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THE FIGHT AGAINST BANK FRAUDS: CURRENT SCENARIO AND FUTURE

CHALLENGES

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ISSN:0254-0223 Vol. 31 (n. 2, 2016)

THE FIGHT AGAINST BANK FRAUDS:

CURRENT SCENARIO AND FUTURE
CHALLENGES

Dr. Madan Lal Bhasin

Visiting Professor,
School of Accountancy, College of Business
Universiti Utara Malaysia (UUM), Kedah, Malaysia
E-mail: madan.bhasin@rediffmail.com

ABSTRACT: Banks are the engines that drive the operations in the financial
sector, money markets and growth of an economy. With the rapidly growing
banking industry in India, frauds in banks are also increasing very fast, and
fraudsters have started using innovative methods. As part of the study, a
questionnaire-based survey was conducted in 2013-14 among 345 bank
employees to know their perception towards bank frauds and evaluate the factors
that influence the degree of their compliance level. In the modern era, there is
―no silver bullet for fraud protection. The use of neural network-based behavior
models in real-time has changed the face of fraud management all over the world.
Banks that can leverage advances in technology and analytics to improve fraud
prevention will reduce their fraud losses. Recently, forensic accounting has come
into limelight due to rapid increase in financial frauds or white-collar crimes.

Some other promising steps to control frauds are: educate customers about fraud
prevention, make application of laws more stringent, leverage the power of data
analysis technologies, follow fraud mitigation best practices, and employ
multipoint scrutiny. In 2015, the RBI has introduced new mechanisms for banks
to check loan frauds by taking pro-active steps by setting up a Central Fraud
Registry, introduced the concept of Red Flagged Account, and Indian
investigative agencies (CBI, CEIB) will soon start sharing their databases with
banks. Although banks cannot be 100% secure against unknown threats, a certain
level of preparedness can go a long way in countering fraud risk.

Keywords: Bank frauds, banking industry, RBI, risk management, use of

technology, current scenario, future challenges.

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INTRODUCTION

A well-organized and efficient banking system is an essential pre-requisite for the

economic growth of every country. In modern era, banking industry plays an
important role in the functioning of organized money markets, and also acts as a
conduit for mobilizing funds and channelizing them for productive purposes. It
has been observed during the last 50 years that even the sophisticated markets and
long-functioning banking systems have had significant bank failures and bank
crisis on account of increasing magnitude of frauds and scams. Banks, therefore,
need to get their customers actively involved in their fraud prevention efforts as
customers may be willing to switch to competing banks if they feel left in the dark
about those efforts. Since banking industry is a highly-regulated industry, there
are also a number of external compliance requirements that banks must adhere to
in the combat movement against fraudulent and criminal activity (Bhasin, 2010).

The Indian banking industry is unique and has no parallels in the banking history
of any country in the world. Banking industry, which was operating in a highly
comfortable and protected environment till 1990s, has been pushed into the
choppy waters of intense competition. After independence, the banks have passed
through three stages. They have moved from the character-based lending to
ideology-based lending to today competitiveness-based lending in the context of
India‘s economic liberalization policies and the process of linking with the global
economy (Singh, 2005). The banking sector of India accommodates 1,175,149
employees, with total of 109,811 branches in India (and 171 branches abroad),
and manages an aggregate deposit of Rs. 67,504.54 billion (US$1.31 trillion) and
bank credit of Rs. 52,604.59 billion (US$870 billion). The net profit of the banks
operating in India was Rs. 1,027.51 billion (US$17 billion) against a turnover of
Rs. 9,148.59 billion (US$150 billion) for the financial year 2012-13. The public-
sector banks (PSB) accounted for 74.6% of bank deposits, while private-sector
banks had only 18%, with the rest of the funds lying with regional rural banks and
foreign banks. The PSBs have a 75 market share, but the number of banking
frauds by private banks is five times that of PSBs. The phenomenal spread of
branches, growth and diversification in business, large-scale computerization and
networking, have collectively increased manifold the operational‘‘ risks faced by
the banks. In fact, globalization and deregulation have opened up new frontiers for
banks to augment their revenues. The pressure to grow rapidly in a highly
competitive environment has also given a new dimension to managing
‗operations‘ risk—the risk of loss resulting from inadequate or failed internal
processes, people, and systems, or from external events. Reserve Bank of India
(RBI) is the regulatory body, keeping an eye, over banking industry.

The banking sector, being the barometer of the economy, is the reflective of the
macro-economic variables. There has been a noticeable upsurge in transaction
through ATMs and internet/mobile banking. Consequently, the different banks
have invested considerably to increase their banking network and their customer
reach. The Indian banking industry is currently worth Rs. 81 trillion (US$1.31

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trillion), as shown below in graph, and banks are now utilizing the latest
technologies like internet and mobile device to carry out transactions and
communicate with the masses (Pan, 2015). ―The Indian banking sector is
expected to become the fifth largest in the world by 2020 and third largest by the
year 2025,‖ according to KPMG-CII report on the banking sector. While the
banking industry in India has witnessed a steady growth in its total business and
profits, the amount involved in bank frauds has also been on the rise. This
unhealthy development in the banking sector produces not only losses to the
banks but also affects their credibility adversely (Kaveri, 2014).

Recently, Pan (2015) stated that ―deposits of Indian banking industry is Rs. 81
trillion (USD1.30 trillion) in 2014. Banks are using internet and mobile devices to
carry out transactions and communicate with the masses.‖ Moreover, according to
th
KPMG-CII report (2013), ―Indian banking sector has potential to become 5
rd
largest in the world by 2020, and 3 largest by 2025.‖ Besides, Kaveri (2014)
remarked that ―while the Indian banking industry has witnessed a rapid growth
in their business and profits, the amount involved in bank frauds has also been on
the rise. This unhealthy development causes losses to the banks and badly affects
their credibility.‖ As KPMG‘s ‗India Fraud Survey 2012‘ states, ―Despite having
a strong regulator, the financial services sector has emerged as the most
susceptible sector to frauds.‖ According to Chiezey and Onu (2013), ―fraudulent
activities cause losses to banks and their customers, and also reduce money
available for the development of economy.‖ Shockingly, ―the banking industry in
India dubs rising fraud as an inevitable cost of business‖ (E&Y). According to
Deloitte India Banking Fraud Survey Report (Edition II, 2015), ―Common causes of
frauds in banking include diversion & siphoning of funds, whereas fraudulent
documentation and absence, or overvaluation of collaterals were the main reasons for
fraud in retail banking.‖ Thus, in nutshell, ―inadequate measures to prevent banking
fraud is the primary reason for widespread frauds. Technology is like a double-edged
sword, which can be used to perpetuate, detect and prevent frauds‖
(Bhasin, 2013).

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However, Gates and Jacob (2009) have pointed out that ―the misuse of technology
in the banking includes use of banking access for over-payments to vendors, sharing
confidential information, and misuse of technology for unauthorized activities.‖ Also,
providing services on mobile and social media platforms, with limited knowledge of
security requirements, poses lot of threats to customers and banks (ACL, 2015). Data
analysis software enables auditors and fraud examiners to analyze an organization‘s
business data to gain insight into how well internal controls are operating and to
identify transactions that indicate fraudulent activity or the heightened risk of fraud
(Bhasin, 2012). Data analysis can be applied to just about anywhere in an
organization where electronic transactions are recorded and stored. As Kumar and
Sriganga (2014) stated, ―By leveraging power of data analysis technology, banks
can detect fraud very soon and reduce the impact of losses due to frauds. Use of new
technology can prove to be very helpful to control the fraud risk in banks.‖ It is a
well-known fact that investigation and prosecution of fraudsters in India is ―very
slow, time-consuming process, thus, the danger of fraud will always be there. Since
banking industry is a highly-regulated industry, there are also a number of external
compliance requirements that banks must adhere to in the combat movement against
fraudulent and criminal activity.

