PROJECT REPORT

ON
“BANKING FRAUD "

A Project Submitted to
University of Mumbai for Partial Completion of the Degree of
Bachelor of Financial Market

Under the Faculty of Commerce

BY
ANIL SURESH BASUDE
ROLL NO.:- 36

UNDER THE GUIDANCE OF

PROF. KOMAL MANSUKHANI

RAMCHAND KIMATRAM TALREJA COLLEGE

OF ARTS, SCIENCE & COMMERCE.
ULHASNAGAR - 421 004.

UNIVERSITY OF MUMBAI
2019-20
 DECLARATION

I the undersigned Miss / Mr. ANIL SURESH BASUDE

here by, declare that the work embodied in this project
work titled “BANKING FRAUD”forms my own
contribution to the research work carried out under the
guidance of PROF. KOMAL MANSUKHANI a result
of my own research work and has not been previous
submitted to any other University for any other Degree /
Diploma to this or any other University.
Wherever reference has been made to previous works of
others, it has been clearly indicated as such and included
in the bibliography.
I, here by further declare that all information of this
document has been obtained and presented in accordance
with academic rules and ethical conduct.

(ANIL SURESH BASUDE)

Certified By:

PROF. KOMAL MANSUKHANI

 INDEX

CHAPTER TOPIC NAME PAGE

NO NO

1
INTRODUTION 1

2
THE MECHANICS OF 13
CREDIT CARD TRANSACTION

3
CREDIT CARD OPERATIONS OF BANK 19

4 DIFFERENT TYPES OF CREDITS 33

5 TYPES OF CREDIT CARD OFFERED BY 35

INDIAN BANKS

6 DEBIT CARD 43

7
QUESTIONNARIES 58
8
PUNJAB NATIONAL BANK 60

9 REVIEW OF LITERATURE 62

1
Chapter:-1.Introduction:

EVOLUTION OF BANKING SYSTEM IN INDIA:

Banking system occupies an important place in a nation’s economy. A

banking institution is indispensable in a modern society. It plays a pivotal
role in economic development of a country and forms the core of the money
market in an advanced country.

Banking industry in India has traversed a long way to assume its present
stature. It has undergone a major structural transformation after the
nationalization of 14 major commercial banks in 1969 and 5 more on 15
April 1980.

Banks are the engines that drive the operations in the financial sector, which
is vital for the economy. With the nationalization of banks in 1969, they also
have emerged as engines for social change. After Independence, the banks
have passed through three stages. They have moved from the character based
lending to ideology based lending to today competitiveness based lending in
the context of India's economic liberalization policies and the process of
linking with the global economy.

A sound banking system should 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 immediate grievance remedial system. All these
conditions are their missing or extremely weak in India.

2
Section 5(b) of the Banking Regulation Act, 1949 defines banking as
“Banking is the accepting for the purpose of lending or investment, deposits
of money from the purpose of lending or investment, deposits of money
from the public, repayable on demand or otherwise and withdraw able by
cheque, draft, order or otherwise.”

In the present day, Global Scenario Banking System has acquired new
dimensions. Banking did spread in India. Today, the banking system has
entered into competitive markets in areas covering resource mobilization,
human resource development, customer services and credit management as
well.

With the rising banking business, frauds in banks are also increasing and the
fraudsters are becoming more and more sophisticated and ingenious. In a bid
to keep pace with the changing times, the banking sector has diversified its
business manifold. Replacement of the philosophy of class banking with
mass banking in the post-nationalization period has thrown a lot of
challenges to the management on reconciling the social responsibility with
economic viability.

The banking system in our country has been taking care of all segments of
our socio-economic set up. A bank fraud is a deliberate act of omission or
commission by any person carried out in the course of banking transactions
or in the books of accounts, resulting in wrongful gain to any person for a
temporary period or otherwise, with or without any monetary loss to the
bank.

3
Definition of Fraud:

Fraud is defined as “any behavior by which one person intends to gain a

dishonest advantage 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 defined u/s 421 of the Indian Penal Code and u/s 17 of the Indian
Contract Act. Thus essential elements of frauds are:

1.There must be a representation and assertion;

2. It must relate to a fact;
3. It must be with the knowledge that it is false or without belief in its
truth; and
4. It must induce another to act upon the assertion in question or to do
or not to do certain act.

A false representation of a matter of fact — whether by words or by conduct,

by false or misleading allegations, or by concealment of what should have
been disclosed — that deceives and is intended to deceive another so that the
individual will act upon it to her or his legal injury.

In law, the deliberate misrepresentation of fact for the purpose of depriving

someone of a valuable possession or legal right. Any omission or
concealment that is injurious to another or that allows a person to take
unconscionable advantage of another may constitute criminal fraud. The
most common type of fraud is the obtaining of property by giving a check
for which there is insufficient funds in the signer's account. Another is the
assumption of someone else's or a fictitious identity with the intent to
deceive. Also important are mail and wire fraud (fraud committed by use of
the postal service or electronic devices, such as telephones or computers). A
tort action based on fraud is sometimes referred to as an action of deceit.

4
Bank Frauds:
Losses sustained by banks as a result of frauds exceed the losses due to
robbery, dacoit, burglary and theft-all put together. Unauthorized credit
facilities are extended for illegal gratification such as case credit allowed
against pledge of goods, hypothecation of goods against bills or against book
debts. Common modus operandi are, pledging of spurious goods, inletting
the value of goods, hypothecating goods to more than one bank, fraudulent
removal of goods with the knowledge and connivance of in negligence of
bank staff, pledging of goods belonging to a third party.

While the operations of the bank have become increasingly significant, there
is also an occupation hazard. There is a Tamil proverb, which says that a
man who collects honey will always be tempted to lick his fingers. Banks are
all the time dealing with money and the temptation should therefore is very
high. Oscar Wilde said that the thief was an artist and the policeman was
only a critic. There are many people who are unscrupulous and are able to
perpetrate a fraud. We must be able to see that we devise our systems and
procedures in such a way that the scope for such clever and unscrupulous
people is reduced.

Frauds in deposit accounts take place by opening of bogus accounts, forging

signatures of introducers and collecting through such accounts stolen or
forged cheques or bank drafts. Frauds are also committed in the area of
granting overdraft facility in the current accounts of customers. A large
number of frauds have been committed through bank draft, mail transfers
and telegraphic transfers.

An analysis made of cases brings out broadly the under mentioned four
major elements responsible for the commission of frauds in banks.

5
1. Active involvement of the staff-both supervisor and clerical either
independent of external elements or in connivance with outsiders.
2. Failure on the part 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 between business, top banks
executives, civil servants and politicians in power to defraud the
banks, by getting the rules bent, regulations flouted and banking
norms thrown to the winds.

6
Chapter:-2 Mechanics of bank frauds:

By Insiders:

1. Wire fraud

Wire transfer networks such as the international interbank fund transfer

system are tempting as targets as a transfer, once made, is difficult or
impossible to reverse. As these networks are used by banks to settle
accounts with each other, rapid or overnight wire transfer of large
amounts of money are commonplace; while banks have put checks and
balances in place, there is the risk that insiders may attempt to use
fraudulent or forged documents which claim to request a bank depositor's
money be wired to another bank, often an offshore account in some
distant foreign country.

2. Rogue traders

A rogue trader is a highly placed insider nominally authorised to invest

sizeable funds on behalf of the bank; this trader secretly makes
progressively more aggressive and risky investments using the bank's
money, when one investment goes bad, the rogue trader engages in
further market speculation in the hope of a quick profit which would hide
or cover the loss.

Unfortunately, when one investment loss is piled onto another, the costs
to the bank can reach into the hundreds of millions of dollars; there have
even been cases in which a bank goes out of business due to market
investment losses.

7
3. Fraudulent loans

One way to remove money from a bank is to take out a loan, a practice
bankers would be more than willing to encourage if they know that the
money will be repaid in full with interest. A fraudulent loan, however, is
one in which the borrower is a business entity controlled by a dishonest
bank officer or an accomplice; the "borrower" then declares bankruptcy
or vanishes and the money is gone. The borrower may even be a non-
existent entity and the loan merely an artifice to conceal a theft of a large
sum of money from the bank.

4. Forged or fraudulent documents:

Forged documents are often used to conceal other thefts; banks tend to
count their money meticulously so every penny must be accounted for. A
document claiming that a sum of money has been borrowed as a loan,
withdrawn by an individual depositor or transferred or invested can
therefore be valuable to a thief who wishes to conceal the minor detail
that the bank's money has in fact been stolen and is now gone.

5. Uninsured deposits

There are a number of cases each year where the bank itself turns out to
be uninsured or not licensed to operate at all. The objective is usually to
solicit for deposits to this uninsured "bank", although some may also sell
stock representing ownership of the "bank". Sometimes the names appear
very official or very similar to those of legitimate banks. For instance, the
"Chase Trust Bank" of Washington D.C. appeared in 2002 with no
licence and no affiliation to its seemingly apparent namesake; the real
Chase Manhattan Bank is based in New York.

8
There is a very high risk of fraud when dealing with unknown or
uninsured institutions.

The risk is greatest when dealing with offshore or Internet banks (as this
allows selection of countries with lax banking regulations), but not by any
means limited to these institutions.

6. Demand draft fraud

Demand draft fraud is usually done by one or more dishonest bank

employees. They remove few DD leaves or DD books from stock and
write them like a regular DD. Since they are insiders, they know the
coding, punching of a demand draft. These Demand drafts will be issued
payable at distant town/city without debiting an account. Then it will be
cashed at the payable branch. For the paying branch it is just another DD.
This kind of fraud will be discovered only when the head office does the
branch-wise reconciliation, which normally will take 6 months. By that
time the money is unrecoverable.

By others

7. Forgery and altered cheques

Thieves have altered cheques to change the name (in order to deposit
cheques intended for payment to someone else) or the amount on the face
of a cheque (a few strokes of a pen can change Rs.10000 into Rs.100,000,
although such a large figure may raise some eyebrows).

Instead of tampering with a real cheque, some fraudsters will attempt to

forge a depositor's signature on a blank cheque or even print their own
cheques drawn on accounts owned by others, non-existent accounts or

9
even alleged accounts owned by non-existent depositors. The cheque will
then be deposited to another bank and the money withdrawn before the
cheque can be returned as invalid or for non-sufficient funds.

8. Stolen cheques

Some fraudsters obtain access to facilities handling large amounts of

cheques, such as a mailroom or post office or the offices of a tax
authority (receiving many cheques) or a corporate payroll or a social or
veterans' benefit office (issuing many cheques). A few cheques go
missing; accounts are then opened under assumed names and the cheques
(often tampered or altered in some way) deposited so that the money can
then be withdrawn by thieves. Stolen blank chequebooks are also of value
to forgers who then sign as if they were the depositor

9. Accounting fraud

In order to hide serious financial problems, some businesses have been

known to use fraudulent bookkeeping to overstate sales and income,
inflate the worth of the company's assets or state a profit when the
company is operating at a loss. These tampered records are then used to
seek investment in the company's bond or security issues or to make
fraudulent loan applications in a final attempt to obtain more money to
delay the inevitable collapse of an unprofitable or mismanaged firm.

Accounting fraud has also been used to conceal other theft taking place
within a company.

profitable customer. To give the illusion of being a desired customer, the

company regularly and repeatedly uses the bank to get payment from one
or more of its customers. These payments are always made,

10
 1. Bill discounting fraud

Essentially a confidence trick, a fraudster uses a company at their disposal to gain

confidence with a bank, by appearing as a genuine,
as the customers in question are part of the fraud, actively paying any and all bills raised
by the bank. After time, after the bank is happy with the company, the company requests
that the bank settles its balance with the company before billing the customer. Again,
business continues as normal for the fraudulent company, its fraudulent customers, and
the unwitting bank. Only when the outstanding balance between the bank and the
company is sufficiently large, the company takes the payment from the bank, and the
company and its customers disappear, leaving no-one to pay the bills issued by the bank.

