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Banking Fraud is posing threat to Indian Economy. Its vibrant effect may be understood be the fact that in the year 2004 number of Cyber Crime were 347 in India which rose to 481 in 2005 showing an increase of 38.5% while I.P.C. category crime stood at 302 in 2005 including 186 cases of cyber fraud and 68 cases cyber forgery. Thus it becomes very crucial that occurrence of such frauds will have to be minimized. More upsetting is the fact that such frauds are entering in Banking Sector as well. In the present day, Global Scenario Banking System has acquired new dimensions. Banking did disseminate in India. Today, the banking scheme has entered into competitory markets in areas covering resource mobilization, humane resource development, client services and credit management as well. Indian’s banking system has various outstanding accomplishments to it is credit, the most striking of which is it is reach. In fact, Indian banks are now disseminate out into the remotest areas of our country. Indian banking, which was operating in a highly comfortable and protected surroundings till the beginning of 1990s, has been pushed into the choppy waters of intense competition. A sound banking scheme will have to possess three basic characteristics to protect depositor’s interest and public faith. Theses are (i) a fraud free culture, (ii) a time tested Best Practice Code, and (iii) an in house prompt grievance remedial system. All these conditions are their missing or exceedingly weak in India. Section 5(b) of the Banking Regulation Act, 1949 defines banking… “Banking is the accepting for the aim of lending or investment, deposits of cash from the aim of lending or investment, deposits of cash from the public, repayable on demand or other than as supposed or expected and withdraw capable by cheque, draft, order or otherwise.” But if his cash has fraudulently been drawn from the bank the latter is beneath rigorous obligation to recompense the depositor. The bank hence has to make sure at all times that the cash of the depositors is not drawn fraudulently. Time has come when the security distinct features of the banks have to be dealt with on priority basis. The banking scheme in our country has been taking care of all segments of our socio-economic set up. The Article holds a discussion on the rise of banking frauds and respective methods that may be used to refrain from such frauds. A bank fraud is a deliberate act of omission or commission by any person carried out in the course of banking dealings or in the books of accounts, resulting in wrongful gain to any person for a temporary amount of time or otherwise, with or without any monetary loss to the bank. The applicable provisions of Indian Penal Code, Criminal Procedure Code, Indian Contract Act, and Negotiable Instruments Act relating to banking frauds has been cited in the present Article. EVOLUTION OF BANKING SYSTEM IN INDIA Banking scheme occupies an crucial place in a nation’s economy. A banking institution is necessary in a modern society. It plays a pivotal role in economic development of a country and forms the core of the cash market in an innovative country. Banking industry in India has traversed a long way to assume it is present stature. It has undergone a major structural transformation after the nationalization of 14 major mercantile banks in 1969 and 6 more on 15 April 1980. The Indian banking scheme is distinctive and perchance has no parallels in the banking history of any country in the world. RESERVE BANK OF INDIA-ECONOMIC AND SOCIAL OBJECTIVE The Reserve Bank of India has an crucial role to play in the maintenance of the interchange value of the rupee in view of the close interdependence of global trade and national economic growth and well being. This aspect is of the wider responsibly of the central bank for the maintenance of economic and financial stability. For this the bank is entrusted with the custody and the management of country’s international reserves; it acts likewise as the agent of the government in respect of India’s membership of the international monetary fund. With economic development the bank likewise performs a potpourri of developmental and promotional functions which in the past were registered being outside the normal purview of central banking. It likewise acts an necessary regulator. BANK FRAUDS: CONCEPT AND DIMENSIONS Banks are the engines that drive the operations in the financial sector, which is critical for the economy. With the nationalization of banks in 1969, they likewise have emerged as engines for social change. After Independence, the banks have passed through three stages. They have moved from the reputation based lending to ideology based lending to today competitiveness based lending in the context of India’s economic liberalization policies and the routine of linking with the global economy. While the operations of the bank have become more and more substantial banking frauds in banks are also increasing and fraudsters are