Recently, banking sector business has become more complex with the
development in the field of information and communication technology, which
has changed the nature of bank fraud and fraudulent practices. For example,
Berney (2008) observes that customers rely heavily on the web for their banking
business, which leads to an increase in the number of online transactions.
Similarly, Gates and Jacob (2009), and Malphrus (2009) have asserted that ―the
internet provides fraudsters with more opportunities to attack customers, who are
not physically present on the web to authenticate transactions.‖ Fraud, however, is
a major component of operational risk. But if the banker is upright and knows his
job well, the task of the defrauder will become extremely difficult, if not
impossible. This has thrust enormous responsibilities in terms of prescribing and
maintaining an effective architecture of internal checks and controls, and optimum
use of innovative technology (Wells 2005). Banks have more technology and
more incentive than ever to combat fraud in electronic banking services. But
whether they have enough technology and incentive to protect consumers from the
headaches of a compromised account, payment card or identity is doubtful.

MEANING AND TYPES OF BANK FRAUDS

Fraud is a worldwide phenomenon that affects all continents and all sectors of the
economy. As per RBI, fraud can be ―loosely‖ described as ―any behavior by
which one person intends to gain a dishonest advantage over another.‖ Fraud
encompasses a wide-range of illicit practices and illegal acts involving intentional
deception or misrepresentation. The Institute of Internal Auditors‘ ―International
Professional Practices Framework (IPPF)‖ (2009) defines fraud as: ―Any illegal
act characterized by deceit, concealment, or violation of trust. These acts are not
dependent upon the threat of violence or physical force. Frauds are perpetrated by

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parties and organizations to obtain money, property, or services; to avoid payment

or loss of services; or to secure personal or business advantage.‖ Fraud impacts
organizations in several areas including financial, operational, and psychological.
While the monetary loss owing to fraud is significant, the full impact of fraud on
an organization can be staggering. In fact, the losses to reputation, goodwill, and
customer relations can be devastating. As fraud can be perpetrated by any
employee within an organization or by those from the outside, therefore, it is
important to have an effective fraud management program in place to safeguard
your organization‘s assets and reputation.

Banks can secure and preserve the safety, integrity and authenticity of the
transactions by employing multipoint scrutiny: cryptographic check hurdles. In
addition, banks should rotate the services of the persons working on sensitive
seats, keep strict vigil of the working, update the technologies employed
periodically, and engage more than one person in large-value transactions. Of
course, internal auditors can continue to win the battle against frauds and scams
through the continued application of fundamentals, such as education,
technological proficiency, and support of good management practices. Close
attention and vigilance on the part of both banks and customers is, therefore, the
best deterrence. According to Freddie Mac (2015), ―Fraud Mitigation Best
Practices‖ include: (a) Fraud Risk Management Policies and Procedures: Put
sound and appropriate fraud detection, prevention, investigation, resolution, and
reporting policies and procedures in place, and communicate them to employees;
(b) Regulatory Compliance: Ensure appropriate policies and procedures are in
place pertaining to your company‘s obligations under the RBI Act, as applicable;
(c) Ethical Conduct: Familiarize employees with your company‘s standards for
ethical conduct; (d) New Employee Awareness: Incorporate fraud awareness in
new employee orientation programs; and (e) Training: Ensure that employees
receive fraud training appropriate for their roles and levels.

One of the most challenging aspects in the Indian banking sector is to make
banking transactions free from electronic crime (Pasricha and Mehrotra, 2014).
Fraud detection in banking is a critical activity that can span a series of fraud
schemes and fraudulent activity from bank employees and customers alike. It may
be noted at the outset that all the major operational areas in banking industry
offers a good opportunity for fraudsters, with growing fraud and financial
malpractices being reported under deposit, loan, and inter-branch accounting
transactions (including remittances). Frauds generally take place in a financial
system when safeguards and procedural controls are inadequate, or when they are
not scrupulously adhered to, thus, leaving the system vulnerable to the
perpetrators (Bhasin, 2012). Most of the time, it is difficult to detect frauds well-
in-time, and even more difficult to book the offenders because of intricate and
lengthy legal requirements and processes. In the fear of damaging the banks
reputation, these kinds of incidence are often not brought to light. Historical
evidence shows that whether the agency (or individual) committing the fraud
works for the bank or deals with it, the culprit usually does very careful and

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detailed planning before he finally attacks the system at its most vulnerable point.
Table 1 shows some of the common types of frauds in the Indian banking sector.
In today‘s volatile economic environment, the opportunity and incentive to
commit frauds have both increased. Instances of asset misappropriation, money
laundering, cybercrime and accounting fraud are only increasing by the day. With
changes in technology, frauds have taken the shape and modalities of organized
crime, deploying increasingly sophisticated methods of perpetration. As financial
transactions become increasingly technology-driven, they seem to have become
the weapon of choice when it comes to fraudsters.

Table 1: Types of Frauds Prevalent in the Indian Banking Industry

Bribery and Cybercrime Multiple funding Counterfeit cheques
corruption
Terrorist Financing Data Security Identity theft Tunnelling
Money Laundering Loan loss Internet banking Absence of
frauds collaterals
Tax Evasion Fraudulent Incorrect sanctioning Mobile Banking
documentation Risks

According to the PwC Global Economic Crime Survey 2014, ―cybercrime was
one of the top economic crimes reported by organizations across the world,
including India.‖ Regulations and laws governing the financial services sector in
India are continuously evolving. For any growing organization, it is critical to
keep up with the changing laws in order to mitigate risks and stay ahead. Some of
the important regulatory drivers for the financial sector in India are as follows: (a)
Reserve Bank of India Act, 1934; (b) Securities and Exchange Board of India Act,
1992; (c) Companies Act, 2013; (d) Prevention of Money Laundering Act, 2002;
and (e) The Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015. The PwC‘s Survey identified that suspicious
transaction reporting, effective fraud risk management measures, whistleblowing
processes and tip-offs helped financial services organizations to detect most
frauds. According to Accenture (2015), ―‖The key trend being seen across the
banking industry is integration and optimization of fraud management tools and
capabilities‖ including the followings:
Integration of IT security and fraud management capabilities to address the
increasingly technical nature of fraud attacks, as well as the impact of
innovations in the banking sector, such as mobile applications and
payments.
Greater use of social network analysis and cyber data mining to identify
the propensities of both new and existing customers to participate in
fraudulent activities.
Updates to international payment fraud controls.
Consolidation of legacy systems, including cross-financial crime
prevention toolkits.
Strengthening of Fraud Control Framework for outsourcing contracts and
off-shored services.

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Increased industry coordination and improved fraud reporting.

Development of pan-channel solutions for customer on-boarding and
ongoing ID&V.
Desire to move to global solutions to deal with fraud and anti-money
laundering problems, to reduce the cost of financial crime prevention.

There is no simple way to squash fraud, but by implementing the right mix of
technologies and prevention techniques, treasury executives can greatly reduce their
organization‘s risk. As Accenture‘s Santoro puts it, ―A solid portfolio of solutions
with multiple layers of protection and controls can go a long way toward providing
the necessary protection. If you put enough deadbolts at the door, thieves are going to
give up and look elsewhere.‖ According to Accenture (2015), ―changing customer
demographics, the expansion of banks into new markets, and the adoption of new
technologies and channels present new challenges in fraud protection. Rapid
technological and social changes alter the relationship between banks and their
customers in a way that creates new opportunities for fraudsters.‖
It is an endless game of ―cat and mouse‖ between banks and cyber-criminals.
There is a virtual arms race taking place online between financial institutions and
cyber criminals, who as soon as the bank deploys a new process or technology to
prevent online fraud, they find a weakness to exploit (ACI, 2013; Dzomira, 2014).
In addition, customers expect to be protected from fraud, but also want anti-fraud
tools to look at them holistically, assessing the fraud risk of transactions based on
their individual profiles. Five ways to combat bank frauds are highlighted below
as:

1. Adopt appropriate technologies: An inclusive mix of strong authentication

systems; analytics software; and bank services, positive pay and payee
verification, for example, can greatly reduce an organization‘s exposure to
fraud. It is important to have layers of protection.
2. Beef up your internal controls: Sarbanes-Oxley mandates that companies
pay strict attention to their internal controls. But even the most thorough
Sarbanes-Oxley compliance effort cannot provide comprehensive protection
against fraud. Proactive organizations will want to put additional controls in
place, including rigorous approval procedures and careful separation of duties.
That is especially true of disbursement processes, such as wire transfers.
3. Screen job applicants carefully: One of the biggest security problems
company‘s face is fraud perpetrated by trusted insiders. Key finance functions
such as treasury must conduct background checks on potential hires, and
companies should also consider drug testing and honesty testing. It is the first
line of defense.
4. Educate your workforce: Employees need to understand how damaging
fraud can be to the organization. They must be able to recognize signs of
fraudulent activity and know how to report it. In addition, treasury employees
will need to be trained in the correct use of the company's fraud-protection
tools and technologies.

