BANK FRAUD INVESTIGATION PPT Final

Bank Frauds : Basics and
Investigation
1
Introduction
 Banks are an essential part of the Indian economy.
 While the primary responsibility for preventing frauds lies with
banks themselves.
 Banks dealing with public's money: due care and diligence
 The RBI advisory to banks for prevention of frauds.
2
Definition of fraud
 Fraud can loosely be defined as “any behaviour by which one

person intends to gain a dishonest advantage over another“
fraud, under section 17 of the Indian contract act, 1872,
 RBI has defined the term “fraud” in its guidelines on frauds
which reads as under.
 “A deliberate act of omission or commission by any person,
carried out in the course of a banking transaction or in the
books of accounts maintained manually or under computer
system in banks, resulting into wrongful gain to any person for
A temporary period or otherwise, with or without any monetary
loss to the bank”.
3
Table 1: Number of frauds cases reported by RBI
regulated entities
(No. of cases in absolute terms and amount involved in Rs. crore)
Sl. No. Category No. of cases Amount involved
1 COMMERCIAL BANKS 169190 29910.12
2 NBFCs 935 154.78
3 UCBs 6345 1057.03
4 FIs 77 279.08
176547 31401.01
5 Total
4
Types of frauds
 Account opening fraud: this involves a deposit and cashing of

fraudulent cheques.
 Cheque kiting: is a method where by a depositor utilizes the
time required for cheques to dear to obtain an unauthorized
loan without any interest charge.
 Cheque fraud: most common cases of this kind of fraud are
through stolen cheques and forged signatures.
 Counterfeit securities: documents, securities, bonds and
certificate could be forged, duplicated, adjusted or altered and
presented for loan collection.
5
 Computer fraud: hacking, tampering with a diskette
to gain access to unauthorized areas and give credit to
an account for which the funds were not originally
intended.
 Loan fraud: when funds are lent to a non-borrowing
customer or a borrowing customer that has exceeded
his credit limit.
 Money laundering fraud: this is a means to conceal
the existence, source or use of illegal obtained money
by converting the cash into untraceable transactions in
banks.
6
 Letters of Credit: Most common in international
trading, these are instruments used across borders ads
can be forged, altered, adjusted and take longer to
identify.
 Advanced Fees Fraud: Popularly known as „419‟,
advanced fees fraud may involve agent with an offer
of a business proposition which would lead to access
often for a long term.
7
Table 2: Year-wise and amount of fraud cases in
the banking sector
(No. of cases in absolute terms and amount involved in Rs. crore)
Sl. No. Year No. of cases Total

amount
1 2009-10 24791 2037.81
2 2010- 11 19827 3832.08
3 2011- 12 14735 4491.54
4 2012- 13 13293 8646.00
8
Frauds in banks’ advances portfolio
 Frauds related to the advances portfolio accounts for the largest
Share of the total amount involved in frauds in the banking
sector. (Involving amount of Rs. 50 crore and above)
 Another point that public sector banks account for a substantial
chunk of the total amount involved in such cases.
 Declaration of frauds by various banks in cases of consortium/
multiple financing we have on occasions observed more than 12–
15 months lag in declaration.
 The large value advance related frauds, which pose a significant
challenge to all stakeholders, are mainly concentrated in the
public sector banks.
9
 Majority of the credit related frauds are on account of deficient
appraisal system, poor post disbursement supervision and
inadequate.
 Reserve bank has also advised banks to audit periodically so
that cases of multiple financing may be detected in the initial
stages itself.
10
Table 4: Bank Group wise Advance Related Frauds
Rs. 1 Crore & above in value
Source: BIS central bankers‟ speeches

11
Expectations of the supervisor
 RBI has clearly indicated that fraud risk management, fraud

monitoring and fraud investigation function must be owned by
the bank‟s CEO, audit committee of the board.
 In respect large value frauds, the special committee of the
board are CMDs, CEOs, audit committee and the special
committee evolving robust fraud risk management systems.
 They are responsible for effective investigation of fraud cases
and accurate reporting to appropriate regulatory and law
enforcement authorities.
 Top management puts in place targeted fraud awareness
training for its employees focusing on prevention and detection
of fraud.
12
 Audit systems prevalent in banks have not proved effective in
detecting fraud cases.
 Providing individuals a means to report suspicious activity is a
critical part of an anti-fraud program.
 A system of protected disclosure scheme has been evolved
which is regulated by CVC in case of public sector banks.
13
Investigation of Bank Frauds
 Target: Minimize Losses, Least Adverse Publicity, Preserving

of material Evidence, Effective Legal Action
 Agencies: District Police,

CID(CB),
EoW
SFIO
CBI (fraud amount more than 3 crores in Public
Sector Banks )
14
 Important Steps in investigation:
 Preliminary Enquiry ( if required, permitted in SC judgment of
Lalita Kumari) to ascertain cognizable offence, N.I Act, Civil
matter?
 FIR : Proper drafting is key,( Bhajan Lal case) moneyed

suspects.
 Understand the banking methodology, co-opt experts( Satyam
case)
 Searches , collection of documents including hard disks(
proper custody , 65B I. EV. Act, 2A Bankers Books of Evidence
Act), imaging of hard disk.
 Contd…
15
 Motivate the witnesses with the help of bank
 Examine witnesses showing original documents
 Arrest and seizure u/s 27 Ev. Act, LOC
 Freeze accounts u/s 102 CrPC and inform magistrate
 Analysis and examination of documents: CAs, FSL
 Is there any need for Letter Rogatories?
16Contd.
 Summing up evidence: FR/CS? , DE?, CVO? CBI? ED?
 Necessary follow up action with other agency.
 Key of investigation: immediate collection of

documents, evidence about dishonest knowledge, mensrea,
17
Conclusion
 The impact of frauds on entities like banks, and the economic
cost of frauds can be huge in terms of likely disruption,
confidence in the banking system and may damage the integrity
and stability of the economy.
 It can bring down banks, undermine the central bank‟s
supervisory role and even create social unrest, discontent and
political upheavals.
 The vulnerability of banks to fraud has been heightened by
technological advancements in recent times.
 Challenge before investigation agencies lies in shape of

capacity building, quality of investigation, support from
experts.
18
 CASES: STUDIES
19

 Thanks
20

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Bank Frauds : Basics and

 Fraud can loosely be defined as “any behaviour by which one

Sl. No. Category No. of cases Amount involved

1 COMMERCIAL BANKS 169190 29910.12

2 NBFCs 935 154.78

3 UCBs 6345 1057.03

 Account opening fraud: this involves a deposit and cashing of

Sl. No. Year No. of cases Total

2 2010- 11 19827 3832.08

3 2011- 12 14735 4491.54

4 2012- 13 13293 8646.00

Source: BIS central bankers‟ speeches

 RBI has clearly indicated that fraud risk management, fraud

 Target: Minimize Losses, Least Adverse Publicity, Preserving

 Agencies: District Police,

 FIR : Proper drafting is key,( Bhajan Lal case) moneyed

 Examine witnesses showing original documents

 Arrest and seizure u/s 27 Ev. Act, LOC

 Freeze accounts u/s 102 CrPC and inform magistrate

 Analysis and examination of documents: CAs, FSL

 Is there any need for Letter Rogatories?

 Necessary follow up action with other agency.

 Key of investigation: immediate collection of

 Challenge before investigation agencies lies in shape of

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