FRAUDS IN BANKING SECTOR AND ROLE OF AI IN FRAUD MANAGEMENT

Introduction

The banking sector, a cornerstone of the Indian economy, plays a critical role in driving financial inclusion and stability. However, it has not been immune to fraudulent practices, which jeopardize not only the financial institutions but also the trust of the populace. Understanding fraud perpetrators, their methodologies, and motivations is vital to curtailing these malpractices. This article delves into the landscape of banking frauds in India, providing insights into why and how they occur and suggesting robust measures for prevention.

The Landscape of Banking Frauds in India

Banking frauds in India have been a growing concern, reflected in increased incidences of large-scale financial crimes. According to the Reserve Bank of India (RBI), the financial year 2021-22 witnessed a total of 9,103 frauds involving ₹60,389 crore in the Indian banking sector. Latest RBI report highlights a significant rise in the number of banking frauds to 36,075 in the fiscal year 2023-24, marking a year-on-year increase. However, on the positive side, the total amount implicated in these frauds saw a substantial decrease of 46.7%, amounting to Rs 13,930 crore

Indians lost more than Rs 1,750 crore to cyber criminals in the first four months of 2024 with over 7 lakh 40 thousand cybercrime complaints being registered on the National Cybercrime Reporting Portal run by the ministry of home affairs between January to April 2024. According to Indian Cyber Crime Coordination Centre (I4C), on an average 7,000 cybercrime complaints were registered per day in May 2024, a jump of 113.7% between 2021-2023 and 60.9% from 2022-2023, and 85%of them were financial only

These figures, while alarming, underscore the pressing need for stringent controls and vigilant monitoring.

Key Perpetrators and Their Methods

Fraud perpetrators in the banking sector can be broadly categorized into individuals (internal or external) and organized groups. Here’s a deeper look into their modus operandi:

1. Internal Fraudsters:

Internal fraud involves collusion of bank staff or executives who exploit their positions of trust to commit fraud. Common tactics include:

• Misappropriation of assets: Employees divert funds for personal gain.
• Forgery: Alteration of documents and signatures to authorize unauthorized transactions.
• Overriding controls: Executives bypass established procedures and internal controls to facilitate illicit transactions.

2. External Fraudsters :

External fraud often involves customers, outsiders, or professional fraud syndicates. Methods include:

• Identity theft: Using stolen personal information to commit financial fraud.
• Credit card fraud: Duplication and unauthorized use of debit/credit cards.
• Phishing and cyber-attacks: Gaining access to sensitive banking information via fraudulent communication.

Why Frauds Occur?

There are Several factors contribute to the prevalence of banking frauds in India, let us try to understand that why the frauds occur.:

1. Systemic Vulnerabilities:

   Outdated technology systems, weak internal controls, and inadequate risk management frameworks can create an environment conducive to fraud.

2. Greed and Opportunity:

   The confluence of personal financial greed and ample opportunities in loosely monitored systems is a significant driver of fraudulent actions.

3. Lack of Vigilance and Regulatory Loopholes:

Delayed regulatory updates and the lack of stringent compliance mechanisms contribute to systemic weaknesses.

4. Technical Advancements:

While technology advancements have streamlined banking processes, they have also provided sophisticated tools for fraudsters to exploit vulnerabilities in digital infrastructures.

Strategies to Curtail Banking Frauds

Mitigating banking frauds requires an amalgamation of technological innovation, stringent policy frameworks, and a culture of vigilance and integrity. Here are some effective strategies:

1. Strengthening Internal Controls:

Enhancing internal controls through regular audits, employee background checks, and segregating duties can diminish opportunities for internal fraud.

2. Advanced Technology Deployment:

Implementing robust cybersecurity measures, AI-based fraud detection systems, and blockchain technology can safeguard against external threats. Real-time transaction monitoring and predictive analytics help in prompt anomaly detection.

3. Regulatory Enhancements:

Banking regulators must update frameworks to keep pace with evolving risks. Stricter KYC (Know Your Customer) and AML (Anti-Money Laundering) protocols are essential for reducing identity-based frauds.

4. Employee Training and Awareness:

Continuous staff training programs focusing on ethical conduct, fraud awareness, and compliance can foster a culture of vigilance.

5. Customer Education:

Educating customers about fraud prevention measures and the importance of safeguarding personal information can reduce instances of identity theft and related fraud.

6. Collaborative Efforts:

Strengthening public-private partnerships for sharing information on fraud trends and best practices. Collaborative initiatives between banks, regulators, and law enforcement authorities are vital for effective fraud mitigation.

ROLE OF AI IN FRAUD MANAGEMENT

AI-driven AFS is built on the foundation of transaction monitoring, identity verification, and authentication. These elements work together to create an effective defence mechanism against a wide range of fraudulent practices. Whether it’s detecting unauthorised transactions or confirming user identities, AI-powered Anti-Fraud solution offers a comprehensive toolkit for efficiently mitigating fraud.

The versatility of AI-powered AFS emerges through, meeting the different needs of banks and financial institutions across the globe. From real-time fraud detection to predictive analytics for future risks, AI effectively integrates into existing operations, combining human experience with machine intelligence.

By leveraging AI, banks can analyze vast datasets to identify and prevent fraud efficiently, shifting from reactive to proactive measures. This strategic adoption not only protects customers but also secures the integrity of financial transactions, showcasing a commitment to innovation and data safety in the financial sector.

AI-powered video analytics can detect suspicious behavior and alert security personnel in real-time. Machine learning algorithms can analyze vast amounts of transaction data in real-time, identifying patterns and anomalies that deviate from a customer’s typical behavior. This allows for immediate intervention in case of suspicious activity

AI systems detect online fraud such as identity theft and phishing by analyzing user behavior and transaction patterns, flagging anomalies for immediate intervention.

Machine learning algorithms monitor employee actions, identifying unusual patterns that may indicate collusion or unethical practices, ensuring compliance with dual authorization mandates. For example, if two employees always approve each other’s transactions quickly without proper checks, the system can flag this as suspicious. This way, the company can investigate and prevent potential fraud even if the Four Eyes Rule is bypassed.

Conclusion

Banking frauds in India present a formidable challenge that necessitates a multifaceted approach. By understanding the profile and methods of fraud perpetrators, banks can implement more effective safeguards. Armed with cutting-edge technology, robust regulatory frameworks, and a culture of vigilance, the Indian banking sector can significantly reduce the incidence of fraud, strengthening the trust and resilience of the financial ecosystem.