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5. Prosecute thieves: Many organizations fire employees who are caught

stealing but avoid prosecuting them for fear of bad publicity. A zero-tolerance
policy goes a long way toward reducing the risk of illegal activity. Likewise,
managers should immediately turn over any evidence of suspected fraud to
law enforcement agencies.

WHO IS RESPONSIBLE FOR FRAUD DETECTION?

While the senior management and the board of Directors of the Banks are
ultimately responsible for a fraud management program, internal audit can be a
key player in helping to address fraud. By providing an evaluation on the potential
for the occurrence of fraud, internal audit can show an organization how it is
prepared for and is managing these fraud risks. Instead of relying on reactive
measures like whistleblowers, organizations can and should take a more hands-on
approach to fraud detection (ACL). A fraud detection and prevention program
should include a range of approaches–from point-in-time to recurring and,
ultimately, continually for those areas where the risk of fraud warrants. Based on
key risk indicators, point-in-time (or ad hoc) testing will help identify transactions
to be investigated. If that testing reveals indicators of fraud, recurring testing or
continuous analysis should be considered. According to Deloitte India Banking
Fraud Survey Edition II (2015), ―Some of the top reasons for increase in fraud
incidents are: (a) Lack of oversight by line managers/senior management on
deviations from existing processes, (b) Business pressures to meet unreasonable
targets, (c) Lack of tools to identify potential red flags, and (d) Collusion between
employees and external parties.‖

In today‘s automated world, many business processes depend on the use of

technology. This allows for people committing fraud to exploit weaknesses in
security, controls or oversight in business applications to perpetrate their crimes.
However, the good news is that technology can also be a means of combating
fraud. Internal audit needs to view technology as a necessary part of their toolkit
that can help to prevent and detect fraud. Leveraging technology to implement
continuous fraud prevention programs helps to safeguard organizations from the
risk of fraud and reduce the time it takes to uncover fraudulent activity. This helps
both to catch fraud faster and to minimize the impact it can have on organizations.
According to ACL (2015), the analytical techniques, which may prove very
effective in detecting fraud, are shown below:

Calculation of statistical parameters to identify outliers that could indicate

fraud
Classification to find patterns amongst data elements
Stratification of numbers to identify unusual entries
Digital analysis using Benford‘s Law to identify unexpected occurrences
of digits in naturally occurring data sets.

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Joining different diverse sources to identify matching values where they

should not exist
Duplicate testing to identify duplicate transactions such as payments,
claims or expense report items.
Gap testing to identify missing values in sequential data where there
should be none.
Summing of numeric values to identify control totals that may have been
falsified
Validating entry dates to identify suspicious items for postings or data
entry.
st
As very strongly emphasized by Bhasin (2015), ―In the 21 century, the forensic
accountants are in great demand and forensic accounting is listed among the top-
20 careers of the future.‖ Recent accounting scandals and the resultant outcry for
transparency and honesty in reporting, therefore, have given rise to two disparate
yet logical outcomes. First, forensic accounting skills have become very crucial in
untangling the complicated accounting maneuvers‘ that have obfuscated financial
statements. Second, public demand for change and subsequent regulatory action
has transformed corporate governance (CG) scenario (Bhasin, 2016). Therefore,
many senior-level company officers and directors are under the ethical and legal
scrutiny. In fact, both these trends have the common goal of addressing the
investors‘ concerns about the transparent financial reporting system. The failure of
the corporate communication structure has also made the financial community
realize that there is a great need for skilled professionals that can identify, expose,
and prevent structural weaknesses in three key areas: poor CG, flawed internal
controls, and fraudulent financial statements (Bhasin, 2012). Therefore, forensic
accounting skills are becoming increasingly relied upon within a corporate
reporting system that emphasizes its accountability and responsibility to
stakeholders.
A KPMG ―Forensics Fraud Risk Management‖ report states, ―unlike
retrospective analyses, continuous transaction monitoring allows an organization
to identify potentially fraudulent transactions on, for example, a daily, weekly, or
monthly basis. Organizations frequently use continuous monitoring efforts to
focus on narrow bands of transactions, or areas that pose particularly strong risks.‖
By leveraging the power of data analysis technology organizations can detect
fraud sooner and reduce the negative impact of significant losses owing to fraud.
According to DSCI-KPMG Survey (2010) measures such as SMS alert, separate
transaction password, virtual keyboard seem to be more popular, adoption of the
strongly advocated measures, such as one-time-password (dynamic token),
identity grid and risk-based authentication are still at a nascent stage.

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MAGNITUDE OF FRAUDS: THE INDIAN BANKING SCENARIO

According to Ernst & Young Report (E&Y 2012), ―Different types of frauds
caused Rs. 6,600 crore loss to the Indian economy in 2011-12, and banks were the
most common victims in swindling cases; insider enabled fraud accounted for
61% of fraud cases.‖ However, Soni and Soni (2013) concluded that ―cyber fraud
in the banking industry has emerged as a big problem and a cause of worry for
this sector.‖ Similarly, another survey conducted by Deloitte (2012) shows that
―banks have witnessed a rise in the number of fraud incidents in the last one
year, and the trend is likely to continue in the near future.‖ The Deloitte India
Banking Fraud Survey Report Edition II (2015) added ―number of frauds in
banking sector have increased by more than 10% over the last two years. Banks
witnessed rise in level of sophistication with which frauds were executed.‖ It is
universally accepted that continued prevalence of frauds will have long-term bad
consequences for banks, customers, investors, government and the economy in
general.

The year-wise details, beginning from 2000-01 to 2013-14, regarding the number
and amount of frauds reported by the Indian banking sector to the RBI, are shown
in Table 2. The following broad generalizations can be made. During the last six
years, from 2000-01 to 2005-06, the number of fraud cases has shown a constantly
rising trend. For example, in 2000-01 there were 1858 cases of frauds, which
substantially jumped to 2658 fraud cases in 2005-06. However, in 2006-07 and
2007-08, the number of fraud cases declined sharply from 2568 to 1385,
respectively. In fact, the amount involved in fraud cases has also increased very
sharply from the lowest level of Rs. 374.97 crore during 2002-03 to the highest
level of Rs. 1134.39 crore during 2005-06. The year 2007-08 was an exceptional
year in which the amount of loss caused due to fraud declined to Rs. 396.86 crore.
In sharp contrast to this, year 2005-06 was also a very significant year for the
banking industry, since this year witnessed the highest ever fraud loss of Rs.
1134.39 crore. Keeping in view the loss of Rs. 451.04 crore in 2004-05, the loss
of Rs. 1134.39 crore in 2005-06, works out to about 2.5 times the loss of previous
year. Moreover, the scenario of number of frauds and amount involved has
significantly changed from 2008-09 to 2013-14. For example, 24,791 cases of
frauds were reported in 2009-10, which showed a constant trend of decline till
2012-13. Number of fraud cases reported were 19,827 in 2010-11, which declined
to 14,735 cases in 2011-12, and 13,293 cases in 2012-13 (a decline of 46.37%),
respectively. As against this, the trend has reversed when we have a look at the
amount of loss suffered by banks during the same period. For instance, the amount
of loss suffered has increased very sharply from Rs. 2037.81 crore in 2009-10 to
Rs. 8646 crore in 2012-13, an increase of 324.27%.

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As Pai and Venkatesh (2014) reported, ―As on March 31, 2014 banks reported
total loss of Rs. 169,190 crore from 29,910 cases. In 2012-13, Rs. 13,293 crore of
fraud was detected from 8646 cases.‖ During Apr.-Dec. 2014, PSBs suffered
losses of Rs. 11,022 crore from 2100 fraud cases involving Rs. one lakh or more.
During same period, 46% more amount was lost due to frauds compared to last
full-year.