2. Cheque kiting

Cheque kiting exploits a system in which, when a cheque is deposited to a

bank account, the money is made available immediately even though it is
not removed from the account on which the cheque is drawn until the
cheque actually clears.

Deposit Rs.1000 in one bank, write a cheque on that amount and deposit
it to your account in another bank; you now have Rs2000 until the cheque
clears.

In-transit or non-existent cash is briefly recorded in multiple accounts.

A cheque is cashed and, before the bank receives any money by clearing
the cheque, the money is deposited into some other account or withdrawn
by writing more cheques. In many cases, the original deposited cheque
turns out to be a forged cheque.

Some perpetrators have swapped checks between various banks on a

daily basis, using each to cover the shortfall for a previous cheque.

11
What they were actually doing was check kiting; like a kite in the wind, it
flies briefly but eventually has to come back down to the ground.

3. Payment card fraud:

Credit card fraud is widespread as a means of stealing from banks,

merchants and clients. A credit card is made of three plastic sheet of
polyvinyl chloride. The central sheet of the card is known as the core
stock. These cards are of a particular size and many data are embossed
over it. But credit cards fraud manifest in a number of ways.

They.are:
i),Genuine cards are manipulated
ii) Genuine cards are altered
iii) Counterfeit cards are created
iv) Fraudulent telemarketing is done with credit cards.
v) Genuine cards are obtained on fraudulent applications in the
names/addresses of other persons and used.

It is feared that with the expansion of E-Commerce, M-Commerce and

Internet facilities being available on massive scale the fraudulent fund
freaking via credit cards will increase tremendously.

i) Booster cheques:

A booster cheque is a fraudulent or bad cheque used to make a payment

to a credit card account in order to "bust out" or raise the amount of
available credit on otherwise-legitimate credit cards. The amount of the
cheque is credited to the card account by the bank as soon as the payment
is made, even though the cheque has not yet cleared. Before the bad
cheque is discovered, the perpetrator goes on a spending spree or obtains

12
cash advances until the newly-"raised" available limit on the card is
reached. The original cheque then bounces, but by then it is already too
late.

ii) Stolen payment cards:

Often, the first indication that a victim's wallet has been stolen is a phone
call from a credit card issuer asking if the person has gone on a spending
spree; the simplest form of this theft involves stealing the card itself and
charging a number of high-ticket items to it in the first few minutes or
hours before it is reported as stolen.

A variant of this is to copy just the credit card numbers (instead of

drawing attention by stealing the card itself) in order to use the numbers
in online frauds. The use of a four digit Personal Identity Number (PIN)
instead of a signature helps to prevent this type of fraud.

iii)Duplication or skimming of card information:

This takes a number of forms, ranging from a dishonest merchant copying

clients' credit card numbers for later misuse (or a thief using carbon
copies from old mechanical card imprint machines to steal the info) to the
use of tampered credit or debit card readers to copy the magnetic stripe
from a payment card while a hidden camera captures the numbers on the
face of the card.

Some thieves have surreptitiously added equipment to publicly accessible

automatic teller machines; a fraudulent card stripe reader would capture
the contents of the magnetic stripe while a hidden camera would sneak a
peek at the user's PIN. The fraudulent equipment would then be removed

13
and the data used to produce duplicate cards that could then be used to
make ATM withdrawals from the victims' accounts.

4. Empty ATM envelope deposits:

A criminal overdraft can result due to the account holder making a

worthless or misrepresented deposit at an automated teller machine in
order to obtain more cash than present in the account or to prevent a
check from being returned due to non-sufficient funds. The crime could
also be perpetrated against another person's account in an "account
takeover" or with a counterfeit ATM card, or an account opened in
another person's name as part of an identity theft scam. This scenario may
become a thing of the past next decade due to the emergence of ATM
deposit technology that scans currency and checks without using an
envelope.

14. Impersonation:

Impersonation has become an increasing problem; the scam operates by

obtaining information about an individual, then using the information to
apply for identity cards, accounts and credit in that person's name. Often
little more than name, parents' name, date and place of birth are sufficient
to obtain a birth certificate; each document obtained then is used as
identification in order to obtain more identity documents. Government-
issued standard identification numbers such as "social security numbers"
“PAN numbers” are also valuable to the fraudster.

Information may be obtained from insiders (such as dishonest bank or

government employees), by fraudulent offers for employment or

14
investments (in which the victim is asked for a long list of personal
information) or by sending forged bank or taxation correspondence.

In some cases, a name is needed to impersonate a citizen while working

as an illegal immigrant but often the identity thieves are using the bogus
identity documents in the commission of other crimes or even to hide
from prosecution for past crimes. The use of a stolen identity for other
frauds such as gaining access to bank accounts, credit cards, loans and
fraudulent social benefit or tax refund claims is not uncommon.

Unsurprisingly, the perpertators of such fraud have been known to take

out loans and disappear with the cash, quite content to see the wrong
persons blamed when the debts go bad or the police come calling.

15. Fraudulent loan applications

These take a number of forms varying from individuals using false

information to hide a credit history filled with financial problems and
unpaid loans to corporations using accounting fraud to overstate profits in
order to make a risky loan appear to be a sound investment for the bank.

Some corporations have engaged in over-expansion, using borrowed

money to finance costly mergers and acquisitions and overstating assets,
sales or income to appear solvent even after becoming seriously
financially overextended.

16. Prime bank fraud:

The "prime bank" operation which claims to offer an urgent, exclusive

opportunity to cash in on the best-kept secret in the banking industry,
guaranteed deposits in "prime banks", "constitutional banks", "bank notes

15
and bank-issued debentures from top 500 world banks", "bank guarantees
and standby letters of credit" which generate spectacular returns at no risk
and are "endorsed by the World Bank" or various national governments
and central bankers. However, these official-sounding phrases and more
are the hallmark of the so-called "prime bank" fraud; they may sound
great on paper, but the guaranteed offshore investment with the vague
claims of an easy 100% monthly return are all fictitious financial
instruments intended to defraud individuals.

17. Phishing and Internet fraud:

Phishing operates by sending forged e-mail, impersonating an online

bank, auction or payment site; the e-mail directs the user to a forged web
site which is designed to look like the login to the legitimate site but
which claims that the user must update personal info. The information
thus stolen is then used in other frauds, such as theft of identity or online
auction fraud.

Phishing means sending an e-mail that falsely claims to be a particular

enterprise and asking for sensitive financial information. Phishing, thus,
is an attempt to scam the user into surrendering private information that
will then be used by the scammer for his own benefit.Phishing uses
'spoofed' e-mails and fraudulent Web sites that look very similar to the
real ones thus fooling the recipients into giving out their personal data.
Most phishing attacks ask for credit card numbers, account usernames
and passwords. According to statistics phishers are able to convince up to
five per cent of the recipients who respond to them.

16
18. Money laundering

Money laundering has been used to describe any scheme by which the
true origin of funds is hidden or concealed.

The operations work in various forms. One variant involved buying

securities (stocks and bonds) for cash; the securities were then placed for
safe deposit in one bank and a claim on those assets used as collateral for
a loan at another bank. The borrower would then default on the loan. The
securities, however, would still be worth their full amount. The
transaction served only to disguise the original source of the funds.

19. Forged currency notes:

Paper currency is the usual mode of exchange of money at the personal

level, though in business, cheques and drafts are also used considerably.
Bank note has been defined in Section 489A.If forgery of currency notes
could be done successfully then it could on one hand made the forger
millionaire and the other hand destroy the economy of the nation. A
currency note is made out of a special paper with a coating of plastic
laminated on both sides of each note to protect the ink and the anti
forgery device from damage. More over these notes have security threads,
water marks. But these things are not known to the majority of the
population. Forged currency notes are in full circulation and it’s very
difficult to catch hold of such forgers as once such notes are circulated
it’s very difficult to track its origin.

20. Computer Frauds:

Computerization has brought advantages of efficiency, speed and

economy in all spheres of life. It is a very powerful tool and provides

17
opportunities of efficiency and speed to everybody using it. Further, the
vast increase in the memory (whether RAM or storage) and processing
speeds as well as availability of wide range of software, particularly
Internet and web-based applications i.e. connectivity, have made them
pervade all aspects of our lives. This has also brought large economy of
scale particularly in our economic environment and we are becoming
more and more dependent on computers and their networks for the
services such systems deliver.

Frauds committed using computers vary from complex financial frauds

where large amounts are illegally transferred between accounts by
sophisticated hackers, to the simpler frauds where computer is only a tool
that a criminal uses to commit a crime.

It also provides ample opportunities for their misuse particularly for

economic or financial gains. This is as computers networks can also be
used to commit crimes from geographically far places. Such computer
frauds are known by various names such as cyber crimes or e-crimes and
we can describe them as an act involving computer equipment, software
or data that results in an unauthorized financial advantage. Worldwide
frauds in computerized environment cause losses running into very large
sums. Although in India, frauds committed so far have not revealed any
extensive manipulation of computer systems, it is no doubt a potentially
high-risk area, which should be addressed carefully and in timely manner.
According to a recent survey, companies in India have not addressed
security issues appropriately.

18
1) Manipulation:

In an ideal situation, where information systems have all the necessary

controls, which are properly integrated with other manual controls and
maintained, there will generally be no cause of worry. It is however, not
so. Not only, most system controls are not perfect, people also try to
manipulate systems for variety of motives from games playing, ego peer
pressure, and hatred for the organization, emotional maladjustment,
blackmail and economic gains. Such people could be insiders, outsiders
as well as vendors, competitors in fact any one.

Computer frauds gain their criticality as they are easy to commit, difficult
to detect and even harder to prove. The most important type of such
frauds is committing the fraud by manipulation of input, output or
throughput of a computer system.

a) Input Manipulation:

In input manipulation, input data such as deposit amounts in ledgers,

limits in accounts or face value of cheques are changed.

b) Output manipulation:

Output manipulation is achieved by affecting the output of the system,

such as use of stolen or falsified cards in ATM machines.

c) Throughput manipulation:

Throughput manipulation could be by rounding off sums credited to

different accounts and siphoning of the rounded digits to another account.

19
No system is foolproof and fraudulent transfers can occur in even highly
automated and secure funds transfer systems.

2) Unauthorized use:

Other types of such frauds or crimes could be unauthorized access to

computers by hacking into systems or stealing passwords, deliberate
damage caused to computer data or programs, computer forgery
(changing of data or images stored in computers) and un-authorized
reproduction / modification of computer programs.

3) Awareness:

Other important causes of such frauds are lack of employee awareness,

poor implementation of security policies and segregation of duties,
vendor products with weak security controls, outsourced service
providers and hackers (many as young as school students). Computer
frauds in such cases are generally for economic benefit to the fraudster
and corresponding loss to the organization

Other sources of computer crimes are terrorists, organized criminals and

groups hating the organization.

20
Chapter:-3 Frauds- Prevention and Detection:

A close study of any fraud in bank reveals many common basic features.
There may have been negligence or dishonesty at some stage, on part 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 practices 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 deliberately ignored.

Components of Fraud:

There are two important components in any fraud committed by an

employee of a bank, himself or in collusion with a burrower. They are,
firstly, the intention which is subjective; and secondly, the opportunity which
is objective. Conditions must be created in the bank that the person who
intends perpetrating a fraud does not get the opportunity to commit it.

