CA.T.G.Sukumaran

PRESENTATION
ON
FRAUDS IN BANKING INDUSTRY
DETECTION, CLASSIFICATION AND REPORTING
&
DISCUSSION OF CASE STUDIES
By
CA.T.G.Sukumaran
B.Com.,FCA,CAIIB
CONTENTS
Various types of Frauds
Causes and Concern
Detection of Frauds
Reporting of Frauds
Fraud Risk and Risk mitigation
Prevention and Control
Role of Concurrent Auditors
A few Case Studies in various departments of Banks
DEFINING ‘FRAUD’
In General – as per Contract Law
A deception deliberately practiced in order to secure
unfair or unlawful gain or causing loss to another party
In Banking as per RBI
“..a deliberate act of omission or commission by any
person, carried out in the course of a banking
transaction or in the books of account 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.”
WHY & HOW
Why fraud is committed
Motive mainly greed ,making effortless money
Pressure due to commitment
Opportunity caused by laxity /ignorance of colleagues
Life style not commensurate with income
How fraud is committed:
1.
2.
3.
4.
Laxity in observance in the laid down systems and procedure by
operational staff and also by supervising staff.
Policies / Systems and procedures are not being followed
deliberately with malafide intention.
Lethargy, Negligence ,and ignorance
Misutilisation/overstepping of lending/discretionary powers in
credit dispensation etc.
TYPES OF FRAUDS
INSIDER
Frauds by dishonest employee/s
OUTSIDER
Customer/s or outsider/s
BOTH COLLUDING
Clients in connivance with the Employees
Frauds reported can be broadly divided into two groups
Technology / operational More number of incidences but with lesser values
viz. credit card, ATM, inoperative accounts, etc.,
Advances related Accounting for major amount involved ,
but less number of accounts
MAGNITUDE & RISK
Increasing Magnitude of Frauds in Banks
Year-wise no. and amount of fraud cases in the Banking sector
Year
No. of cases
Amount in Cr
2009-10
24791
2037.81
2010-11
19827
3832.08
2011-12
14735
4491.54
2012-13
13293
8646.00
In spite of computerized environment Frauds / Scams are increasing in Banks in
the present liberalisation scenario and unhealthy competition
Challenges to Banks
Financial Loss
Brand Image & Reputation
Public / Regulator confidence is shaken
RISK FOR CONCURRENT AUDITORS
1.
Will be held liable in case there is a lapse in Audit
2.
Reporting to ICAI and RBI about the lapse
3.
Will be involved in CBI enquiry , unless examine and report perfectly
VARIOUS TYPES IF INSIDER INVOLVEMENT
Misappropriation of Cash remitted by customers
Intentional misposting to fraudster accounts
Unauthorised withdrawal from deposit accounts through forged
instruments
Passing fictitious entries in Books/System and manipulation of
records
Theft of jewels pledged by the Customers
Draw money using Limits not cancelled in system after repayment
Misuse of Password sharing for transfer of funds to fraudster
accounts
Misusing security forms like DDs , payorders, FD Receipts
Misutilisation/overstepping of lending/discretionary powers, nonobservance of prescribed norms/ procedures in credit dispensation
VARIOUS TYPES OF OUTSIDER DEFRAUDING
Fudging of financials /falsification of records
Suppressing sundry creditors /over stating the sundry debtors
Over valuing the stock to match DP with the credit limits.
Arranging stocks in their godown only when bank comes for Inspection
Collaterals lodged with the bank are inadequate or valueless.
Hypothecated stocks are sold but the godown is set on fire to show loss of
stock is due to fire
Taking loan from multiple banks with the same stocks
Obtaining loan from forged/colour Xerox of documents
Middle men availing overdrafts against fraudulent dischharge of Fixed
deposit Receipts
Phishing ( anonymous e mail) , vishing ( voice), Smishing ( SMS) or
whaling ( targeting HNW clients) to elicit sensitive data in Hi Tech Banking
Kite Flying / raising of accommodation bills in availing Bills Purchase
Facility
TYPES OF FRAUD BY
INSIDER / OUTSIDER COLLUSION
Bribe / Commission for doing a favour to customer or credit decisions
Over appraisal of Primary / collateral securities
Unauthorised restructuring / extension
Write off of recoverable amounts
Advances sanctioned at the behest of top management
Purchase of bills with out goods / cheques to accommodate the
borrower
Disbursement of credit knowing diversion of funds
Extending additional credit facility to prevent slippage of existing
facility into NPA
Deliberately giving false credit rating to reduce Rate of Interest.