Table 2: Number of Frauds and Amount Involved in Indian Banks

Year ending Amount Involved Number of Fraud Cases
31st March (Rs. in Crore) Reported to RBI
2000-01 538.56 1,858
2001-02 470.37 1,353
2002-03 374.97 1,643
2003-04 823.61 2,193
2004-05 451.04 2,520
2005-06 1134.39 2,658
2006-07 844.76 2,568
2007-08 396.86 1,385
2008-09 1911.68 23,941
2009-10 2037.81 24,791
2010-11 3832.08 19,827
2011-12 4491.54 14,735
2012-13 8646.00 13,293
2013-14 169190.00 29,910
(Source: Compiled by the author from various published bank reports)

With the advent of mobile and internet banking, the number of banking frauds in
the country is on the rise as banks are losing money to the tune of approximately
Rs. 2,500 crore every year. While the figure for 2010-11 was Rs. 3,500 crore, for
the current financial year (till September) it is about Rs. 1,800 crore. Further,
state-wise list of information on banking frauds shows Maharashtra (Mumbai)
reporting the highest number of cases to the RBI. In the last financial year, banks
in the Maharashtra reported 1,179 cases with Rs. 1,141 crore being lost to such
frauds. Maharashtra is followed by Uttar Pradesh with 385 cases during the same
period.

RBI GUIDELINES FOR FRAUD CASES

The RBI requires banks to pursue fraud cases vigorously with the CBI or police
authorities, and in court. In the case of PSBs, all fraud cases below Rs. one crore
should be reported to the local police, except when the CVO and CMD consider it
serious, and when the cases cannot be classified in monetary terms. In those cases,
the frauds are referred to the CBI. Cases above Rs. one crore must be referred to a
different wing of the CBI depending on the category it falls into. In the case of
private-sector banks, frauds of Rs. one lakh and above committed by an outsider,

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in connivance with a bank official should be referred to the local police. In actual
practice, in many of the cases, the banks do not follow the RBI guidelines. Banks
response to fraud is critical as it has the ability to prevent future occurrences. Any
response to fraud should be swift and effective so as to percolate the right
message to employees. According to a 2009 Circular issued by RBI states,
―Banks to investigate frauds of large values with the help of skilled manpower in
order to effectively take internal punitive action against the staff in question, along
with external legal prosecution of the fraudsters and their abettors, if required.‖ It
is important to understand that fraud investigation requires specific skill-sets like
forensic accounting and technology to collect relevant and adequate evidence
which is admissible in a court of law.

The central bank has taken several steps to sensitize banks and curb frauds in the
banking industry. So, after RBI learns of the fraud, they examine the case and
advise the concerned bank to report the case to the CBI/police or SFIO. Also, it
takes measures to recover the amount involved in the fraud. The RBI has also
issued several notifications sensitizing banks about common fraud prone areas. It
has also issued caution notices against repeat offenders. The evolving fraud
landscape around banking and the increase in fraud-related losses requires
automated detection systems and robust fraud defense processes (E&Y, 2010).

REVIEW OF LITERATURE

Jeffords (1992) examined 910 cases submitted to the ―Internal Auditor‖ during the
nine-year period from 1981-1989 to assess the specific risk factors cited in the
Treadway Commission Report. Approximately 63 percent of the 910 cases are
classified under the internal control risks. Similarly, Calderon and Green (1994) made
an analysis of 114 actual cases of corporate fraud published in the ―Internal
Auditor‖ from 1986 to 1990. They found that limited separation of duties, false
documentation, and inadequate or nonexistent control account for 60 percent of
the fraud cases. Moreover, the study found that professional and managerial
employees were involved in 45 percent of the cases. Ziegenfuss (1996) performed
a study to determine the amount and type of fraud occurring in state and local
government.

Willson (2006) examined the causes that led to the breakdown of ‗Barring‘ Bank,
in his case study, ―the collapse of Barring Banks‖. The collapse resulted due to
the failures in management, financial and operational controls of Baring Banks.
However, Bhasin (2007) examined the reasons for check frauds, the magnitude of
frauds in Indian banks, and the manner in which the expertise of internal auditors
can be integrated in order to detect and prevent frauds in banks. In addition to
considering the common types of fraud signals, auditors can take several
‗proactive‘ steps to combat frauds. One important challenge for banks, therefore,
is the examination of new technology applications for control and security issues.
In another study, Bhasin (2012) examined in-depth the corporate accounting fraud
perpetuated by the Satyam management team in collusion with the auditor.

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As per the survey conducted by Ganesh and Raghurama (2008), about 80

executive from Corporation Bank and Karnataka Bank Ltd of India, were
requested to rate their subordinates in terms of development of their skills before
and after they underwent certain commonly delivered training programs.
Responses revealed that for the 17 skills identified, there was improvement in the
skills statistically. The paired t-test was applied individually for the seventeen
skills, and all these skills have shown statistical significance. Moreover, another
study to investigate the reasons for bank frauds and implementation of preventive
security controls in Indian banking industry was performed by Khanna and Arora
(2009). The study ―seeks to evaluate the various causes that are responsible for
bank frauds. The result indicate that lack of training, overburdened staff,
competition, low compliance level are the main reasons for bank frauds.‖

Mhamane and Lobo (2012) in their study attempted to detect and prevent fraud in
case of internet banking using Hidden Markov Model algorithm. Chiezy and Onu
(2013) evaluated the impact of fraud and fraudulent practices on the performance
of 24 banks in Nigeria during 2001-2011. Secondary sources of data were used for
the study. The relationship between fraud cases and other variables were
estimated using Pearson product moment correlation and multiple regression
analysis was used. The paper recommended that banks in Nigeria need to
strengthen their internal control systems and the regulatory bodies should improve
their supervisory role. However, Dzomira (2014) investigated the use of digital
analytical tools and technologies in electronic fraud and detection used in the
Zimbabwe banking industry. He concluded that banking institutions should
reshape their anti-fraud strategies to be effective by considering frauds detection
efforts using advanced analytics and related tools, software and application to get
more efficient oversight. Similarly, Kumar and Sriganga (2014) highlighted the
common insider frauds occurring in banks and also tried to categorize them into
different types. They focused on different generic data mining techniques and in
specific, the techniques used for detecting insider frauds.

The foregoing discussion suggests that the literature on the bank frauds in Indian-
context is very limited and inconclusive. Thus, our study builds on the previous
literature of bank frauds in the Indian banking sector. The scope of the study has
been confined to 21 banks in the National Capital Region (NCR) of India.

MATERIALS AND METHODS

The present study is both descriptive and analytical in nature. As part of the study,
in 2013-14 a questionnaire-based survey was conducted among 345 bank
employees of the National Capital Region (NCR) area. The questionnaire was
structured into two parts. In fact, the first part comprised of several questions that
attempted to know their opinions while working in a bank regarding training
received, attitude towards the procedures prescribed by RBI, awareness level
towards frauds and their compliance level under the following six heads: deposit
account, loans and advances, administration of passbook and check book, drafts

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section, internal and inter-branch accounts, and credit-card section. Moreover, the
second part encompassed the issues about how to integrate technology in the
banking industry in order to detect and prevent frauds in Indian banks. It also
examined the technology solutions available and how to integrate forensic
approach to combat bank frauds in the Indian banking industry.

All the respondents were selected through the random sampling method. There
were 42 public sector banks in the area and finally, 21 banks were selected. The
sampled employees comprising of Managers, Officers and Clerks of the branches
were given the questionnaire by personally visiting them in bank. Out of all the
employees, 296 employees responded, with an overall response rate of 85%. In
all, there were 57 managers, 130 officers and 109 clerks as respondents and
grouped on the basis of the following parameters, as shown in Table 3.

Table 3: Classification of Respondents into Categories based on Parameters

Parameter Category/Group
Compliance score of bank High Medium Low
employee
Attitude of bank employee Favorable Moderate Unfavorable
towards procedures prescribed
by RBI
Training status Trained Untrained
Awareness level of bank High Medium Low
employees
Hierarchical level Managers Officers Clerks

RESULTS AND DISCUSSION

The RBI, being the overall central regulatory agency, has developed many
important guidelines for prevention of bank frauds, which can help banks to
prevent frauds. In the first part of the questionnaire, we focused on the compliance
level of these security controls were measured under the following six heads—
internal checks, deposit accounts, administration of check books and passbooks,
loans and advances, drafts, internal accounts and inter branch accounts. The
results of this study indicate that the security control measures are not fully
complied with. As per a study, limited separation of duties, false documentation,
and inadequate or nonexistent control account for 60% of the fraud cases. It found
that professional and managerial employees were involved in 45% of the cases.
Thus, education, training and awareness programs are informal intervention
measures that should be implemented to prevent frauds. Undoubtedly, security
controls prescribed by RBI, if followed with 100% adherence, can prevent frauds
to a maximum extent.

