BANK FRAUDS IN INDIA– ANANALYSIS

Abstract:
The growing number of bank frauds in India is a serious matter which adversely impact the working of banks, markets and payment system. These also shake the confidence in the banking system and the integrity and stability of the economy. Besides a sharp growth in the number of frauds and the amount involved in them during the recent past, innovative approaches have been adopted by the culprits which goes difficult to detect and prevent them, Appreciating the seriousness of the issue, both the Government and RBI have been initiating steps from time to time to ensure effective detection and prevention mechanism in banks. But these need to be supplemented by strengthening professionalism and corporate governance &business ethics, besides promoting education and training in banks. More importantly, efforts are called for creating seriousness among the bank staff in dealing with frauds. Appreciating this felt need,, the article is specially written for bank officers to develop a fair understanding of bank frauds by discussing analysis of frauds, modus of operandi, Know Your Principles for prevention of frauds, measures taken by Government and RBI, present arrangements for investigation of frauds in banks and suggestions to strengthen the machinery in banks for detection and prevention of bank frauds

Introduction:
Fraud’ under Section 17 of the Indian Contract Act, 1872 includes any of the acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract. In the context of banking business, ‘Bank Fraud’ is defined in the Report of Reserve Bank of India (RBI) Working Group on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds , 2011 which reads: ‘A deliberate act of omission or commission by any person, carried out in the course of a banking transaction or in the books of accounts maintained manually or under computer system in banks, resulting into wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank'(1).

Bank frauds in India are on the rise which is a matter of concern to banks and RBI.Consequently, the impact of frauds can be huge in terms of likely disruption in the working of the markets, banks, and the payment system.Besides, frauds can have a potentially debilitating effect on confidence in the banking system and may damage the integrity and stability of the economy.

Besides a sharp growth in the number of frauds and the amount involved in them, innovative approaches under technology driven banking have been adopted by culprits in perpetrating bank frauds which is becoming difficult even to detect them and undertake preventive measures. In this backdrop,this paper attempts to study bank frauds by examining analysis of bank frauds, modus of operandi of frauds, Know Your Principles for prevention of frauds, Reserve Bank of India (RBI) and Government of India (GOI)initiatives, investigation of frauds in banks and offers suggestions to strengthen the machinery in banks for detection and prevention of bank frauds.

Analysis of Bank Frauds
With the sweeping changes in the scope and magnitude of banking transactions witnessed in the past few decades, the emergence of hybrid financial products, the increasing trend of cross border financial transactions &the dynamics of real-time fund movement and transformation,bank frauds are on the rise both in terms of number and quantum.Hence, it was felt necessary for RBI to create a database relating to bank frauds for review and monitoring.

Accordingly, RBI made it mandatory for scheduled commercial banks (SCBs) to report fraud cases way back in July 1970. In 2005-06, such reporting was extended to urban co-operative banks (UCBs) and deposit taking Non-Banking Financial Companies (NBFCs), registered with RBI. In March 2012, NBFC-ND-SIs (systemically important, non-deposit taking NBFCs) having an asset base of Rs. 100 crore and above were also brought under the reporting requirements.

According to the data given by RBI in response to an RTI query as on June 13, 2019, of the total 53,334 cases of frauds reported during 2008-09 and 2018-19 fiscal years, involving a whopping Rs 2.05 lakh crore, the highest of 6,811 were reported by the ICICI Bank involving Rs 5,033.81 crore(2).The state-run State Bank of India (SBI) reported 6,793 fraud cases involving Rs 23,734.74 crore, followed by HDFC Banks which recorded 2,497 such cases involving Rs 1,200.79 crore.

Further analysis of fraud related data suggests that, a quantum jump in the amount involved in frauds during 2017-18 was on account of a large-value fraud committed in the gems and jewellery sector, mainly affecting Punjab National Bank. Further, during 2017-18, public sector banks (PSBs) accounted for 92.9 per cent of the amount involved in frauds of more than Rs.1 lakh, as reported to the Reserve Bank; private sector banks accounted for 6 per cent.