In India, the design, management and regulation of electronically-based

payments system are becoming the focus of policy deliberations. The
imperatives of developing an effective, efficient and speedy payment and
settlement systems are getting sharper with introduction of new instruments
such as credit cards, telebanking, ATMs, retail 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.

We are basically concerned about computer frauds committed by an

unauthorized user (whether insider or outsider) to the computer networks,

21
which aims at causing economic or financial gains to the user by this act or
an economic or financial loss to the information system (i.e. hardware,
software and data) owner.

Prevention of frauds:

i) Internal Prevention:

It is said that failures are the stepping stone for success. What this means is
that if we are able to analyse why a particular failure by way of a fraud took
place, we can then detect the loopholes in our system which led to the fraud
and take corrective measures or change the system. For instance the great
Harshad Mehta scam took place because among other things, the public debt
office of the Reserve Bank of India was not computerised and was operating
on a manual system. This gave a float of fifteen days, which gave
opportunity for people like Ketan Parekh to perpetrate the fraud. Even after
this scam while in the case of the RBI the defect was rectified the overall
banking system is still manual. Only 5000 out of the 65000 branches of
banks are computerised. In today's competitive market, it is necessary that
the banks are able to service their clients effectively. Therefore strongly urge
is that we should have a massive effort at computerisation of the banks.

Execution of Documents:

22
 1. A bank officer must adopt a strict professional approach in the
execution of documents. The ink and the pen used for the execution
must be maintained uniformly.
2. Bank documents should not be typed on a typewriter for execution.
These should be invariably handwritten for execution.
3. The execution should always be done in the presence of the officer
responsible for obtain them,
4. The borrowers should be asked to sign in full signatures in same style
throughout the documents.
5. Unless there is a specific requirement in the document, it should not
be got attested or witnessed as such attestation may change the
character of the instruments and the documents may subject to stamp
duty.
6. The paper on which the bank documents are made should be pilfer
proof. It should be unique and available to the banks only.
7. The printing of the bank documents should have highly artistic
intricate and complex graphics.
8. The documents executed between Banker and Borrowers must be
kept in safe custody,

One issue when a fraud is perpetrated is who should be held responsible. For
instance in the case of the borrower-based accounts, there is the person who
posts the accounts, there is the person who passes the instrument and, there
is a third person who makes the payment. It has been suggested that there
must be a method of isolating the person who makes the payment from the
people who make the posting or pass the order. The relative responsibility of
the three will have to be fixed. This is an issue that has been raised before
me by one of the Chairman of the banks. Perhaps in a programme like this
we will be able to go into such issues and evolve guidelines about what

23
should be done so that while the innocent is not punished, the guilty are not
spared.

Another issue, which is of importance to the Indian economy. This is the

reported fear of many officers, especially in the middle levels in the banks,
to take decisions regarding dispersal of funds. As a result, there is always a
tendency to push the case upwards and the whole banking system is
operating in a sub-optimal manner. We must be able to find a solution to
this. In fact, the whole vigilance function can become an effective function
for economic growth if we are able to create an environment in which the
honest are encouraged to take the decision and the dishonest are punished
quickly.

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 extremely difficult, if not possible.

ii) External Prevention:

In the banking and financial sectors, the introduction of electronic

technology 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 transactions 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 large number of fully
computerized branches across the country.

24
a) Appropriate controls:

The first steps in prevention of frauds in computerized systems involve

setting up of proper access controls both physical and logical. The physical
protection of Information System assets means physical control of access to
computer and network systems and the devices to which they are connected.
Access to these systems could be controlled by security guards, installation
of code locks, smart card driven door opening devices or modern biometric
devices (which control the access on the basis of certain individual
characteristics such as finger-prints, eyes retina image etc., which cannot be
changed or falsified).

However, in a computerized environment, logical access controls (i.e.

controls to operating systems, data-base systems as well as application
systems) play more important role. Adequate controls over system software
and data is done by keeping a strict control over functional division of labor
between all classes of employees, keeping in mind the principle of least
privilege and that maker and checker. A clear segmentation of access to
system engineers, programmers and administrators is also done depending
on their work responsibility. Information System Auditors / Security
Management must exercise a great deal of creativity in identifying ways in
which unauthorized users could gain access.

Hence, the first step in prevention of computer frauds is setting up of the

appropriate controls.

25
b) Proper Implementation;

Second step in prevention of frauds would be to ensure that the users

properly implement the control systems. Control measures could be either
software driven like passwords or system driven like exception reports and
transaction authorization processes. In this connection, it may be noted that
access controls are a system in themselves and existence of such controls
means existence and maintenance of such control systems.

In the case of passwords, as access control measures. It may be noted that

merely having passwords is not sufficient. It should also be ensured that
password have been prescribed to have certain minimum characters, are
stored in encrypted files, there is a forced change of passwords at the time of
first login as well as after a specified period. These features however depend
on the security policy of the organization.

Systems are also designed to keep a chronological record of the events

occurring in the system (i.e. commands executed by the users, actions on
files, messages displayed by the system, resources consumption by the users,
transaction entry and security violations) in the form of audit trails. These
can be built in operating systems, database management systems as well as
application software. A regular analysis of audit trails as control measure
helps in containing any future loss through fraud.

However, although having good controls and maintaining them is a major

step in prevention of frauds it is still not sufficient to prevent them. Even
with the best of systems and their maintenance, all the possibilities of their
misuse can neither be predicted nor tested. Even when the best of the access
controls tools are used and monitored, when data flows from within the
network through data communication lines or from one network to another

26
or through Internet, protection of the data becomes an important tool for
prevention of frauds. For this, one can either depend on simple processes like
check sum or hash totals built in the software or may require using
encryption technology or cryptography. The complexity and cost of
implementation of these methods varies a lot and is, hence, decided by the
risk element.

Examples:

1) When data relating to inter-branch reconciliation flows through network

simple processes like check sum or hash totals may suffice. However, in the
case of INFINET used for Real Time Gross Settlement, which uses dial-up
connections, leased lines as well as VSAT technology for access, use of
Public Key Infrastructure (PKI) with a larger key-size is necessitated.

2) Firewalls for computer networks are another important tool in prevention

of frauds when access is allowed across networks or Internet. They are used
to enforce an access control policy across the networks. They allow only
authorized traffic to pass and prevent unauthorized access. They also protect
sensitive data and provide audit or logging information. As such they
provide a focal point for monitoring and log access to the network and thus
limit exposure of network services.

3) Present technology also makes us available what is called as Intruder

Detection Systems (IDS). IDS are systems build up to detect intruders
entering the network. It is the process of identifying and responding to
malicious activity targeted at computing and networking resources and is an
important component of defensive measures protecting computer system and
networks from abuses. There are different kinds of IDS:

27
i) Network Intrusion Detection Systems (NIDS) monitor packets on the
network and attempt to discover if a hacker is trying to break into a system.
ii) System Integrity Verifiers (SIV) monitors system files to detect when an
intruder changes them and send alert.
iii) Log File Monitor (LFM) monitors log files generated by network and
look for patterns in the log files that suggest an intruder is attacking. Once
the hacker gets into the network it triggers an alarm at the same time.

As firewall acts like a fence around the network, it cannot on its own detect
somebody trying to break in. It restricts access at the designated points. IDS,
on the other hand, are intended to recognize attacks against the network that
firewall are unable to see. 80% of all the financial losses are due to hacking
that come from inside the network. Firewall cannot see anything happening
inside the network. Firewall checks for traffic which passes between internal
network and the Internet. Adding IDS will double-check miss-configured
firewalls; catch attempts that fail; catch insider hacking; record electronic
evidence.

28
Detection of Frauds:

i) Internal detection:

Despite all care and vigilance there may still be some frauds, though their
number, periodicity and intensity may be considerably reduced. The
following procedure would be very helpful if taken into consideration:

1. All relevant data-papers, documents etc. Should be promptly

collected. Original vouchers or other papers forming the basis of the
investigation should be kept under lock and key.
2. All persons in the bank who may be knowing something about the
time, place a modus operandi of the fraud should be examined and
their statements should be recorded.
3. The probable order of events should thereafter be reconstructed by the
officer, in his own mind.
4. It is advisable to keep the central office informed about the fraud and
further developments in regard thereto.

One method of detection will be only by regular checks and this is where
apparently there is slackness today. Ultimately we must be able to create in
our banks an atmosphere of trust on the one side and transparency on the
other so that frauds if they occur are immediately detected, checked and
penalized.

Apart from the systems and procedures, ultimately the whole issue boils
down to the values we have. Today we are highly tolerant of corruption. We
also have in our Hindu philosophy the two basic principles, which seem to
indirectly encourage corruption. These are extreme tolerance and the
prayaschitta principle. As a result many people who commit frauds can
literally get away freely. Our systems are really to be blamed. As it is seen, if

29
we make a quick analysis of 100 people in any given organisation, 10% may
be honest and 10% dishonest whatever we do. 80% depend on the systems
we have.

And our systems encourage corruption due to the following factors:

 Scarcity of goods and services

 Lack of transparency
 Delay and red tape
 Cushions of safety that have been built for the corrupt on the healthy
principle that everybody is innocent till proved guilty. We have got
voluminous vigilance manuals and the corrupt can find always some
method of escaping punishment by exploiting some loophole or other.
This must be checked.

Do not know to what extent the bank frauds can be attributed to the people in
our own banking system that, because of loyalty of the profession or
organisation, tends to protect the corrupt. Such people may be doing a
disservice to the nation. We should therefore be able to evolve ultimately
systems which tackle the corruption promoting factors mentioned above so
that the punishment of the corrupt becomes a perceived reality and acts as a
check for people who have a tendency to commit frauds. After all that is the
way for prevention and detection of frauds.

30
ii) External detection:

Despite all such measures, as technology is taking rapid strides (for

fraudsters as well as organizations), system security administrators are
discovering that they have to constantly improve upon the technological
tools. However, security can only reduce the possibility of fraud and not
totally rule it out. In a computerized environment, the perpetrators of fraud
also expect their crime to be near impossible to detect among the thousands
or millions of transactions processed by the organization. Hence to reduce
the losses, timely detection of the frauds plays an important role.

Bank computer crimes have a typical feature, the evidence relating to crime
is intangible. The evidences can be easily erased, tampered or secreted. More
over it is not easily detectable. More over the evidence connecting the
criminal with the crime is often not available. Computer crimes are different
from the usual crimes mainly because of the mode of investigation. There
are no eyewitness, no usual evidentiary clues and no documentary evidences.

It is difficult to investigate for the following reasons:

•Hi-tech crime

The information technology is changing very fast. The normal investigator

does not have the proper background and knowledge .special investigators
have to be created to carry out the investigations. the FBI of USA have a
cell, even in latest scenario there has been cells operating in the Maharashtra
police department to counter cyber crimes.C.B.I also have been asked to
create special team for fighting cyber crimes.

31
•International crime:

A computer crime may be committed in one country and the result can be in
another country. There has been lot of jurisdictional problem a though the
Interpol does help but it too has certain limitations. The different treaties and
conventions have created obstructions in relation to tracking of cyber
criminals hiding or operation in other nations

•No-scene crime:

The computer satellite computer link can be placed or located any where.
The usual crime scene is the cyber space. The terminal may be anywhere and
the criminal need not indicate the place. The only evidence a criminal leaves
behind is the loss to the crime.

•Faceless crime:

The major advantage criminal has in instituting a computer crime is that

there is no personal exposure, no written documents, no signatures, no
fingerprints or voice recognition. The criminal is truly and in strict sense
faceless.

