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Fraud, Forgery and Vigilance in Banking Sector

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Fraud, Forgery and Vigilance in Banking Sector THAVAN IJREB Vol-1, No-2 Jan-Mar 2012 ISSN: 2277-1476 Fraud, forgery and Vigilance in Banking Sector Alekhya Reddy Student, HNLU, Raipur, [email protected] Abstract- Banks are the engines that drive the 1969 and 6 more on 15 April 1980. The Indian operations in the financial sector, which is vital banking system is indeed unique and perhaps for the economy. With the nationalization of has no parallels in the banking history of any banks in 1969, they also have emerged as country in the world.1 engines for social change and have become indispensable in a modern society. Banks play a The Indian Banking system performs a crucial critical role in economic development of a role in economic development of India through nation. The increase in banking operations is saving-investment.2Banks are the engines that now accompanied by an increase in frauds in drive the operations in the financial sector, the banking sector. In this paper the first chapter which is vital for the economy. With the deals with an introduction to banking and nationalization of banks in 1969, they also have related frauds. The second chapter focuses on emerged as engines for social change. After Fraud and Forgery, subsequently the Next Independence, the banks have passed through Chapter deal with Fraud and Forgeries in three stages. They have moved from the Banking sector with relevant legal provisions. character based lending to ideology based The fourth chapter deals with measures for lending to today competitiveness based lending prevention and detection of such discrepancies, in the context of India's economic liberalization followed by the vigilance in banking sector and policies and the process of linking with the the fifth chapter deals with Legal regime global economy. available to control the menace of banking While the operations of the bank have become frauds followed by the conclusion. increasingly important, banking frauds in banks have also increased and fraudsters are becoming KEYWORDS: Banking-nationalization-fraud- more and more sophisticated and ingenious. In a forgery-losses- bank employees-crime-Indian bid to keep pace with the changing times, the Penal Code, 1860-Rangarajan Committee banking sector has diversified its business Report manifold. The old philosophy of class banking has been replaced by the modern concept of mass banking. The challenge in management of INTRODUCTION social responsibility with that of economic Banking system occupies a significant place in a viability has also increased.3 nation's economy. A banking institution is crucial and indispensable in a modern society. It 1Apoorva Yadav and Juhi Malviya “Banking Fraud - plays a pivotal role in economic development of Prevention and Control” a nation and forms the core of the money market http://ezinearticles.com/?Banking-Fraud--- in an advanced country. Banking industry in Prevention-and-Control&id=772623(March 30, India has traversed a long way to accomplish its 2011). 2 present stature. It has undergone a major SUNDHARAM AND VARSHNEY, BANKING th structural transformation after the THEORY LAW AND PRACTICE 1.64 (17 ed, nationalization of 14 major commercial banks in 2006). 3Apoorva supra note 1. Fraud, forgery and Vigilance in Banking Sector THAVAN IJREB Vol-1, No-2 Jan-Mar 2012 ISSN: 2277-1476 FRAUD banking fraud law vary between jurisdictions, Fraud is defined as "any behavior by which one the term bank fraud applies to actions that person intends to gain a dishonest advantage employ a scheme or artifice, as opposed to bank over another". In other words , fraud is an act or robbery or theft. For this reason, bank fraud is omission which is intended to cause wrongful sometimes considered a white-collar crime.6 gain to one person and wrongful loss to the BANK FRAUDS other, either by way of concealment of facts or Losses sustained by banks as a result of frauds otherwise. 4 exceed the losses due to robbery, dacoity, Fraud is defined u/s 421 of the Indian Penal burglary and theft-all put together. Unauthorized Code and u/s 17 of the Indian Contract Act. credit facilities are extended for illegal Thus essential elements of frauds are: gratification such as case credit allowed against 1. There must be a representation and assertion; pledge of goods, hypothecation of goods against 2. It must relate to a fact; bills or against book debts. Common modus 3. It must be with the knowledge that it is false operandi are, pledging of spurious goods, or without belief in its truth; and inletting the value of goods, hypothecating 4. It must induce another to act upon the goods to more than one bank, fraudulent assertion in question or to do or not to do certain removal of goods with the knowledge and act. connivance of in negligence of bank staff, Financial