Public Sector Banks (PSBs) also accounted for about 85 per cent of the cumulative amount involved in frauds during 2017-18 and, private sector banks accounted for a little over 10 per cent.At the system level, frauds in loans, by amount, accounted for more than 75 per cent of frauds involving amounts of Rs.1 lakh and above, while the number of frauds in deposit accounts was at just over 3 per cent.Within the loan category of frauds, PSBs accounted for a major share (87 per cent) followed by the private sector banks (11 per cent).

The share of PSBs in frauds relating to ‘off-balance sheet items’ such as Letter of Credit, Letter of Undertaking, and Letter of Acceptance was higher, at 96 per cent.Of the seven classifications of fraud in alignment with the Indian Penal Code, ‘cheating and forgery’ was the major component, followed by ‘misappropriation and criminal breach of trust’.In ‘cheating and forgery’ cases, the most common modus operandi was multiple mortgage and forged documents.

Further, Mumbai (Greater Mumbai), Kolkata and Delhi were the top three cities in reporting of bank frauds under ‘cheating and forgery’category.In respect of staff involvement in frauds, banks reported that it was prominent in the categories ‘cash’ and ‘deposits’, though these together had a much smaller share in the overall number of fraud incidents and the amount involved(3).Due to increasing number of frauds, banks reported a total loss of about Rs 70,000 crore during the last three fiscals up to March 2018. The extent of loss in fraud cases reported by scheduled commercial banks (SCBs) for the last three years stood at 16,409 16,652 and 36,694 as on March end, 2015-16, 2016-17and 2017-18 respectively.

While the bulk of banking frauds was loan-related, it is observed that there has been a significant jump in card and internet banking related frauds during 2017-18. A total of 972 such incidents were reported in 2017-18, roughly three per day. The banking sector lost a total of Rs 168.74 crore to organised crimes directed at ATMs in the past three years. With a lot of essential financial services shifting to the digital space, the number of frauds targeting online transactions has also increased. In 2017-18, a total of 911 frauds were committed using debit and credit cards. The sum total of money that went into the wrong hands stands at Rs 65.26 crore.(4)

In view of the alarming rise in Bank frauds, in 2017, the Central Vigilance Commission (CVC) analysed the top 100 banks frauds in the countryThe analysis focussed mainly on the Modus Operandi; Amount involved; Type oflending viz. Consortium/ Multiple/Individual; anomalies observed; loopholes that facilitated perpetration of concerned fraud and systemic improvements required toplug the loopholes in the system & procedures, etc (5).

The Top 100 Banks frauds were analysed industry-wise and credit facility-wiseThe CVC report discusses modus operendi and loopholes/lapses and offers suggestions for systemic improvement. Lastly, a quick estimate puts the average number of all transactions that happen every day in the banking system stood at 10 crores, which is enormous. But the number of frauds per million banking transactions was about 0.4, which is not a very high figure (6). However, efforts should be made to keep a check on the rising trends in bank frauds. In this regard, it would be interesting to know about reasons for bank frauds.

Reasons for Bank Frauds:
A study conducted at IIM Bengaluru identifies causes of bank frauds. Accordingly, bank frauds are primarily due to lack of adequate supervision of the top management; collusion between the staff, corporate borrowers and third party agencies; weak regulatory system; lack of appropriate tools and technologies in place to detect early warning signals of a fraud; lack of awareness of bank employees and customers; and lack of coordination among different banks across India and abroad.

Further, delays in legal procedures for reporting, and various loopholes in system are the reasons of frauds. Also, lack of specialized forensic audit as well as a good legal understanding of frauds is one of the reasons. (7). For detection and prevention of bank frauds, it is necessary to understand about the modus operandi of frauds.

Modus of Operandi of Frauds:
Bank frauds can be divided into three main sub-groups related to: Technology, Advances and KYC (mainly in deposit accounts). Nearly, 65 percent of totalfraud cases were technology related covering frauds committed through /at internet banking channel, ATMs and other alternate payment channels like credit/ debit/prepaid cards.

Frauds related to deposits are relatively less in number and in value. But, the frauds in advances portfolio accounted for a major proportion (64%) of the total amount involved in frauds. Relatively speaking, large value advances related frauds (>Rs. 1 crore) have increased both in terms of number and amount involved over the years. Modus operandi in these frauds and preventive &mitigation strategies are discussed as under :
(1) Technology Related Frauds: The cumulative total of number of cases and the amount involved in technology related frauds as at March end, 2013 stood at 1,11,655 and Rs. 357.33 crores respectively. Though the average amount involved in frauds is less than Rs.31,000, banks should be constantly on the guard to provide a secure environment for customers to conduct banking transactions. While banks’ customers havenow become tech-savvy and started using online banking services and products, fraudsters are devising newer ways of perpetrating frauds by exploiting the loopholes in technology systems and processes.