There are certain spy software’s which is utilized to find out passwords and
other vital entry information to a computer system. The entry is gained
through a spam or bulk mail.

The existing enacted laws of India are not at all adequate to counter cyber
crimes. The Indian Penal code, evidence act, and criminal procedure code
has no clue about computers when they were codified. It is highly required to
frame and enact laws which would deal with those subjects which are new to
the country specially cyber law; Intellectual property right etc.

32
The Reserve Bank of India has come up with different proposals to make the
way easier, they have enacted electronic fund transfer act and regulations,
have amended, The Reserve Bank of India Act, Bankers Book Evidence Act
etc., experience of India in relation to information and technology is limited
and is in a very immature state. It is very much imperative that the state
should seek the help of the experienced and developed nations.

As the success of the fraudster depends on how fast their crime is detected
among very large number of transactions processed by the organization,
auditors and fraud investigators find that computers are their best tools for
detection of fraud. Powerful, interactive software that quickly sifts through
mountains of electronic data enables auditors to effectively detect and
prevent fraud throughout an organization. The benefit is speed.

One such tool is the General Audit Software (like ACL - Audit Command
Language and IDEA - Interactive Data Extraction & Analysis). Such tools
can quickly compare and analyze data to identify patterns and trends that
often reveal fraudulent activity.

For effectively detecting and preventing fraud, one must be able to

recognize fraud and its symptoms. Auditors have been trained to look for
anomalies and a data analysis tool can highlight anomalies quickly.
However, while gathering evidence for fraud, one will have to be little
creative and examine closely any indication of fraud, however, small. In
other words, to uncover a fraud, one must think like a thief and not as an
auditor.

In fact, as such crimes can be committed by comparatively with much less

investment and gains to fraudsters may be beyond geographic boundaries.
Another way to use such software for prevention of fraud could be

33
identifying organizations risks and exposures and assembling fraud profiles
for targeted audits.

One should not forget that, in a computerized environment, frauds increase,

as fraudsters believe their action near impossible to detect, if detected near
impossible to prove, if proved nearly impossible to convict and if convicted,
amounts nearly impossible to recover. The problem is compounded in
networked banks operating in different nations with different laws. Despite
this, it has been observed that frauds perpetrated from across the globe have
been detected and amounts recovered by proper combination of technology
and sleuthing skills. Hence, while security administrators continually watch
incidences and plug the holes, fraud investigators improve their skills and
actively liaise with authorities to improve the legal framework.

34
Chapter:-4 Relevant Measures to tackle Bank Frauds in India:

All the major operational areas in banking represent a good opportunity for
fraudsters with growing incidence being reported under deposit, loan and
inter-branch accounting transactions, including remittances.

Broad analyses of various frauds that have taken place throw up the
following high-risk areas in committing frauds:

 Misappropriation of cash by fudging accounts.

 Unauthorized withdrawal or transfers of funds, mostly from long
dormant accounts.
 Opening of fictitious accounts to misappropriate funds from illegal
activities i.e. Laundering through the fictitious accounts
 Use of interbank clearing for accommodation, kite-flying and
misappropriation.
 Cheating in foreign exchange transactions by flouting exchange
control provisions.
 Withdrawal from deposit accounts through forged documents.

The most effective defence banks could have against fraud is to strengthen
their operational practices, procedures, controls and review systems so that
all fraud-prone areas are fully sanitized against internal or external breaches.
However, the huge expansion in banking transactions consequent to the
transition of banks to mass banking and the large scale computerization have
played a major role in the perpetration of the frauds. Hence mere reliance on
the internal controls is of no use. The ten fold “INDIA FORENSIC”
approach to tackle the bank fraud will definitely play a crucial role in
coming days.

35
Following is the procedure to tackle frauds in banks:

1) Expect fraud:

Nowhere in the world the fraud can be avoided hence the banks can be no
exceptions. It is a human tendency of taking the risk to commit the frauds
if he finds suitable opportunities. So it is wise to expect the occurrence of
the fraud. If the fraud is expected, efforts can be concentrated on the
areas, which are fraud prone. Fraud is the game of two. The rule makers
and rule breakers. Whoever is strong in the anticipation of the situations
wins the game of frauds. Fraud is a phenomenon, which cannot be
eliminated, but it needs to be managed.

2) Develop a fraud policy:

The policy should be written and distributed to all employees, Borrowers

and depositors. This gives a moral tension to the potential Fraudster.
Maintain a zero tolerance for violations. The Indian bank needs to roar
against the action that is taken against the Fraudsters. The media publicity
against the fraudsters at all the levels is necessary. The announcement by
US president George W. Bush that the “Corporate crooks will not be
spared” gave the deep impact to the Corporate America. In India also we
need to consider it as a sever problem and need to fight against it.

3) Assess Risk:

Look at the ways fraud can happen in the organization. It is very

important to study the trend and the style of frauds in the bank. Some of
the big nationalized banks maintain the databases of the fraud cases

36
reported in their banks. But the databases are dumb. They yield nothing
unless they are analyzed effectively. Establish regular fraud-detection
procedures. It could be in the form of internal audit or it could also be in
the form of inspections. These procedures alone discourage employees
from committing fraud. In addition to this the Institute of Chartered
Accountants of India has issued an “Accounting and Assurance standard
on internal controls which is a real guideline to test internal controls.
Controls break down because people affect them, and because
circumstances change.

4) Segregate duties in critical areas:

It is the absolutely basic principle of auditing a single person should not

have the control of the books of accounts and the physical asset. Because
this is the scenario which tempts the employee to commit the fraud.
Hence it becomes essential to see that no one employee should be able to
initiate and complete a critical transaction without involving someone
else.

Most of the banks in India have the well-defined authorization

procedures. The allocation of the sanctioning limits is also observed in
most of the cases. But still the bankers violate the authorities very easily.
They just need to collude with the outside parties. However the detection
of the collusions is possible in most of the cases if the higher authorities
are willing to dig the frauds.

37
5) Maintain the tone of Ethics at the top:

The subordinates have the tendency to follow their superiors. When the
signals are passed on to the middle management about the unethical
behavior of the top management the fear of punishment gets reduced and
the tendency of following the superior dominates. Fear vanishes when the
tendency of “If I have to die I’ll take along the superior and die” tendency
rises.

6) Review and enforce password security:

The incidences of hacking and the Phishing have troubled the Indian
Private Sector banks to a great extent. In addition to this most of the
Indian banks are running behind the ATM and credit cards to compete
with each other but have conveniently forgone the fact that ATM cards
and the credit cards are the best tools available in the hands of the
fraudsters. Inappropriate system access makes it possible to steal large
amounts of money very quickly and, in many cases, without detection.
Hence the review and the enforcement of the security policy are going to
be a crucial.

7) Conduct pre-employment screening:

Since the raw material of the Banks is cash the banker needs to be more
alert than any other employer before they recruit. Only testing the
aptitude of a person is not of any use. Know whom you are hiring. More
than 20 percent of resumes contain false statements. Most employers will
only confirm dates of employment. Some times post employment
condition might create the greed in the minds of employee, hence at least
the bankers should test check the characters of their subordinates by

38
creating real life scenarios such as offering the bribes by calling on some
dummy borrower.

8) Screen and monitor Borrowers:

Bad borrowers cause the biggest losses to the banks. What are they? Who
they represent themselves to be? Look at their ownership, clients,
references, and litigation history. In many cases the potential fraudsters
have history of defaulting in some other bank or Financial Institution.

Though this is not the foolproof solution to the disease of the frauds to
some extent it helps to combat the frauds.

39
Chapter:-5 SECURITY IN BANKING SYSTEM:

Security implies sense of safety and of freedom from danger or anxiety.

When a banker takes a collateral security, say in the form of gold or a title
deed, against the money lent by him, he has a sense of safety and of freedom
from anxiety about the possible non-payment of the loan by the borrower.
These should be communicated to all strata of the organization through
appropriate means. Before staff managers should analyze current practices.
Security procedure should be stated explicitly and agreed upon by each user
in the specific environment. Such practices ensure information security and
enhance availability. Bank security is essentially a defense against unforced
attacks by thieves, dacoits and burglars.

PHYSICAL SECURITY MEASURES-CONCEPT:

A large part of banks security depends on social security measures. Physical

security measures can be defined as those specific and special protective or
defensive measures adopted to deter, detect, delay, defend and defeat or to
perform any one or more of these functions against culpable acts, both covert
and acclamations natural events. The protective or defensive, measures
adopted involve construction, installation and deployment of structures,
equipment and persons respectively.

40
The following are few guidelines to check malpractices:

1. To rotate the cash work within the staff.

2. One person should not continue on the same seat for more than two
months.
3. Daybook should not be written by the Cashier where another person is
available to the job.
4. No cash withdrawal should be allowed within passbook in case of
withdrawal by pay order.
5. The branch manager should ensure that all staff members have
recorder their presence in the attendance registrar, before starting
work.

CHANGES IN LEGISLATIONS AFTER ELECTRONIC

TRANSACTIONS:

1. Section 91 of IPC shall be amended to include electronic documents

also.
2. Section 92 of Indian Evidence Act, 1872 shall be amended to include
commuter based communications.
3. Section 93 of Bankers Book Evidence Act, 1891 has been amended 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 amended
to facilitate electronic fund transfers between the financial institutions
and the banks. A new clause has been inserted in Section 58(2).

41
Customer guidelines to avoid Fraud:

The customer should keep in mind the following guidelines to prevent

themselves from any frauds.

 Never give your account number to people you do not know,

especially on telephone.
 Never give out financial or other personal information such as bank
account or credit card numbers unless you are sure that the company is
legitimate and the information is necessary for the transaction.
 Never judge a website by its appearance. Anyone can create a flashy
website. Just because it looks professional does not mean it is run by a
professional.
 Do not write your credit card number on the cheque.
 Don’t leave blank spaces on the payee and amount lines.
 Keep changing your e-mail password frequently because it can be
hacked.
 Limit the amount of personal information on your cheque. For e.g.
driver’s license, telephone numbers. A criminal can use this
information by applying for credit card or loan, opening a new
account.
 Don’t send any personal information to any e-mail ID this can lead
phising.

Thus above are some the measures that the customer should undertake to
avoid any type of bank frauds.

42
Chapter:-6 Bank Frauds Statistics in India:

Year Loss in Fraud Cases

Rs.Crores
2002 399.53 Cr. 1744
2003 653.5 Cr 2207
2004 600.16 Cr. 2663

A survey On Frauds:

Highlights of the first annual survey published by India forensic Research

Foundation. This study was carried out in the period of August'2006 and
February'2007. This is the first independent and privately funded study
carried out in India on the banking sector frauds.400 participants contributed
their valuable views on this subject.

 Total fraud loss to Indian Banks in year 2005- 06 was Rs. 1381
crores according to the report published by Reserve Bank of India.

 Existence of the internal controls is still the methodology in India

to catch the frauds.

 Collusion of the borrowers and the employees is the biggest cause

of the bank frauds.

43
 At least Rs.690 crores worth of frauds are known to the banks but
are not reported to various authorities for reasons like unclear
definition of word frauds, damage to the bank’s image etc.

 Technology related frauds like (ATM Card, Debit card, Credit

card) are expected to be going un-exposed on the vast proportion.

 Estimated minimum loss to the banking industry because of the

unknown frauds could be more than Rs.828 crores.

 Total impact of frauds on banking revenues = 1.7% of the total

consolidated revenues of the banks are lost to frauds.

 Money laundering is considered to be the risk of frauds in future.

 Educating the bank employees is the most effective way to prevent

the bank frauds.