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Table 4: Average Compliance Scores of Various Heads of Bank Managers

Section Internal Loans & Deposit Admin. in Draft Internal &
checks advances account check, pass section inter-branch
book account
Compliance 95% 91% 82% 65% 84% 83%
score

Table 4 depicts the average compliance score of Bank Managers under the various
heads. The results show that Bank Managers compliance level is the lowest (65%)
in administration of check/pass book. In sharp contrast, the highest (95%)
compliance is noticed in internal checks. The Managers gave second highest
(91%) importance to loans and advances, and gave almost equal importance to the
draft section (84%), internal and inter-branch account (83%), and deposit account
(82%), respectively. But surprisingly, still there is lack of 100% compliance
related to security controls under any of the above listed six bank heads. Thus, it is
amply clear that till now, banks in India are not able to follow ―zero-tolerance‖
policy.

Table 5: Average Compliance Scores of Various Heads of Bank Officers

Section Loansand Deposit Admin. in Draft Internal & inter-
advances account check, pass section branch account
book
Compliance 65% 75% 60% 81% 86%
score

Table 5 provides a snapshot of average compliance scores of Bank Officers under

the various heads. The compliance level of Officers is the ―highest‖ in internal &
inter-branch account (86%), followed by draft section (81%) and deposit account
(75%). Surprisingly, Bank Officers gave the lowest scores to the following two
areas viz., loans and advances (65%), and administration in check and pass book
(60%) sections. Keeping in view the Bank Managers and Officers scores, we can
draw a broad conclusion: nobody likes to perform the work especially in the
administration of check and pass book section.‖ Thus, there appears to be
considerable differences in compliance level of employees of various banks, most
probably, on account of differences in the organizational culture, training
provided, past experiences and their mental attitudes to strictly follow the RBI
procedures.

We feel that if the detailed procedures and/or instructions as prescribed by the RBI, if
fully complied with (both in letter and spirit), no doubt, it can greatly reduce the
incidences of frauds. But the present study revealed ―very low percentage of
respondents display highly-favorable attitude towards the procedures laid-down by
RBI.‖ As Table 6 shows, a ―very high proportion of respondent (98+113=211/296)
believe that they do not have sufficient staff to carry out the work meticulously, they
are usually overburdened with work and hence, not able to follow the procedures
strictly. Since this attitude is based on the perception of bank employees towards
adequacy of staff, it can be inferred that ―if

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there is an adequate number of bank staff hopefully the compliance level will be
more.‖

Table 6: Frequency Distribution of the Responses of Bank Employees on the basis of their Attitude
towards RBI Procedures
Attitude towards RBI Favorable Moderate Unfavorable Total
procedures
Total number of 85 98 113 296
employees

From Table 7, we can conclude that ―the compliance level of the managers
(48%) is higher than that of officers (22%). This may be due to the fact that
managers are more rigorously trained and their attitude towards RBI‘s procedures
is more favorable than that of officers and clerks. Hence, Mangers awareness level
is high as they have increased level of responsibility.

Table 7: Distribution of Managers and Officers according to their Compliance Level

Position High Medium Low
Manager 48 42 10
Officer 22 53 25

It is amply clear from Table 8 the awareness level is very low, both on the part of
Clerks and Officers in Banks. For example, only 9.17% of clerks and 13.07% of
officers belong to ―high‖ category of awareness level. However, Managers show
a little better awareness level. For example, around 15.78% of Managers belong to
high category of awareness level. A careful study of the data contained in the table
reveals shockingly that about 52% of Clerks, 49% of Officers, and 47% of
Managers belong to ―low‖ category of awareness level. It is very disappointing to
know that the awareness level of Bank employees about various types of frauds
and losses suffered by the banks are very low. Hence, with this dismal scenario,
how can we expect from them to follow detailed procedures and guidelines issued
by the RBI and take pro-active actions to prevent frauds and mitigate bank losses?

Table 8: Frequency Distribution of the Responses on the basis of Awareness Levels

Awareness High Medium Low Total
Category
Position Frequency % Frequency % Frequency %
Managers 9 15.78 21 36.84 27 47.36 57
Officers 17 13.07 49 37.69 64 49.30 130
Clerks 10 9.17 42 38.53 57 52.29 109

Table 9 depicts the relative importance (on 10 point score) assigned by the Bank
Managers, Officers and Clerks to the reasons responsible for the commitment of
bank frauds. Managers gave more weight-age to lack of training (7), and followed
by overburdened staff (5). In sharp contrast to this, both Officers (6) and Clerks
(7) felt that overburdened staff is the main reason responsible for bank frauds,
which is followed by lack of training for Officers (5) and Clerks (6), respectively.

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Table 9: Responses about the Key Reasons for Perpetration of Frauds in Banks
Position Lack of Corrupt officer Overburdened staff Competitio
training in-charge n
Managers 7 3 5 4
Officers 5 5 6 5
Clerks 6 4 7 4

When we asked the bank employees and managers, 80% indicated that fraud
detection tools and technologies are the most effective ways of combatting bank
frauds. On the other hand, 43% of the respondents showed that real-time decision
making tools are effective in preventing fraud, while 22% respondents showed
that monitoring of accounts is effective, whilst 77% indicated that customer
awareness is most effective of preventing fraud, and finally, 76% of the
respondents revealed that training of employee putting emphasis on identification
and response to fraudulent activities is the most effective way of preventing fraud
in organisations. The response given by Bank Employees and Bank Managers are
shown in Table 10.

Table 10: Responses about Detection and Prevention of Frauds in Banks

Monitoring Training of Customer Real-time Fraud detection
accounts Employees Education decision-tools techniques
manually
22% 76% 77% 43% 80%

Based on how fraud incident is typically detected in bank, a large majority of 21%
respondents gave the reason of complaint by a customer. However, the second
important reasons given by 18% of respondents were internal whistle-blower and
during audit of accounts or reconciliation process. Over 16% of respondents gave
the reason ―through automated data analysis or transaction monitoring software.‖
Moreover, other important reasons given by the respondents were: at the point of
transaction (10%), through a third-party notification (7%), by accident (6%) and
review by a law enforcement agency (4%), respectively. To conclude, as shown in
Table 11, survey respondents indicated that frauds in their organizations were
most commonly detected through customer complaints, followed by an internal or
external tip, which is in line with global trends.

Table 11: Response about How Fraud incident is Typically Detected in Bank
Review by Through a At the point Through During audit Internal By
law third party of automated or whistle- custome
enforceme notification transaction data reconciliatio blower r
nt agency analysis or n complai
software nt
4 7 10 16 18 18 21

Banks response to fraud is critical as it has the ability to prevent future

occurrences. Any response to fraud should be swift and effective so as to
percolate the right message to employees. According to a 2009 Circular issued by

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RBI states, ―Banks to investigate frauds of large values with the help of skilled
manpower in order to effectively take internal punitive action against the staff in
question, along with external legal prosecution of the fraudsters and their abettors,
if required.‖ In line with RBI‘s recommendations, the majority of the survey
respondents indicated that upon the detection of fraud, they carried out internal
investigations, while others reported the incident to a law enforcement agency
(see Table 12). The reasons given by respondents were: internal investigation is
done (46%), incident reported to legal agency (32%), and forced to resign (14%).
It is interesting to note that only 8% of survey respondents indicated using an
independent consultant to carry out investigations. Survey respondents indicated
that the top three challenges faced by banks in preventing fraud were: lack of
customer awareness (23%); integration of data from various sources (20%); and
inadequate fraud detection tools (18%).

It is important to understand that fraud investigation requires specific skill sets

like ―forensic accounting and technology‖ to collect adequate evidence, which
can be admissible in a court of law (Bhasin, 2016). In the absence of these, banks
may not have the confidence to take legal resource or action on the fraudster,
which could be one of the reasons why banks may not be reporting all the cases to
law enforcement agencies. While the responses received in our survey indicate
that banks have set up a dedicated fraud investigative cell, it appears to be
hampered by the lack of dedicated technology tools for investigation. A little over
40% of survey respondents indicated they had not started implementing dedicated
forensic technology tools for investigation, whereas, 20% of respondents had
partially implemented these tools. Only 20% indicated that they had implemented
forensic technology tools for investigation, and that these tools were effective.

