Banking Frauds
Banking frauds occur when money and other assets are obtained illegally from financial institutions with the aim to defraud and deceive them. Numerous loopholes and errors in the banking organization have led to an unprecedented rise in such fraudulent activities. Even though we have financial institutions pouring millions into technological and security advancements, these efforts have not been able to curb the shenanigans and flimflams of con artists and scammers. In this article, we seek to explore the various types of banking frauds and assess the factors which may have lead to their rise.
In this period of economic slowdown, the risk of fraud and money laundering has only heightened and banks are now expected to exercise added caution in their day-to-day activities, in order to prevent popping up in the news headlines for the wrong reasons. It has now become crucial for them to be agile to be able to respond to such threats; thus, they must be ready to embrace new approaches and technologies to circumvent fraud. Moreover, banking sector regulators have also been prescribing stringent and astute frameworks to mitigate fraud risk and tackle current and upcoming challenges.
However, customers must also play a key role in prevention and detection of fraudulent activities and this makes it very important to educate them about possible errors on their part. This is especially because fraudsters are now directly manipulating customers rather than trying to breach the strenuous and complex measures put in force by institutions.
Over the years, con artists have orchestrated many schemes and have duped financial institutions in various atypical methods. Surveys all round the world show that the most repeated cases have been those of identity theft. Identity theft refers to stealing of personal information of an individual like bank account number and credit card information, possibly through data mining. Forging and altering cheques have also caused a lot of nuisance for banks. It involves tampering with the names and amount on the cheque, forging a depositor’s signature or even printing false cheques. Frank Abagnale is considered to be one of the most infamous con men charged with passing bad cheques in the late 1970s in the US.
Rampant as these frauds may be, their value is usually nominal in nature. Accounting frauds, on the other hand, have led to some of the biggest financial scandals in the world. The 2008 financial crisis led by the Lehman Brothers’ bankruptcy is a prime case of “cooking the books” wherein the then 4th largest investment firm misused an accounting trick called Repo105 to temporarily remove $50 billion from their ledgers in order to make it seem like they were reducing their debt balances. Their manipulated balance sheets and financial statements led to the biggest bankruptcy till date and caused an aftermath worse than the great depression.
In the growing digital world, Phishing or Internet fraud has also gained a lot of traction. Phishing involves sending forged emails and links to the user, which redirects them to a forged website. The personal information of the user is stolen upon login and then used in committing other frauds. A number of malicious “Trojan horse” programmes are also used to invade the privacy of users and capture confidential data therein. Other related internet scams include online shopping frauds, tax scams, lottery frauds, and social media scams.
In our country as well, the situation is no better. Hundreds of scams and forgery reports are submitted every day and conditions are not improving. As per data published by the Reserve Bank of India, India saw an average of 229 banking frauds per day in the financial year 2020-21, involving a whopping sum of Rs 1.38 lakh crore. Events of ATM Cloning, deciphering PIN and passwords, phishing or fraudulently influencing customers to give sensitive information and thereafter transferring money to an offshore account has become an everyday occurrence. While e-banking frauds are definitely a part of the hassle, the real dilemma is the rise in the number of corporate banking frauds. They occur majorly as a result of sloppiness on part of institutions and their impact on the economy and the banking system can be catastrophic.
Generally, such frauds happen in the form of default in huge bank loans or by exploiting the loopholes inherent in the banking system of our country. And who else to bear the brunt but taxpayers? The corporates present highly inflated financial statements which are accepted by the banking authorities to give out loans worth crores of rupees without verification and due diligence. They become defaulters sooner or later, forming a massive stumbling block for the lending bank. This opens a can of worms, risking the entire economy into recession. The Satyam Computers scandal is the perfect example of how a company’s financial statements are manipulated, profits overrated and assets inflated to present a very rosy picture.
It is shocking to see that the total fraud loans in 2020-21 in India amounted to Rs 1.37 lakh crores, which accounts for 99% of all bank frauds. Recently, in February 2022, India witnessed its biggest banking fraud at ABG Shipyard. The scope and scale of the alleged fraud is staggering, but the crux of the deception was the novel way in which the company apparently created a web of transactions to cheat a consortium of 28 banks led by ICICI.