getting more and more sophisticated and ingenious. In a bid to keep pace with the altering times, the banking sector has diversified it business manifold. And the old doctrine of class banking has been substituted by mass banking. The challenge in management of social obligation with economic viability has increased. DEFINITION OF FRAUD Fraud is specified as “any conduct by which one person intends to gain a dishonest vantage over another”. In other words , fraud is an act or omission which is intended to cause wrongful gain to one person and wrongful loss to the other, either by way of concealment of facts or otherwise. Fraud is specified u/s 421 of the Indian Penal Code and u/s 17 of the Indian Contract Act. Thus necessary parts of frauds are: 1. There ought to be a representation and assertion; 2. It must relate to a fact; 3. It will have to be with the psychological result of perception learning and reasoning that it is untrue or without faith in it is truth; and 4. It ought to induce another to act upon the assertion in question or to do or not to do sure act. BANK FRAUDS Losses sustained by banks as a result of frauds exceed the losses due to robbery, dacoity, burglary and theft-all put together. Unauthorized credit facilities are extended for illegal gratification such as case credit permitted versus pledge of goods, hypothecation of goods versus bills or versus book debts. Common modus operandi are, pledging of spurious goods, inletting the value of goods, hypothecating goods to more than one bank, fraudulent remotion of goods with the cognition and connivance of in negligence of bank staff, pledging of goods belonging to a third party. Goods hypothecated to a bank are found to comprise obsolete stocks packed in amidst goods stocks and case of shortage in weight is not uncommon. An analysis made of cases brings out broadly the underneath noted four major constituents responsible for the commission of frauds in banks. 1. Active involvement of the staff-both supervisor and clerical either independent of external parts or in connivance with outsiders. 2. Failure on the portion of the bank staff to follow meticulously laid down instructions and guidelines. 3. External elements perpetuating frauds on banks by forgeries or manipulations of cheques, drafts and other instruments. 4. There has been a growing collusion amidst business, top banks executives, civil servants and politicians in power to defraud the banks, by getting the rules bent, regulatings flouted and banking norms thrown to the winds. FRAUDS-PREVENTION AND DETECTION A close study of any fraud in bank reveals a lot of mutual basic features. There may have been negligence or dishonesty at a good deal of stage, on share of one or more of the bank employees. One of them may have colluded with the borrower. The bank official may have been putting up with the borrower’s sharp exercises for a personal gain. The proper care which was expected of the staff, as custodians of banks interest may not have been taken. The bank’s rules and procedures laid down in the Manual instructions and the circulars may not have been observed or may have been on purpose ignored. Bank frauds are the failure of the banker. It does not mean that the external frauds do not defraud banks. But if the banker is upright and knows his job, the task of defrauder will become exceedingly difficult, if not possible. Detection of Frauds Despite all care and vigilance there may still be a good deal of frauds, though their number, periodicity and intensity may be substantially reduced. The following routine would be very helpful if taken into consideration: 1. All applicable data-papers, documents etc. Should be promptly collected. Original vouchers or other papers forming the basis of the investigation ought to be held beneath lock and key. 2. All humans in the bank who may be knowing something regarding the time, place a modus operandi of the fraud will have to be examined and their affirmations ought to be recorded. 3. The probable order of events must thereafter be reconstructed by the officer, in his own mind. 4. It is advisable to keep the central office informed regarding the fraud and further developments in regard thereto. Classification of Frauds and Action Required by Banks The Reserve Bank of India had set-up a high level committee in 1992 which was headed by Mr. A… Ghosh, the then Dy. Governor Reserve Bank of India to inquire into respective distinct features relating to frauds malpractice in banks. The committee had noticed/observed three major causes for perpetration of fraud as given hereunder: 1. Laxity in observance of the laid down scheme and procedures by operational and supervising staff. 2. Over selfassurance reposed in the clients who indulged in breach of trust. 