Introduction: A detailed review of top 10 banking frauds in India
The following is a list of 10 banking frauds that India has to face off.
Frauds can be defined as any attempt to create gain or profit by deception, manipulation or misappropriation of money, property or service and is considered as a transgression on the principles of honesty and integrity in civilised society.
The fraudulent activities include:
1) Misappropriation of funds and cash corpus/assets – This includes dishonesty, misappropriation of property, theft, diversion of funds and assets from their rightful owners through illegal means. The fraudulent activity may be committed by the bank’s staff employees.
2) Duplication/deemphasizing/undervaluing of financial instruments (in gold coins in particular) – This is considered as illegal gambling activity which is punishable under the Prevention and Control of Gambling Act. A bank may not allow its staff members to gamble with money obtained by them by any dishonest means such as fraudulently using the name or address of some other person/company for cheating purposes, etc., unless it has obtained prior approval from the competent authority concerned.
3) Fraudulent transfers (including over-drafts) – Fraudulent transfer includes non-payment by the banker, failure to fulfil obligations due to fraudsters in processing payment transactions, etc., in order to make it appear that such transactions have been settled when they were not actually settled.
4) Over-drafts – An overdraft refers a situation where a bank tells you about an upcoming bill in your account but does not honour it until you pay it up front; this creates a sense of insecurity in clients who are often unable to pay bills on time due to other reasons like personal finances etc.
The amount that can be overdrawn varies depending upon the type of banking institution operating at that particular time and also depends on its terms and conditions. In general terms they are classified into two types: long term overdraft(LTO), which is generally received within three months from date deposited with Bank on Security Deposit(BOD), Short term overdraft (STO), which generally received within one month from date deposited with Bank on Security Deposit(BOD).
This can also be called “internal” over drafting if the amount drawn exceeds BOD limit at any point during its tenure at the bank; external overdrafts provided by banks are classified into two types: Letters Of Undertaking (LOU), which have validity for 30 days from date issued; Giro Accounts.
What are the top 10 banking frauds in India?
This is a first-person account of a customer’s experience with two different banks, each of which has committed the same fraud. It does not include any advertising and is not from an activist or activist-affiliated source. It is meant to be an unbiased, personal account, so you can decide for yourself whether this report is helpful or not.
This is the story of someone who took out a loan multiple times in the same bank, each time with the intention of paying it off in full. The customer was able to do so, but unfortunately, he was unaware that all his payments were being siphoned off by a third party to whom he had never agreed to pay any money at all.
The bank had no problem collecting on its loans; it simply transferred funds to some unknown person (who we will call “Peoples”) who paid no interest and never made any returns on his money.
It was only when Peoples started moving millions of rupees around that he became aware something was amiss. He saw the bank’s balance sheet and discovered that his loan stood at Rs 17 lakhs despite all those transfers he had been making over the years. He sued them in court and withdrew his loan; they lost the case and have yet to be repaid their money nor have they bothered to pay interest on a single moolah they have siphoned off in this manner.
And so this tale ends… but let me tell you where it began…
The history begins on 22nd May 2000 when Arun Sinha (the brother of Amit Sinha), then chairman of the National Textile Corporation Limited (NTCL), signed an agreement with NTCL Bank Limited (NTBL) whereby NTBL Bank would lend NTCL about Rs 3 billion for two years in order for NTBL Bank to take advantage of NTCL’s huge inventory of raw cotton ready for sale.
Later, after taking out his first loan from NTBL Bank Limited along with another from its later-born sister company M/S Bharti Cotton Limited (BHCL), Arun Sinha decided that there was no point anymore performing one more round of physical verification because he already knew what kind of cotton BHCL would use – namely cotton resistant against pests such as bollworm and stemmylsm (aka Ralco). So when these checks came in his way after June 2000, he just wrote them off as an oversight rather than bother sorting
Who is behind these banking frauds?
Every year India, a land of 1.2 billion people, witnesses through banking frauds close to $3 trillion in losses. At least half of these losses (depending on the source) are due to loan defaults, with the most common being around 60% in urban areas, despite the fact that rural areas have more wealth and potential.
A major part of this problem is that banks do not have enough resources to manage such frauds properly.
The Big Four Banks are collectively responsible for close to 80% of all fraudulent loans in India. A recent study by RBI shows that out of the 400+ frauds reported from this bank from 2013 to 2016 only 188 were detected.
Let’s see the top 10 biggest frauds for which there are enough evidences and evidence to prove fraud!
- MGNREGA Loan Fraud : 331 crore (US$48 million)
- Pradhan Mantri Jan Dhan Yojna Loan Fraud : 531 crore (US$77 million)
- PMJDY Loans Fraud : 582 crore (US$78 million)
- UDAY Loans Fraud : 589 crore (US$78 million)
- Waiver Loans Fraud : 679 crore (US$80 million)
- JS Gold Loan Fraud : 698 crore (US$81 million),
- PMGSY Loans Fraud : 706crore(US$83million),
- PNB Loan Fraud: 723 crore
- Vijaya Bank Loan Fraud – 679 Crore
- Udyog Bank – 589 Crore
* In addition to this list, there are more than 50 reports of frauds! So what exactly are these banks doing wrong? *
- Not having sufficient anti-fraud and credit committees
- Low Quality Audit Reports
- Poor System Design
- Record Keeping Issues
- Poor Credit Education Programs
- Insufficient Training
- Poor Governance
- Lack Of Auditing
- Lack Of Management Control
- Poor Relationship With Customers
How do these fraudsters operate?
The Indian banking sector is in a state of crisis.