According to CBI sources, ABG took loans from these banks and then diverted them to overseas subsidiaries and bought assets in the names of affiliated companies. They are also alleged to have also transferred money to several related parties.
This has once again exposed the vulnerabilities in India’s banking system and it is certainly not the first time that we are witnessing a fraud of this scale. In 2018, Punjab National Bank reported a fraud to the tune of Rs 14,000 crore involving the Nirav Modi Group and some other firms. Officials at PNB fraudulently issued ‘letters of undertaking’ (LoUs), allowing these firms to get short term loans for which PNB was the guarantor. Similarly, Vijay Mallya, once a formidable business tycoon, and his now defunct Kingfisher Airlines owe over Rs 10,000 crores to a dozen banks. These banks kept on extending loans without the exercise of due diligence and the failure of Kingfisher Airlines further exacerbated the problem. The rise and fall of Yes Bank also shows the disastrous impact of mismanagement on the banking sector and the economy at large. Yes Bank disbursed nearly Rs.20,000 crores of bank loans to corporates without following the RBI Guidelines.Their aggressive lending policy led to a steep rise in NPAs (Non Performing assets) with the majority of the loans extended becoming bad.
The names do not stop coming. A lack of regulation, flawed lending policies, and an inefficient fraud monitoring mechanism are some of the primary reasons behind this monumental increase in the instances of fraud and a rise in NPAs. In March 2021, the Non Performing Assets of India’s scheduled commercial banks stood at Rs 8.35 lakh crore – most of which was from the public sector banks.
We also must acknowledge that more frauds occur in India than the management would like to accept. Now, not all the blame can be put on the defaulters. Equally liable are the institutions and regulators who fail to be vigilant and apprehend the scammers early on. Rather than playing with public money by writing off large corporate bad loans again and again, India needs to strengthen loan recovery processes and introduce stricter regulation and lending policies. Over the coming years, banks will need to adopt a more sophisticated approach to fraud risk management by integrating state-of-the-art fraud detection tools, as well as by combining Big Data analytics with AI to generate more meaningful and accurate alerts.
This has once again exposed the vulnerabilities in India’s banking system and it is certainly not the first time that we are witnessing a fraud of this scale. In 2018, Punjab National Bank reported a fraud to the tune of Rs 14,000 crore involving the Nirav Modi Group and some other firms. Officials at PNB fraudulently issued ‘letters of undertaking’ (LoUs), allowing these firms to get short term loans for which PNB was the guarantor. Similarly, Vijay Mallya, once a formidable business tycoon, and his now defunct Kingfisher Airlines owe over Rs 10,000 crores to a dozen banks. These banks kept on extending loans without the exercise of due diligence and the failure of Kingfisher Airlines further exacerbated the problem. The rise and fall of Yes Bank also shows the disastrous impact of mismanagement on the banking sector and the economy at large. Yes Bank disbursed nearly Rs.20,000 crores of bank loans to corporates without following the RBI Guidelines.Their aggressive lending policy led to a steep rise in NPAs (Non Performing assets) with the majority of the loans extended becoming bad.
The names do not stop coming. A lack of regulation, flawed lending policies, and an inefficient fraud monitoring mechanism are some of the primary reasons behind this monumental increase in the instances of fraud and a rise in NPAs. In March 2021, the Non Performing Assets of India’s scheduled commercial banks stood at Rs 8.35 lakh crore – most of which was from the public sector banks.
We also must acknowledge that more frauds occur in India than the management would like to accept. Now, not all the blame can be put on the defaulters. Equally liable are the institutions and regulators who fail to be vigilant and apprehend the scammers early on. Rather than playing with public money by writing off large corporate bad loans again and again, India needs to strengthen loan recovery processes and introduce stricter regulation and lending policies. Over the coming years, banks will need to adopt a more sophisticated approach to fraud risk management by integrating state-of-the-art fraud detection tools, as well as by combining Big Data analytics with AI to generate more meaningful and accurate alerts.
Curated By: Pratik Bajaj and Ratna Nangalia
(Pratik Bajaj is a 1st year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)
(Ratna Nangalia is a 1st year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)