Fraudsters have employed hostile software programs or malware attacks, phishing, Vishing (voicemail), SMSishing (text messages) and Whaling (targeted phishing on High Networth Individuals) techniques apart from stealing confidential data to perpetrate frauds. With cyber-attack becoming more frequent, the RBI has advised banks in February 2013 to introduce certain minimum checks and balances like introduction of two factor authentication in case of ‘card not present’ transactions, converting all strip based cards to chip based cards for better security, issuing debit and credit cards only for domestic usage unless sought specifically by the customer, putting threshold limit on international usage of debit/ credit cards, constant review of the pattern of card transactions in coordination with customers, sending SMS alerts in respect of card transactions etc. to minimize the impact of such attacks on banks as well as customers.

Regarding the electronic modes of payment like NEFT and RTGS, it is the responsibility of the user to ensure that his unique ID and password are properly secured and do not get misused due to his laxity. And, banks, on their part, should also ensure that these payment channels are safe and secure. Towards this end, RBI has advised banks to introduce preventive measures such as putting a cap on the value/number of beneficiaries, introducing system of issuing alert on inclusion of additional beneficiary, velocity checks on number of transactions effected per day/per beneficiary, considering introduction of digital signature for large value payments, capturing internet protocol check as an additional validation check for any transaction, etc.

Regarding duplicate debit/ credit cards, banks need to improve the peripheral and system security in ATM locations and, at the same time, educate their customers about using their payment cards with due caution. Similarly, cases of circulation of fraudulent e-mails and SMS messages conveying winning of prize money have become matter of a concern in recent times. Many a times, innocent people fall prey to such e-mails and pay money in designated accounts, which is then quickly siphoned off through ATMs located in far flung areas of the country.

For this purpose, the fraudsters generally use deposit accounts in banks with lax KYC drills or accounts which remain inoperative for long. Banks, therefore, not only need to caution their customers to guard against such temptations for easy money. In fact, inadequacy of KYC drill would render any subsequent investigation process meaningless.

RBI, as a part of its financial literacy programme, constantly seeks to caution the general public through print media, electronic media and on its web-site not to get enamored by the false promises made in such e-mails. Apart from enlisting active co-operation from their technology vendors, banks must look to build a close rapport with other banks, investigative agencies and regulators to ensure that there is prompt and coordinated exchange of information, whenever required. With the spread of mobile banking, banks would need to closely engage with the telecom service providers for reducing the technology related fraud risk. Banks could also consider seeking insurance coverage as a risk transfer tool and a mitigant for the financial losses arising from technology induced fraudulent customer transactions.

(2) Advances Related Frauds : Majority of the credit related frauds are on account of deficient appraisal system, poor post-disbursement supervision and inadequate follow up. In this regard, RBI in its circular of August 07, 2004highlighted major deficiencies observed in credit area which shall lead to frauds. These are observed at both at sanction and post sanction stage(8). At the sanction stage, there are major deficiencies noticed. For Instance, sanctions are made deviating from the laid down policy / lending norms. Ad-hoc limits are sanctioned frequently even if the company has regular limits and, the same are running irregularly.

Credit limits are sanctioned by branch/Zonal Office/Central Office level functionaries in excess of their delegated powers. The sanctioning authorities overlook the irregularities pointed out by the lower level functionaries in the borrowal account.The sanctioning authorities are not given full facts about the borrowers and the project by the officials in controlling office/branch. Sanctioning authorities overlook the fact at the time of takeover of accounts that the borrowing company has irregular accounts with the previous bank/s.

There have been instances where some of professionals like chartered accountants, valuers and advocates involved in the loan assessment and, sanctioning processes have also facilitated the perpetration of frauds by colluding with the borrowers to fabricate fudged financial statements, inflated security valuationreports and defective search reports for title deeds of mortgaged property based on which banks have been led to overestimate the funding requirements and security cover for the same.