44
Case Studies

1) Supposed ATM Fraud

Saturday, August 13, 2005

I did some snooping around the internet and found that even though this kind
of ATM fraud those occur there has been no indication that this is prevailant
in India or Pune for a matter of fact

Therefore the letter was either a warning from ICICI Bank to it's customers
or an attempt by someone to spread rumours or create a popular email
forward. Since no such warning is listed on the ICICI Bankwebsite I would
think it's the latter.

A team of organized criminals are installing equipment on legitimate bank

ATM's in at least 2 regions to steal both the ATM card number and the PIN.
The team sits nearby in a car receiving the information transmitted
wirelessly over weekends and evenings from equipment they install on the
front of the ATM.

If you see an attachment, do not use the ATM and report it, immediately to
the bank using the 800 number or phone on the front of the ATM.
The equipment used to capture your ATM card number and PIN are cleverly
disguised to look like normal ATM equipment. A "skimmer" is mounted to
the front of the normal ATM card slot that reads the ATM card number and
transmits it to the criminals sitting in a nearby car.

45
The thieves copy the cards and use the PIN numbers to withdraw thousands
from many accounts in a very short time directly from the bank ATM.

Equipment being installed on front of existing bank card slot.

The equipment as it appears installed over the normal ATM bank slot.

46
At the same time, a wireless camera is disguised to look like a leaflet holder
and is mounted in a position to view ATM PIN entries.
Suprisingly this happens only in Pune for some reason. Pune India's high
tech crime capital.

47
  WEDNESDAY, DECEMBER 26, 2007,
SOURCE TIMES OF INDIA

Card crooks tap into data wires:

First, it was skimmers. Now, credit card crooks in Kolkata may be getting
more tech savvy, using wire-tapping gadgets to cash in on unsuspecting card
users.
It's a new cause of worry for city police and CID. Wire-tapping is a
complicated scheme and much more difficult to track down. It's a technical
maze that involves telephone wires, receiving-terminals and a cable line
parallel with telephone cables to copy the card details when it is swiped for a
transaction.
The first time that the city police got an inkling of fake credit card rackets in
Kolkata was when three Bangladeshis were arrested for using a card whose
owner was in Singapore.
Wire-tapping is the most likely method, they now say. Though they have not
identified a racket as yet, cyber sleuths are sure the card racketeers are
running a hi-tech operation in the city. Their suspicions were strengthened
when a private bank recently held a workshop for CID to discuss fraud
techniques.

"We haven't got any case where wire-tapping was used to dupe somebody
but we are sure the racketeers are out there. We are trying to find the right
technique to detect such crimes and also adopting safe-guard measures," said
a senior CID officer.

Wiretapping works in three phases. The first phase involves tapping into the
wires of the main server to capture card data as it is processed for a

48
legitimate transaction. The next step is to transfer the encoded data to
another server, at the fraudster's end, where it is decoded. In the last phase,
the data is used to produce counterfeit cards. The technology is definitely
more complicated than a skimmer - a gadget which copies the details of a
card from a measured distance. In advanced countries, encrypted cables are
installed to prevent telephone wire tapping but awareness is low in India.

"The cable linking the electronic data capturing machine (EDC) and the
distribution point box is a very sensitive area which is targeted by the
racketeers. When the card is swiped on the EDC, the machine records the
financial data in the card's magnetic strip and feeds it to the DP box, from
where it moves to the main server of the telephone service provider and is
finally transferred to the servers of banks where the transaction is recorded.
The hackers target the area between the EDC and the DP box, tap into the
wires, steal data and send it to another server," said an anti-fraud officer of a
private bank.

Police officers say it is difficult to trace such rackets. "For the first phase, the
fraudsters need only a map of the telephone wiring, a receiving terminal and
cables matching the ones used by the telephone service provider. These are
not very difficult to manage and anybody who has a flair for technology can
use it to store the data. High-end technology comes in the next level," said an
officer.

Police suspect card fraudsters in Kolkata could be using the technology to

copy the data and send it to other cities in India and abroad. They have a
good reason to suspect this. In the last one year, such units have been busted
in Delhi, Jaipur and Hyderabad. "We heard about it and are looking for
effective measures to prevent wire-tapping," said Jawed Shamim, deputy

49
commissioner, detective department. Kolkata Police could also take tips
from south-east Asian countries like Thailand and Philippines, where such
rackets are active and where law enforcement agencies have more
experience in handling such crimes.

PNB Official involved in Bank Fraud of Rs. 2 Lakh

July 14, 2008

The cases of credit card frauds do not seem to end. Following the recent case
of an ING Vysya Bank employee, in partnership with others, duping the
bank of crores, a case has been registered against a Punjab National Bank
(PNB) in Chandigarh. Baldev Singh, who works as a cashier-cum-computer
operator in the Kurali branch of PNB, has been remanded to police custody
because of duping the bank to an amount of Rs 2 lakh. According to the
investigating officer, Ravindar Pal Singh, the accused had first defrauded the
bank of Rs 1.87 lakh; however, after he was caught, he duped 2 more
customers to the tune of Rs 1.1 lakh to clear the bank’s liability.

The case had come to the Kurali police when the head of PNB, Chandigarh
Circle, had lodged a complaint against Baldev on March 10. That day the
bank had given Rs 8 lakh in cash to Baldev Singh to disburse payments as
cashier-cum-computer operator. However, he had disbursed Rs 6, 12,700 but
failed to deposit back the remaining amount of Rs 1, 87,300.

After the bank authorities had initiated an enquiry against the accused, he
committed to the crime and agreed to pay back the defrauded cash.

However, on March 15, he once again siphoned off Rs 1, 00,500 from the
account of a customer, Balveer Singh. Further enquiry also revealed that he

50
had duped another customer, Beant Singh, of Rs 10,000 as he withdrew Rs
15,000 from Beant’s account when the latter had come to withdraw Rs
5,000.

UTI Bank: Phishing Fraud :

Recent fraudulent transactions through phishing resulted in loss of over

Rs 20 lakh for a customers.
Friday, June 08, 2007

The Economic Offences Wing, Crime Branch, Delhi Police, received a

complaint from the vice president, Operations, UTI Bank that many
customers of various UTI banks in Delhi, Vishakapatnam, Thane, Nasik, and
Ahmedabad received emails claiming to have originated from the bank.

These emails included a hyperlink within the email itself, and a click on the
link took the recipients to a Web page, which was identical to UTI's Web
page. Some unsuspecting recipients responded to these mails, and gave their
login information and passwords. Later on, through Internet banking, a large
number of fraudulent transactions took place. These transactions resulted in
loss of over Rs 20 lakh for customers with bank accounts in Delhi,
Vishakapatnam, Thane, Nasik, and Ahmedabad.

An analysis on those phishing mails revealed that they had originated from
somewhere in Lagos, Nigeria. The UTI phishing site had lifted the UTI logo
as well as the Iconnect symbol from the original UTI site in order to make
the fake site look real. The fake site provided a 'click here' option, which in
turn took victims to a fake customer verification site based in Austria. IP

51
addresses of the fraudulent transactions indicated transactions had been
made from Nigeria, Atlanta and California.

Investigations:
Upon a complaint of the vice president, UTI Bank, a case registered and
taken up for investigation by a special team. Investigations revealed that
Sanjit Chowdhary, Account No 111010100023959 with UTI Bank, Noida,
had received a disputed credit entry totaling Rs 1.3 lakh through Internet
banking from the account of Lakshmi Narayan Sarkar of Kolkata, who has
an account at UTI Bank, Salt Lake, Kolkota, and from the account of
Makaran H Pundalik, who has an account with the Standard Chartered Bank,
Delhi.It was further revealed that the misappropriated funds had been
transferred in the account of accused Sanjit Chowdhary. The police team laid
a trap at UTI Bank in Noida and the accused Sanjit Chowdhary, who came to
the branch to make enquiries regarding the inactive status of his account,
was arrested on December 7, 2006.On being interrogated, the accused
disclosed that he had received money in his bank account consequent to
phishing mails sent to various customers of UTI Bank. Various transaction
slips pertaining to the UTI Bank and ICICI Bank were recovered from his
possession. A scrutiny of these slips revealed that Sanjit Chowdhary had
withdrawn funds and deposited the same in accounts of his other associates,
who had accounts in UTI and ICICI Bank at Mumbai and Trichy.Till
December 2006, a total of twenty complainants had registered their
complaints. All the six beneficiary accounts are in Delhi for these twenty
complainants. Further, ten complaints had been received by UTI branches in
Vishakapatnam, Ahmedabad, Nasik, and Thane, where the beneficiary
accounts are being maintained. An analysis of the accounts of the four
arrested Nigerian nationals revealed that financial transactions worth over Rs
1 crore took place in an eight-month period.

52
.Survey Report

Findings:
According the survey conducted by me most of the customers know about
bank frauds. They have a computational idea of frauds taking place in banks.
There are very few, those are not aware of bank frauds.

30

25

20

15

10

0
Yes No

The survey also revealed the types of bank frauds that the customers know
about. The survey included ATM Fraud, Credit card fraud and Online fraud.
The following is the graph revealed:

30
25
20 18-30yrs of age
15 30-60yrs of age

10 60yrs & above

5
0
Atm Fraud Credit Card Online all the noneof the
Fraud fraud Frauds frauds

53
Due to computerization banks facilities have increased. There has been
increase in frauds also. The following Graph shows the survey on frauds
increased or decreased due to computerization.

30

25

20 18-30yrs ofage
15 30-60yrs of age

10 60yrs & above

0
Increased Decreased

Following survey shows the number of customers those have experienced

the frauds in banks either through banks or by others.

30

25

20

15 Frauds

10

0
Yes No

The suggestions that the survey reveal is that there must be some strict
actions take against the fraudsters. Banks should provide the necessary
information regarding the frauds that the customers can come across.
Awareness among the customers regarding frauds is must.

54
1) What are the major types of frauds conducted?
Phising, Forgery altered cheques, fraudulent loans application.

2) What are the general preventive measures taken?

There is a department which looks after fraud and their prevention i.e. Risk
Content Unit (RCU). They go through the fraud conducted and take
necessary steps. Know Your Customer (KYC) is an important tool to prevent
frauds in banks.

3) Do you think that computerization have increased frauds? Why?

No. Because due to computers there has been increase in work. A work
which would take 3hrs is done in 11/2hrs, thus providing better service.
More over out of entire customers 2% conduct frauds. Because of this 2%,
we can’t avoid providing better services to 98% customers.
4) Effect of fraud on banks?
The customers are affected. The banks reputation is shattered. Many
customers try to avoid the bank branch. Negative views are spread to the
customers.

1) What are types of frauds you have come across?

Property mortgaging in different bank with the help of duplicate
document, Money laundering, credit card fraud, Debit card fraud, DD fraud
Bill discounting fraud.

2) What are the measures taken against frauds?

i) Core Banking Solutions (EXEL report) to find out fraud.
ii) Know the Introducer while opening the account
iii) Account should not be opened those coming with DD, Cheques.

55
 iv) Internal Checking’s

3) What are the steps taken after the fraud is detected?

Several steps are taken:
In case of Accounts fraud higher authority is reported.
In case of cash authority is consulted and if necessary FIR is registered.

4) How a customer can be made aware the frauds they can come across?
Customers are asset to the banking company. They can be made aware
through E-mails, Advertisements, Posters, etc.

`5) Which frauds are more conducted Internal or by others?

Most of the frauds conducted are by others. Whereas, internal fraud can
be controlled through strict supervision, daily check of the documents, etc.
External frauds are threat to the public as well as banks.

