BANKING FRAUDS

Raghav Srivastava (15956)Siddharth Mehta (16044)Mihir Upasani (16043)Dhruv Agarwal (16036) (BFIA 2)

OVERVIEW Introduction Frauds Banking Frauds Types of Frauds 1. Frauds by Insider

2. Fraud by others

3. Fraud by bank employees

Difficulty in tackling frauds Detection of frauds Prevention of frauds 1. Cheque frauds

2. Credit card fraud

3. Phishing and internet fraud

INTRODUCTION

Banking system occupies an important place in a nation's economy

It is indispensable in a modern society. Plays pivotal role in in economic development of country. Forms core of money market. Banking sector in India has traversed a long way to reach

its present stature 14 major commercial banks were nationalised in 1969

and 6 more in 1980. Banks in the past have also emerged as engines for social

change.

Banking sector has now diversified its business by manifolds.

After independence banks have moved through three stages:-

Character based Lending

Ideology based Lending

Competitiveness based Lending

FRAUD Fraud is defined u/s 421 of the Indian Penal Code & u/s

17 of the Indian Contract Act.

Fraud is any dishonest act & behavior by which one person gains or intends to gain advantage over another person.

Fraud causes loss to the victim directly or indirectly.

BANKING FRAUD Constitute a considerable percentage of white-collar offences.

Unlike ordinary thefts & robberies, the amount misappropriated in these crimes runs into lakhs & crores of rupees.

Bank fraud is a federal crime in many countries.

Bank frauds in India is increasing substantially with the passage of time.

In the current financial year, banks lost Rs 2,289 crore (till November 2010), while the loss was Rs 1,057 crore in 2007-08.

Major elements responsible for commission of frauds in banks are:-

Active involvement of the staff-both supervisor & clerical either independent of external elements or in connivance with outsiders.

Failure on the part of the bank staff to follow meticulously laid down instructions & guidelines.

External elements perpetuating frauds on banks by forgeries or manipulations of cheques, drafts & other instruments.

There has been a growing collusion between business, top banks executives, civil servants & politicians in power to defraud the banks, by getting the rules bent, regulations flouted & banking norms thrown to the winds.

TYPES OF FRAUDS

By Insider

Rogue Trader

Wire Fraud

Uninsured Deposits

Fraudulent Loans

Bank Employees

Demand Draft Fraud

ROGUE TRADERS

A rogue trader is a highly placed insider nominally authorized to invest sizeable funds on behalf of the bank; this trader acts individually, secretly makes progressively more aggressive & risky investments using the bank's money.

When one investment goes bad, the rogue trader engages in further market speculation in the hope of a quick profit which would hide or cover the loss.

Name Loss Institution Market activity Sentence

Nick Leeson, 1995 £827 million Barings Bank Nikkei index futures 6.5 years jail

John Rusnak, 2002 £691 million Allied Irish Banks foreign exchange options 7.5 years jail

Toshihide Iguchi, 1995 £557 million Resona Holdings U.S. Treasury bonds 4 years jail

Yasuo Hamanaka, 1996 $2.6 billion Sumitomo Corporation copper 8 years jail

Gianna Gray, David Bullen,Vince Facarra, Oct 03 - Jan 04

AU$360 million National Australia Bank foreign exchange options16 months jail, 3 years & 8 months jail,2 years & 4 months jail

Chen Jiulin, 2005 $550 million China Aviation Oil jet fuel futures 4 years & 3 months jail

Jérôme Kerviel, 2006–2008

$7.2 billion Société GénéraleEuropean stock index futures

5 years prison of which 2 years are suspended - may still appeal ruling

Boris Picano-Nacci, Oct 2008

€751 million Groupe Caisse d'Epargne Equity Derivatives Investigation in progress

The following table shows some of the largest rogue trader losses in the world:

CASE Shivraj Puri, an employee at Citibank Gurgaon duped

investors for a sum of at least Rs.400 crore. He created 3 accounts in the name of Premnath, Sheila

Premnath & Diskha Puri, his relatives, in Citibank Gurgaon apart from 15 other accounts in various other banks.

By showing a forged Securities & Exchange Board of India (SEBI) letter offering high returns of 20-24% he conned high-net-worth investors to transfer their money to these accounts.

He tried making money by investing these large sums in Nifty futures & options. His trading plan failed miserably as he had not hedged his positions on the Nifty derivatives. Puri’s trades were on the wrong side of the transaction each time, expiring as out-of-the-money trades. This led to heavy trading losses exceeding 400 crores.

FRAUDULENT LOANS One in which the borrower is a business entity

controlled by a dishonest bank officer or an accomplice.

The "borrower" then declares bankruptcy or vanishes & the money is gone.