Cases of multiple financing against the same security are also observed. In the same way, there are major deficiencies at post-sanction stage. For instance, the terms and conditions prescribed at the time of sanction of loan facilities are subsequently relaxed without justification by the sanctioning authorities themselves while disbursing funds. In respect of high valued advances, cases of diversion of funds are not reported to the bank’s Board for their information and action in the matter.As regards working capital limits, failure to detect disappearance of stock given as security has resulted into misappropriation of funds/sale of stock and receivables without the knowledge of banks.

Further, there could be failure to ensure adequacy of the security offered by the borrowers, and to verify whether the same asset is mortgaged to another bank. Periodical reviewof accountsis not undertaken after the funds are lent by the banks.Excess drawings, permitted by the branch/Regional Office level functionaries in the borrowal accounts, are ratified by the Head Office in a routine manner without examining the need for such permissions, at times, frequently. Lastly, limits sanctioned are allowed to be interchanged indiscriminately by the branch officials without proper authority.

For prevention of frauds in credit area, Certain measures are suggested. To mention few of them, in cases of diversion of funds, the lending bank should obtain a certificate from the borrowers on a quarterly basis furnishing details of accounts opened with other banks.Generally, banks rely on the certificates of valuation given by the external valuers which in some cases are found to have shown grossly inflated values. It is, therefore, suggested that banks shall set up of independent ‘valuation Cell’ within banks themselves.

Immediate action should be taken where the malafide/gross negligence on the part of dealing officials are noticed.Wherever there is a prima-facie case against the dealing officials, appropriate action in terms of CVC guidelines for their inclusion in the list of officers with doubtful integrity, should be initiated by banks in consultation with the CBI.

Banks should evolve a process of checklisting which enables them to examine any deficiencies while releasing the funds to the borrowers or monitoring the end use of funds. Lastly, there is a need for building up a cadre of officials with proper educational background and training to take care of larger projects financed by the banks.

(3) Frauds related toDeposits: There are several ways of perpetrating frauds in deposits area. These include: opening of new fictitious deposit accounts by persons not properly identified by the bank followed by depositing of fake/stolen/forged instruments in such accounts and then withdrawing proceeds, manipulation in inward/outward clearing, by passing unauthorized entries in the books accounts, giving free access to unidentified so called middlemen/ agents of the original depositor and withdrawing the amount, debiting impersonal accounts such as Imprest Clearing Account/ Suspense account, laxity in the safe custody of critical stationary etc.

In these regards, banks should ensure that deposit accounts maintained with them are fully KYC compliant. Newly opened accounts with unusual banking operation should be under check. Further, timely rectification of entries in Suspense Accounts, and Reconciliation of entries in Clearing Adjusted Account should be ensured, adequate safeguards should be in place in respects of TTs, DDs and Pay Orders. Operations in dormant accounts should be under watch. The banks should also have a system of generating alerts to monitor transactions in accounts which are inoperative for long or where transactions are not in conformity with general trend and customer risk profile.

Know Your Principles for Prevention of Frauds:
In 2015, in his speech delivered by Shri R. Gandhi, Deputy Governor, RBI (9), three Know Your Principles are suggested for banks to prevent a fraud. These include: Know Your Customer (KYC), Know Your Employee (KYE) and Know Your Partner (KYP). Regarding the first KYC, the emphasis is on the different types of document to be obtained from an account holder which will establish that KYC norms have been followed. In a scenario where many frauds are committed by submitting forged and fabricated documents, KYC becomes very important.

A bank, apart from obtaining the relevant documents, should make an effort to KYC in the real sense regarding his background, his stated activities/profession, what his signature/ style of operation etc. A robust KYC system envisages an understanding of his pattern of transactions and will let the bank draw up a customer profile.

Once this is established, any exception to the norms can raise a red flag and tracked or confirmed with the customer. At the bank level, it is possible to segment its customers based on their risk profile and transaction patterns and develop appropriate response systems for exceptional patterns noticed and fortify systemic level controls. About the second KYE, several frauds are committed by insiders.. Bankers are generally people of integrity.

The selection process is highly sensitized in this respect. Banks have to take extra care to have continuous vigil on their staff. Background checking for antecedents, checks and balances, periodic rotations, vigilance assessments and internal audits techniques will have to be employed to know the employees better and as preventive measures. The last one is KYP. Modern day banking necessitates that a bank join hands with partners, agents, vendors etc.

