Bank Frauds

The Indian Penal Code does not clearly define fraud but includes sections related to cheating, forgery, counterfeiting, and breach of trust, all of which contribute to fraud. In addition, the Indian Contract Act, Section 17 states that fraud includes any act committed by a party to a contract, or with their connivance or by their agents, to deceive another party or their agent or to induce them to enter into a contract. Banking fraud is a significant concern for federal law enforcement in many countries and is categorised as a white-collar crime. The amount lost due to these crimes runs into large sums of money, often reaching lakhs and crores. The incidence of banking fraud in India is substantial, with many instances reported under deposit, loan, and inter-branch accounting transactions, including remittances. 

Bank fraud is a growing issue, facilitated by higher educational qualifications, impersonal banking, and the increase in the banking sector. Bank fraud can be broadly categorised into two types: by insiders and by outsiders. It is essential to be aware of the risks these activities pose and take necessary steps to minimise the chances of them occurring.

Insider fraud rogue trading

It can have devastating consequences for financial institutions when losses are compounded. Rogue traders are individuals, usually in a position of authority, who are granted the power to invest significant funds on behalf of their bank. However, these traders may take risks hidden from their employer, and when a bad investment is made, further speculation is often attempted to recoup the losses. When these gambles do not pay off, the costs can be immense, with some banks even facing bankruptcy.

Illegal acquisition of funds

This type of loan is typically taken out by a business entity controlled by a dishonest bank officer or accomplice, who then declares bankruptcy or disappears with the money. The borrower may even be a non-existent entity, and the loan is merely a ploy to conceal the theft of a large sum of money from the bank. 

Wire fraud

This is another common way of stealing money from banks. Due to the complexity and difficulty of reversing a wire transfer, criminals often target these networks to acquire funds quickly and easily. 

As banks use the international interbank fund transfer system to settle their accounts, there is a risk that insiders may use forged documents to request that a bank depositor’s money be wired to another, often offshore, account. 

Banks have instituted several checks and balances to reduce the risk of wire fraud. It is important to note that fraudulent loans and wire fraud are illegal activities that can lead to severe financial penalties and jail time. Banks, therefore, take great care to prevent such occurrences.

Forged or fraudulent documents

Forged documents concealing the misappropriation of funds is a common practice. Banks take great care to maintain accurate records of their finances, meaning any false documents claiming the borrowing, withdrawal, transfer, or investment of funds can be used to mask the illicit activities of a thief. Formally, one must be aware that any attempts to deceive a financial institution through altered or fabricated documents are never condoned.

Identity theft

It is a severe issue, with reports of dishonest bank staff disclosing customers’ personal information for fraudulent purposes. Such data is then used to acquire identity and credit cards in the victim’s name. Individuals must take steps to protect their identities and financial details.

Fraudulent activity involving Demand Drafts (DDs) 

It is typically committed by one or more dishonest bank employees, often referred to as ‘Bunko Bankers’. These individuals remove a few DD leaves or books from stock and create them like a regular DD. As insiders, they know the coding system and punching of a demand draft, allowing them to issue DDs payable at distant locations without debiting an account. This fraud is only detected when the head office performs a branch-wise reconciliation – usually six months later – when the money is already gone. Other forms of fraud can also occur, such as forgery and the alteration of cheques. 

Thieves may alter a cheque to either change the name (to use a cheque intended for someone else) or the amount on the face of the cheque. Alternatively, fraudsters may attempt to forge a depositor’s signature on a blank cheque or print their cheques drawn on the accounts of others, non-existent accounts or even accounts owned by non-existent depositors. When deposited, the cheque can be withdrawn before it is returned as invalid or insufficient funds. 

Stolen cheques are also of value to fraudsters, who gain access to facilities handling large amounts of cheques, such as mailrooms, post offices, tax authorities (receiving many cheques), corporate payrolls, and social or veterans’ benefit offices (issuing many cheques). A few missing cheques are enough to open accounts under assumed names and deposit the altered or tampered cheques. This allows the thieves to withdraw the money before it is detected. Stolen blank cheque books are also of significant value to forgers, who then falsely sign as if they were the depositor.

Misappropriation of funds

It is also known as accounting fraud, a serious issue that some businesses have resorted to concealing financial difficulties. This involves falsifying financial records to make it appear that sales and income are higher than reality, assets are worth more than their actual value, or that the company is making a profit when it is operating at a loss. These falsified documents are then used to solicit investments or secure loans to raise additional funds in a desperate attempt to stave off the collapse of an ailing and mismanaged enterprise.

Bill discounting fraud

It is a deception that involves a company convincing a bank that it is a genuine, profitable customer. To achieve this, the company regularly and frequently uses the bank to get payments from one or more of its customers. These payments are always made, as the customers involved are knowingly complicit in the fraud. 

After some time, when the bank is satisfied with the company, the company requests that the bank settles its balance with the company before billing the customer. This process continues until the balance between the bank and the company is large enough, at which point the company takes the payment from the bank, leaving the bank with no one to pay the bills that have been issued.

Cheque kiting 

It is an illegal process of exploiting a system in which money is made available immediately after depositing a cheque, even though it is only removed from the account on which it is drawn once the cheque clears. It involves depositing a cheque in one bank, writing a cheque with that amount and depositing it in another, and creating in-transit or non-existent cash.