3. Unscrupulous clients by taking vantages of the laxity in observance of established, time tested safeguards also devoted frauds. In order to have uniformity in reporting cases of frauds, RBI considered the question of classification of bank frauds on the basis of the provisions of the IPC. 1. Cheating (Section 415, IPC) Remedial Measures. The preventive measures in respect of the cheating may be concentrated on cross-checking when it comes to identity, genuineness, validation of particulars, etc. in respect of respective instruments as well as humans involved in encashment or dealing with the property of the bank. 2. Criminal misappropriation of property (Section 403 IPC). Remedial Measure Criminal misappropriation of property, presuppose the custody or control of funds or property, so subjected, with that of the person committing such frauds. Preventive measures, for this class of fraud ought to be taken at the level the custody or control of the funds or property of the bank in general vests. Such a measure will have to be sufficient, it is extended to these humans who are in truth handling or having actual custody or control of the fund or movable properties of the bank. 3. Criminal breach of trust (Section 405, IPC) Remedial Measure Care will have to be taken from the introductory step when a person comes to the bank. Care needs to be taken at the time of recruitment in bank as well. 4. Forgery (Section 463, IPC) Remedial Measure Both the preventative action and detection of frauds through forgery are essential for a bank. Forgery of signatures is the most ordinary fraud in banking business. The bank will have to take special care when the instrument has been staged either bearer or order; in case a bank pay forged instrument he would be liable for the loss to the authenti costumer. 5. Falsification of accounts (Section 477A) Remedial Measure Proper diligence is required while filling of forms and accounts. The accounts ought to be rechecked on each day basis. 6. Theft (Section 378, IPC) Remedial Measures Encashment of stolen’ cheque may be prevented if the bank distinctly specify the age, sex and two visible distinguish action marks on the body of the person traveler’s cheques on the back of the cheque leaf. This will aid the paying bank to without apparent effort tell apart the cheque holder. Theft from lockers and safe deposit vaults are not easy to commit because the master-key remains with the banker and the person key of the locker is handed over to the costumer with due acknowledgement. 7. Criminal conspiracy (Section 120 A, IPC) In the case of State of Andhra Pradesh v. IBS Prasad Rao and Other, the accused, who were clerks in a cooperative Central Bank were all convicted of the offences of cheating under Section 420 read along with Section 120 A. all the four accused had conspired together to defraud the bank by making untrue demand drafts and receipt vouchers. 8. Offences relating to currency notes and banks notes (Section 489 A-489E, IPC) (a) Counterfeiting currency notes or banks. (b) Selling, buying or using as genuine, forged or counterfeit currency notes or bank notes. Knowing the same to be forged or counterfeit. (c) Possession of forged or counterfeit currency notes or bank-notes, knowing or counterfeit and intending to use the same as genuine. (d) Making or passing instruments or materials for forging or counterfeiting currency notes or banks. (e) Making or using documents resembling currency-notes or bank notes. Most of the above provisions are Cognizable Offences underneath Section 2(c) of the Code of Criminal Procedure, 1973. FRAUD PRONE AREAS IN DIFFERENT ACCOUNTS The following are the potential fraud prone areas in Banking Sector. In addition to those areas I have likewise given kinds of fraud that are mutual in these areas. Savings Bank Accounts The following are a heap of of the examples being played in respect of savings bank accounts: (a) Cheques bearing the forged signatures of depositors may be staged and paid. (b) Specimen signatures of the depositors may be changed, particularly after the death of depositors, (c) Dormant accounts may be operated by dishonest persons with or without collusion of bank employees, and (d) Unauthorized withdrawals from customer’s accounts by employee of the bank preserving the savings ledger and later destruction of the recent vouchers by them. Current Account Fraud The following types are likely to be committed in case of current accounts. (a) Opening of frauds in the names of fixed companies or firms by unauthorized persons; (b) Presentation and payment of cheques bearing forged signatures; (c) Breach of trust by the workers of the companies or firms possessing cheque leaves duly signed by the authorized signatures; (d) Fraudulent alteration of the amount of the cheques and getting it paid either at the counter or altho another bank. Frauds In Case Of Advances Following types may be committed in respect of advances: (a) Spurious gold ornamentations may be pledged. (b) Sub-standard goods may be pledged with the bank or their value may be shown at inflated figures. LEGAL REGIME TO CONTROL BANK FRAUDS Frauds constitute white-collar crime, consecrated by unscrupulous people deftly vantage of loopholes existent in systems/procedures. The idealisti circumstance is one there is no fraud, but taking ground realities of the nation’s environs and humane nature’s fragility, an establishment ought to always like to keep the overreach of frauds at the minimum occurrence level. Following are the applicable segmentations relating to Bank Frauds Indian Penal Code (45 of 1860) (a) Section 23 “Wrongful gain”.