The borrower may even be a non-existent entity & the loan merely a ploy to conceal a theft of a large sum of money from the bank.

Loans are taken by hiding past credit history filled with financial problems.

WIRE FRAUDS It is defined as attempting to defraud using electronic means,

such as a computer or telephone.

It must be proved is that the person knowingly & willfully devised or intended to devise a scheme to defraud.

Wire transfer networks such as the international, interbank fund transfer system are tempting as targets as a transfer, once made, is difficult or impossible to reverse.

There is also risk that insiders may attempt to use fraudulent or forged documents which claim to request a bank depositor's money be wired to another bank, often an offshore account in some distant foreign country.

CASE

Terrance J. Holmes of Ohio was convicted on January 3, 2007 for his involvement in a wire fraud. Between Jan 2001 & Feb 2002 Holmes owned & operated a company, GPS Computer Services from Ohio & offered various brands of laptops & notebook computers for sale via an internet website maintained by GPS computer service & by means of E-Bay, an internet auction website.

The websites advertised the computers at highly discounted prices of $400 to $700 whereas the retail price quoted by the manufacturer ranged from $1100 to $1600. The company got orders from at least 1187 customers totaling approximately $964,560.

Holmes & his company failed to deliver or supply the computers as promised. The employees of GPS Computer Services were instructed by Holmes to give various excuses to customers in order to delay any remedial action they might have taken. On January 3, 2007, Terrance J. Holmes finally pleaded guilty.

UNINSURED DEPOSITS There are a number of cases each year where the bank

itself turns out to be uninsured or not licensed to operate at all.

Objective is usually to solicit for deposits to this uninsured "bank", although some may also sell stock representing ownership of the "bank".

Sometimes the names appear very official or very similar to those of legitimate banks and there is very high risk of fraud when dealing with unknown or uninsured institutions.

EXAMPLE "Chase Trust Bank" of Washington DC appeared in 2002

with no license & no affiliation to its seemingly apparent namesake; the real Chase Manhattan bank, New York.

FRAUDS BY BANK EMPLOYEES

Employee gains the confidence of his superiors by voluntary helping them in making entries in ledgers & other records

Employee makes false credit entries in his account & withdraws large amounts from the same.  He himself posts entries in the ledger & checks the books at the end of the day & balances the same.

Ignorant customers approach Bank peons to assist them in carrying out cash transactions. The peon pockets the amount, forges the signature of the official on pay-in-slip, puts the stamp on it & returns it to the party

DEMAND DRAFT FRAUD DD fraud is usually done by one or more dishonest bank

employee.

They remove few DD leaves or DD books from stock & write them like a regular DD. Since they are insiders, they know the coding, punching of a demand draft.

These Demand drafts will be issued payable at distant town/city without debiting an account.

This kind of fraud will be discovered only when the head office does the branch-wise reconciliation, which normally will take 6 months. By that time the money is unrecoverable

By Outsiders

Cheque Fraud

Credit Card

Phishing

Fraudulent Loan Application

Money Laundering

Identity Theft

Bill Discounting

CHEQUE FRAUDSForgery and

Altered cheque

Booster cheque

Cheque Kiting

Forgery & Altered cheque

A cheque or any other negotiable instrument that has been materially & maliciously altered to affect a fraud

Usually either the name of the payee or the amount of the check is changed.

Sometimes fraudsters will attempt to forge a depositor's signature on a blank cheque or even print their own cheques drawn on accounts owned by others, non-existent accounts or even alleged accounts owned by non-existent depositors.

The cheque will then be deposited to another bank & the money withdrawn before the cheque can be returned as invalid or for non-sufficient funds.

Booster Cheques

A booster cheque is a fraudulent or bad cheque used to make a payment to a credit card account in order to "bust out" or raise the amount of available credit on otherwise-legitimate credit cards.

The amount of the cheque is credited to the card account by the bank as soon as the payment is made, even though the cheque has not yet cleared.

Before the bad cheque is discovered, the perpetrator goes on a spending spree or obtains cash advances until the newly-"raised" available limit on the card is reached.

The original cheque then bounces, but by then it is already too late.

Cheque Kiting

Cheque Kiting exploits a system in which, when a cheque is deposited to a bank account, the money is made available immediately even though it is not removed from the account on which the cheque is drawn until the cheque actually clears.

In-transit or non-existent cash is briefly recorded in multiple accounts.

A cheque is cashed &, before the bank receives any money by clearing the cheque, the money is deposited into some other account or withdrawn by writing more cheques.

In many cases, the original deposited cheque turns out to be a forged cheque.

Some perpetrators have swapped checks between various banks on a daily basis, using each to cover the shortfall for a previous cheque.

