3-track plan could combat rising trend of bank fraud

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe

Banking frauds are on the rise, both in terms of number of frauds and the value involved. A disquieting increase in frauds has been observed in the retail segment – housing and mortgage loans, credit cards, internet banking, etc. – while frauds in the traditional areas of banking, such as cash credit, export finance, guarantees and letters of credit, have not abated.

Thacker,_Shardul-CMYKIn view of earlier concerns expressed by the Central Vigilance Commission and Central Bureau of Investigation, banks were advised in January 2004 to constitute a special committee of their board of directors to monitor and follow up frauds involving amounts of ₹10 million (US$200,000) and above. While the banks have adopted certain policies and processes in this regard, they are not well structured and systematic to ensure proper focus on typical fraudulent activities.

The reported frauds show recurrence or a rising trend in the following areas: loans and advances against hypothecation of stocks; housing loans; submission of forged documents including letters of credit; inflating the overall cost of a property to obtain a higher loan amount; overvaluation of mortgaged properties at the time of loan approval; grant of loans against forged fixed deposit rates; over-invoicing of export bills resulting in concessional bank finance and exemptions from various duties; etc.

In recent cases of bank frauds, it was eventually discovered that the borrower had offered the same security to different banks. The banks need to introduce closer monitoring and tighter controls in the above areas.

Recommended framework

A three-track operating framework should be structured for tracking and dealing with banking frauds.

Detection and reporting: The banks should have a set of prescribed procedures and criteria to analyse and assess events or transactions that have serious irregularities to establish occurrence of fraud. This process should demarcate or distinguish events attributable to negligence in the conduct of staff duties from “collusion” between the bank staff and the borrowers with an intention to cheat the bank.

The banks may also examine incidents of “intent to defraud”, even if loss does not take place. Any action taken in collusion to derive undue/unjust benefit or advantage should be termed as fraud.

Corrective action: An important corrective step in a fraud is recovery of the funds siphoned off through the fraud. Tracking the flow of the funds often does not get due priority during the course of investigation and enquiry into fraudulent events or transactions, or the exercise undertaken in that direction does not lead to material results.

A structured scrutiny of such events or transactions would lead to a quick conclusion about whether a fraud has occurred and the bank’s funds have been siphoned off. Therefore, this exercise is the first critical step towards corrective action in the sense that it would lead to expeditious filing of police complaints, blocking/freezing of accounts and salvaging funds from these in due course.

Moreover, once a set of transactions is identified as fraudulent, it becomes easier to seize and take possession of related documents, and to suspend identified/suspected employees or order them to take leave, thereby preventing them from obstructing investigations or destroying or manipulating evidence.

Preventive and punitive action: In the current system-driven environment in banks, transactions that breach overriding controls get reflected in the “end of day exception report”. All exception reports should be perused by the designated staff. Banks should ensure that they refine this process and also specify to which level of authority the exception reports must be submitted and the manner in which the authority will deal with the reports. The reports submitted to higher authorities to obtain authorization for breaches should be periodically subjected to review and oversight by the bank’s board of directors.


The rising trend of fraud in the banking sector is due to structural and procedural factors in the banking sector. Adopting aggressive business strategies and processes for quick growth and expansion without ensuring that adequate and appropriate internal controls are in place could give operating staff incentives to lower the standards of control while attempting to meet business targets.

To control fraud, banks should ensure that all staff in key and sensitive posts – in dealing rooms, treasury, relationship managers for high-value customers, heads of specialized branches, etc. – satisfy the “fit and proper” criteria. Policies for staff rotation and mandatory leave should immediately be put in place. Both internal and concurrent auditors must be specifically required to examine the implementation of these policies and point out instances of breach irrespective of any apparent justifications for non-compliance.

Shardul Thacker is a partner at Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.


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Email: shardul.thacker@mullaandmulla.com