- “Wrongful gain” is gain by unlawful means of property to which the person benefitting is not legally entitled. (b) “Wrongful loss” “Wrongful loss” is the loss by unlawful means of property to which the person losing it is legally entitled. Losing wrongfully-A person is said to gain wrongfully when such person retains wrongfully, as well as when such person acquires wrongfully. A person is said to lose wrongfully when such person is wrongfully held out of any property, as well as when such person is wrongfully deprived of property. (d) Section 24. “Dishonestly” Whoever does anything with the intention of causing wrongful gain to one person or wrongful loss to another person, is said to do that thing “dishonestly”. (e) Section 28. “Counterfeit” A person is said to “counterfeit” who causes one thing to resemble another thing, intending by means of that resemblance to exercise deception, or knowing it to be likely that deception will thereby be practiced. BREACH OF TRUST 1. Section 408- Criminal breach of trust by clerk or servant. 2. Section 409- Criminal breach of trust by public servant, or by banker, merchant or agent. 3. Section 416- Cheating by personating 4. Section 419- Punishment for cheating by personation. OFFENCES RELATING TO DOCMENTS 1) Section 463-Forgery 2) Section 464 -Making a untrue document 3) Section 465- Punishment for forgery. 4) Section 467- Forgery of worthful security, will, etc 5) Section 468- Forgery for aim of cheating 6) Section 469- Forgery for intent of harming reputation 7) Section 470- Forged document. 9) Section 477- Fraudulent cancellation, destruction, etc., of will, authority to adopt, or priceless security. 10) Section 477A- Falsification of accounts. THE RESERVE BANK OF INDIA ACT, 1934 Issue of demand bills and notes Section 31. Provides that only Bank and except provided by Central Government shall be authorized to draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of cash payable to bearer on demand, or borrow, owe or take up any sum or sums of cash on the bills, hundis or notes payable to bearer on demand of any such person THE NEGOTIABLE INSTRUMENTS ACT, 1881 Holder’s right to duplicate of lost bill Section 45A. 1. The finder of lost bill or note acquires no title to it. The title remains with the true owner. He is entitled to recover from the unfeigned owner. 2. If the finder incurs payment on a lost bill or note in due course, the payee may be competent to get a valid discharge for it. But the unfeigned proprietor may recover the cash due on the instrument as damages from the finder. Section 58 When an Instrument is received by unlawful means or for unlawful considerateness no proprietor or indorse who claims through the person who found or so received the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such proprietor or indorse is, or a good deal of person through whom he claims was, a holder thereof in due course. Section 85: Cheque payable to order. 1. By this section, bankers are placed in privileged position. It provides that if an order cheque is indorsed by or on behalf of the payee, and the banker on whom it is drawn compensate it in due course, the banker is discharged. He may debit his client with the amount so paid, though the endorsement of the payee might turn out to be a forgery. 2. The assert shelter beneath this division the banker has to prove that the payment was a payment in due course, in good faith and without negligence. Section 87. Effect of material alteration Under this section any alteration made without the consent of party would be void. Alteration would be valid only if is made with mutual intent of the party. Section 138. Dishonour of cheque for insufficiency, etc., of funds in the account. Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of cash 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 cash standing to the credit of that account is insufficient to honour the cheque or that it surpasses the amount arranged to be remunerated from that account by an agreement made with that bank, such person shall be deemed to have devoted an offence and shall, without prejudice. Section 141(1) Offences by companies. If the person committing an offence under Section 138 is a company, each person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded versus and punished accordingly. SECURITY REGIME IN BANKING SYSTEM Security implies sense of safety and of freedom from risk or anxiety. When a banker takes a collateral security, say in the form of gold or a title deed, versus the cash lent by him, he has a sense of safety and of freedom from anxiety with regards to the possible non-payment of the loan by the borrower. These ought to be communicated to all strata of the institution