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Introduction:

In recent years, the banking sector has faced a surge in fraudulent activities, underscoring the pressing need for robust measures to detect and prevent such incidents. This article delves into significant recent bank fraud cases, offering invaluable insights to empower professionals in safeguarding against evolving threats. By drawing lessons from real-life instances, this study aims to illuminate the changing landscape of bank fraud, equipping professionals to effectively navigate these challenges.

Professionals are kindly encouraged to leverage these case studies as valuable learning resources to gain insights into potential risks and tailor their audit plans accordingly. By applying the lessons gleaned, auditors can fortify internal controls and audit processes, proactively mitigating potential fraudulent activities.

Additionally, this article serves as a repository of knowledge, shedding light on the types and methods of fraud employed by fraudsters. It’s pertinent to note that the methods adopted by officials in one branch may be replicated in other branches. Hence, these case studies are presented to aid professionals in effectively planning their audits, enabling them to identify and address potential fraudulent activities across multiple branches.

A) Notable Fraud Cases:

Cases where misappropriation of funds routed through Fixed Deposit Account , Loan Against FD Account  ,Gold loan Account:

 1.1 ICICI bank ,Pratapgarh ,Rajasthan:

Case Overview:

Preliminary investigations have revealed that the branch manager and his accomplices did this misappropriation due to the pressure of meeting business performance targets. These officials had been creating overdrafts against FDs and using the money from the overdraft to open new current accounts, saving accounts and FD accounts. This technique is called ‘Entry and Reverse Entry’ in banking parlance. After a few days the newly created current accounts, saving accounts and FD accounts would be closed and the money would be routed back to the source bank accounts. This operation has been running for years. (Source “The Economic Times”)

Bank Fraud Lessons Influencing Today Audits -I

How fraud discovered :

The scam which has been running for many years came to light only because an employee noticed that about Rs 70 lakh was missing from her friend’s bank account. The employee’s friend was privy to the ongoing scam, and he was informed that Rs 70 lakh would be withdrawn from his account and after 3 to 4 days it would be returned to his account. “However, the money was never reversed back to the individual’s account, and this raised suspicion of the bank employee,” says SP Kumar (Investigating Officer).

1.2 Another case of ICICI bank:

A Gurgaon woman has accused an ICICI Bank manager of embezzling Rs. 16 crore from her account. This was reported by BBC. Shveta Sharma alleged that she transferred funds from her US account to ICICI Bank for fixed deposits, but the bank official created fake accounts, forged signatures, and obtained debit cards and cheque books in her name to withdraw money. The bank spokesperson acknowledged the fraud, emphasizing ICICI’s reputation and commitment to punishment for those involved.(Source “MintWebsite”)

1.3 State Bank of India Mumbai Branch:

Case Overview:

The Mumbai branch of State Bank of India (SBI) witnessed a robbery by one of its employees when 4 kgs of gold worth ₹3 crore went missing. SBI’s Personal Banking branch in Mulund West had given gold loans worth ₹1.94 crore, which is around 65 percent of the value of the mortgaged gold ornaments, police informed. The prime accused, a 33-year-old service manager, Manoj Maruti Mhaske, siphoned off about 4 kg of gold jewellery worth around ₹3 crore from the bank’s locker. The accused, Mhaske, resides in Raheja Township of Malad East and hails from Marathwada’s Nanded.(Source “MintWebsite”)

How fraud discovered :

Amit Kumar, employed as an administrator with the Mulund Branch of SBI’s Personal Banking branch at Runwal Greens in Nahur, lodged a complaint, following which a probe into the incident was launched by police.

How fraudster launched the scheme:

The police officer involved in the probe informed that the theft surfaced on February 27 when Mhaske was on leave. The officer was quoted as saying, “On 27th of February, as Mhaske was on leave, Kumar looked after the locker and even filed a note in the Core Banking System (CBS) about it. In the evening, around 5 pm, when Kumar went to deposit cash and jewellery in the locker, he found that several gold jewellery packets were missing.” Thus, when Amit Kumar checked the documents, he discovered that 63 gold loans had been given by the branch, but he found only four packets of gold remaining in the locker.

When Kumar called Mhaske to inquire about the 59 missing packets of gold, he was informed that Mhaske had taken them for his personal use. Mhaske said he had mortgaged and even sold the gold but assured him he would return them in the next seven days.As per the complaint, a total of 4 kgs of gold, valued at a market rate of around ₹3 crore, was missing. The prime suspect was arrested by the Bhandup police on Friday, March 1, under section 409 (criminal breach of trust by a public servant or banker, etc.) of the Indian Penal Code. (Source “MintWebsite”)

2. Agent-Driven Fund Theft Through Mobile Number Linking:

2.1: Bank of Baroda Scandal :

Case Overview:

The investigation revealed that bank agents had illicitly linked unauthorized mobile numbers to customer accounts that lacked a registered mobile number, to on-board them onto the bank’s new mobile banking app, “Bob World”. These unauthorized numbers included those of strangers or bank agents in remote areas. These fraudulent practices were apparently due to pressure from the bank to boost registrations on its “Bob World” app, as reported by Al Jazeera.

After the scam came to light, Bank of Baroda conducted a nationwide audit, verifying documents related to approximately 422,000 accounts suspected of being wrongly linked. However, bank employees claimed that this audit was an attempt to cover up the scandal and that they were instructed by regional offices to arrange and forge documents, Al Jazzera said in its report.