Sanction of one time adhoc credit facilities to non-clients,
Issue of letter of credit, bank guarantees without recording in branch
books
DETECTION
Main ways in which fraud may be uncovered:
Discoveries by management, usually emerge from
careful monitoring of internal controls
Routine or specific audit checks of operations &
systems;
Operations review
“Whistle-blower”
” tip from a concerned individual
– either internal or external party (clients)
By accident
TIPS FOR DETECTION
Check proper implementation of management controls
Check for 100% compliance in sensitive / fraud prone areas
Examine impersonal accounts ( direct GL Heads)
Plug shortcuts evolved by branch functionaries
Check KYC norms strictly in all account opening
Check Suspicious Transaction Report , Cash Transaction Reports
Check all large volume Transactions in the newly opened accounts
No staff to sit in the same seat continuously i.e rotation of duty is
must
Do documentation checks
Do trend analysis, verify abnormal transactions
Review properly-generated MIS reports
competent, courageous, and efficient audit,
Do field visits for asset verification
Keep your eyes and ears open for observing what is happening in
the branch
DEPOSIT ACCOUNT FRAUDS
Withdrawal from deposit accounts through forged
documents/instruments , mostly from inoperative accounts
Transfer of funds to a fraudster account mostly fictitious through RTGS
/ NEFT
The miscreant obtains/steals the cheque, materially alters the
particulars of cheques and presents over the counter for
payment/collection in the account with fake KYC documents
Payments of cheques under forged signatures, generally perpetrated
by the employees/partners/relatives of the account-holders.
Daily deposit collections from traders & hawkers are not deposited next
working day
Employee becomes joint account holder and withdraws the money.
Manipulates the depositor’s Pass Book to conceal the facts
Staff members including Branch Head indulging in fraudulent use of
cash deposited and concealing
TERM DEPOSITS
Recently Banking industry was shaken by FD scam in Dena
Bank defrauded over Rs.256 Crores and OBC defrauded over
Rs.180 Crores. Further UCO bank &Bank of Maharastra under
CBI scanner.
MODUS OPERANDI
Middle man approaches with bulk deposits
Funds transferred through electronic transfer
Fraudster then takes overdraft with fake FD in the name of
private Co.,
Funds transferred from overdraft( OD) unknown to the
depositor
Reason
Inadequate security in FD receipt , weak KYC in FD opening
and rush to mop up deposits
TERM DEPOSIT
CASE STUDY
In a Private Bank, an NRI depositor had Rs. 11 Cr deposits in Five branches
The NRI executed a specific power of attorney in favour of his representative , who is an exbanker, for collection of rent from tenants, depositing and issuing cheques towards property tax ,
electricity , other taxes and maintenance .
He managed to get FD receipts signed by NRI saying that the same is required for renewal
After NRI left the country ,after some days , the local person approached Bank Manager and
informed that the NRI wanted to purchase a property, which has come on distress sale . Manager
did not want to loose a big deposit and suggested a loan. After some days the POA holder
informed the bank , saying that he could convince his NRI friend . Loan was disbursed by transfer
to the local person account as requested .
Similarly , he got a loan from other branches as well using same modus operandi.
When the branch sent an e mail to NRI at the time of renewal, mentioning the loan outstanding
, fraud came to light . But money was almost recovered by selling the property purchased by
the fraudster
Lapses
Branch should have contacted NRI before release of the Loan
Power of attorney should have been examined carefully.
Release of a loan to a third party’s account should not have been done
CHEQUES / BILLS PURCHASED
Bogus or stolen railway receipts and Lorry receipts accompanied by
counterfeit bills are discounted.
Fake bills with inflated value, drawn on sister concerns, are discounted.
Genuine LRs and RRs are presented and got discounted from the bank but
the material is got released from the lorry godown/ railways on indemnity
bond.
Bogus bills for worthless goods are discounted on the strength of dispatch
papers.
Cheque purchase for huge amounts with out proper authority
Kite flying / raising of accommodation bills
Not crystallizing the bills remaining outstanding beyond due dates
Bills purchased with out regular sanction limit or proper authority
Bills remaining unrealized for a long period after due dates
FOREX
LC devolvement (Importer not meeting the commitment in bills under LC
on due dates)
Disbursement of Packing credit without verifying actual purchase of raw
material goods
Fictitious buyer incase of export bills
Purchase of bills with forged acceptance of LC by other banks
Frequent overdue crystallization of bills
LC / PC / BP sanction with out authority
Frequent request for extension of time ( Roll over ) for payment of bills
finance
Not adhering to the stipulations in respect of ECGC cover such as payment
of premium and reporting of default in time
Proper KYC in respect of opening of NRI accounts
Monitoring huge inflow in NRE accounts and checking of huge transfers
from these accounts
Inexperience of staff in this specialized operations
CASH & JEWEL LOANS
CASH
Most sensitive Asset in Bank prone to fraud
Misappropriation of Cash remitted and concealment
Security lapses leading to decoity
Shortage in cut / soiled notes
JEWEL LOANS
Appraiser defrauding
Fake / stolen / less quality jewels
Branch Head using pledged jewels to pledge with some other Banks
to raise money for his use
Not adhering to key handling procedures
LOAN ACCOUNT FRAUDS
Advance granted in haste or at the behest of top management or
any pressure or some consideration.