through suitable means. Before staff managers must make an analyzation of current practices. Security routine must be stated explicitly and consorted upon by each user in the specific environment. Such exercises make sure selective information security and heighten availability. Bank security is basically a defense versus unforced attacks by thieves, dacoits and burglars. PHYSICAL SECURITY MEASURES-CONCEPT A huge portion of banks security depends on social security measures. Physical security measures may be specified as those specific and particular protective or defensive measures adopted to deter, detect, delay, defend and defeat or to carry out any one or more of these functions versus culpable acts, both covert and covert and acclamations natural events. The protective or defensive, measures adopted implicate construction, installation and deployment of structures, instrumentation and humans respectively. The following are few guidelines to check malpractices: 1. To rotate the cash work within the staff. 2. One person ought to not proceed on the same seat for more than two months. 3. Daybook will have to not be written by the Cashier where an other person is available to the job 4. No cash withdrawal will have to be permitted within passbook in case of withdrawal by pay order. 5. The branch manager must assure that all staff members have recorder their presence in the attendance registrar, before starting work. Execution of Documents 1. A bank officer will have to adopt a rigorous professional approach in the execution of documents. The ink and the pen applied for the execution will have to be maintained uniformly. 2. Bank documents will have to not be typed on a typewriter for execution. These will have to be constantly handwritten for execution. 3. The execution ought to always be done in the presence of the officer responsible for obtain them, 5. Unless there is a specific requirement in the document, it will have to not be got attested or witnessed as such attestation may change the reputation of the instruments and the documents may subject to ad volrem stamp duty. 6. The paper on which the bank documents are made must be pilfer proof. It will have to be distinguishable and available to the banks only. 7. The printing of the bank documents must have highly artistic intricate and complex graphics. 8. The documents executed amid Banker and Borrowers ought to be held in safe custody, CHANGES IN LEGISLATIONS AFTER ELECTRONIC TRANSACTIONS 1. Section 91 of IPC shall be ameliorated to include electronic documents also. 2. Section 92 of Indian Evidence Act, 1872 shall be ameliorated to include commuter based communications 3. Section 93 of Bankers Book Evidence Act, 1891 has been meliorated to give legal sanctity for books of account maintained in the electronic form by the banks. 4. Section 94 of the Reserve Bank of India Act, 1939 shall be meliorated to facilitate electronic fund transfers amid the financial foundations and the banks. A new clause (pp) has been inserted in Section 58(2). RECENT TRENDS OF BANKING SYSTEM IN INDIA In the banking and financial sectors, the introduction of electronic engineering for transactions, settlement of accounts, book-keeping and all other related functions is now an imperative. Increasingly, whether we like it or not, all banking dealings are going to be electronic. The thrust is on commercially important centers, which account for 65 percent of banking business in terms of value. There are now a huge number of to a complete degree computerized subsections all over the country. A switchover from cash-based dealings to paper-based dealings is being accelerated. Magnetic Ink reputation acknowledgement clearing of cheques is now operational in galore cities, besides the four metro cities. In India, the design, management and regulation of electronically-based payments scheme are getting the focus of policy deliberations. The imperatives of constructing an effective, effective and speedy payment and settlement systems are getting sharper with introduction of new instruments such as credit cards, telebanking, ATMs, merchandising Electronic Funds Transfer (EFT) and Electronic Clearing Services (ECS). We are moving towards smart cards, credit and financial Electronic Data Interchange (EDI) for straight through processing. Financial Fraud (Investigation, Prosecution, Recovery and Restoration of property) Bill, 2001 Further the Financial Fraud (Investigation, Prosecution, Recovery and Restoration of property) Bill, 2001 was introduced in Parliament to curb the menace of Bank Fraud. The Act was to prohibit, control, investigate financial frauds; recover and restore properties subject to such fraud; prosecute for causing financial fraud and matters connected therewith or incidental thereto. Under the said act the term Financial Fraud has been specified as under: Section 512 – Financial Fraud Financial frauds means and includes any of the following acts consecrated by a person or with his connivance, or by his agent, in his dealings with any bank or financial institution or any other entity keeping public funds; 1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true; 2. The active concealment of a fact by one having noesis or faith of the fact; 3. A promise made with out any intent of performing it; 4. Any other act fitted to deceive; 5. Any such act or omission as the law exceptionally declares to be fraudulent. 