Outsourcing peripheral and several operational activities involves deploying and trusting somebody else’s employees. Varied activities as diverse as cash logistics to IT and data management are being entrusted to third parties. Banking Correspondents and Banking Facilitators are emerging as another set of persons closely associated with a bank. If frauds are to be prevented effectively, banks have to know their partners.

RBI and Government Initiatives:
Besides suggesting specific preventive measures for frauds relating technology, advances and deposits as discussed above, both the RBI and the Government have taken several initiatives. To elaborate, RBI advised banks to strengthen the role of the Chairmen and Managing Directors(CMDs)/Chief Executive Officers (CEOs), Audit Committee of the Board (ACB) and Special Committee of the Board to evolve robust fraud risk management systems and implement effective fraud risk mitigating measures.

They are responsible for effective investigation of fraud cases and prompt and accurate reporting to appropriate regulatory and law enforcement authorities. The Board of the banks/ ACB should alsoensure a periodical review of the procedures and processes to avoid loopholes, if any, in their policy guidelines. More importantly, the top management should organize fraud awareness training for its employees focusing on prevention and detection of fraud.

Further, providing individuals a means to report suspicious activity is a critical part of an anti-fraud program. Towards this end, a system of protected disclosure scheme has been evolved which is regulated by CVC in case of public sector banks and RBI in case of private and foreign banks. Reserve Bank has also advised private and foreign banks operating in India to upgrade their internal vigilance mechanism to the same level as is applicable in case of public sector banks in terms of CVC guidelines in the matter.

Information sharing is a vital fraud prevention and alert mechanism. On its part, Reserve Bank shares information with all banks detailing the modus operandi of fraud cases reported by any bank together with details of the entities involved in the perpetration of such frauds in the form of confidential caution advices. This also serves to encourage a periodic review of existing guidelines, identify loopholes on the basis of caution advice, if any, and initiate corrective steps. It has also issued instructions requiring banks to report negligence or involvement of entities like chartered accountants, valuers and advocates resulting in perpetration of frauds, to their professional oversight bodies for appropriate deterrent action.

Today, most banks have put in place a system of checking the credit history of a borrower through credit information companies like the CIBIL. Considering that fraudulent borrowers could still seek credit from the banking system even after defrauding one bank, it calls for setting up of ‘fraud registry’ on the lines of credit information bureau. Further, fraudulent borrowers are prohibited to get access to banking facilities.Government, on its part, enacted Prevention of Anti Money Laundering Act, 2002 for preservation of records and reporting of certain information such as cash transactions of more than Rs 10 lakhs, fake notes, suspicious transactions such as those relating to terrorist activities to RBI.

In addition, it has changed the norms to reduce the liability of customers with regard to card related frauds. The liability will be shared by banks and customers depending on the circumstances under which the fraud took place. Customers are exempted from liability if the fraud has happened due to negligence of the bank or a third-party breach where the liability is not on the bank or the customer, but on the system. On the other hand, customers will have to bear the loss if fraud has occurred due to negligence on their part. In such cases, customers are liable for losses accrued before they report the same to the bank.

Further, RBI has introduced stricter norms to appoint a correspondent bank abroad by a bank in India. “Shell Bank” should be avoided in which case the bank abroad is only on paper. List of terrorist organizations is circulated by RBI for banks to undertake necessary precaution in banking transactions. List of wilful defaulters and non- cooperative borrowers is also in circulation among banks On the advice of RBI, banks are expected to freeze of assets of suspicious parties. PAN should be quoted for cash transaction of more than RS. 50.000. In addition, Forensic Laws expect a detailed scrutiny of Legal Documents of high value advances to detect early warning signals of fraud.

Fraud Risk Management:
In the context of the framework for dealing with Loan frauds in banks, few steps have been taken up. For instance, Identification of Red Flagged Account (RFA) needs a special mention which is one where a suspicion of fraudulent activity is thrown up by the presence of one or more Early Warning Signals (EWS).

