BANK FRAUDS: CONCEPT AND DIMENSIONS

Banks r th engines tht drive th operations n th financial sector,

whh vital fr th economy. Wth th nationalization f banks n 1969,
th l hv emerged engines fr social change. Aftr Independence,
th banks hv passed thrugh thr stages. Th hv moved frm th
character based lending t ideology based lending t today
competitiveness based lending n th context f Indias economic
liberalization policies nd th process f linking wth th global economy.

Whl th operations f th bank hv bm increasingly significant

banking frauds n banks r l increasing nd fraudsters r bmng
mr nd mr sophisticated nd ingenious. In bid t k pace wth th
changing times, th banking sector h diversified t business manifold.
And th ld philosophy f class banking h bn replaced b mass
banking. Th challenge n management f social responsibility wth
economic viability h increased.

DEFINITION OF FRAUD

Fraud defined any behavior b whh n person intends t gain

dishonest advantage vr another. In thr words, fraud n act r
omission whh intended t u wrongful gain t one person nd
wrongful loss t th other, thr b w f concealment f facts r
otherwise.

Fraud defined u/s 421 f th Indian Penal Code nd u/s 17 f th Indian

Contract Act. Thu essential elements f frauds are:

1. Thr mut b representation and assertion;

2. It mut relate t fact;

3. It mut b wth th knowledge tht t false r wthut belief n t truth;

nd

4. It mut induce nthr t act un th assertion n question r t d r

nt t d rtn act.
BANK FRAUDS

Losses sustained b banks result f frauds exceed th losses due t

robbery, dacoity, burglary nd theft-all put together. Unauthorized credit
facilities r extended fr illegal gratification uh case credit allowed
gnt pledge f goods, hypothecation f goods gnt bills r gnt
book debts. Common modus operandi are, pledging f spurious goods,
inletting th vlu f goods, hypothecating goods t mr thn n bank,
fraudulent removal f goods wth th knowledge nd connivance f n
negligence f bank staff, pledging f goods belonging t thrd party.
Goods hypothecated t bank r fund t ntn obsolete stocks packed
n btwn goods stocks nd case f shortage n weight nt uncommon.

An analysis md f cases brings ut broadly th undr mentioned fur

major elements responsible fr th commission f frauds n banks.

1. Active involvement f th staff-both supervisor nd clerical thr

independent f external elements r n connivance wth outsiders.

2. Failure n th part f th bank staff t follow meticulously laid dwn

instructions nd guidelines.

3. External elements perpetuating frauds n banks b forgeries r

manipulations f cheques, drafts nd thr instruments.

4. Thr h bn growing collusion btwn business, top banks

executives, civil servants nd politicians n power t defraud th banks, b
gttng th rules bent, regulations flouted nd banking norms thrown t th
winds.

FRAUDS-PREVENTION AND DETECTION

A close study f n fraud n bank reveals mn common basic features.

Thr m hv bn negligence r dishonesty t m stage, n part f
n r mr f th bank employees. On f thm m hv colluded wth
th borrower. Th bank official m hv bn putting u wth th
borrowers sharp practices fr personal gain. Th proper care whh w
expected f th staff, custodians f banks interest m nt hv bn
taken. Th banks rules nd procedures laid dwn n th Manual
instructions nd th circulars m nt hv bn observed r m hv
bn deliberately ignored.

Bank frauds r th failure f th banker. It d nt mn tht th external

frauds d nt defraud banks. But f th banker upright nd knw h job,
th task f defrauder wll bm extremely difficult, f nt possible.
Detection f Frauds
Dt ll care nd vigilance thr m tll b m frauds, thugh thr
number, periodicity nd intensity m b considerably reduced. Th
fllwng procedure wuld b vr helpful f tkn nt consideration:

1. All relevant data-papers, documents etc. Shuld b promptly collected.

Original vouchers r thr papers forming th basis f th investigation
huld b kt undr lock nd key.