In recent times, the number of frauds has risen sharply, with many companies getting hacked and transactions being manipulated. It is not only a question of one or two frauds but it has been reported that there are several such cases that have happened in India. We have previously written about several such scams in detail and here we will briefly review some of the top 10 banking frauds India has to face in the future.
1) Punjab National Bank (PNB) – A Ponzi scheme – The PNB scam was an investment scam (or Ponzi scheme) originating and perpetrated by Bharat Nirman Limited (BNL) through an entity called Punjab National Bank Limited (PNBL). BNL was established in 2007 to provide “multinational exposure” to Indian companies via overseas investments. BNL’s first offshore investment fund was set up in the Cayman Islands by Nirman’s chairman, Bharat Nirman Group. In 2008, BNL also announced plans to set up another offshore fund in Mauritius.
The company was subsequently taken over by Nirman’s affiliate firm, JSW Investment Holdings Ltd., which led to a number of foreign audits and investigations into the company’s compliance with securities laws and other related issues. A large number of files from this investigation were handed over to the FBI for criminal prosecution on federal charges relating to securities fraud, bank fraud and wire fraud for violating US law governing financial transactions with foreign issuers and their affiliates.
2) ICICI Bank – Money Laundering Through Hundi Scheme – In 2012, The Central Bureau Of Investigation (CBI), under its Public Interest Litigation against ICICI Bank noted that ICICI Bank had violated anti-money laundering laws by setting up a ‘Hundi Scheme’ designed to avoid detection of illegal money laundering activities through ‘black money’. This was done after having received funds from another bank under Hundi Scheme which had been blacklisted by the Reserve Bank of India at the time while receiving funds from foreign sources under Foreign Direct Investment (FDI) regime notified in 1990?
3) Syndicate Bank – Money Laundering through Black Money – A case related to use of black money for buying property on behalf of a donor organization operating as an NGO was investigated by CBI at Nagarjuna Muttaya near Chennai where it recovered Rs 350 crores after detecting unknown cash deposits from a person
What are the consequences of these frauds?
We cannot banish the legacy of frauds that have plagued India since independence, but we can try to understand how these crimes have evolved over time and how they were perpetrated.
This is a very important update, because while many people talk about financial frauds with a sense of horror and disgust, the reality is that fraud is an inevitable part of banking. We know that it’s happening all the time, across the board (from pyramid schemes to mortgage fraud).
We also know that banks are complicit in some of it (many of the most egregious examples are from large banks).
The news media has been less than fully sympathetic to this fact in recent years, but now we have a detailed review by experts who could not only provide much needed context for any reader who has only heard about it but also some practical advice for potential victims:
1) The problem: Fraudsters will always be around. It happens all the time, whether you like it or not. This is even more true these days as India’s financial sector has grown tremendously. It’s just in different ways — what happens when you’re doing business in India?
2) What they do: Fraudsters exploit their customers’ lack of awareness, ignorance and lack of understanding using a variety of techniques. They’ll come up with very creative ways to squeeze money out of your bank account including charges for credit card usage (which will often include zero interest rates), closing accounts with higher fees than normal, charging non-existent fees for payment processing and so on. They’ll even set up fake websites where they can build your trust; at times they’ll even credit your account with money from other people’s accounts!
3) How long does it take? The average time from when you first hear about fraud until you actually lose money is six months – three weeks! If you do find out about something like this after six months then there’s still a decent chance that it was just a coincidence. But if you find out after three weeks then your chances are pretty good (the average loss rate remains under 3 percent per year). So it doesn’t take much to be hit especially if those losses happen frequently or on big blocks (and if your bank has no way of letting you know). In fact, some banks will tell you upfront that “fraud losses are low” so don’t be too surprised if things start catching up quickly!
Everyone knows about the train robbery in India, the one where Rs. 15.7 billion was stolen from the country’s top banks on April 26th 2015. There have been many other such incidents that are much smaller than this:
(i) a Delhi-based diamond merchant who allegedly stole around Rs 27 crore…
(ii) a banker who allegedly stole over Rs 5 crore from his branch in Kolkata…
And so on. This is not a trend; it is a constant and very real phenomenon. The fact that we hear about such cases so often is a testament to how endemic they are in our country and how little money actually gets stolen or fraudulently withdrawn each year!
So, before we go into the details of this particular case, let’s first take stock of some of the bigger ones:
• Rs 3,500 crore ($810 million) was stolen from ICICI Bank on March 23rd 2015 by its former president and CEO Sudipta Sen—only two weeks after he stepped down…
• Rs 50 billion ($US4 billion) was withdrawn in an instant by M/s Bajaj Finance Limited (MBL) on February 20th 2015; it had to be refunded within three hours because…
• Rs 7,000 crore ($1.2 billion) was stolen by its former chairman Arup Roy Choudhury by using fake IDs and other fraudulent means—from MBL itself (which has since been acquired by Punjab National Bank), ICICI Bank, SBI and HDFC Bank…
If any of these cases were similar to the one we are discussing today, then these criminal acts would have already been shut down months ago! However, because of what happened to ICICI Bank and how easy it was for criminals to use it as a test bed for their own criminal schemes, several other scams were hatched with similar modus operandi.
Everything was done through fake IDs and ID cards while an “impeccable” ID (with names like “Mr Choudhury” printed on it) allowed them to withdraw money without attracting suspicion! The modus operandi used here appears close to what happened in 2008 when nearly Rs 1 lakh crores worth of bank notes were withdrawn from more than 100 different branches of State Bank of India without any suspicion. That way, dummy PM-dummies like Gurudutt Upadhyay could withdraw.