the customer an thereon . When we talk about risk factor from the banks point of view the risk of a fraud is now a days becoming more dangerous not only in respect of particular bank but on the large extend to the overall economic growth of the Nation.

            The bank continuous to work in efficient manner for there customers and the nation so one cannot neglect the contribution of banking sector which has its own importance specially in the modern economy. The manufacturers borrow from the bank the money needed for purchase of raw materials and to meet other requirements such as working capital. The bank plays important role in the creation of new capital (or capital formation) in the country and thus helps the growth process. It is safe to keep money in the banks, interest is also earn thereby so the desire to save  stimulated and volume of saving increases. The saving can be utilized to produce new capital. Bank in this era are more updated and customer friendly by giving different types of services like Net banking to transact with online mode, demat account facility, to deal with shares and debentures, overdraft and many more. There are banks known as industrial banks which assists the formation of new companies and new industrial enterprises and gives long term loan to manufactures. The banking systems facilitates Internal and International trade. A large part of trade is done on credit. Banks provide reference and guarantee on behalf of their customers, on the basis of which seller can supply goods on credit. Trade is also assisted by the grant of a loan by discounting bill of exchange and foreign exchange transactions which are also done through banks.

            So for giving many services the banking system have to work in proper manner. Indian banking system is one of the strongest banking system. The regulation of a banking system is known as “CORE” banking system that is centralize real time exchange it can be define as banking services provided by a group of a network bank branches where customers may access there bank account and perform basic transactions from any of the member branch office. Banking business are usually manage via the corporate banking divisions of the institutions. CORE banking become possible with the advancement of computer and tele communication technology that allows information to be shared between bank branches quickly and efficiently. Core banking functions include transition of accounts, loan, mortgages and payments. Bank make these services available across multiple channels like automated teller machine (ATM), internet banking, mobile banking and branches for the smooth conduct of the banking system. Some necessary security measures had to be taken by bank which include Anti virus, Anti malwares protection. These program helps to detect and prevent viruses and malicious software socket layer (SSL) multifactor authentication measures, credential confidentially etc.

            As the title suggest about the frauds for that matter, the main job of the every bank is to accept deposit and grant loans so, as far as the banking fraud is concern the loan giving policy is that particular thing which matter a lot, Indian banks has variety types of loan (under which the firm or an individual paid certain amount by bank on specific rate of interest) such loans are granted particularly to businessman and members of the public against personal security, gold, silver and other movable and immovable assets at different rate of interest allowed by bank, the rate of interest varies depending upon the purpose, period and the mode of repayment. There are various kinds of loans such as cash credit, short term or long term loan and advances, Demand loans, Bank overdraft, discounting of bills and many others. In the recent past time the banking system has provided another methods of lending money like wise Letter of credit commonly  knowns as LoC it is a document that guarantees the buyers payments to the sellers. It is issued by the bank and ensures timely and full payment to the seller, if buyer is unable to make such payment, the bank covers the full or the remaining amount on behalf of the buyer. A letter of credit issued against a pledge of securities or cash. Banks typically collect a fee. i.e. a percentage of size / amount of the letter of credit.

            Another concept is of letter of undertaking  can said to be sort of guarantee that is issued by a banking entity to the concern person for attaining short term credit from the overseas branch of an Indian bank. Such LoU’s are not issued against retail transactions but are employed in business or trade transactions. In short it is nothing but the guarantee given by the Indian bank to the overseas branch of the said Indian bank for the repayment in foreign currency.

            These facilities which are provided by bank in case of loan sometimes it becomes problematic for the banking institution itself whether it is private or public bank, because there are some individuals or firm who fails to pay the amount of loan with interest so bank have to search many different ways to recover the money from them, this loan related aspects directly affects the balance sheet of bank which show loss and NPA’s (Non-Performing Assets) it due to inability of repayment of loan the various wrongful activities takes place which are known as fraud or scam. The fraud is defined in the laws of India for example Contract Act 1872 section 17 “Fraud means and includes any of  the following Acts committed by party to a Contract or with his connivance or by his agent with intent to deceive another party these to of this agent or to induce his to enter into the contract”

            This is the rising concern in the Indian economy there are different kinds of fraud which may happen due to various reasons, like in normal sense the fraud is the use of potentially illegal means to obtain money, assets or other property owned or help by a financial institution or to obtain money from depositors by fraudulently posing as a bank or other financial institution, in many instances it is an criminal offence. There are multiple types of frauds which can be seen in banking sector like wise accounting fraud which is serious financial problem, some employees purposely make the commission or omission of particular accounting figures in financial statement of bank, Demand draft fraud which lays down by particular bank, another were bill discounting frauds, Fraud related with uninsured deposits of banks, duplication or skimming of card information, cheque fraud and forged or fraudulent documents, false loan applications, fraudulent loans, fraud related with ATM machines these are the major fraud types so nowadays the banks needs to be more careful and accurate in their working system.