fraud is not an offence in spite of the pledging of goods belonging to a third party.7 fact that the banks and financial institutions An analysis made of cases brings out broadly the suffer heavily in frauds committed by the under mentioned four major elements borrowers, more often than not, in collusion with responsible for the commission of frauds in the employees of the banks and financial banks. institutions. In the last decade, instances of 1. Active involvement of the staff-both „scam‟ have gone up. People, banks and supervisor and clerical either independent of financial institutions have suffered losses of external elements or in connivance with thousand of crores. The situation is becoming outsiders. explosive and can lead to anarchy at any time 2. Failure on the part of the bank staff to follow unless „scam‟ is legally contained. Financial meticulously laid down instructions and fraud is a very sensitive issue. It affects the guidelines. public faith in the system structure. The whole 3. External elements perpetuating frauds on banking system is predominantly based on banks by forgeries or manipulations of cheques, public faith. Market systems are structured in a drafts and other instruments. society to ensure public confidence. Repeated 4. There has been a growing collusion between market failure, undetected frauds in financial business, top banks executives, civil servants institutions and collusion of employees in and politicians in power to defraud the banks, by financial fraud cause frustration in the public, getting the rules bent, regulations flouted and which is a challenge to any good governance.5 banking norms thrown to the winds.8 Bank fraud is the use of fraudulent means to Frauds are committed in the banks in various obtain money, assets, or other property owned or departments by employees and by the outsiders held by a financial institution. In many with the connivance of the bank employees. instances, bank fraud is a criminal offense. Each bank has prescribed the systems and While the specific elements of a particular procedures for the holding of banking transactions, but frauds are committed due to 4 WILLIAM BLAIR AND RICHARD BRENT, BANKS AND FINACIAL CRIMES (Ist ed 2008). 6 http://en.wikipedia.org/wiki/Bank_fraud 5 The Report of the Expert Committee on Legal 7Apoorva supra note 1. Aspects of Bank Frauds. 8Id.. Fraud, forgery and Vigilance in Banking Sector THAVAN IJREB Vol-1, No-2 Jan-Mar 2012 ISSN: 2277-1476 loopholes in the system, non compliance of the difficulty. Sometimes it is difficult to distinguish procedures, ineffective supervision and control between kiting and good fund management.11 of the working of the branches. It is not easily FORGERY possible to identify the fraudulent person. The Section 463 0f the Indian Penal Code intricate procedures also help the culprit escape A person who makes any false documents with altogether many times the matter is kept pending intent to cause damage or injury commits so long , that the gravity of the offence is forgery. A document is a matter expressed or reduced. Sometimes the frauds come to the described upon any substance by means of notice, years after they are perpetrated.9 letters, figures or marks, intended to be used, or The Reserve Bank of India had set-up a high which may be used, as evidence of that matter. It level committee in 1992 which was headed by is immaterial by what means or upon what Mr. A. Ghosh, the then Dy. Governor Reserve substance the letters, figures or marks are made. Bank of India to inquire into various aspects The offence of forgery will be committed, when relating to frauds malpractice in banks.10 The the false document, it is not necessary that there committee had noticed/observed three major must be writing or contain the signature or causes for perpetration of fraud as given facsimile of any person. A document may be hereunder: made false by wiping out the signatures, which 1. Laxity in observance of the laid down system gives it validity. In forgery the making of the and procedures by operational and supervising document should be with a fraudulent or staff. dishonest intention. The intention to defraud is 2. Over confidence reposed in the clients who different from the intention to cause a wrongful indulged in breach of trust. gain or loss. While an intention to cause a 3. Unscrupulous clients by taking advantages of wrongful gain or loss of property is necessary the laxity in observance of established, time for a dishonest act, though intended to deceieve, tested safeguards also committed frauds. may not be connected with the wrongful gain or TYPES OF FRAUD wrongful loss of property, though it must KITE-FLYING OPERATIONS involve the causing of injury. If there is an In terms of bankers and accountants, the word intention to obtain an advantage by deceit, there “Kite” means that a depositor is passing is a fraud.
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