Table 12: Response about the Process Followed to Handle Fraud Incidents in Banks
An internal Incident is reported to Individual in question External
investigation is law enforcement is asked to resign investigation by an
carried out agency independent
consultant
46% 32% 14% 8%

The second part of the questionnaire focussed very specifically about the use of
technology in banks. Accordingly, we asked the Bank Employees and Bank
Managers regarding the most effective methodologies used by them in banks to
detect and prevent frauds. The response given by Bank Employees and Bank
Managers are shown in Table 13. An overwhelming majority of 85% of the
respondents indicated that they are planning to use in their bank intrusion
prevention technologies. However, 78% of the respondents expressed the opinion
that fraud management system be planned for use. However, 68% of the
respondents revealed that they intend to use strong encryption techniques in
future, and 70% indicated that they plan to apply neural net fraud detection
technologies. As against this, 62% of the respondents plan to use strong
authentication, as on-going fraud prevention and detection program in future.

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Table 13: Response about Technologies Used by Banks to Detect and Prevent Frauds
Fraud Strong Intrusion Encryption Neuralfraud
management authentication Prevention System detection
system system technologies systems
78% 62% 85% 68% 70%

According to the responses received, 53% of the respondents appear to have

implemented a dedicated fraud detection/analytics solution. However, only one in
every three respondents appears to be entirely satisfied with it. The following
responses were given by the respondents, in order of response: ability to highlight
red-flags where controls are being circumvented (29%), ability to identify where
enhanced controls are needed (27%), provide enhanced tracking of high-risk
customers (19%), provide case management abilities (13%) and provide audit
trails (12%), respectively (see Table 14). Thus, it was interesting to note that 56%
of respondents sought technology to help them either highlight red-flag areas
(29%), where controls have been circumvented, or where controls needed to be
enhanced (27%). We feel this could be because banks have realized that
―deviation from existing controls by line managers/supervisors is one of the
major causes of fraud in this sector.‖ With technology available, which can help
banks detect these deviations in controls, the internal audit team can also leverage
this solution to undertake forensic based audits, which could go a long way in
enhancing the efficiency of detecting frauds in time (Bhasin, 2012).

Table 14: Response about the Most Important Areas which are Crucial to an Anomaly Detection
Solution
Highlight Red Areas controls Tracking high- Case management Audit Trails
flag areas needed risk customers
29% 27% 19% 13% 12%

Since banks are increasingly depending on technology, it is not surprising to find

that cybercrime continues to increase in volume, frequency and sophistication.
This includes ATM skimming, phishing/vishing and misuse of credit and debit
cards (Bhasin, 2007). Table 15 shows that ATM frauds ranked first with 23%,
phishing and vishing attacks with 16%, mortgage with 114%, credit cards with
10%. Others (37%), includes options such as third-party POS skimming, account
takeover fraud, IP theft, money laundering etc. Additionally, when asked to select
the top three areas which were giving sleepless nights to bankers, it was no
wonder that internet banking/ATM fraud, E-Banking and identity fraud were the
top culprits. Interestingly, mortgage portfolio also appears to be increasingly
vulnerable to the risk of fraud.

Table 15: Response about New Fraud Trends that will be of Concern in the Next Two Years
ATM Phishing/vishing Mortgage Credit card Others
23% 16% 14% 10% 37%

As we know, the great financial scandals were based on accounting manipulation

practices, but also on collaborations with the audit firms, which instead of acting
as the ‗guardians‘ of the financial markets have come to overlook, to hide, and

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even to participate to some of the greatest frauds in the history (Bhasin, 2015a).
Thus, reform measures for the companies‘ Corporate Governance systems were
also imposed. It was equally revealed that one of the best ways to prevent the
practice of CA is ―to enforce both preventive, as well as, strong enough punitive
measures on those that engage in creative accounting practice.‖

Also, we asked the respondents some questions about ―the demand for forensic
chartered accountants (FCAs) in the future—next five, ten and twenty years.‖ As
can be seen from Table 16, the majority of respondents felt that the demand for
FCAs will increase well into the foreseeable future. In fact, ninety-four percent
felt that the demand for FCAs would increase in the next 10 years. Respondents
were also asked ―if they felt that there will be enough FCAs available to meet the
demand in the next five, or ten years, and beyond the next 10 years.‖ As can be
seen in Table 17, many participants were unsure if the supply of FCAs would be
enough to meet the demand in the future.

Table 16: Demand for Forensic Accountants in the Future.

Question Mean Standard
Deviation
The demand for forensic accountants in the next 5 years will: 4.46 (0.646)
The demand for forensic accountants in the next 10 years will: 4.34 (0.651)
The demand for forensic accountants in the next 20 years will: 4.20 (0.728)

Table 17: Availability of Forensic Accountants in the Future

Question Percent
Will there be enough forensic accountants available to meet the demand in the
next 5 years:
Yes 13
No 62
Not Sure 25
Will there be enough forensic accountants available to meet the demand in the
next 10 years:
Yes 25
No 29
Not Sure 46
Will there be enough forensic accountants available to meet the demand
beyond the next 10 years:
Yes 32
No 16
Not Sure 52

Recently, the banking industry around the world has undergone a tremendous
change in the way business is conducted. As pointed out by Bhasin (2006),
―Leading banks are using Data Mining (DM) tools for customer segmentation and
profitability, credit scoring and approval, predicting payment default, marketing,
detecting fraudulent transactions, etc.‖ Finally, the sampled respondents were asked,
―In general, do FCAs needs to know computer-based forensic techniques?‖ Eighty-
four percent of the respondents answered in ―yes‖ to this question. Moreover, we
asked the respondents ―how important four different software tools

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are for FCAs: ACL, IDEA, Data Mining, and Digital Evidence Recovery.‖ The
scales were anchored at each end with the descriptors ―extremely unimportant‖
and ―extremely important,‖ respectively. For the purpose of analysis, the
descriptor ―extremely unimportant‖ was given a weight of 1, while the descriptor
―extremely important‖ was given a weight of 7. The mid-point of the scale
―neither‖ was given a weight of 4. Table 18 shows the results. The respondents
rated each of these four tools as important, with data mining being rated as the
most important with a mean score of 5.83.

Table 18: Response about the Ratings of the Importance of the Software Tools for
Forensic Chartered Accountants
Tools Mean Standard
Deviation
ACL 5.45 (1.297)
IDEA 5.24 (1.232)
Data Mining 5.83 (1.240)
Digital Evidence Recovery 5.82 (1.224)

Discussion on frauds cannot be complete without analysis of human behavior. An

employee in a bank is like a fish in a small ocean. Nobody can determine when
and how much water a fish has consumed. Likewise a corrupt and dishonest
person in a bank can commit frauds with impunity (ACFE, 1996). Unfortunately,
most of the employees committing frauds get scot free, with the award of minor
penalties, and the cases pending in courts keep on dragging for many years. As
pointed out by Inamdar (2013), ―The time taken for cases to be ascertained as
fraud was very high. It took over 10 years for 45% of the cases and between 5 to
10 years for 67% of the cases, creating a great disconnect between the punishment
meted out and the offence.‖

The RBI (on May 8, 2015) pointed out that ―detection of fraud takes very long-time,
and banks tend to report an account as fraud only when they exhaust the chances of
recovery. Delays in reporting of frauds further delay the alerting of other banks about
the modus operandi through caution advices that may result in similar frauds being
perpetrated elsewhere.‖ Bhasin (2013a), concluded ―In the current environment,
forensic accountants are in great demand for their accounting, auditing, legal, and
investigative skills in order to detect and prevent frauds and scams in the Indian
banking sector.‖ An analysis of big cases looked into by the CBI reveals that bankers
sometimes exceed their discretionary powers, and give loans to unscrupulous
borrowers on fake/forged documents. More than 7,000 employees of different PSBs
are under the scanner for their involvement in these cases. As B. Venkat Ramana,
general manager, corporate communication, UCO Bank said, ―The most prevalent
nature of cheating and forgery cases relates to forged/fake documents/diversion of
funds by borrowers. When fraud is proved with employees‘ involvement, there is a
disciplinary action/criminal case against the employee.‖ According to the General
Manager (Risk Management), Bank of Baroda, ―the bank immediately carries out an
internal investigation if a case of fraud is detected. The incidence is reported to the
RBI and a complaint lodged

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with the local police/state CID/EOW/CBI depending upon the amount involved.
In case involvement of the employee is proved, bank takes disciplinary action,
which includes even termination/dismissal of the employee.‖

There is lack of trained and experienced bank staff, and tremendous increase in
banking business. By-and-large, new recruits do not have adequate training or
experience before they are put into a responsible position. Ganesh and Raghurama
(2008) believe that training improves the capabilities of employees by enhancing
their skills, knowledge and commitment towards their work. Moreover, bank staff
feels ―they are overburdened with work.‖ The life has become fast and the bank
staff does not have enough time to scrutinize documents thoroughly. Dilution of
system and non-adherence to procedures is also a significant reason for bank
frauds. This shows that a full-proof system has not been developed and
implemented to familiarize the bank employees of various types of frauds that
take place in banks every year. ―Most banks try to put in place robust systems
and controls to prevent fraud and forgery—regrettably crooks and criminals use
more and more sophisticated methods, especially where online fraud is concerned,
to defraud banks,‖ said Meera Sanyal, former CEO and Chairperson of Royal
Bank of Scotland in India (Pai, 2015).