2. All persons n th bank wh m b knowing mthng but th time,

place modus operandi f th fraud huld b examined nd thr
statements huld b recorded.

3. Th probable order f events huld thrftr b reconstructed b th

officer, n h wn mind.

4. It advisable t k th central office informed but th fraud nd

furthr developments n regard thereto.

Classification f Frauds nd Action Required b

Banks
Th Reserve Bank f India hd set-up high level committee n 1992
whh w headed b Mr. A Ghosh, th thn Dy. Governor Reserve Bank
f India t inquire nt vru aspects relating t frauds malpractice n
banks. Th committee hd noticed/observed thr major u fr
perpetration f fraud gvn hereunder:

1. Laxity n observance f th laid dwn system nd procedures b

operational nd supervising staff.

2. Ovr confidence reposed n th clients wh indulged n breach f trust.

3. Unscrupulous clients b tkng advantages f th laxity n observance f

established, time tested safeguards l committed frauds.

In order t hv uniformity n reporting cases f frauds, RBI considered th

question f classification f bank frauds n th basis f th provisions f
th IPC.

Given blw r th Provisions nd thr Remedial measures tht n

b taken.

1. Cheating (Section 415, IPC)

Remedial Measures.

Th preventive measures n respect f th cheating n b concentrated

n cross-checking rgrdng identity, genuineness, verification f
particulars, etc. n respect f vru instruments wll persons
involved n encashment r dealing wth th property f th bank.

2. Criminal misappropriation f property (Section 403 IPC).

Remedial Measure

Criminal misappropriation f property, presuppose th custody r control f

funds r property, subjected, wth tht f th person committing uh
frauds. Preventive measures, fr th class f fraud huld b tkn t th
level th custody r control f th funds r property f th bank generally
vests. Suh measure huld b sufficient, t extended t th persons
wh r tull handling r hvng actual custody r control f th fund r
movable properties f th bank.

3. Criminal breach f trust (Section 405, IPC)

Remedial Measure

Care huld b tkn frm th initial step whn person m t th

bank. Care nd t b tkn t th time f recruitment n bank well.

4. Forgery (Section 463, IPC)

Remedial Measure

Bth th prevention nd detection f frauds thrugh forgery r important

fr bank. Forgery f signatures th mt frequent fraud n banking
business. Th bank huld tk special care whn th instrument h bn
presented thr bearer r order; n case bank pays forged instrument h
wuld b liable fr th loss t th genuine costumer.

5. Falsification f accounts (Section 477A)

Remedial Measure

Proper diligence required whl filling f forms nd accounts. Th

accounts huld b rechecked n daily basis.

6. Theft (Section 378, IPC)

Remedial Measures
Encashment f stolen cheque n b prevented f th bank lrl f
th age, sex nd tw visible identify action marks n th body f th person
travelers cheques n th bk f th cheque leaf. Th wll hl th paying
bank t easily identify th cheque holder. Theft frm lockers nd safe
deposit vaults r nt easy t commit bu th master-key remains wth
th banker nd th individual key f th locker handed vr t th
costumer wth due acknowledgement.

7. Criminal conspiracy (Section 120 A, IPC)

In th case f State f Andhra Pradesh v. IBS Prasad Rao nd Other, th

accused, wh wr clerks n cooperative Central Bank wr ll convicted
f th offences f cheating undr Section 420 read lng wth Section 120
A. ll th fur accused hd conspired tgthr t defraud th bank b
making false demand drafts nd receipt vouchers.

8. Offences relating t currency notes nd banks notes (Section 489 A-

489E, IPC)
Th sections provide fr th protection f currency-notes nd bank notes
frm forgery. Th offences undr section are:

(a) Counterfeiting currency notes r banks.

(b) Selling, buying r ung genuine, forged r counterfeit currency notes

r bank notes. Knowing th m t b forged r counterfeit.

(c) Possession f forged r counterfeit currency notes r bank-notes,

knowing r counterfeit nd intending t u th m genuine.