These signals in a loan account should immediately put the bank on alert regarding a weakness or wrong doing which may ultimately turn out to be fraudulent. A few Early Warning Signals include: financing the unit far away from the branch, substantial increase in unbilled revenue year after year, disproportionate increase in other current assets,huge related party transactions, not routing of sales proceeds through bank etc.

The most effective way of preventing frauds in loan accounts is for banks to have a robust appraisal and an effective credit monitoring mechanism during the entire life-cycle of the loan account. In detection of fraud, auditors have a vital role to play.

Coming across the instances of fraudulent transactions in the account, they should immediately bring it to the notice of the top management and Audit Committee of the Board (ACB) for appropriate action. In case of accounts classified as ‘fraud’, banks are required to make provisions to the full extent immediately, irrespective of the value of security.

However, in case a bank is unable to make the entire provision in one go, it can spread it to four quarters provided there is no delay in reporting. Further, banks have taken initiative in bringing up Fraud Risk Management (FRM) Solution in the digital platform of the respective products and services offered. FRM solution is an additional authentication which is added into the system to calculate the risk profile of the user.

The system will understand the transaction and usage pattern of the user and identify the risk associated in performing the transaction/activity based on the risk profile of the user and the transaction is challenged with second factor authentication. In other words the system will Allow / Challenge / Deny the transaction of the user based on the risk associated with the transaction.

If risk associated with the transaction is low, system will allow the user to perform the transaction. In such cases only PIN will be required to perform the transaction/activity. ii. If risk associated with the transaction is high, system will challenge the user to answer any one of the already opted security questions.

Based on the answer the user will be allowed to perform the transaction. iii. If risk associated with the transaction is very high, system will deny the user from performing such a transaction and system will automatically intimate the same to FRM cell for analysis. Apart from the FRM solution, banks have come up with measures of self- locking the account when it is not being used i.e., blocking the transactions.

Investigation of Frauds in Banks:
As observed in banks, each bank has a Chief Vigilance Officer toinvestigate a fraud committed by the staff up to Rs 25 lakhs after informing the police and the RBI. Any fraud beyond Rs 25 lakhs is referred to CBI. Investigation team in banks conducts investigation to fix staff accountability and initiate staff side action lacks in objectivity and fairness. Staff-side action includes suspension immediately after the bank reaches the conclusion of involvement of the staff member. Criminal complaints are lodged with police (CBI).

Further, banks have to report frauds of Rs 1 crore and above to RBI which creates a Data Base and issues a circular based on new frauds reported. Chief Vigilance Commissioner guides and monitors investigation of frauds. There are several issues associated with investigation of frauds in banks. In general, investigation function is not paid sufficient attention so far as public sector banks are concerned. The general trend in such cases is to include a large number of officials in the probe so that the investigation is both delayed and diluted. Even in instances where investigations are concluded, there is a tendency to hold only the junior level officials involved in post disbursement supervision account and ignore the lapses on the part of higher officials who are involved in sanctioning of the advances.

Many a times, the internal investigation is put on hold when the probe is handed over to external investigation agencies. But the completion of internal probe would also assist in carrying out prompt investigation by the law enforcement agencies and the perpetrators of fraud can be brought to book. While fixing accountability, there would be a need to categorically establish mala fide intention/ malfeasance on the part of the erring employee involved in fraud cases so that the other officials do not become wary of sanctioning even good credit proposals.

In the backdrop of the above deficiencies, a need is felt to tone up internal investigation function in banks. In addition, many more steps are needed to strengthen both detection and prevention of frauds in banks. . Towards this end, few suggestions are offered

