Scams And Frauds: Black Eyes In The Banking Industry

INTRODUCTION

Since the dawn of time, man has had a drive for accumulating wealth. Means were considered essential in the good old times. However, in today's consumerist culture, obtaining money by whatever means has become critical. The simplest method is to defraud people since it can often be a low-risk, high-reward endeavor. Bank fraud has been increasingly common in India in current times. While financial frauds have always been considered a consequence of operating a business in India, since liberalization, the regularity, sophistication, and impact of financial fraud have grown dramatically, posing a major threat to regulatory agencies such as the Reserve Bank of India (RBI).

EVOLUTION OF BANKING

The establishment of private financial institutions organized as joint-stock corporations was a major feature of the period before independence. Most banks were fairly small and had a limited number of tightly held private shares. They were governed by the Reserve Bank, which was founded in 1935 as the country's national bank. The Reserve Bank of India Act, 1934, and the Companies Act, 1913, however, restricted the system of control and monitoring. The native bankers and money-lenders had mostly been cut off from the system's formal components. Cooperative financing was the sole way to get credit, but this was only functional in some areas.

Major events marked the years from 1967 to 1991, including the imposition of coercion on banks in 1967 and the nationalization of 14 banks in 1969 and six more in 1980. The nationalization of banks was an effort to harness the financial sector's limited assets for targeted growth. The restructuring approach aided in bringing banking industry administration to a point where the RBI stopped micromanaging financial institutions and instead concentrated on broader aims.

TYPES OF BANK FRAUDS

• Accounting Fraud

To hide some monetary operations, some businesses or owners use a false financial report to represent sales and revenue, which exhibits valuable corporate assets to indicate a position of profit while the firm is really losing money. These financial reports are then utilized by these firms to submit deceptive business loan requests in order to get funds to help them stabilize their businesses. Enron, WorldCom, and Ocala financing are just a few examples of financial scams that have happened throughout the globe. DD fraud and electronically generated cheque fraud are other classifications of accounting fraud.

• Cheque Kiting

In this type of fraud, the amount is tallied twice, which is termed as 'Float'. For example, when a cheque is approved and placed in Mr. X's account, payment is instantly credited, but no money is deducted from Mr. Y's account, by which the cheque is withdrawn. As a consequence, banks end up double-counting the money since it has been credited to one account but not deducted from the other.

• Forged Documents

Falsified Paperwork (Land/House Documents, LOU) is used to obtain funds unlawfully as means for personal loans, and the financial institution would be unable to reclaim funds in the years ahead because the loan was granted based on falsified paperwork.

• Altered Cheque

It's the most frequent kind of financial fraud, in which scammers simply add an additional zero to the end of a cheque to modify the sum or alter the name in the cheque. They also try to fake the depositor's signatures on a blank cheque and then duplicate it over their own cheque, which was issued on the accounts of others, and quickly retrieve the funds, well before the banks realize the cheque was forged.

MAIN REASONS FOR FRAUD

• In connection with Employees

Extreme trust in workers is one of the factors that contributes to the prevalence of fraud in banks. If a valuable bit of information is leaked and the employee benefits financially as a result of the spill, the employee could breach the trust. Any monetary credits or damages on private ends, external strain, and low contentment from the existing job owing to strong pressure can all contribute to the scenario of people committing fraud at the workplace.

• Due to Internal Management Control

Every bank has its own procedures and regulations, which should be developed in accordance with the regulations provided by the nation's central bank, but when these mechanisms have flaws, scammers can take advantage of the circumstance. The complicated and creative nature of banking institutions is one of the primary causes for the emergence of scams.

• Due to Technology

Frauds due to technological flaws are one of the biggest issues in the banking industry nowadays. Frauds using e-banking, debit and credit cards, and other online banking activities are more common among private and foreign banking institutions, and the cause for this is the advent of technologies in the banking industry.

METHODS FOR PREVENTING FRAUD

While fraud is not restricted to the financial sector or unique to the Indian economy, the high prevalence of fraud inside the financial sector requires immediate consideration in order to establish remedies. Fraud diminishes an organization's resources while increasing its obligations. In the banking sector, it may cause a loss of faith among the public, obstruct the bank's ability to continue as an ongoing organization, and eventually result in a banking crisis.

• Operating guidelines

E-banking is becoming a more important platform for expanding financial operations to clients, thanks to the rapid rise in customers and higher bandwidth of communication channels. The central bank of India should provide operational instructions to control this channel, proposing that abnormal activities be reported to the cyber-crime bureau.

• Advanced technology

Since mobile banking relies heavily on telecom carriers for its operations, fraudulent activities' prevention and identification have become much more difficult. To combat fraud, banks must implement a higher degree of vigilance by using innovative tools and technologies competent at safeguarding consumers from immoral practices.

• Internal management control

This parameter's scope is being expanded to cover fraudulent risk assessment. Because of the changing technological environment, conventional methods of internal auditing must make way for new, electronically advanced auditing. Because fraud risk evaluations necessitate substantial use of investigative and information analytics techniques, annual audit strategy may no longer be completely efficient, and dynamic audit strategies are the order of the day.

CONCLUSION

Several businesses have been victims of financial fraud to some degree. The important thing to remember is that handling fraud may be fruitful and revolutionary, and it can help an organization gain clout within its sector. As a result, banks should examine how present and possible upcoming new regulations will influence their marketing strategies, as well as whether their risk mitigation programs have the flexibility to respond effectively to the continuing regulation transition process. Only by collaborating with their customers can financial institutions become truly effective in their fraud prevention efforts. Fraud identification and avoidance should be a collaborative effort between banks, their clients, and the state. Fraud in the financial sector should be avoided at all costs since it damages banking institutions and ruins the economic growth of the country.

Scams And Frauds: Black Eyes In The Banking Industry

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ms Princess Preet Kaur Kalra
Khurana and Khurana
E-13, UPSIDC, Site-IV, Behind-Grand Venice
Kasna Road, Greater Noida
Uttar Pradesh
National Capital Region
INDIA
Tel: [phone]
Fax: [phone]
E-mail: [e-mail]
URL: www.khuranaandkhurana.com

© Mondaq Ltd, 2022 - Tel. [phone] - http://www.mondaq.com, source Business Briefing