False or incomplete credit information
Lack of post disbursement supervision.
End use not ensured / allowing diversion of funds
Mis-use / exceeding of discretionary powers by Managers/Officers
Nomadic artisans obtain loans and vanish from the scene.
Bogus firms appear everywhere and obtain loans.
In connivance with the suppliers, machinery bills are inflated.
Advance against hypothecation of inferior quality of goods,
overvaluation of stock
ADVANCES FRAUD --EXAMPLES
In 2013-14 , advances against Fake documents amounts
to Rs 8734 Cr in Banks
In Bank of Maharashtra , Rs. 3.70 Cr fraud in Vehicle
loans in a particular branch with out purchase of vehicle
in collusion with automobile dealer with fake bills
Even in SHG , 3 women started fake trust and with
forged doc raised loans of Rs. 1.23 Cr
CREDIT FRAUDS – CASE STUDY
In an advance to a business concern , balance sheet was fudged to
be healthy , Auditors signature was also forged . Even previous Bank
statement and opinion was forged
Advance was released . Later after becoming NPA , the fraud came
to surface , when internal inspector found the contradiction in
opinion and bank statement
LAPSES
Concurrent Auditor was asked explanation , Then he could be
exonerated only due to the fact that document forging can not be
detected with naked eye
Lapse on the Bank part here is that the statement , opinion of the
previous Bank was not verified with them
RETAIL LOAN FRAUD CASE
A lady approached “A” branch of a Bank for Housing Loan for purchase of a Flat . In
this case she was asked to take legal opinion from bank’s panelled advocate . She
took the letter to advocate and got legal opinion with documents. in a cover
Then she removed Original title deeds , put colour xerox and handed over to Bank ,
Loan was released
Later she went to “ B “ branch of the same bank saying that legal opinion is taken
and there is delay in sanction by “ A “ branch . Then “B” branch released the loan for
same property
The fraud came to light when she approached “C” branch and applied same trick.
The branch manager got some doubt and telephoned to B Branch which happened
to be his previous branch and found that lady has obtained loan with colour xerox .
LAPSES
Omission to Obtain legal opinion by sending branch staff
Post sanction verification not done ,
Subsequent EC after SRO registration was not taken
B branch should have contacted A branch about delay
REPORTING AND INVESTIGATION
Frauds as soon as detected should be informed to Top
management by a flash report
Branch should Report to Vigilance department ( CVC)
Depending on the amount involved , a complaint should
be lodged to Police , Crime Investigation dept of State or
CBI
Investigation will be initiated by the vigilance
department internally
Delay in reporting due to hesitation and may
lead to further loss.
PREVENTION
Minimize motivation to commit fraud:
Hire and attract honest well-suited staff
Provide reasonable and competitive staff remuneration
Do employee lifestyle check
Have suitable policies for fraud and dishonesty
Close the window of opportunity to commit fraud:
o
Evaluate Bank’s Internal Control System effectiveness, its
policies and implementation, based on identified risk areas.
o Strictly follow the time tested procedures / guidelines
PRECAUTIONS TO BE TAKEN
BY CONCURRENT AUDITORS
In case a fraud is committed in the branch and if there is a lapse on
the part of auditor , there is no protection
Report only what is seen , not on Trust
100 % checking in fraud prone areas
See what is happening around you and interact with staff to elicit
information
Analyse large value Transaction in staff accounts and abnormal
Transactions in business accounts
Be courageous in reporting , not to compromise
Employ efficient Assistants
Auditor should act as per instruction of Central Office and not be
guided by Branch information
Give qualified reports , if not satisfied or not getting information
Report by flash , once fraud is detected
CONSTRAINTS FOR CONCURRENT AUDITORS
Auditors face time constraint as report insisted mostly first week of
the month
Comparatively poor Remuneration
Non co operation and no seriousness from Branch Officials
Information / Returns / Documents not furnished in time
Access to System disrupted often and not restored fast
In experience of the Assistants
In the present target oriented , competitive banking deviations are
high
Incompetence of elderly staff and sub staff promotee in branches
to retrieve required information in the CBS Technology
Considering the fraud risks , DOMOCLE’S SWORD IS HANGING
ABOVE
CONCLUSION
If financial systems and their large financial resources, drawn from
public money, are to be protected, the occurrence of fraud big and
small has to be stamped out
The role of insider in banking fraud, however, pernicious it may be,
is here to stay. considering the growing aspiration for effortless
money
For one detected case, there can be numerous instances, which
remain undetected.
Constant vigilance may reduce its frequency and magnitude, but
complete eradication is just not possible
“ Frauds can be prevented and controlled.”
THANK YOU

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