513(a) – Punishment for Financial Fraud Whoever commits financial fraud shall be: (a) Punished with stringent imprisonment for a term, which may extend to seven years and shall also be liable to fine. (b)Whoever commits severe financial fraud shall be punished with stringent imprisonment for a term which may extend to ten years but shall not be less than five years and shall likewise be liable for fine up to double the amount involved in such fraud. Provided that in both (a) and (b) all funds, bank accounts and properties acquired using such funds subjected to the financial fraud as may reasonably be attributed by the investigating agency shall be recovered and restored to the rightful proprietor according to the procedure traditionalisti by law. CONCLUSION The Indian Banking Industry has undergone vast growth since nationalization of 14 banks in the year 1969. There has an almost eight times increase in the bank sectionalizations from in regards to 8000 for the duration of 1969 to mote than 60,000 belonging to 289 mercantile banks, of which 66 banks are in private sector. It was the result of two successive Committees on Computerization (Rangarajan Committee) that set the tone for computerization in India. While the firstborn committee drew the blue print in 1983-84 for the mechanization and computerization in banking industry, the second committee set up in 1989 paved the way for integrated use of telecommunications and computers for applying technogical breakthroughs in banking sector. However, with the disseminate of banking and banks, frauds have been on a continuous increase. It could be a natural corollary to increase in the number of clients who are using banks these days. In the year 2000 alone we have lost Rs 673 crores in as a heap of as 3,072 number of fraud cases. These are only reported figures. Though, this is 0.075% of Rs 8,96,696 crores of total deposits and 0.15% of Rs 4,44,125 crores of loans & advances, there are any numbers of cases that are not reported. There were almost 65,800 bank subdivisions of a total of 295 mercantile banks in India as on June 30, 2001 reporting a total of almost 3,072 bank fraud cases. This makes closely 10.4 frauds per bank and roughly 0.47 frauds per branch. An Expert Committee on Bank Frauds (Chairman: Dr.N.L.Mitra) submitted it is Report to RBI in September 2001. The Committee examined and suggested both the preventive and curative distinct features of bank frauds. The primary recommendations of the Committee include: o A need for including financial fraud as a criminal offence; o Amendments to the IPC by including a new chapter on financial fraud; o Amendments to the Evidence Act to shift the burden of proof on the accused person; o Special provision in the Cr. PC for properties involved in the Financial Fraud. o Confiscating unlawful gains; and preventive measures including the development of Best Code Procedures by banks and financial institutions. Thus it may be concluded that following measures must inevitably be adopted by the Ministry of Finance in order to reduce cases of Fraud. o There must be a Special Court to undertake financial fraud cases of severe nature. o The law ought to provide discerned structural and recovery procedure. Every bank ought to have a domestic enquiry officer to enquire in regards to the civil dimension of fraud. o A fraud involving an amount of ten crore of rupees and above may be considered severe and be tried in the Special Court. The Twenty-ninth Report of the Law Commission had dealt a heap of categories of crimes one of which is “offences calculated to prevent and obstruct the economic development of the country and endanger it is economic health.” Offences relating to Banking Fraud will fall underneath this category. The most essential feature of such offences is that ordinarily they do not implicate an person direct victim. They are punishable because they injure the whole society. It is clear that cash involved in Bank belongs to public. They deposit there whole life’ security in Banks and in case of Dacoity or Robbery in banks the public will be al lost. Thus it is indispensable that sufficient attempts ought to be taken in this regard. There exists a new kind of threat in cyber world. Writers are referring it as “Salami Attack” beneath this a special software is employed for transferring the amount from the account of the individual. Hence the culprits of such crimes ought to be found speedily and ought to be given rigorous punishment. Moreover there is requisite of more number of IT masters who will support in finding a solution versus all these security threats. |
Section 471- Using as authenti a forged document