Suggestions:
1. The government shall consider an independent specialized cadre of officers in banks who are capable of carrying out an effective and time bound investigation of such scams. In respect of mega frauds and technology based frauds, this arrangement is needed. For this purpose, selection of such officers shall be on the lines of recruitment of IAS/ IES officers. But, in short term, the government shall consider forming this cadre with a pool of commercial bankers, RBI and CBI officials through lateral recruitment. Further, there should be a dedicated department/cell in banks equipped with legal assistance which serves as a single point of contact with investigating agencies and facilitates easy access to relevant documents.
2. There needs to be effective coordination between banks and agencies such as the Central Board of Direct Taxes (CBDT) to share vital information on personal wealth of promoters. In case of any information that may raise a red flag, the CVC and the RBI should jointly investigate the promoters for fraudulent activities..
3. Banks have to ensure corporate governance at the highest levels. The top management needs to set guidelines and policies for ethical practices and standard procedures to maintain zero tolerance to negligence and fraudulent activities.
4. Various types of audits are undertaken by banks such as statutory audit, risk-based internal audit, concurrent audit, information systems audit and special audits. These need to be tightened for the purpose of obtaining early warning signals of frauds. In particular, the concurrent audit has to be carried out on a real-time, or near-real-time basis.
5. There is a need to improve exchange of information between all stakeholders to instill and maintain financial discipline among the users of funds and prevent negative information arbitrage to the detriment of the system. Bank Board shouldensure that the audit processes and the internal systems and control are capable to identify vulnerable areas, raise red flags and plug loopholes quickly and effectively(10).
6. Delays should be avoided in reporting frauds to appropriate authorities, conducting investigation and fixing staff accountability, which in effect leads to shielding of the main culprit while the blame is generally shifted to the junior level officials. More importantly, it is necessarythat a strong foundation is built by leveraging robust IT systems, framing effective policies and procedures, laying down strict compliance processes, setting high integrity standards, developing efficient monitoring capabilities and initiating strict punitive action against the culprits in a time bound manner. This is necessary not just for the safety of banks but for ensuring the stability and resilience of the overall financial system and sustaining the confidence that various stakeholders have in its strength and integrity.
7. Job rotation in critical areas of banking operations and branches should be strictly followed. Compulsory leave should be granted at regular intervals to the staff operating in critical areas banking and also to a branch manager. Star performers as identified in banks should be kept under watch.Further, posting of senior officers to Inspection department should be made compulsory for higher promotion. In addition, the alert staff member should be suitably honored.
8. Investigation team members should be given an opportunity to undergo a training programme to acquire necessary skills to conduct investigation timely & objectively and initiate staff action within a given time limit.Similarly, banks should regularly reorient and train their personnel so that they fully understand the importance of internal controls in their respective work place.Besides class room training, there shall be regular e-modules with e-certifications and updates made available to the officers at large.

Conclusion:
Bank frauds are on the rise which is a matter of concern to all the stakeholders. The impact of bank frauds can be huge in terms of likely disruption in the working of the markets, financial institutions and the payment system. Besides, frauds can have an adverse effect on confidence in the banking system and may damage the integrity and stability of the economy. It can also bring down banks, undermine the central bank’s supervisory role and even create social unrest, discontent and political upheavals.

The vulnerability of bank frauds has been heightened by technological advancement in recent times. In addition, mega frauds in lending area continues affecting overall financial status of banks. Hence, both the Government and the RBI have been taking steps to ensure early detection of frauds and initiate both corrective and preventive steps. But to supplement these, efforts need to be strengthened to create awarenessamong the staff in banks on seriousness of the problem.

It is also necessary to adopt professional and coordinated approaches in conducting investigation of frauds timely and meaningfully.Lastly the top management in banks has a major role to playto set guidelines and policies for ethical practices and standard procedures to maintain zero tolerance to negligence and fraudulent activities. Towards this end, banks have a long way to go.

References:
1. Report of the Working Group on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds,2012
2. Financial Express, June 14, 2019.
3. Economic Times, August 29, 2018.
4. Fraud Risk Management, SIB Students Corner, Theme No 322, South Indian Bank, Thissur
5. Report on Analysis of Top 100 bank Frauds, Central Vigilance Commission, October 2017.
6. Report to the Nation on Occupational Fraud and Abuse, Association of Certified Fraud Examiners (ACFE), 2012Frauds in the Indian Banking Industry,
7. WORKING PAPER NO: 505, Charan Singh & Others, IIM, Bengaluru, March 2016.
8. Deficiencies in Credit, Reserve Bank of India Circular , August 10, 2004
9. Speech delivered by Shri R. Gandhi, Deputy Governor at “2nd National Conference on Financial Frauds Risks & Preventions” organized by ASSOCHAM on June 26, 2015 at New Delhi.
10. Indian Banking Sector: Current Status and the Way Forward ,Address by Shri Shaktikanta Das, Governor, Reserve Bank of India Delivered at the National Institute of Bank Management.

 

Authored By:

Dr V S Kaveri
Retired Faculty,
NIBM