CASE Disappearing ink has been used to commit cheque frauds. In

such cases the ink is altered in such a way that it disappears in several hours or days. For example, an individual writes a cheque to himself using Bank A’s account for say Rs.5100. He writes the digit 5 with the disappearing ink & the remaining digits in normal ink. The cheque is then deposited in Bank B’s account where Rs.5100 is added, but by the time it reaches Bank A for clearance the cheque will only read Rs.100, & only Rs.100 will be debited from the account.

Cheque Washing means theft of a cheque in transit, followed by the use of chemicals to remove the ink removing all the parts other than the signature & filling it to his/her advantage.

Cheque fraud may come from an employee itself. An employee on Banner Bank was convicted for writing 5 corporate cheques to her own birth name from her desk as a loan servicing agent.

BILL DISCOUNTING FRAUD

A fraudster uses a company at their disposal to gain confidence with a bank, by appearing as a genuine, profitable customer.

To give the illusion of being a desired customer, the company

regularly & repeatedly uses the bank to get payment from one or more of its customers. These payments are always made, as the customers in question are part of the fraud, actively paying any & all bills raised by the bank.

Business continues as normal for the fraudulent company, its fraudulent customers, & the unwitting bank.

Only when the outstanding balance between the bank & the company is sufficiently large, the company takes the payment from the bank, & the company & its customers disappear, leaving no-one to pay the bills issued by the bank

CREDIT CARD FRAUD Credit card fraud is a sort of identity theft and is

widespread as a means of stealing from banks, merchants & clients.

Credit card frauds are the cases where one uses other's credit cards to purchase goods or services using the funds of other accounts, without their authorization.

According to RCMP, around 23% of credit card frauds happen by the way of theft & 37% of the credit card frauds happen due to counterfeit card use.

Criminals often make use of the latest technologies to “skim” the data stored on the credit card's magnetic strip

Credit cards fraud manifest in a number of ways: Genuine cards are manipulated. Genuine cards are altered. Counterfeit cards are created. Fraudulent telemarketing is done with credit cards. Genuine cards are obtained on fraudulent applications in the

names/addresses of other persons & used.

It is feared that with the expansion of E-Commerce, M-Commerce & Internet facilities being available on massive scale the fraudulent fund freaking via credit cards will increase tremendously.

CASE

Mukul Garg & his fiancée, Alisha Sharma of Delhi cloned old credit cards & used them to purchase designer clothes. Javed Chauhan, an Assistant Manager with Standard Chartered Bank, claimed that a fraudulent transaction was made using his credit card. The bank blocked his card. On further enquiry it was found that the card is being used at one of the designer stores in a mall. They had been repeatedly visiting the mall & were caught the next day when they turned up at the same store again to make a purchase.

IMPERSONATION AND IDENTITY THEFT Such a scam operates by obtaining information about a

victim, then using the information to apply for identity cards, accounts & credit in that person's name.

Often little more than name, parents' name, date & place of birth are sufficient to obtain a birth certificate; each document obtained then is used as identification in order to obtain more identity documents.

Unfortunately for the banks, identity thieves have been known to take out loans & disappear with the cash, quite content to see the wrong persons blamed when the debts go bad

FRAUDULENT LOAN APPLICATIONS These may take a number of forms:

individuals using false information to hide a credit history filled with financial problems & unpaid loans.

corporations using accounting fraud to overstate profits in order to make a risky loan appear to be a sound investment for the bank.

Some corporations have engaged in over-expansion, using borrowed money to finance costly mergers & acquisitions and overstating assets, sales or income to appear solvent even after becoming seriously financially overextended.

The resulting debt load has ruined entire large companies, leaving banks exposed to massive losses from bad loans.

Eg. Italian Dairy Conglomerate, PARMALAT

CASE

Two brothers Sardainis, both from Sylmar bilked out $5 million from lenders by pledging as collateral properties which they did not own & also forging & fabricating a lot of documents to keep their false claim. The brothers allegedly fabricated fraudulent reconveyances to create the false impression that the other loans on the properties had been paid off & that there was sufficient equity to secure the loans.

PHISHING AND INTERNET FRAUD

Phishing is a way of attempting to acquire sensitive information such as usernames, passwords & credit card details by masquerading as a trustworthy entity in an electronic communication.

Phishing is an example of social engineering techniques used to fool users, & exploits the poor usability of current web security technologies.

Attempts to deal with the growing number of reported phishing incidents include legislation, user training, public awareness, & technical security measures.

CASE In a recent case, Safura Mokhtar a travel agent in Malaysia

was victimized with a phishing campaign at the time an email came to her in November 2010. The mail asserted it was from HSBC bank. It required her to instantly log-in & update her contact information due to security reasons. She filled in her information and hit the link given in the mail. After some time she was informed by HSBC about a money-transfer from her account. The bank did not refund her & passed on the case to Financial Meditation Bureau (FMB). Many such phishing cases happen all around the world.