56
Chapter:-7 SURVEY FORM

SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMIC

NAME: - AGE:-
CONTACT NO: -

Survey for Project on Frauds in Indian Banking Sector

1) Do you know about Bank Frauds?

Yes No

2) Are you aware of any of the following type of fraud?

ATM fraud Credit Card Fraud Online Bank Fraud

All of the above None of the above

3) Do you think Frauds have increased due to online technology?

Yes No

4) If Yes/ No Why?

57
5) Have you come across any bank frauds?

Yes No

6) If yes, which fraud and through which bank?

Suggestions if any:-

Project Guide:-
SANGEETA K.
Signature- ___________
By: SRUSHTI S. SHINDE
Roll no: 35047

58
  PROTECT YOUR ACCOUNT:

IF you are using Internet Banking or any other online account, please read
below on how to protect your account.

 Never respond to e-mails that request personal information.

 Keep your password top secret and change them often.

 Make your password difficult to crack.

 Never use cyber café to asses your online accounts.

 Keep your computer secure.

 Check the website you’re visiting is secure.

 Validate SSL certificate.

59
Chapter:-8PUNJAB NATIONAL BANK

Punjab National Bank (PNB) is an Indian

multinational banking and financial services company. It is a state-owned
corporation based in New Delhi, India.

The bank was founded in 1894. As of 31 March 2017, the bank has over 80
million customers, 6,937 branches (7,000 as on 2nd oct, 2018) and
10681 ATMs across 764 cities.[6]

PNB has a banking subsidiary in the UK (PNB International Bank, with

seven branches in the UK), as well as branches in Hong
Kong, Kowloon, Dubai, and Kabul. It has representative offices
in Almaty (Kazakhstan), Dubai (United Arab
Emirates), Shanghai (China), Oslo (Norway), and Sydney (Australia).

In Bhutan it owns 51% of Druk PNB Bank, which has five branches.
In Nepal PNB owns 20% of Everest Bank Limited, which has 50 branches.

Lastly, PNB owns 84% of JSC (SB) PNB Bank in Kazakhstan, which has
four branches.

60
 Contents

 History
 Timeline
 Punjab National Bank Fraud Case, 2018
 Financial performance
 Mergers and acquisitions
 Listings and shareholding
 Employees
 Awards and recognitions
 Initiatives

History

Punjab National Bank is a PSU working under Central Government of India

regulated by RBI Act, 1934 and Banking Regulation Act, 1949. Punjab
National Bank was registered on 19 May 1894 under the Indian Companies
Act, with its office in Anarkali Bazaar, Lahore, in present-day Pakistan.

61
The founding board was drawn from different parts of India professing
different faiths and of varying back-ground with, the common objective of
creating a truly national bank that would further the economic interest of the
country.
[1]
PNB's founders included several leaders of the Swadeshi movement such
as Dyal Singh Majithia and Lala Harkishen Lal, Lala Lalchand, Kali
Prosanna Roy, E. C. Jessawala, Prabhu Dayal, Bakshi Jaishi Ram, and Lala
Dholan Dass.[7]
Lala Lajpat Rai was actively associated with the management of the Bank in
its early years. The board first met on 23 May 1894. [1]
The bank opened for business on 12 April 1895 in Lahore.

PNB has the distinction of being the first Indian bank to have been
started solely with Indian capital that has survived to the present.
(The first entirely Indian bank, Oudh Commercial Bank, was
established in 1881 in Faizabad, but failed in 1958.)

PNB has had the privilege of maintaining accounts of national leaders

such as Mahatma Gandhi, Jawahar Lal Nehru, Lal Bahadur
Shastri, Indira Gandhi, as well as the account of the
famous Jalianwala BaghCommittee.[1]

Timeline
In 1900 PNB established its first branch outside Lahore in India.
Branches in Karachi and Peshawar followed. The next major event
occurred in 1940 when PNB absorbed Bhagwan (or Bhugwan) Dass
Bank, which had its head office in Dehra Dun.

At the Partition of India and the commencement of Pakistani

independence, PNB lost its premises in Lahore, but continued to
operate in Pakistan. Partition forced PNB to close 92 offices in West

62
Pakistan, one-third of its total number of branches, and which held
40% of the total deposits.

PNB still maintained a few caretaker branches. On 31 March 1947,

even before Partition, PNB had decided to leave Lahore and transfer
its registered office to India; it received permission from the Lahore
High Court on 20 June 1947, at which time it established a new head
office at Under Hill Road, Civil Lines in New Delhi. Lala Yodh Raj was
the Chairman of the Bank.

In 1951, PNB acquired the 39 branches of Bharat Bank (est. 1942).

Bharat Bank became Bharat Nidhi Ltd. In 1960, PNB again shifted its
head office, this time from Calcutta to Delhi. In 1961, PNB acquired
Universal Bank of India, which Ramakrishna Jain had established in
1938 in Dalmianagar, Bihar. PNB also amalgamated Indo
Commercial Bank (est. 1932 by S. N. N. Sankaralinga Iyer) in a
rescue. In 1963, The Burmese revolutionary government nationalized
PNB's branch in Rangoon (Yangon). This became People's Bank No.
7.[9] After the Indo-Pak war, in September 1965 the government of
Pakistan seized all the offices in Pakistan of Indian banks. PNB also
had one or more branches in East Pakistan (Bangladesh).

The Government of India (GOI) nationalized PNB and 13 other major

commercial banks, on 19 July 1969. In 1976 or 1978, PNB opened a
branch in London. some ten years later, in 1986, the Reserve Bank of
Indiarequired PNB to transfer its London branch to State Bank of
India after the branch was involved in a fraud scandal. That same
year, 1986, PNB acquired Hindustan Commercial Bank (est. 1943) in
a rescue. The acquisition added Hindustan's 142 branches to PNB's
network. In 1993, PNB acquired New Bank of India, which the GOI

63
had nationalized in 1980. In 1998 PNB set up a representative office
in Almaty, Kazakhstan.

In 2003 PNB took over Nedungadi Bank, the oldest private sector
bank in Kerala. At the time of the merger with PNB, Nedungadi
Bank's shares had zero value, with the result that its shareholders
received no payment for their shares. PNB also opened a
representative office in London. In 2004, PNB established a branch
in Kabul, Afghanistan, a representative office in Shanghai, and
another in Dubai. PNB also established an alliance with Everest Bank
Limited in Nepal that permits migrants to transfer funds easily
between India and Everest Bank's 12 branches in Nepal.

Currently, PNB owns 20% of Everest Bank. Two years later, PNB
established PNBIL – Punjab National Bank (International) – in the UK,
with two offices, one in London, and one in Southall. Since then it has
opened more branches, this time in Leicester, Birmingham, Ilford,
Wembley, and Wolverhampton. PNB also opened a branch in Hong
Kong. In January 2009, PNB established a representative office in
Oslo, Norway. PNB hopes to upgrade this to a branch in due course.
In January 2010, PNB established a subsidiary in Bhutan. PNB owns
51% of Druk PNB Bank, which has branches
in Thimpu, Phuentsholing, and Wangdue. Local investors own the
remaining shares. Then on 1 May, PNB opened its branch in Dubai's
financial center. PNB purchased a small minority stake in
Kazakhstan-based JSC Danabank established on 20 October 1992 in
Pavlodar.

Within the year PNB increased its ownership till 84% of what has
become JSC (SB) PNB, with its share currently decreased to 49%.
The associate in Kazakhstan now called JSC Tengri Bank has

64
branches in Almaty, Astana, Karaganda, Pavlodar and Shymkent.
September 2011: PNB opened a representative office in Sydney,
Australia. December 2012: PNB signed an agreement with US based
life Insurance company Metlife to acquire a 30% stake in MetLife's
Indian affiliate MetLife India Limited. The company would be renamed
PNB MetLife India Limited and PNB would sell MetLife's products in
its branches.[10][6][11][6][11] | assets = ₹6,435 billion (US$90 billion) (2015) [12]

Punjab National Bank Scam

The Punjab National Bank Fraud Case relates to fraudulent letter of
undertaking worth ₹14,356.84 crore (US$ 2.1 billion) issued by the Punjab
National Bank at its Brady House branch in Fort, Mumbai; making Punjab
National Bank liable for the amount.[1]

The fraud was allegedly organized by jeweller and designer Nirav Modi.
Nirav, his wife Ami Modi, brother Nishal Modi and uncle Mehul Choksi, all
partners of the firms, M/s Diamond R US, M/s Solar Exports and M/s Stellar
Diamonds; along with PNB officials and employees, and directors of Nirav
Modi and Mehul Choksi's firms have all been named in a chargesheet by
the CBI.[2]

Nirav Modi and his family absconded in early 2018, days before the news of
the scam broke in India.

Nirav Modi is currently in the United Kingdom and is seeking political

asylum in Britain though the Indian government has officially asked for his
extradition.[3]

The Enforcement Directorate has begun attaching assets of the accused and
is seeking to immediate confiscation under the Fugitive Economic Offenders
Ordinance.[4]

65
Modi is on the Interpol's wanted list for criminal conspiracy, criminal breach
of trust, cheating and dishonesty including delivery of
property, corruption, money laundering since February 2018.[5][6]

The bank initially said that two of its employees at the branch were involved
in the scam, as the bank's core banking system was bypassed when the
corrupt employees issued LOUs to overseas branches of other Indian banks,
including Allahabad Bank, Axis Bank, and Union Bank of India, using the
international financial communication system, SWIFT.
[7]
The transactions were noticed by a new employee of the bank.

The bank then complained to the CBI, who is currently investigating the
scam apart from ED and RBI.

On a later date, CBI named key officials Usha Ananthasubramanian,

former CEO of PNB, executive directors KV Brahmaji Rao and Sanjiv
Sharan in a chargesheet holding them responsible for failure to implement
several circular and caution notices issued by the RBI regarding the
reconciliation of SWIFT messages and core banking systems. [8]

Investigation
Punjab National Bank (PNB) alleges associates of three firms - Diamond R
US, M/s Solar Exports and M/s Stellar Diamonds- approached PNB on 16
January 2018, with a request for LoUs to make payment to its overseas
suppliers.

The bank demanded at least a 100 percent cash margin for issuing LoUs, but
the firms contested that they had received LoUs without any such guarantee
in the past. Branch records did not show any such facility having been
granted to the firms, PNB suspected fraud and began digging into transaction
history.[9]

66
On 29 January 2018, PNB filed a complaint with the CBI, wherein it
was alleged that Nirav, Ami Modi, Nishal Modi and Mehul Choksi, all
partners of M/s Diamond R US, M/s Solar Exports and M/s Stellar
Diamonds, in collusion with two bank officials committed the offence of
cheating against PNB and caused a wrongful loss.

The PNB official in his complaint informed the agency that at the Bank’s
branch office at Brady House in Fort, Mumbai, two of its employees,
Gokulnath Shetty, retired Deputy Manager of PNB and another bank official
Manoj Kharat, issued fraudulent LoUs to Hong Kong based creditors on
behalf of three firms associated with Nirav Modi and the Gitanjali Group.

“The public servants committed abuse of official position to cause

pecuniary advantage to Diamonds R US, Solar Exports and Stellar
Diamonds and wrongful loss of Rs 280.70 crore to PNB during 2017,” said
the first information report (FIR) filed by CBI.[9][10]

As of 18 May 2018, the scam has ballooned ₹14,356.84 crore (US$2.1

billion) and Nirav Modi is said to be hiding in London, allegedly travelling
on a fake passport.[11][12]

On 13 June 2018, the CBI approached the Interpol to issue a red corner
notice (RCN) against Nirav Modi's brother Nishal and one of his executives
in connection with its probe into the Punjab National Bank (PNB) fraud.

