Criminology

SocioEconomic Offences: Nature and

Dimensions

Bank Fraud- Types and Prevention.

Role Name Affiliation

Principal Investigator Prof. (Dr.) G.S. Bajpai Registrar, National Law University

Delhi

Paper Coordinator Dr. Kavita Singh Associate Professor, West Bengal

National University of Juridical

Sciences, Kolkata.

Content Writer/Author Ms. Vaneeta Patnaik Assistant Professor, West Bengal

National University of Juridical

Sciences, Kolkata.

Content Reviewer Prof. N.K. Chakraborty Director, KIIT School of Law, Odisha.

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DESCRIPTION OF MODULE

Items Description of Module

Subject Name Criminology

Paper Name Socio-Economic Offences

Module

Name/Title

Bank Fraud- Types and Prevention

Module Id

Objectives

Learning Outcome:

To understand the nature of bank frauds

commited;

Understand the procedure of commission of

bank frauds;

Laws involved to deal with Bank Frauds;

Impact of Bank Fraud

Prerequisites Negotiable Instruments Act, 1881,

Indian Penal Code.

Reserve Bank of India Act, 1934.

Key words

Types of Bank frauds, cheque, debit card, credit card,

Act.

Name of the Module : Bank Fraud- Types and Prevention

TABLE OF CONTENTS INTRODUCTION: .................................................................................................................... 3

WHAT IS A FRAUD? ............................................................................................................... 5

Bank Frauds and elements: .................................................................................................... 7

LEGAL REGIME TO CONTROL BANK FRAUDS: .............................................................. 8

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IMPACT OF FRAUD IN INDIA .............................................................................................. 9

CLASSIFICATION OF FRAUD AND PREVENTION ......................................................... 10

DEPOSIT ACCOUNT FRAUDS: ....................................................................................... 10

PURCHASED BILL FRAUDS: .......................................................................................... 11

HYPOTHECATION FRAUD: ............................................................................................ 11

LOAN FRAUD: ................................................................................................................... 12

COMPUTER RELATED FRAUDS: ................................................................................... 12

CHEQUE FRAUDS: ........................................................................................................... 14

DISHONOUR OF CHEQUES ............................................................................................ 15

CREDIT AND DEBIT CARD FRAUD: ............................................................................. 16

CONCLUSION ........................................................................................................................ 17

1. INTRODUCTION:

Banks are considered as necessary equipment for the Indian economy. This particular

sector has been tremendously growing in the recent years after the nationalisation of Banks in

1969 and the liberalisation of economy in 1991.Due to the nature of their daily activity of

dealing with money, and even after having such a supervised and well regulated system it is

very tempting for those who are either associated the system or outside to find faults in the

system and to make personal gains by fraud. A bank fraud includes a considerable proportion

of white collar crimes being investigated by the authorities. These frauds, unlike ordinary

crimes, the amount misappropriated in these crimes runs into lakhs and crores of rupees.

Bank fraud is a federal crime in many countries, defined as planning to obtain property or

money from any federally insured financial institution. It is sometimes considered a white

collar crime.

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Banking has been defined under section 5(b) of the Banking Regulations Act 19491.

According to it banking means accepting, for the purpose of lending or investment, of

deposits of money from the public, repayable on demand or otherwise.

To understand the concept of Bank Fraud, we need to understand the concept of fraud

and the various types of frauds and the ways to detect the same and the prevention of the

same.

1https://www.nabard.org/pdf/India_Banking_BankingRegulationAct1949.pdf

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2. LEARNING OUTCOMES:

On completion of this module, the reader will be able to :

• Define Fraud and understand the ingredients of Bank Fraud

• Understand the Legal Regime to deal with Bank Frauds

• Assess the impact of such Frauds on India

• Classify Fraud and Prevention of the Frauds

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3. WHAT IS A FRAUD?

Generally, A dishonest act or behaviour through which one person gains or tries to

gain an advantage over another which results in the loss of the victim, directly or indirectly is

called as fraud.