Precautionary Measures: Customers should know that banks don't dispatch e-mails to clients asking for confirming their account details. They shouldn’t follow a web-link included in any dubious e-mail. If any such e-mail is received, the customer should confirm with his/her bank before taking any action.

MONEY LAUNDERING Money laundering is generally regarded as the practice

of engaging in financial transactions to conceal the identity, source, and/or destination of illegally gained money by which the proceeds of crime are converted into assets which appear to have a legitimate origin.

In the Indian Penal Code the statutory definition is wider. It is common to refer to money legally obtained as “clean”, & money illegally obtained as “dirty”.

Money laundering happens in three steps:

Placement Layering Integration

DIFFERENT FORMS OF MONEY

LAUNDERING Structuring / Smurfing Bulk Cash Smuggling Cash Intensive Business Trade Based Laundering Shell Companies & Trust Bank captures Casinos Real Estate Black Salaries

DIFFICULTIES IN TACKLING BANK FRAUD

Hi-tech crime

International crime

No-scene crime

Faceless crime

DETECTION OF NEW FRAUDS

Despite all care & vigilance there may still be some frauds. The following procedure would be very helpful if taken into consideration:

All relevant data-papers, documents etc. Should be promptly collected.

All persons in the bank who may be knowing something about the time, place a modus operandi of the fraud should be examined & their statements should be recorded.

The probable order of events should thereafter be reconstructed by the officer, in his own mind.

It is advisable to keep the central office informed about the fraud & further developments in regard thereto.

GHOSH COMMITTEE The RBI had set-up a high level committee in 1992 which

was headed by Mr. A Ghosh, the then Dy. Governor RBI to inquire into various aspects relating to frauds malpractice in banks. The committee had observed three major causes for perpetration of fraud as given hereunder:

Laxity in observance of the laid down system & procedures by operational & supervising staff.

Over confidence reposed in the clients who indulged in breach of trust.

Unscrupulous clients by taking advantages of the laxity in observance of established, time tested safeguards also committed frauds.

 TIPS FOR DETECTING COUNTERFEIT CHEQUES

Perforation

Color

Micrline Ink

Routing Numbers

CHEQUE FRAUD TIPS FOR THE CONSUMER

Make sure your cheques are endorsed by your financial institution .

Store your cheques, deposit slips, bank statements & canceled cheques in a secure & locked location.

Reconcile your bank statement within 30 days of receipt in order to detect any irregularities.

Unless needed for tax purpose, destroy old canceled cheques, account statements, deposit tickets, ATM receipt.

If someone pays you with a cashier's cheque, have them accompany you to the bank to cash it.

Use your own pre-printed deposit slips, & make sure the account number on your slip is correct.

Never endorse a cheque until you are ready to cash or deposit it.

PREVENTION OF CREDIT CARD FRAUD

Keep your credit cards safe:

Shred anything with your credit card number on it:

Avoid giving out your credit card information

Be cautious while doing credit card transactions online

Report lost or stolen credit cards immediately.

Review your billing statements each month

Card Skimming

Memorize your Personal Identification Number

PREVENTION OF PHISHING & INTERNET FRAUD

PHISHY” EMAILS:.

•Emails pretending to be from a legitimate retailer, bank, organization, or government agency. In one case, a phisher can claim to be from a state lottery commission & requested people’s banking information to deposit their “winnings” in their accounts.

Don’t disclose your personal information:

•Fraudsters use these links to lure people to phony Web sites that looks just like the real sites of the company, organization, or agency they’re impersonating.

BEWARE OF

“PHARMING” :

•A virus or malicious program is secretly planted in your computer & hijacks your Web browser. Any personal information you provide at the phony site, such as your password or account number, can be stolen & fraudulently used.

PEVENTION OF PHISHING & INTERNET FRAUD (CONTD.)

SPAM FILTER

S, ANTI-VIRUS

& ANTI-SPY

WARE SOFT

WARE, & A

FIREWALL .

•A spam filter can help reduce the number of phishing emails you get. Anti-virus software, which scans incoming messages for troublesome files, & anti-spy ware software, which looks for programs that have been installed on your computer & track your online activities without your knowledge, can protect you against pharming & other techniques that phishers use

BEWARE OF THE

TELE- MARKETERS

•Avoid giving personal account details to fraudulent tele-marketers pretending to be from a company or government agency, making the same kinds of false claims & asking for your personal information.

REPORT

PHISHING

•Report phishing, whether you’re a victim or not. Tell the company or agency that the phisher was impersonating.