            When we talk about the particular crime or offence irrespective of its nature there are particular or common reason behind it at every time when particular wrongful act occurs in any field like that these are very much important reasons behind the banking fraud which are  related with the top management and lower management or may be consists of whole system of the particular bank, public or private does not matter. The reasons if we see or analyze the fraud we usually found those are related with ethics and values, both are the different things one is talk about what is right and what is wrong and another  with its knowing or understanding the right and wrongs. A greed in human nature one can control it or losses it depends upon  the situation, while dealing with the banking transaction the transparency should be always maintain specially with handling the complex financial transactions other wise due to lack of transparency the chances of miss happenings increase. For the maintenance of transparency the whole management is responsible, for that so the poor management will always held liable for the fraud if it happens within the organization so that structure of bank has to be designed in that way whenever if any complicated instances arises the proper solution can be find in less time, otherwise the complex organizational structure leads to the miss appropriation, the poor accounting control, lack of clear moral directions from senior management which include themselves in ‘semicurupt’ behavior will create problems in future for that institution, almost blind faith on an individual can also be one of the reason behind the scam or fraud in banking sector.

            The daily life fraud also can be said as “Phishing” so when we see the no. of events firstly the fraudsters meets each other and gets divided into 2 or 4 groups, while doing a call they always state the name of SBI main branch or the ATM headquarters, minimum two persons requirement is there the fact is that they are not from HQ’s of bank rather from somewhere else, the state bank of India has its huge customer base in India so many  times cheater gives the reference of SBI if not the first but second or third person caught in their snare, the partner of that cheater is ready with e-wallet along side him, the information received by the cheater from the person to whom they have made the call then it is all filled with e-wallet so when all the details once acquired by the cheater then all money from that person’s account come into their account, another thing is that previously the fraudsters only demands for OTP so people started doubting on them then another idea they got rather than directly asking for OTP they used to tell that your ATM PIN is blocked for the purpose of new pin add a secret no to your old pin, what ever it may be but it has to be of four digits then caller provides this secret number to that person on the along side by deducting the secret no. the caller finds the actual pin no. it means just confused the person on the call in the form of OTP, PIN etc. gets acquired  all the details of various cards and debit their whole bank balance. Because of this kind of method it is very much difficult for the police even to catch them because it is done by different people at different levels, the sim card they used to call it is many of times of a dead man when police try to investigate them it found that card is fake or registered on others name which is used only at once for call then thrown away, after when police try to trace the IMEI number of phone or location of it, many times ended by having nothing because the phone was also destroyed after some times and e-wallets were also gets shut down the police states that only those cheaters gets caught who are new in this or make the silly mistakes while doing fraud otherwise it is very difficult to catch them if someone find himself in this situation then firstly informed to their bank and blocked all cards then informed to the nearest police station or cyber cell via online, if possible there are many examples of this frauds like in  January 2020 the lady who was browsing on internet received  one link after clicking on it she lost total 14,050 rupees just within 10 minutes the lady victim didn’t share any PIN or CVV or OTP with anyone yet money was debited by the fraudsters.

PNB FRAUD CASE

            In our life we can see such kind of negligence which ultimately leads to fraud there are some of major cases which took place in recent past in the Indian banking sector which has put big question mark on this sector. When we talk about such cases there are some of the major cases of famous businessman’s like Nirav modi the PNB scam if we look in deep of this scam it happens in 2018 which started many years back then, the Punjab National Bank fraud case relates to fraudulent letter of undertaking worth Rs.11,35,684 crore (US $ 1.4 billion) issued by PNB at its bardy house branch of Mumbai making Punjab National Bank liable for the amount the fraud was allegedly organized by jeweler and designer Nirav Modi. Nirav, his wife Ami modi, brother Nishal modi and uncle Mehul Choksi’s, all partners of the firm, M/s Diamond R US, M/s Solar export and M/s stellar diamonds along with PNB officials and employees and directors of Nirav modi and Mehul Choksi’s firm have all been named in charge sheet by CBI and E.D.