The primary responsibility for preventing frauds lies with individual banks. Major
cause for perpetration of fraud is laxity in observance in laid down system and
procedures by supervising staff. However, the RBI routinely advises banks about
major fraud prone areas and the safeguards necessary for prevention of frauds.
This is done so that banks can introduce necessary safeguards by way of
appropriate procedures and internal checks. With growing usage and dependency
on electronic forms of transaction, banks have employed more secured means and
platform separate from the normal channels of communication. The authenticity
and integrity of such a platform is ensured through usage of specific software,
which ensures the validity of the bank‘s electronic documents (Dubey, 2013). To
keep the above frauds at bay, RBI prescribes that bank should conduct annual
review of frauds and apprise its board regarding the findings; banks should have
proper reporting mechanism in place to report to the RBI all information about
frauds and the follow-up action taken.

GLOBAL TRENDS IN FRAUD PREVENTION & DETECTION

Technology can play a major part in combatting new age frauds, the E&Y Fraud
Survey (2012) noted and added that a ―proactive Forensic Data Analysis‖ can help
governments, regulatory bodies and corporate to counter the increasingly complex
nature of frauds. While it is not possible for banks to operate in a zero fraud
environment, proactive steps such as conducting risk assessments of procedures and
policies can help them hedge their risk of contingent losses due to fraud. Some
techniques such as data visualization have proved to be effective. Fuzzy logic is
another technique, which can be used on the data records of a company. These
clubbed with a social network analysis, can indicate possible threat of

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collusion. Progressive reviews of unstructured data can help banks analyze the
sentiments, tones and elements described in the fraud triangle (incentive, pressure
and rationalization). This, together with unsupervised pattern recognition, can
proactively help them to put in place fraud parameters. A careful study of the
latest fraud cases in India suggests: (a) banks the most vulnerable, (b) difficult to
detect collusion and (c) need for investors to be vigilant. Banks are enhancing
their processes, controls and fraud risk management frameworks to minimize the
opportunities for fraud, as well as, reduce the time taken in their detection. Many
banks are implementing their fraud control and reporting frameworks to generate
information in a way that the level of fraud identified, prevented and actual losses
incurred are identified. This approach has enabled the benefits of skilled resources
and automated tools to be quantified more precisely.

Regulators and investigative agencies are also trying to gear up for the changed
environment. In 2012, the Central Bureau of Investigation (CBI) announced that it
is developing a ―Bank Case Information System (BCIS)‖ to curb banking frauds.
This database contains the names of accused persons, borrowers and public
servants compiled from the past records. Moreover, the RBI has released ―a new
framework to check loan frauds by way of early warning signals for banks and red
flagging of accounts where defaulters shall have no access to further banking
finance.‖ It also has plans to set up a ―Central Fraud Registry‖ that can be
accessed by all Indian banks. In addition, the CBI and Central Economic
Intelligence Bureau (CEIB) will share their databases with banks. The SEBI is in
the process of getting its existing business intelligence gathering software, which
is used for detecting fraudulent activities in capital markets, upgraded. Whilst the
legal environment and regulators have pushed the financial sector in the right
direction, individual institutions are also taking the lead in protecting their
earnings and reputation. Some of the top trends include:

Automated Analysis Tools: Today, the industry is increasingly aware of

the need for automated analysis tools that identify and report fraud
attempts in a timely manner. Solution providers are providing real-time
transaction screening, third-party screening as well as compliance
solutions.
Sector-Oriented Benchmarking Solutions: Solutions aimed at assessing
the fraud vulnerability of financial institutions are now available. They
help in formulating a targeted and cost-effective action plan against fraud
risks.
Data Visualization Tools: These are being used to provide a visual
representation of complex data patterns and outliers to translate
multidimensional data into meaningful pictures or graphics.
Behavioral Analytics: This is helping businesses identify enemies
disguised as customers. The data analytics implemented by the institutions
to understand customer behavior, preferences, etc. are also helping in the
detection of fraudulent activity either in real-time or post mortem.

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Deep Learning: Internet payment companies providing alternatives to

traditional money transfer methods are using deep learning, a new
approach to machine learning and artificial intelligence that is good at
identifying complex patterns and characteristics of cybercrime and online
fraud.
The Internal Audit Function: This function is being altered to include
fraud risk management in its scope. The changed technological landscape
requires the old ways of internal auditing to give way to new,
technologically equipped audit functions. Annual audit planning may no
longer be fully effective and flexible audit plans are the need of the hour,
as fraud risk assessments require extensive use of forensic and data
analytics solutions.

Effective background checks of employees and associates are recommended. It is

difficult but also necessary to integrate data from various sources to be able to
derive the benefits of analytics techniques. Banks do face challenges in
maintaining the efficiency of anti-fraud security controls at an enterprise-wide
level. Challenges arise while integrating channels or within applications and tools
(integrating online and ATM transactions, retail banking and corporate banking or
integrating subsidiary banks where different information systems are used). The
tone at the top is critical in the fight against fraud. Lack of customer and/or staff
awareness can result in failure of even the best of technology solutions. It takes a
concerted effort to be able to build, maintain and sustain an effective fraud risk
management program. Banks need to build awareness around the latest
technological and procedural vulnerabilities and fraud schemes, to be able to
remain one- step ahead of the fraudsters.

In addition, incident management procedures need to be well-defined and

comprehensive, in order to ensure that incidents of fraud are managed without
exposing the organization to any legal or reputational risks. Forensic tools can be
used to navigate IT systems for evidence of malfeasance such as information
deletion, policy violations and unauthorized access. These tools can help the
company legal counsels to prepare for a suit to be filed against the fraudster. Apart
from internal controls, banks need to also educate the customers. Since the
manoeuvres used by cyber-criminals to target sensitive financial data are
sophisticated and constantly changing, financial institutions must look at existing
security controls with a new approach and risk appetite. The three lines of defense
can only be strengthened by technology, not replaced by it.

Customers love online banking for its convenience, while banks benefit from
lower costs and a greater reach than a physical branch network provides. As
banking fraud might ultimately affect customer relationship quality and customer
loyalty, fraud prevention and its effective communication is very important
(Hoffman and Birnbrich, 2012). In order to ensure that both parties continue to
benefit from online banking, it must remain a safe and secure channel that allows
legitimate customers access as needed, while simultaneously blocking entrance to

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cybercriminals. Cybercriminals will continue to target online banking for as long

as it is worth their effort to do so. Each instance of online fraud helps additional
investment by cybercriminals in the people and technology they need to overcome
bank‘s defenses. Although, there is not a ―one-size-fits-all‖ portfolio of fraud
tools and tactics that is applicable to all banks, the following approaches do exist
that can prove highly effective in preventing online frauds: (a) multi-factor
authentication, (b) geo-location, (c) device recognition, (d) transaction
monitoring, (e) navigation controls, (f) cross-channel, and (g) entity-link analysis.
Educating the customer on how to help prevent online banking fraud is just one
element of a bank‘s fraud defenses. Deploying advanced technology that can
quickly adapt to changes in the cybercriminal‘s modus operandi is essential to
protecting the online channel. Customer must have confidence in the security of a
bank‘s online platform. There is no end in sight, but banks must stay committed to
winning each battle they fight to prevent online fraud (ACI, 2013). To help
prevent and detect financial crime, banks need both an integrated (and timely)
data set and the ability to bring sophisticated analytics to bear on the data to
generate useful insights. Thus, we see the following three major elements for
banks that comprise this capability: (a) enhanced data quality, (b) analytics to
transform data into information, and information into insight, and (c) application
of data visualization techniques.