Under the IPC, fraud has not been defined directly under any particular section, but it

provides for punishments for various acts which lead to commission of fraud. However,

sections dealing with cheating, concealment, forgery, counterfeiting, misappropriation and

breach of trust cover the same adequately. The contract Act under section 17states fraud

means and includes any of the acts by a party to a contract or with his connivance or by his

agents with the intention to deceive another party or his agent or to induce him to enter in to a

contract2:

1. The suggestion, as a fact of that which is not true or by one who doesn’t believe it to

be true;

2. The active concealment of a fact by one having knowledge or belief of the fact;

3. A promise made without any intention of performing it;

4. Any other act fitted to deceive; and

5. Any such act or omission as the law specially declares to be fraudulent.

By reading the relevant IPC provisions and Contract Act, the essential requirements for fraud

are3:

2http://www.legalserviceindia.com/article/l261-Bank-Frauds.html 3 Banking System, Frauds and Legal Control, RP Nainta

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Essentials of Fraud:

Bank Frauds and elements:

As stated earlier, the amount of loss sustained as outcome fraud exceeds the losses

due any other crime(s) put together. With the rising banking business, cheats in banks are

additionally expanding and the fraudsters are turning out to be increasingly complex and

shrewd. In an offer to keep pace with the evolving times, the banking segment has

differentiated its business complex. Substitution of the theory of class banking with mass

banking in the post-nationalization period has tossed a great deal of difficulties to the

administration on accommodating the social duty with financial reasonability

The four most important elements for constituting fraud are; the active involvement of

the staff, failure to follow the instructions and guidelines of the bank by the staff, collusion

between businessman, executives and politicians to bend the rules and regulations and any

other external factors.

1 • Representation of an Act

2 • Fact

3 • Believed to be False

4 • Inducement to Act

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LEGAL REGIME TO CONTROL BANK FRAUDS:

The Indian Penal Code,1860

Criminal Procedure Code, 1973

The Negotiable Instruments Act, 1881

The Reserve Bank of India Act, 1934

SARFAESI Act, 2002

The Banking Regulations Act, 1949

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4. IMPACT OF FRAUD IN INDIA

“Offences related to banking activities are not only confined to banks but have a harmful

impact on their customers and society at large”4

Many recent fraud incidents reported are related to fix deposits, loan disbursements,

and credit and debit card frauds and ATM based frauds. All these frauds show that not only

they undermine the profits, reliability of services and operating efficiencies but can also have

an impact on the society and the organisation itself. With the increase in the gravity of such

instances it is impacting the profitability of the sector and there is an increase in the NPAs.

This rise in the NPA is a serious threat to the Indian Banking Industry as the sturdiness of a

country’s banking and financial sector determines the quality of products and services. It is

also a direct indicator of the living standards and well being of people. Thus if there is high

level of NPAs in the banking system, then it reflects the distress of borrower and the

inefficiencies in the transmission mechanism. The Indian economy suffers greatly due to

these incidents.

Fraud has also hampered the growth of this establishment/ industry. It is a huge killer

for the business sector and underlying factor to all human endeavours. It also increases the

corruption level of a country. Even after there are various measures taken by the RBI to limit

or decrease the frequency of frauds, the amount of money lost is still on the rise.

4http://articles.economictimes.indiatimes.com/2013-10-14/news/43027531_1_offences-bank-employee-moral-

turpitude

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5. CLASSIFICATION OF FRAUD AND PREVENTION

To maintain uniformity in fraud reporting, frauds have been classified on the basis of

types and provisions of the Indian Penal Code, and the reporting guidelines for the same has

been prescribed by RBI The Reserve Bank of India classifies Bank frauds in the following

categories5:

1. Misappropriation and criminal breach of trust.

2. Fraudulent encashment through forged instruments, manipulation of books of account

or through fictitious accounts and conversion of property.

3. Unauthorised credit facilities extended for reward or for illegal gratification.

4. Negligence and cash shortages.

5. Cheating and forgery.

6. Irregularities in foreign exchange transactions.

7. Any other type of fraud not coming under the specific heads as above.

6. MECHANICS OF BANK FRAUDS

6.1. DEPOSIT ACCOUNT FRAUDS:

The following types of frauds are generally committed;

a) Value inflation of cheques deposited

b) Changing the nature of the cheques (Crossed to bearer)

c) Operating a dormant account fraudulently

d) Non deposition and misappropriation by agents

Preventive Measures:

a) Careful and systematic examination procedures of cheques and other transactions.

b) Separation of book keeping and Cash handling operations.

5https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9808

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c) Using Black light, adhesive tapes and pathfinders to ensure that originality and

prevent material alteration.