            The bank initially said that two of its employees at the branch were involved in the scam as the bank’s Core banking system was by passed when the corrupt employees issued LOU’s to overseas branches of the other Indian banks, including Allahabad bank, Axis bank and Union Bank of India by using the international financial communication system, SWIFT. The transaction were noticed by new employees of the bank then bank complained to CBI who is currently investigating agency apart from ED and RBI, CBI named some of the key officials in a charge sheet holding them responsible for failure to implement several circular and caution notices issued by RBI regarding the reconciliation of SWIFT messages and core banking system.

            The PNB officials in its complaint informed the agency that at the bank’s branch office at bardy house in fort Mumbai two of its employees retired deputy manager of PNB and another bank officials issued fraudulent LOU’s to Hong-kong based creditors on behalf of three firms associated with Nirav modi and Gitanjali group, As of 18 may 2018 the scam ballooned rupees 14,356 crore and Nirav modi said to be hiding in London by using fake passport, then on 13 June 2018 CBI issued red corner notice by approaching to Interpol against Nirav modi and his co-partners alleged for fraud.

          India’s enforcement directorate had began attaching assets of the accused and is seeking to immediate confiscation under fugitive economic offenders ordnance, in march 2020, ED also auction 72 luxury items sees from Nirav modi for Rs.2.29 crore on June 2020. The prevention of money laundering act (PMLA) court has ordered confiscated of nearly Rs.1,400 crore worth property of Nirav modi.

            Nirav Modi who disappeared in 2018 caught by British police in London on behalf of Indian Police who asked for extradition of Modi. Nirav Modi’s legal team made four bail application which were refused by the UK court on the ground that modi deemed high risk promote majors and legal action taken by the Indian Government and PNB helped in securing the extradition of Nirav modi by the UK. Home security of UK Preeti Patel sign off and order to extradite Nirav modi.

            Besides a case was filled against the fugitive at the depth recovery tribunal who issued and order of recovery about 7300 crores in 2019 from Nirav Modi.

ROTOMAC FRAUD CASE

            There was a another bank fraud case of Rotomac owner and businessman Vikram Kothari, Rotomac is a stationery brand of Pre Internet era is a fresh in our memories for its catch line “Likhte Likhte love ho Gaya” and also because promoted by Bollywood starts, According to reports, the company took loans from Allahabad bank, Bank of India, India overseas bank and Union bank of India, Oriental bank of commerce, Bank of Maharashtra and mainly Bank of Baroda who field a FIR in CBI as Kothari did not repay the loan amount as well as interest. The amount misappropriated reaches around Rs.3,685 crore including interest and penalties of Rs.776 crore.

            As rough estimates suggest from 2008 Kothari took different amount of loans from different banks as mentioned above in this scam, it is particularly observed that Round – tripping is a practice in which a company sells an unused asset to another company while at the same time agrees to buy back the same or similar assets at about the same price. This has been rampant in Rotomac case, the company took money for executing export orders but remitted the same amount to some other accounts, The representative of bank of Baroda who is from the Hong Kong branch visited the address given by the Rotomac for Gulf distribution ltd. and found that the latter maintained virtual office only not a physical office which was not present. The buyers and suppliers of Kothari’s co. actually operated from virtual offices it has found this BOB said in its complaint to CBI, so for this matter the BOB also alleged that Rotomac (FEMA) violated foreign exchange management Act rules and worked for interest rate differential in local and foreign currency.

            Immediately after registering the case the CBI carried out searches at three locations in  which Kanpur included Kothari’s residence, also according to CBI officials the company allegedly used two modes operandi for siphoning off the loans secured from consortium of banks from 2008 onward. Enforcement Directorate (E.D.) files case against promoters of Rotomac for loan default of Rs.3695 crore the agency registered the case under the prevention of money laundering act (PMLA) after standing CBI FIR which was register earlier. The E.D. then attached worth Rs.177 crore in connection with money laundering probe against M/s. Rotomac Global Private Limited and its directors located at various places apart from this Kothari was declared willful defaulter in 2017 by bank of Baroda, the Income tax dept. also came in action by filling 6 charge sheets against Vikram Kothari these complaints were filled in special court in Lucknow under Income Tax Act.