(d) Making r passing instruments r materials fr forging r counterfeiting

currency notes r banks.

(e) Making r ung documents resembling currency-notes r bank notes.

Mt f th bv provisions r Cognizable Offences undr Section 2(c)

f th Code f Criminal Procedure, 1973.

FRAUD PRONE AREAS IN DIFFERENT ACCOUNTS

Th fllwng r th potential fraud prone areas n Banking Sector. In

addition t th areas I hv l gvn kinds f fraud tht r common n
th areas.

Savings Bank Accounts

Th fllwng r m f th examples bng played n respect f savings
bank accounts:

(a) Cheques bearing th forged signatures f depositors m b presented

nd paid.

(b) Specimen signatures f th depositors m b changed, rtulrl

ftr th death f depositors,

(c) Dormant accounts m b operated b dishonest persons wth r

wthut collusion f bank employees, nd

(d) Unauthorized withdrawals frm customers accounts b employee f th

bank maintaining th savings ledger nd ltr destruction f th rnt
vouchers b them.

Current Account Fraud

Th fllwng types r lkl t b committed n case f current accounts.

(a) Opening f frauds n th names f limited companies r firms b

unauthorized persons;

(b) Presentation nd payment f cheques bearing forged signatures;

(c) Breach f trust b th employees f th companies r firms possessing

cheque leaves duly signed b th authorized signatures;

(d) Fraudulent alteration f th amount f th cheques nd gttng t paid

thr t th counter r thugh nthr bank.

Frauds In Case Of Advances

Fllwng types m b committed n respect f advances:

(a) Spurious gold ornaments m b pledged.

(b) Sub-standard goods m b pledged wth th bank r thr vlu m

b shown t inflated figures.
(c) Sm goods m b hypothecated n favour f dffrnt banks.

LEGAL REGIME TO CONTROL BANK FRAUDS

Frauds constitute white-collar crime, committed b unscrupulous persons

deftly advantage f loopholes existing n systems/procedures. Th ideal
situation n thr n fraud, but tkng ground realities f th nations
environment nd human natures fragility, n institution huld lw lk
t k th overreach f frauds t th minimum occurrence level.

Following r th relevant sections relating t Bank Frauds

Indian Penal Code (45 f 1860)

(a) Section 23 Wrongful gain.-

Wrongful gain gain b unlawful means f property t whh th person

gaining nt legally entitled.

(b) Wrongful loss

Wrongful loss th loss b unlawful means f property t whh th

person losing t legally entitled.
(c) Gaining wrongfully.

Losing wrongfully-A person d t gain wrongfully whn uh person

retains wrongfully, wll whn uh person acquires wrongfully. A
person d t lose wrongfully whn uh person wrongfully kt ut f
n property, wll whn uh person wrongfully deprived f
property.

(d) Section 24. Dishonestly

Whvr d nthng wth th intention f causing wrongful gain t n

person r wrongful loss t nthr person, d t d tht thng
dishonestly.

(e) Section 28. Counterfeit

A person d t counterfeit wh u n thng t resemble nthr

thing, intending b means f tht resemblance t practice deception, r
knowing t t b lkl tht deception wll thrb b practiced.

BREACH OF TRUST

1. Section 408- Criminal breach f trust b clerk r servant.

2. Section 409- Criminal breach f trust b public servant, r b banker,

merchant r agent.

3. Section 416- Cheating b personating

4. Section 419- Punishment fr cheating b personation.

OFFENCES RELATING TO DOCMENTS

1) Section 463-Forgery

2) Section 464 -Making false document

3) Section 465- Punishment fr forgery.

4) Section 467- Forgery f valuable security, will, t

5) Section 468- Forgery fr purpose f cheating

6) Section 469- Forgery fr purpose f harming reputation

7) Section 470- Forged document.

8) Section 471- Ung genuine forged document

9) Section 477- Fraudulent cancellation, destruction, etc., f will, authority

t adopt, r valuable security.

10) Section 477A- Falsification f accounts.