The CBI sent a request to the Interpol to issue a RCN against Nirav Modi
and his uncle Mehul Choksi of the Gitanjali Group. [13]

On 20 August 2018, former MD and CEO of Allahabad Bank, Usha

Ananthasubramanian was granted bail on a surety bond of Rs 1 lakhs by
Special CBI court in Mumbai. A week earlier, the government had dismissed
Usha on the last day of her work.

67
Ananthasubramanian was MD of Punjab National Bank between August
2015 and May 2017 and had also served as its executive director. She was
dismissed with immediate effect. [14]

On 7 September 2018 one of the accused of the Punjab National Bank

(PNB) fraud, Nitin Shahi filed an application in a special Central Bureau of
Investigation (CBI) court to book PNB as an additional accused in the case.
The hearing on the matter is scheduled to be held on September 21.

The application filed by Shahi stated that, although the PNB has not been
charge sheeted on the fraud case, there are materials available for prima facie
proceeding against the bank. [15]

The CBI registered a disproportionate assets case against a retired deputy

manager of Punjab National Bank, Gokulnath Shetty, a key accused,
for allegedly amassing wealth 200 per cent more than his known sources of
income.[16]

Reforms
On 1 March 2018, the government approved the Fugitive Economic
Offenders Bill to deter economic offenders from evading the process of
Indian law by giving powers to the government to confiscate assets of a
fugitive, including Benami assets of absconding loan defaulters.[17]

The bill covers a wide range of economic offenders which include: loan
defaulters, fraudsters, individuals who violate laws governing taxes, black
money, benami properties, financial sector, and corruption. On 12
March2018, the government introduced the bill in the Lok Sabha.[18]

In March 2018, the Reserve Bank of India scrapped banking instruments

such as the Letter of understanding (LoU) and Letter of Comfort (LoC) that
in an attempt to plug a loophole and improve banks’ due diligence in trade

68
credit. Some bankers said that LoUs and LoCs led to receiving banks
depending completely on the issuing bank on creditworthiness.[19]

What’s irregular about this?

In the normal course, when an importer goes to a bank to ask for such a
guarantee, one of two things happens. One, the bank asks him for collateral
before it gives a guarantee. This collateral could be property in his name, or
a fixed deposit with the bank. Second, the bank sanctions a credit limit. That
means it will evaluate the importer (just like a lender asks for your income
proof and address proof before giving you a home loan) and says he is good
to be given a loan for a certain amount; but no money actually changes
hands.

Why would an importer use this convoluted method to raise money?

There are multiple reasons. For one, he has raised money in foreign currency
to pay for goods bought abroad. Second, the cost of such foreign currency
borrowings abroad is typically lower.

What happens when the foreign bank or branch receives this

guarantee?
When the foreign bank or branch receives the guarantee, for example from
PNB, it will give a loan to the importer. That means it will deposit money
either in the account of the supplier who’s selling goods to the importer, or
in PNB’s account held with it. The tenure of this loan varies from ninety
days up to even five years for capital goods. The money gets used to settle
the payment for imports. Then, when the term of the loan is up and the

69
importer makes money from reselling the goods he imported, he will pay this
sum to PNB with interest. PNB in turn will settle with the.

What happens now for PNB?

PNB is left holding bank guarantees worth Rs 11,400 crore which it has to
pay to, among others, State Bank of India, Allahabad Bank and Union Bank.
These payments are due over the next few months. The bank has tried to
shift some of the blame to these banks. In a caution notice to the chiefs of
other banks it essentially said this: You should have done more due diligence
before giving out loans. Didn’t you notice that these guarantees are for one
year, much above the RBI allowance of 90 days for the diamond industry?

Other banks aren’t buying these arguments. They say: We took an exposure
on PNB, a state-owned bank (and an implicit bet on the Indian Union) not on
a diamond merchant. It is still a gray area on who will actually pay up and
how the burden will shared.

So, the banking system will take another Rs 11,400 crore on top of its
huge bad loans problem of Rs 10 trillion?
Not necessarily. There will be some recoveries. For instance, the
enforcement directorate has claimed it has already recovered gold, precious
stones and diamonds worth around Rs 5,500 crore (although that valuation is
debatable for an asset like diamonds). In any case, the entire Rs 11,400 crore
which was raise for loans would either be in the form of diamonds (in case
of genuine imports) or stashed away somewhere in other assets (if it had
been diverted). It remains to be seen how much can be recovered.

70
 Mumbai, February 16

The Central Bureau of Investigation named three companies under the

Gitanjali Group in their latest FIR related to the multicrore scam involving
the country’s second biggest public sector bank—the Punjab National Bank.

The companies named are Gitanjali Gems, Gili India and Nakshatra Brand
Ltd.

THE HISTORY
1894 : PNB was founded on May 19, 1894 in Lahore.
1895 : PNB opened for business on 12 April, 1895 at Ganpatrai Road in Lahore.
1904 : PNB established branches in Karachi and Peshawar.
1939 : PNB acquired Bhagwan Dass Bank Limited.
1947 : Partition of India and Pakistan at Independence. PNB lost its premises
in Lahore, but continued to operate in Pakistan.
1960 : PNB amalgamated Indo-Commercial Bank Limited (established in 1933)
in a rescue.
1961 : PNB acquired Universal Bank of India.
1963 : The Government of Burma nationalized PNB's branch in Rangoon (Yangon).
1965 : After the Indo-Pak war the government of Pakistan seized all the offices in
Pakistan of Indian banks, including PNB's headoffice,
which may have moved to Karachi. PNB also had branches in East Pakistan
(Bangladesh).
1969 : The Government of India nationalized PNB and 13 other major banks on
19th July, 1969.
1978 : PNB opened a branch in London.

71
1986 : The Reserve Bank of India required PNB to transfer its London branch
to State Bank of India after the branch was involved in a fraud scandal.
1988 : PNB acquired Hindustan Commercial Bank Limited in a rescue.
1993 : PNB acquired New Bank of India, which the Government of India had
nationalised in 1980.
1998 : PNB set up a representative office in Almaty , Kazakhstan.
2003 : PNB took over Nedungadi Bank (established the bank in 1899), the oldest
private sector bank in Kerala. It was incorporated in 1913 and in 1965 had
acquired selected assets and
deposits of the Coimbatore National Bank. At the time of the merger
with PNB, Nedungadi Bank's shares had zero value, with the result that
its shareholders received no payment for their shares.

72
CBI arrests 8 Punjab National Bank officials for defrauding
bank in Nirav Modi fashion

The Rs 9 crore fraud involves directors of a not-so-famous company called

Chandri Paper and Allied Products Pvt Ltd. The CBI has also arrested both
the directors of the company.

This is the second case of fraud at the PNB Brady House branch.
(Image: Reuters)

The Central Bureau of Investigation (CBI) has arrested 10 people for

defrauding the Punjab National Bank's Brady House branch of Rs 9
crore by allegedly misusing Letters of Undertaking (LoU) in a similar
case like that of Nirav Modi that was also centred around the same PNB
branch.

The Rs 9 crore fraud involves directors of a not-so-famous company

called Chandri Paper and Allied Products Pvt Ltd. The CBI has also
arrested both the directors of the company.

In March, the CBI booked ex-DGM of PNB, Gokulnath Shetty and Single
Window Operator Manoj Hanumat Kharat and the two directors -
Ishwardas Aggarwal and Aditya Rasiwasia of Chandri Papers.

Shetty, who is also accused of being a key player in the PNB scam
worth over Rs 13,000 crore, has now been blamed for issuing LoUs
using the same modus operandi to Chandri Papers.

These LoUs were issued to the State Bank of India branch in Antwerp
on April 25, 2017.

73
The agency on Wednesday said, "Two directors Ishwardas Aggarwal
and Aditya Rasiwasia and Public servants Manoj Kharat, the single
window operator, Sanjay Kumar, then branch head, Amar Jadhav,
Sagar Sawant, Bechu Tiwari, then Chief Manager, Yeshawant Joshi,
then manager of Foregin Exchange department, Praful Sawant,
Mohinder kumar Sharma, Chief internal auditor of PNB have been
arrested and remanded to CBI custody till December 21."

CBI spokesperson Abhishek Dayal, said, "The case was registered on

the allegations of defrauding of Punjab National Bank, MCB, Brady
House to the tune of around $1421311.82 (Rs 9,09,63,956.48) in the
matter of dishonest and fraudulent issuance of two Letters of
Undertakings (LoU) aggregating to the said amount, in favour of State
Bank of India (SBI), Antwerp, Belgium."

74
Officials said that they are yet to trace the money source that Nirav used to
purchase the company but unearthed investment of $47 million (Rs 327
crore) into it which is layered through a series of transactions. ED officials
examined bank statements of several shell companies in Barbados, Dubai
and Hong Kong and traced the flow of funds into several accounts. The total
attachment and seizure of movable and immovable properties in the case are
to the tune of Rs 2,362 crore, ED said

UK sought intel on Nirav only in June: ED

The ED has denied reports that UK Serious Fraud Office (SFO) had
communicated to Indian authorities about Nirav Modi’s presence in the
country in March last year and said the extradition request was sent by the
agency only in July after filing of a chargesheet against him. The Interpol
had issued a red notice against Nirav around that time.

“In June, the National Central Bureau of UK, which is the nodal agency for
matters relating to Red Corner Notice, had asked ED to provide them with
intelligence suggesting that Nirav Modi is in UK,” the agency said.
No such formal or informal communication was received by ED from UK
authorities in March, 2018 or later, the officer added. The consistent stand of
the UK government regarding execution of arrest warrant is that it can be
done only through an extradition request for which filing of chargesheet is
mandatory.

75
The extradition request cannot be sent at the stage of investigation.
Nirav Modi invested PNB scam funds in US firm he bought in
2010

Officials said that they are yet to trace the money source that Nirav used to
purchase the company but unearthed investment of $47 million (Rs 327
crore) into it which is layered through a series of transactions.
MUMBAI: Fugitive diamantaire Nirav Modihad purchased one of
America’s oldest jewellery companies — Bailey Bank & Biddle — in 2010
and invested around Rs 327 crore of the money from the Punjab National
Bank fraud into the company, says the supplementary chargesheet filed by
Enforcement Directorate (ED).
ED officials said Nirav purchased Bailey Bank & Biddle through a shell
company and his brother Nehal was made one of the directors in the
jewellery retailer. They said all the instructions related to the running of the
company were issued by Nirav himself. ED submitted related details to the
court as part of the chargesheet and attached statement of an expert who
carried out due diligence and helped Nirav in the purchase. ED also attached
email communication on transfer of funds between Nirav and his aides from
a ‘secret server’.
The firm’s website says that it was founded in 1832. “On September 10,
1832, Bailey & Kitchen, the name of Bailey, Banks & Biddle at the time,
was founded by Joseph Trowbridge Bailey and Andrew Kitchen in
Philadelphia. This founding date makes us the oldest nation-wide jeweler in
America,’’ it says.
The website says that Bailey & Co was commissioned to create a mortuary
medal after President Abraham Lincoln was assassinated on April 14, 1865.
In 1878, Bailey and Co changed its name to Bailey Banks & Biddle

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Punjab National Bank’s Internal Probe On Nirav Modi Scam
Names 54 Officers

Punjab National Bank has named 54 officers in its internal investigation

report on the $2 billion (nearly Rs 14,000 crore) scandal involving fugitive
diamantaire Nirav Modi, a senior government official told BloombergQuint.

The persons named range from those at the top management to clerks, the
official said. “They include assistant general managers, deputy general
managers and officials from the treasury department as the letters of credit
were issued without making entries in the system.”
News agency Reuters was the first to report on the internal investigation,
which has not been made public.