This is done by cashing a cheque and depositing the money into another account or withdrawing more cheques before the bank receives the money through clearing the cheque. In some cases, the original cheque turns out to be forged. Criminals have taken advantage of this by swapping cheques between multiple banks daily and using each to cover the shortfall of a previous cheque. In conclusion, cheque kiting is a fraudulent action in which people take advantage of the system to have more money than they do temporarily. It is essential to be aware of this practice to protect oneself from being a victim.

Credit card fraud

This is a significant problem, affecting banks, merchants and customers alike. It takes various forms, including manipulating genuine cards, altering real cards, creating counterfeit cards, fraudulent telemarketing, and obtaining genuine cards on false applications.

As technology advances, it is feared that incidents of credit card fraud will increase exponentially as E-commerce, M-commerce, and internet facilities become more widely available. This poses a severe threat to the security of banking and merchant systems and the individuals whose cards are being used fraudulently. Preventing credit card fraud requires vigilance from all stakeholders, including customers, banks and merchants.

To protect themselves, customers should be aware of the various forms that fraud can take and take steps to protect their card information, such as regularly changing passwords and monitoring statements. Banks and merchants should also have robust systems to detect and prevent fraudulent activities.

Booster cheques

A booster cheque is a fraudulent or lousy cheque used to pay a credit card account to “bust out” or raise the amount of available credit on otherwise-legitimate credit cards. The cheque amount is credited to the card account by the bank as soon as the payment is made, even though the cheque still needs to be 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 bounces, but it is already too late by then.

Stolen payment cards

Often, the first indication that a victim’s wallet has been stolen is a ‘phone call from a credit card issuer asking if the person has gone on a spending spree; the simplest form of this theft involves stealing the card itself and charging several high-ticket items to it in the first few minutes or hours before it is reported as stolen.

A variant of this is to copy just the credit card numbers (instead of drawing attention by stealing the card itself) in order to use the numbers in online frauds.

Illegal copying or skimming of cards

Card information fraud may take many forms, from a dishonest merchant recording credit card numbers for future fraudulent use or a thief using an old mechanical card imprint machine to steal information to tampered credit or debit card readers that copy the magnetic stripe on a payment card while a hidden camera catches the numbers on the face of the card. Sometimes, criminals have installed personal devices onto publicly accessible automatic teller machines. These fraudulent devices would capture the magnetic stripe data while a hidden camera recorded the user’s PIN. The fraudulent equipment would then be removed, and the data used to make illegal duplicate cards could be used to withdraw money from the victim’s accounts.

Identity theft 

It has become a pervasive issue, with criminals obtaining personal data and using it to obtain identity cards, open accounts, and acquire credit. The information needed to receive documents such as birth certificates can be minimal, such as name, parents’ name, date and place of birth. Government-issued standard identification numbers, such as Social Security and PAN numbers, are also highly sought-after by identity thieves. Banks are particularly vulnerable to identity theft, as these criminals can take out loans and disappear with the money, leaving innocent victims to face the consequences.

Fraudulent loan applications 

They come in many forms and often involve individuals providing false information to conceal credit issues or corporations using accounting fraud to make a risky loan seem like a sound investment. In some cases, companies have engaged in over-expansion, taking on too much debt and becoming financially overextended, resulting in the downfall of entire companies. 

Phishing and internet fraud 

They can involve sending forged emails from sources such as banks, auction sites, and payment sites which direct users to fake websites. The information collected here can then be used for other forms of fraud, including identity theft and online auction fraud. Additionally, malicious ‘Trojan’ programmes can be used to spy on internet users, stealing confidential data and sending it to outside sites. 

Money laundering

It is a process of concealing the origin of funds. It can be done in various ways, such as buying securities with cash and using these assets as collateral for a loan. The loan is then defaulted on while the securities remain of value. This makes it difficult to determine the origin of the funds.

Since 1994, the Reserve Bank of India (RBI) has set up different microwave stations for local and wide area networks to complete money transactions quickly and securely. Computers aid in maintaining debit-credit records of accounts, operating automated teller machines, carrying out electronic fund transfers, printing out account statements, and creating periodic balance sheets. 

Furthermore, the internet has revolutionised international banking. Transactions are fast and secure, as customers are assigned different PINs and passwords. Bank computer crimes are classified as computer fraud or computer crimes. Computer frauds involve embezzlement or defalcations achieved by tampering with computer data records or programmes.

Computer crimes are committed using the computer as a medium. The criminal’s motive can be personal vendetta, blackmail, ego, mental aberrations, or mischief. Bank computer crimes are challenging to detect, as the evidence is often intangible and can be easily erased, tampered with, or hidden. Furthermore, evidence connecting the criminal to the crime may be absent. Investigating computer crimes differs from the usual investigation process, as there are no eyewitnesses or documentary evidence.

The bank rules indicate that loan applications can be assessed even using xerox copies of documents. This has, unfortunately, opened the door to cheats and fraudsters who exploit the system. Computer-based banking crimes are increasing, making investigations highly intricate and challenging. Therefore, the best approach is to focus on prevention rather than detective or punitive measures. Bank management must invest more time and effort in preventive vigilance to reduce the occurrence of financial fraud. All banks must create a foolproof system to ensure that any documents presented are not forged. Furthermore, to reduce the likelihood of cheating, banks should prevent employees from receiving money in return for providing their salary slips and other documents.

Bank fraud is a severe crime that can have devastating consequences for individuals, businesses, and even entire economies. Whether it involves identity theft, account takeover, or other forms of financial deception, bank fraud can result in significant financial losses, damage to credit scores, and a loss of trust in the banking system.

Our experienced attorneys are here to help you understand your legal rights and get the legal aid you deserve. Don’t wait – let us help you today. Contact our team today.