            Besides this there are couple of more popular cases of Vijay Mallya who is also considered as willful defaulter. The Mallya owes Rs.9000 crore from 17 Indian banks and also accused of fraud and money laundering cases in the country. The another complaint in CBI was registered this time by the oriental bank of commerce in which OBC has alleged that jewellery company took loans for gold jewellery export and import between 2007 and 2012 but failed to pay back, CBI action comes in wake, a case was registered after receiving a complainant from the OBC on 16 August 2017 regarding its bank loans. The loan turned into non-performing assets in 2014 but bank approached the agency in 2017 after the company had folded up and prime accused settled the country, then CBI started tracing by issuing look out circulars (LoC’s) against the directors of diamond jewelry exporting firm like this there are many cases of bank frauds.

            When fraud of any kind took place it not only affect the party who involved in it but at a large extent to the whole economy, as far as banking sector is concern the fraud losses the public trust and most importantly the money with the bank of depositors. Bank scams are one of the most distrust factors for any economy. Hence, the scamming bank must face stringent action by regulator, bank scams cause a dis-balance in the economy often leading to the weak of the market.

            Due to such scams stock market faces huge crashes there by affecting the economy in a big way, This causes a slowdown in economic growth often leading to weakening of the economy and often disappearance of foreign investments. Often scam revolves around individuals making such deposits to bank, solely to churn their black money into white, sometimes bank give away loans to individuals or institutions way above paying capacity. Once bank start to falls this leads to a greater effect on the economy and it affect a lot the normal lives. Thus the most important factor in the ‘death’ of YES bank is the trust factor which has declined from the bank. Thus, it has affected millions of people in India and major players who tied up with this bank in their journey.

            From the harmful impacts on the overall growth of the country specially economic development, the fraud prevention must be there for that purpose there are many changes are being made in legal system as of now the RBI becomes more aware has set guide lines in respect of fraud which includes, the managing Directors (MD) / Chief Executive officer (CEO) / (CMD’s) must provide focus on the fraud prevention and management functions to enable among others, for effective investigations of fraud cases and accurate reporting to law enforcement authorities, this can be categories as a general guidelines for fraud, then the classification of fraud has to be there which should be registered in central fraud register (CFR) based on monetary return filed by banks, including updates available and access given to bank of password and user id’s, the caution advices, another important thing that bank should avoid the delays of in reporting of frauds with RBI after that proper report submission is required then the review procedure annually or quarterly, closure of the cases which is also has to be done in proper way.

IPC & VARIOUS ACTS FOR FRAUD PREVENTION      

            There are various offences which consists in cases of fraud those are mention in Indian penal code -1860 those are section 124A criminal conspiracy, 405 criminal branch of trust, 415-cheating, 420 cheating and dishonesty inducing delivery of property, 421 – dishonest or fraudulent removal or concealment of property to prevent distribution among creditors. 464- making  false documents, 463-forgery as far as these offence are concern which were mentioned in IPC  as having a punishment which includes the imprisonment or death penalty depending upon the circumstances in offence. There are certain laws made by government like Debt Recovery Tribunal which was established under the recovery of debts and Bankruptcy Act 1993, with specific objective of providing expeditious adjudication and recovery of debts due to banks and financial institutions. A case can be filled before the DRT where the amount to be recovered from the borrower is more than 10 lakhs, DRT expected to resolves the case within 6 months. Then there was a SARFESI Act 2002 – securitization and reconstruction of financial assets and enforcement of security interest Act in this the bank can acquire the security which is associated with NPA loan and then by registering it on CERSAI can transfer for sell before that bank has to issue notice to borrower & within  25 days can expect  the replay if not received then bank can do further legal proceedings.

            For foreign  regulations there is  foreign exchange management Act 1999, is an act of parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payment and for promoting orderly development and maintenance of foreign exchange market in India, previously it was FERA that is foreign exchange regulation act which makes offences related to foreign exchange civil offences according to FEMA Act 1999 section 3 & 4 explains the dealing and holding of foreign exchange section 5, 6 consists of transaction current account and capital account transaction in this act the powers are given Reserve bank to inspect authorized reason and directorate of enforcement who plays vital role with regards to power of search seizure etc. as mention is section 36, 37, 37 A of the said act, further the act has provision for penalties as well which includes in chapter 4 U/s 13, 14, 14 A, & 15, which says that any person who contravenes the provision of this act by violating the rules and regulations issued direction and orders and any condition subject to authorization shall be liable to a penalty up to thrice the same involved in such contravention where such amount is quantifiable or up to 2 lakhs rupees or if he contravention continues the penalty will be extend to five thousand rupees every day If person is found to have acquired any foreign exchange or foreign security of aggregate value as mention is sub-section 1 of section 37 A shall also be liable for penalty up to three times the sum involved.