CONCLUSION AND RECOMMENDATIONS

While the banking industry in India has witnessed a steady growth in its total
business and profits, the amount involved in bank frauds has also been on the rise.
This unhealthy development in the banking sector produces not only losses to the
banks but also affects their credibility adversely (Kaveri, 2014). According to
Klein (2015), ―The business firms lose 5% of revenue each year to fraud. When
applied to the 2013 estimated gross world product, this revenue loss translates to a
global figure of nearly USD3.7 trillion.‖ Accordingly, the Government of India
has expressed serious concern over the sharp rise in cases of fraud and corruption
in the Indian banking sector. Recently in April 2015, RBI chief Mr. Rajan has
written to the PMO seeking ―concerted action in the country‘s 10 biggest bank
frauds allegedly involving prominent real-estate, media and diamond firms that
are being probed by the CBI,‖ (Baruah, 2015). Moreover, fraud and fraudulent
activities inflict severe financial difficulties on banks and their customers; they
also reduce the amount of money available for the development of the economy
(Chiezey and Onu (2013). Many banks and companies that have been victims of
frauds are reluctant to share and publicize the facts of the fraud cases due to fear
of ‗adverse‘ impact on their reputation (Banks, 2004). Inadequate measure to
prevent banking fraud is the primary reason for widespread frauds. So, what
should banks do to safeguard the interests of its customers? According to
Chakrabarty, Deputy Governor of the RBI, (2013), ―Banks should strengthen their
reporting system, quickly report fraud cases, and fix staff accountability. There is
urgent need for sharing practices of fraudsters and methods used by such criminals.‖
As Siddique and Rehman (2011) stated, ―The only promising step is to

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create awareness among people about their rights and duties, and make
application of laws more stringent to check crimes.‖ Banks should ensure that the
reporting system is suitably streamlined so that frauds are reported without any
delay and fix staff accountability. Banks must provide sufficient focus on the
―Fraud Prevention and Management Function‖ to enable effective investigation
of fraud cases. The fraud risk management, fraud monitoring and fraud
investigation function must be owned by the bank‘s CEO, its Audit Committee of
the Board and the Special Committee of the Board, at least in respect of large
value frauds. Banks can also frame internal policy for fraud risk management and
fraud investigation function, based on the governance standards relating to the
ownership of the function and accountability for malfunctioning of the fraud risk
management process in their banks.

While it is not possible for banks to operate in a ‗zero‘ fraud environment,

‗proactive‘ steps, such as conducting risk assessments of procedures and policies
can help them to hedge their risk of contingent losses due to fraud. By leveraging
the power of data analysis technology banks can detect fraud sooner and reduce
the negative impact of significant losses owing to fraud. Moreover, use of new
technologies (such as, data visualization, fuzzy logic, social network analysis, data
mining, encryption, dynamic account modeling, etc.) can prove handy to mitigate
the fraud risk in banks. Although banks cannot be 100% secure against unknown
threats, a certain level of preparedness can go a long way in countering fraud risk.
At least, it can minimize the damages and protect their reputations. The use of
neural network-based behavior models in real time has changed the face of fraud
management all over the world. Fraud prevention specialists are grappling with
ever-mounting quantities of data, but in today's volatile commercial environment,
paying attention to that data is more important than ever. Bank Fraud provides a
frank discussion of the attitudes, strategies, and—most importantly—the
technology that specialists will need to combat fraud.

According to E&Y ‗India Fraud Indicator‘ (2012), ―Since it is impossible for

banks to work in a fraud-free environment, banks should conduct risk assessment
of policies and hedge the risk of likely losses due to fraud.‖ Expressing concern
over zooming up of the corporate fraud in the last 15 years, Mr. Ranjit Sinha (CBI
Director), said on May 14, 2014 at an ASSOCHAM event, ―Rising number of
frauds in Indian banks are taking place due to collective failure of regulatory
oversight system comprising of external auditors, audit committee, internal audit
system, board of directors, independent directors, shareholders, etc. All regulatory
and investigative agencies must work in close cooperation and share their inputs
and databases with each other in order to prevent frauds.‖ Although banks cannot
be 100% secure against unknown threats, a certain level of preparedness can help
to face with confidence fraud risks. Very recently, in March 2015, the RBI has
―established Central Fraud Registry by sharing information about unscrupulous
borrowers at the time loans are sanctioned by cross-checking their credentials, and
thus, helping banks to control their bad loans. The CBI and Central Economic
Intelligence Bureau will also share their databases with banks.‖ The regulators

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also stressed on prevention of fraud through improved market intelligence. Now,

we are hopeful that with the help of new initiatives, banking industry would be
able to minimize the fraud losses, gain customer trust and improve their
reputation.

The top three fraud risks that are currently the highest concern to the banks are:
(a) Internet banking and ATM fraud, (b) E-banking (credit card and debit card,
etc.) and (c) Identity fraud.Despite the proliferation of online and mobile service
offerings and the rise in cybercrime, banks and financial institutions can fight
back. A comprehensive anti-fraud program can not only protect customers but can
cause would-be cyber criminals to turn their attentions elsewhere. Our experience
indicates that such a program has four basic elements:

Fraud diagnostic to assess the current state of fraud management and to

design a blueprint for the future;
Threat assessment to identify future risks and opportunities;
Analytics innovation to bring advanced analytics to bear upon issues
related to both consumer and fraudster behavior; and
Optimization of fraud management processes and tools to develop more
holistic customer authentication strategies, business rules and integrated
anti-fraud measures.

It is important to understand that fraud investigation requires specific skill sets like
forensic accounting and technology to collect adequate evidence (Bhasin 2007a).
While the evidence unearthed by a fraud investigation can vary on a case-to-case
basis, typically, it needs to be relevant and comprehensive to be admissible in a court
of law. Certain additional aspects such as the source of the evidence, a legitimate
witness, electronic evidence and data etc., can all add credibility to the case. In the
absence of these, organizations may not have the confidence to take legal recourse or
action on the fraudster which could be one of the reasons why banks may not be
reporting all the cases to law enforcement agencies. Prior to Satyam (often called as
India‘s Enron) fraud, most companies perceived fraud as largely an internal event,
primarily pinching the bottom line. They now understand that fraud can have an
impact not only on the reputation and business prospects but also on the survival of
the firm. This concern has led to higher demand for forensic chartered accountants
(FCAs) in countries like India and China. The Ministry of Corporate Affairs in India
has also established the Serious Fraud Investigation Office, which seeks the help of
FCAs. The government recently proposed to give more teeth to the SFIO under the
new Companies Bill by providing it statutory recognition and empowering it with
more powers. The FCA‘s being professional members of the CG and Audit
Committees, can play a far greater role in coordinating company efforts to achieve a
cohesive policy of ethical behavior within an organization (Bhasin, 2013a,b,c). By
helping companies to detect and prevent fraud, FCAs can create a ‗positive‘ work
environment, establish ‗effective‘ lines of communication, and be vigilant as a
corporate ‗watchdog‘, the FCAs role can gradually evolve into a key component

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in the CG system. Let us hope that FCAs, through their specialized knowledge,
training and skills, will be able to improve CG scenario, still a work-in-progress,
across the globe.

We would like to make the following three recommendations to the banking

industry: (a) Push top management to implement policies that encourage moral
behavior and demonstrate an ethical culture. Appoint a senior person for the anti-
fraud group to put fraud prevention and controls on the bank‘s map; (b) Conduct
detailed fraud risk assessments to help focus management‘s attention on the risks
to be addressed. These should include specific fraud schemes that could be
perpetuated against the bank; and (c) Prepare an anti-fraud policy and create
appropriate training which clearly defines fraud and misconduct. Last, but not the
least, effective customer education and communications programs–helping
customers recognize how to prevent fraud, but also helping them understand their
own responsibilities–should go hand-in-hand with sophisticated cyber security
measures. Only by working in partnership with their customers can financial
institutions develop truly effective fraud prevention efforts.

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