6.2. PURCHASED BILL FRAUDS: These are generally expensive and can take the following forms:

a) Discount on Stolen or Fake Railways Receipts and motor receipts along with other

necessary bills.

b) Forged/ fake bills with inflated value, drawn on sister concern are discounted.

c) Fake/ Forged bills for valueless goods are discounted.

Preventive Measures:

a) Examining the receipts properly and strictly by confirming from the concerned

authorities.

b) In case of auction, inform the authorities regarding the interest of the bank in the

property so as to get information incase of non collection of goods.

c) Establishing a better connection between the purchaser and the seller in case of

dispatch of proceeds.

d) Strict examination before discounting the bill.

6.3. HYPOTHECATION FRAUD: Cash advances, against pledged goods, as security are fertile field for frauds.

a) Unauthorized removal of hypothecated good from the godowns.

b) Some of the stocked goods in large quantity may have less value

c) Inflation of stock statements.

d) Valueless and meaningless stocks are offered as security.

e) Hypothecating same goods in favour of different banks.

Preventive Measures:

a) Strict examination of the bank representative’s and borrower’s credential

b) Only marketable goods to be accepted as security

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c) Proper evaluation of stocks

d) Verification of statements of stocks

6.4. LOAN FRAUD: The following types of frauds are generally committed;

a) Two different person taking loan on the same item or product

b) People taking loan without a providing actual address and disappearing at the time of

repayment.

c) Loan taken for one purpose but used for a different purpose i.e loan taken for

agriculture but used for personal purposes

d) Borrowing is denied when the particular person is alleged of non payment.

Prevention:

a) Proper verification of documents and the purpose for taking the loan

b) Including the local authorities as to verify the authencity of the loan purpose and

authentication

c) Incase of a substantial amount of loan taken, it should be checked by the competent

authority.

6.5. COMPUTER RELATED FRAUDS:

To provide efficient and fast service, most of the branches of the banks except the

ones in the rural and remote areas have been computerized. Not many frauds relating to

computers have yet been reported so far as computerization in the Indian banks is of recent

origin. But in the western countries where virtually everything is computerized, a large

number of cyber crimes in the banking sector are reported on a regular basis. There is a need

to analyse the nature of such crimes so that appropriate preventive measures may be devised.

Normally following types of frauds are committed-

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(a) Spy software is devised by the cyber criminals to crack the passwords. They enter into

the computer system of the banks and manipulate the data to transfer the money from

other’s accounts.

(b) Computer virus is created by the mischief mongers who find way into the computer

system by way of e-mails. These viruses destroy the data stored in the computers and

slow down the entire computer system. It is sometimes alleged that the manufacturers of

anti-virus software themselves create virus so that their product may be sold in the

market.

(c) Hackers are computer experts who steal the passwords and access the classified

information stored in the computer system. They do not even fear to “raid” the

government departments including military establishments to carryout their nefarious

design to destroy and mutilate the date stored in the computer systems. Such acts are

committed normally not for any material gain but to derive mental satisfaction out of

other’s sufferings.

(d) Wire tapping is a crime committed by tapping the wire of the ATMs of the banks to

withdraw money out of other person’s account. The fraudster, in this case, attaches a

wireless microphone to the telephone line connecting the ATM with the bank’s computer

and records signals through wire tapping while a customer is using the ATM. These

signals are later on utilized for withdrawing money.

The Government of India enacted the Information Technology Act, 2000 to provide

for punishment and penalties in respect of frauds committed in respect of computers. Section

43 of the said Act provides for hefty damages upto rupees ten lakhs payable by the offender

to the person affected in case there are unauthorized acts committed in respect of another

person’s computer system like access, downloads or taking copies of the information or data

stored, introduction of computer contaminant or computer virus, damages to the computer or

its system etc. Further, the said Act also provides for punishment with imprisonment upto

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three years for tampering with computer source documents and for hacking the computer

systems.

6.6. CHEQUE FRAUDS:

This constitutes the biggest volume of bank frauds. This crime is done in the

following forms:

a) Cheques are stolen, filled and signed spuriously and encashed.

b) The signed cheques are stolen and are encashed with alterations, if needed

c) Cheques issued by organisations for employees are duplicated

d) Alteration of cheques to increase the amount or change the beneficiary or add an

additional beneficiary.

e) Cheque Kitting: 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 clears6.