Since Gokulnath Shetty, the former deputy manager of PNB Brady House
branch — the epicentre of the fraud—was not transferred for seven years,
contrary to the state-run lender’s transfer policy, the people involved in
stopping his transfer have also been named. Shetty, who has also been
named in a CBI charge sheet, was not transferred from the Mumbai branch
despite three orders being issued in this regard, according to the report.
BloombergQuint couldn’t reach Shetty for a comment. PNB didn't respond
to queries sent over email.

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According to the report, Shetty, who joined the forex division at the Brady
House branch in April 2010, issued the first fake credit guarantees of Rs 10.5
crore in March 2011 to Nirav Modi’s firms through SWIFT messages,
bypassing the bank’s internal system. The report added that Shetty should
only have been able to approve transactions of up to Rs 25 lakh without
approval from senior officials.
The internal report also flagged off the following concerns:

5. Shetty escaped detection because he did not log his SWIFT

transactions on the bank’s internal software - something he was
supposed to do because the two systems were not integrated.
6. The bank’s international banking department and the IT division had
delayed the integration work.
7. They had also not complied with central bank advisories in 2016
calling for a comprehensive audit of SWIFT systems in use.
8. Missing monthly reports from the Brady House branch despite which
a compliance certificate was granted.
9. Bank did not notice a big surge in transactions at the branch.
10. The branch did not respond to almost 50 percent of the observations
flagged in its annual inspection report.

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RBI On Nirav Modi Fraud: The Buck Stops With PNB’s
Board

Understanding and managing the risks emerging out of issuing letters of

undertaking was the responsibility of the board of Punjab National Bank, the
Reserve Bank of India said in response to queries from parliamentarians
asking whether the banking regulator had failed in detecting and preventing
a Rs 14,000 crore fraud at PNB. The primary responsibility of understanding
the risks
undertaken by the bank and ensuring that these risks are managed rests with
the board of directors of the bank, the RBI said in written responses
submitted to the Parliamentary Standing Committee on Finance.

In February, Punjab National Bank disclosed that it had detected the issue of
fraudulent letters of undertaking from its Brady House branch in Mumbai.
These LoUs were issued to entities linked to diamantaire Nirav Modi and his
uncle Mehul Choksi. The SWIFT messaging system, through which these
guarantees are transmitted to other lenders who loan money against them,
was not integrated with the bank

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A Supervisory Failure?
When questioned whether the RBI’s supervisory processes had failed to
detect the fraud, the regulator said that it follows a ‘risk based supervision’
framework. Under this framework, supervisory resources are directed at
banks which pose a higher risk and functions within a bank that are seen to
be most at risk. This framework monitors banks through a robust offsite
reporting mechanism coupled with need-based onsite inspections, the RBI
said. It added that conducting onsite inspections of more than 1 lakh bank
branches in the country would be impossible.

Since RBI’s supervisory process does not constitute an audit of banks and does
not seek to replace it, RBI has issued to banks detailed instructions for putting in
place and strengthening their internal control systems and on scope of concurrent
audit, which is an important component of the risk control system.

RBI’s supervisory process does not constitute an audit of banks and does not
seek to replace it, RBI has issued to banks detailed instructions for putting in
place and strengthening their internal control systems and on scope of
concurrent audit, which is an important component of the risk control

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Punjab National Bank Customer Care

Punjab National Bank is India’s first Swadeshi Bank that incorporated on

12th April 1895. The bank has a strong network base of over 80 million
customers, 10681 ATMs, 6937 branches in across 764 cities around the
country. From many years, the bank has been showing consistent growth and
success since its inception. Punjab National Bank customer care executives’
works hard to provide the wide range of products and best services and to its
customers. Its endeavor is to offer the best of services to the customers and
keep them informed of the latest in PNB. Customers can easily file their
grievances, queries or complaints and the customer care executives would
resolve their issues within some time. In order to ensure that the customers
get the best assistance, PNB also provides 24*7 customer care services that
let the PNB customers get their PNB banking related problems resolved as
early as possible. Customers can reach to the bank’s customer care through
toll-free helpline numbers, online complaints, feedback forms, emails, SMS,
etc. If the customers are not happy or satisfied with the resolution given by
the customer executives then they also have the option to reach out to higher
authorities including nodal officer and general manager.

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Punjab National Bank Customer Care Toll-Free Helpline
Number:

There are multiple customer care numbers on which a PNB customer can
contact. Customers can the customer care for balance enquiry, hot listing the
lost or damaged credit or debit card, non-disbursement of cash from ATM or
for any other issue. Given below are the following numbers which can be
contacted: 1800 180 2222, 1800 103 2222

Tolled No.: 0120-2490000

Landline: 011-23714562

For credit card enquires: 1800 180 2345/ 0120-4616200

Note, that the numbers which are not toll-free will charge you regular
charges for a call.

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Punjab National Bank Customer Care Email ID:

There is another alternative to contact the Punjab National Bank customer

care and that is through emails. Customers can also email their queries,
grievances, complaints or feedbacks to the customer care executives of
Punjab National Bank. It is recommended that customers should use their
bank registered email ID to mail their concerns. PNB customer care
executives would address the issue within 48 hours of receiving the email.
Given below in the PNB customer care ID: care@pnb.co.in

If a customer has credit card related queries or concerns, then they can mail
on complaint@pnb.co.in

If a customer has complaints or issues regarding a particular PNB banking

product, then they can also send a mail on the given below email IDs.

for issues related to online payments: itdibs@pnb.co.in

for issues related to internet banking: ibshelpdesk@pnb.co.in

PNB also offers complaint forms to its customers so that they can report
their concerns without putting much effort into getting their issues resolved.
The complaint form is available on the official website of the Punjab
National Bank. The customers can fill this form with their queries,
complaints, grievances or feedbacks. Customers should also write their
registered email id in the end to receive the reply over their email. As an
alternative, customers can also use the ‘Online Complaint Cum Feedback
Kiosk’ given at the Head Office or Field General Manager Office of Punjab
National Bank.
If a customer’s query is still unanswered or unsatisfying after contacting the
above-mentioned modes of communication, then he/she can also escalate the
issue to the higher authorities of the bank including the nodal officer, general
manager, etc. Given below are the contact details of the higher authorities:

PNB Bank Postal address:

PNB
Credit Card Processing Centre,
11th Floor, Atma Ram House,
1 Tolstoy Marg,
New Delhi –110001

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Nodal Officer

Principal Nodal Officer (General Manager),

PUNJAB NATIONAL BANK
Head Office – 5, Sansad Marg, New Delhi, India 110001
Contact Number – +91-11-23716185Fax Number – +91 11 2332 3707
Email ID: – care@pnb.co.in

Punjab National Bank Credit Card Customer Care

Punjab National Bank has a dedicated customer service department through
which it addresses all kinds of customer queries and grievances. The query
could be regarding any bank product or service ranging from how to use
PNB Net Banking, or how to register for a particular product, request for
account balance and transaction details, request for new cheque book or
statement, request help with resolving any kind of issue. If you have a query
for the PNB credit card customer care department, you can approach the
general enquiry number or the dedicated number for credit card enquiries
and have a representative resolve your issue.

84
Below is a list of PNB Customer Care numbers for general enquiries and
PNB Card Customer Care numbers (for queries related to credit cards).

IN CASE OF LOSS OR FRAUD

In case of loss, theft or fraudulent transaction on your credit card, call the
PNB Credit Cards 24-hour Customer Care numbers 1800 180 2345 or 0120
– 4616200 immediately to get your credit card blocked.
You can also send an email to creditcardpnb@pnb.co.in and get your credit
card blocked.
In case you lose your debit card, you should immediately contact the bank
and get your card hotlisted or blocked to avoid potential misuse. Following
are the ways you can do it:

You can call the PNB 24x7 customer care toll free numbers: 1800 180
2223 and Tolled no (01202303090)

85
Chapter:- 9 REVIEW OF LITERATURE

In this chapter a review of relevant literature, particularly that relating to

performance analysis of banks in India, risk management in banks and allied
areas is attempted. This is followed by research gap, what remains to be
done to bridge the gap between the available literature and what is really
required at present to address the relevant research problem.

2.1.Major Studies on Banking in India and Their Findings: an Overview

Aggarwal, (1979)1, has conducted a study on nationalised banks with special

reference to their social obligations. The main recommendations of the study
were: (i) providing more branch office to the public particularly in the semi-
urban and rural areas and in the lead districts, (ii) providing greater credit
facilities to the public as well as to the priority and neglected sectors, (iii)
helping generation and maintenance of employment opportunities in the
country, (iv) financing the government securities and (v) popularizing the
bill form of credit.

Amandeep, (1983)2, studies various factors which effect the profitability of

commercial banks with the help of multiple regression analysis. She has tried
to determine the share of each factor which determines the profitability of
commercial banks. The trend analysis, ratio analysis, multiple regression
analysis was effectively used to know the profitability of commercial banks

Adhivarahan, (2001)6, in his research article has attempted to study the

provisions of ‘Information Technology Act 2000 and its implications on the
functioning of banks. The study has pointed out that the number of incidents
of e-fraud and on-line breaches is the highest in India. As such,

86
instances of cyber crimes in banking sector have to be treated with utmost
care. For this purpose, it has been suggested that a statutory body similar to
‘Internet Fraud Center’ in the United States has to be formed in India.

Birla Institute of Scientific Research (1981)7, has conducted a study to

evaluate the performance of nationalized banks in comparison with that of
banks in private sector. The emphasis has been on the objectives of
nationalization and their achievements, relative performance of private
sector banks and nationalized banks since 1969 and the effect of
nationalization on rest of the banking sector. The study has revealed that the
growth and development in banking after nationalization has been not just
because of transfer of ownership. Rather, it has been because of various
incentives and punitive measures that were implemented with more vigilance
and care after 1969 by the Government and the RBI to make banks fulfill
their social responsibilities. Similarly in the same spheres even better results
have been achieved by non-nationalized banks. The performance of private
sector banks in the post-nationalization era has been noteworthy, especially
because of the odds that they faced in securing the growth of the business.
The achievement of significantly high growth in deposits, advances, and
branches etc. has clearly shown the high quality of entrepreneurship and
management of these banks.

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  BIBLOGRAPHY

 www.google.co.in
 www.yahoo.com
 www.fraudsinindianbankingsector.com
 www.punjabnationalbank.wikipedia.com

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  Conclusion:

The Indian Banking Industry has undergone tremendous growth since

nationalization of 14 banks in the year 1969. There has an almost eight times
increase in the bank branches from about 8000 during 1969 to mote than
60,000 belonging to 289 commercial banks, of which 66 banks are in private
sector.

However, with the spread of banking and banks, frauds have been on a
constant increase. It could be a natural corollary to increase in the number of
customers who are using banks these days. In the year 2000 alone we have
lost Rs 673 crores in as many as 3,072 number of fraud cases. These are only
reported figures. There were nearly 65,800 bank branches of a total of 295
commercial banks in India as on June 30, 2001 reporting a total of nearly
3,072 bank fraud cases.

The most important feature of Bank frauds is that ordinarily they do not
involve an individual direct victim. They are punishable because they harm
the whole society. It is clear that money involved in Bank belongs to public.

There must be certain preventive and curative measures to control frauds.

The higher authority of bank must follow strict rules against such fraudsters.
The various new technologies must be adapted by the bank to overcome such
frauds.

Thus, a fraud is the game of two, the rule makers and the rule breakers.
Fraud is a phenomenon that cannot be eliminated but can be managed.

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