             Another act which comes in action that is prevention of money laundering act 2002, which has provisions for in respect to Banking companies financial institutions and intermediaries for that purpose there is a mentioning about the powers of directors to impose fine as mention in chapter five of said act u/s 12, 13, 14, 15 when we talk about the offence of money laundering its explanation is given in chapter two u/s 3 and section 4 for punishment in this there is a provision for rigorous imprisonment which is not less than 3 years or extend up to 7 years with fine which may extend to 5 lakhs apart from this in this act also thee is a provisions for summons, searches & seizures as mention in chapter 5 from section 15 to 24, the special court provision is also there u/s 43 to 47.

            In 2018 the Government of India passed another act to prevent the fraudulent activities and its offenders under the fugitive economic offenders Act 2018 which consists of two chapters in the first one if talks about the declaration of fugitive offender and confiscation of property32, in second one which is miscellaneous and includes the rules of evidence, appeal, Bar jurisdiction powers of central government to amend schedules, overriding effects etc. from section 16 to 26 of said act, apart from this in this act various section of IPC are also applicable.

            Though we have a strict law the fraud cases in banking sector are increasing so the question comes why ? if thee is proper law for everything then its implementing also has to be done in proper way within at particular time otherwise the offenders wont be caught. When we see in some of major cases of bank fraud it is observed that most of the time the internal management is liable for that whether it is employees or the manager at top level who knows the exact nature of bank and its policies so by finding loop. Holes in it there are able to work for individuals or for an institution by favoring them in wrongful acts for that matter the RBI should supervise the bank’s working quarterly or annually it has it is also found that after receiving multiple notices bank do not take any actions so in those matters RBI should strictly take action against that bank without wasting time, while giving loan the tract record must be properly verified by banks the audit system should be separately needs to be implemented for the banks so that the detention of wrong activity, like manipulating figure, issuing false document etc. can come forward as far as laws are can earn the provision for punishments should be increased and the procedure has to be complete as early as possible when we talk about different agencies some time the weaker enforcement can be seen because they are burden with excessive work pressure and therefore have to choose different assignments, this is due to insufficient man power and sources available at their disposal. In Indian banks it can be observe that due to poor appraisal system and monitoring mechanism post for sanction of loan is weaker in PSBS compared to PVBS on account of diverse loan portfolio which needs to be change.

            According to working paper of IIM, Bangalore on frauds in the Indian Banking Industry. Observe that more than 95% of a number of fraud cases and amount involve in fraud loans from commercial banks, among the commercial banks, public sector banks account for just 18% of total number of fraud cases. There are various cases in which the courts in India have given proper judgements in relation with bank fraud cases. e.g. IIC Ltd. v/s debt recovery appellate tribunal and others Supreme Court of India.

            The report publish by statistic research department on 15 March, 2021 in the financial year 2020 the Reserve Bank of India reputed a total more than 8700 banks frauds across India which include all kinds like mobile banking, fraud like wise this was another sharp increase compare to the previous year and follows trade of last decade. The total value of bank fraud more than double from 715 billion Indian Rupees to 1.85 trillion Indian Rupees.

CONCLUSION

It is clear that the bank fraud is the critical issue before the country but the pace of development for an effective mechanism to fight it is negligible banking fraud affects the modern quality of a life and imposes a detrimental effect on National growth. A number of strategies can be develop by both the reserve bank of India and Government of India to curb the menace of banking frauds. However these strategies can only be effective if they straight the development of a more effective banking system in fact within the banking system fraud is on of the areas which need immediate and urgent attention.

            However Indian Penal Code 1860 does not recognize banking fraud as a separate offence, different provisions of IPC 1860 are attracted depending upon the facts of each case of banking frauds. This shows that till now, these is no independent legislation to deal with banking fraud exclusively and comprehensively, In general the banking fraud constitute white collar crime committed by unscrupulous person smartly taking under advantages of loop holes existing in current banking system and its procedures.

Author: Durgesh Prashant Parkhi, Law College M.V.P. Samaj’s.

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