Preventive Measure:

a) The instrument must contain a proper date

b) The cheque must be checked thoroughly and the character should be verified

c) Checking the signatures which should be genuine.

d) The amount should be checked that it should be written in both numerical and

words.

e) Checking cheque kitting

6http://www.legalserviceindia.com/article/l261-Bank-Frauds.html

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6.7. DISHONOUR OF CHEQUES

Dishonour of cheques or cheque bounces are a very serious problem and it is

becoming even bigger. To cope with this issue which was affecting the smooth business

transactions, the Government of India has introduced the Negotiable Instruments Act, 1881

which provides for provisions to deal with cases of cheque bounce under section 138 to 142.

The Supreme Court of India in a landmark judgement7 has also provided with new guidelines

to deal with cheque bounce cases.

Section 138 of the Negotiable Instruments Act, 1881 “Where any cheque drawn by a

person on an account maintained by him with a banker for payment of any amount of money

to another person from out of that account for the discharge, in whole or in part, of any debt

or other liability, is returned by the bank unpaid, either because of the amount of money

standing to the credit of that account is insufficient to honour the cheque or that it exceeds the

amount arranged to be paid from that account by an agreement made with that bank, such

person shall be deemed to have committed an offence and shall, without prejudice to any

other provisions of this Act, be punished with imprisonment for 1[a term which may be

extended to two years], or with fine which may extend to twice the amount of the cheque, or

with both: Provided that nothing contained in this section shall apply unless--

(a) the cheque has been presented to the bank within a period of six months from the date on

which it is drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand

for the payment of the said amount of money by giving a notice in writing, to the drawer of

the cheque,2[within thirty days] of the receipt of information by him from the bank regarding

the return of the cheque as unpaid; and

7('MANU/SC/1391/2013'); Indian Bank Association vs. Union Of India

16

(c) the drawer of such cheque fails to make the payment of the said amount of money to the

payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of

the receipt of the said notice.”8

6.8. CREDIT AND DEBIT CARD FRAUD: The introduction of plastic money also brought in the frauds as a natural evil fall out. As

more and more number of people using them there is more and more chances of fraud in the

related sector. The case is much worse in foreign countries where the general usage is much

higher than in India.

The various modes of credit/ debit card fraud are:

a) Abuse of genuine cards:

The genuine cards are stolen while in transit from the institution to the user or from

the owners and sometimes the card is stolen, and there is a misuse of the stolen cards.

Even in some cases the cardholders falsely report about their card being stolen and go

on a shopping spree before the acquirer bank suspends the transactions or block the

card.

b) Altered Cards

An altered card is an original card only which is altered by the fraudsrer by giving a

new name and if replaces the signature strip also then he gets genuine account number

from a bunco bankster. It is very abnormal and can damage the security features of the

card provided by the bank.

c) White Plastics

The duplicate fraudulent cards are called as white plastics. They are the copy of the

original genuine cards. They have pictorial similarities but doesn’t have the safety

features.

d) Impersonation frauds

These are also called as application frauds. The fraudster assumes the name and

address of some well know personality and collects the card.

8http://www.manupatrafast.in/Search/dispsearch.aspx?nActCompID=25842&iPage=1&hText=

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Preventive Measures:

Speeding up the transmission of information about the stolen or altered card

through a dedicated website.

Appointing trained operators to recognise and differentiate between genuine

and original cards

Monitoring the working of the sale terminals periodically to detect

unscrupulous merchants.

7. CONCLUSION

These frauds are a creation of the experienced criminals, frantic customers or

someone associated with the banking system or a bunco bankster or their collusion. Most of

time with a strict vigilance and examination of various documents, their work can easily be

detected. The preventive measures stated above in this module will surely help if followed

correctly in combating the issue of bank frauds. Information of the conceivable avenues can

keep the banker cautioned and subsequently help in battling the frauds.

These Frauds are now becoming more and more frequent and can be considered as

one of the main reasons for damaging the economy of the country and with such high profile

frauds happening all over the country, it has become necessary to put a check to these

activities and if possible to create a more stringent legislation to deal with these issues.

Sticking to the rules and eternal vigilance is the basic preventive measure.9

9 Sharma BR; Universal Law Publishing; Bank Frauds – Prevention and Detection

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