Report also revealed that unauthorized mobile numbers were linked to some of these accounts and later removed from the back-end. In some cases, customers provided one mobile number in the account-opening form, but a different number was linked to their account and registered on “Bob World”. (source”Outlook business plus money”)

Oversight for Auditors: As an Internal/Concurrent/Statutory Auditor, generally we do not have much time to verify all mobile number link forms but we should include this in our audit plan after assessment of risk involved, significance and bank reporting requirement. It is very easy to withdraw funds from customer’s accounts by changing customers mobile number because many mobile apps are require authorization from number linked to their account once this number is changed it is very easy to transfer fund from customer’s account and this can be done where there is very weak internal control at branch or documentation issues reported by branch officials. Therefore whether mobile number linked at the time of account opening or it is linked after account opened should be verified. For old accounts mobile number link form, signature of customer, authorization should be verified carefully. However this can also be done for sample saving accounts to analyze the risk associated with it and internal control.

3.Forgery of Signature:

3.1 Canara Bank:

Case Overview:

The complainant, 63-year-old Dalit woman, Gajjala Jayamma, resident of Gachibowli, said that Padmakar Reddy and Malla Reddy have lured her son G. Shailendar to join their company Eversure Aqua solotions Private Limited, Padmavathi Plaza Madhapur as a director in 2011-12. Later, on the pretext of developing the business, the duo made her son deposit the property standing on her name for obtaining a loan from the bank. However, the duo did not use the money borrowed from the bank to develop the business. Instead, they transferred the funds to the accounts of their wives and relatives.

The senior citizen came to know that Padmakar Reddy and Malla Reddy in collusion with some bank officials have forged her signature to borrow additional loan amounts. The accused including the bank officials have granted additional loan amounts without the knowledge and consent of my mother who is the guarantor and the complainant” Dr Gajjala Amar the complainant said. Padmakar Reddy and Malla Reddy did not repay the loan due to which the loan account became a non-performing account. As a result, the bank officials, ignoring the plea of Jayamma that her signature was forged, auctioned the property for just Rs 79.91 lakh, though the property is worth Rs 4 crore.

Even as Jayamma is fighting a legal battle against the bank, the State Forensic Science Laboratory has submitted a report in the court confirming that her signature has been forged on the loan documents.(Source “Deccan Chronid”)

  • Here bank official ignored the plea and auctioned the property further bank officials also ignored that bank loan is not utilized for the purpose it obtained.
  • During last few years many subsidy schemes launched by government to encourage the startups and MSME sector which also includes loan schemes and therefore business loans increasing and it becoming essential to analyze that whether loan is utilized for the purpose obtained. Because there may be cases where purpose of the loan shown is just to divert the bank and to obtain subsidy.
  • We all know how to verify the utilization of loan but what difficult to verify for us is forgery which was happened in above case.
  • Obtaining details of complaints lodged by customer should be considered in this regard

3.2 Another case of forgery:

ED initiated investigation on the basis of FIR registered by Maisuma Police Station, Srinagar (J&K) for causing loss to the tune of Rs. 5.59 Crore to Canara Bank, Budshah Chawk Branch, Srinagar (J&K).  Charge sheet by J&K Police in this case is yet to filed before the Court of Law.

ED investigation revealed that during 2014 the abovenamed borrowers alongwith 26 other borrowers in the connivance of M N Doley, the then Branch Manager, Canara Bank availed cash credit loans totaling to the tune of Rs.30 Crore in the names of non-existent proprietorship entities on the basis of forged and fake documents and later the borrowers siphoned off the same after routing the loan proceeds through various bank accounts of other entities/persons ultimately utilizing the funds for personal benefits contrary to its project purpose of business.  All the loans granted by M N Dole became NPA since 2016 and causes huge loss (loan Amount and interest thereof) to the public money held in Canara Bank, Budhsah Chawk, Srinagar (J&K). (source “Kashmir News Service”)

  • One common factor in above two forgery cases is both the loans was under NPA category therefore loans which turn NPA very early should be verified carefully.

4. False Kisan Credit Card Accounts:

Case Overview:

The Economic Offences Wing (EOW) of the Crime Branch arrested a former branch manager and an ex-agricultural finance officer of the Central Bank of India for their alleged involvement in a fraud amounting to Rs 3.3 crore.

The accused Dambarudhar Nayak, former branch manager and ex-agricultural finance officer Devidutta Panigrahi were posted in the bank’s Bhadreswar branch in Cuttack district. As per a complaint lodged by the bank’s regional head Anadi Biswas with EOW, Nayak and Panigrahi had fraudulently sanctioned funds into 68 Central Kisan Credit Cards (CKCC) and 24 term loan accounts.

During their tenure, they illegally diverted government subsidies. Further investigation revealed the accused entered into a criminal conspiracy and illegally sanctioned/diverted over Rs 85.49 lakh in 68 CKCC accounts and more than Rs 1.49 crore in 24 term loan accounts, along with Rs 15.60 lakh subsidy amount of eight borrowers of Prime Minister’s Employment Generation Programme (PMEGP) and Rs 83.24 lakh towards 114 irregular transactions in bank’s profit and loss accounts.

Nayak and Panigrahi sanctioned the loans in the name of different persons without their knowledge and consent. They even fraudulently raised the limit of the loans without their knowledge and used forged documents to misappropriate the money.(Source “The New Indian Express”)

– Number of KCC loan accounts is high in rural branch also during the crop season number of loan files sanctioned increase significantly so verifying each loan file is not always possible for us.

– Sanctioning large number KCC accounts with small limits may create this fraud material from the bank point of view.

– Therefore while selecting KCC accounts for verification accounts which do not have large limit should also be considered.

– Internal control and attitude of bank officials are play important role in this.

5. Manipulation of Accounts:

Case Overview:

Coimbatore: The city crime branch police on Friday arrested the deputy branch manager and two cashiers of IndusInd Bank’s Coimbatore branch and three customers for misappropriation of 7.33 crore. Police also have formed a special team to arrest 10 more accused in the case.According to an investigation officer, the six were nabbed based on a complaint that Z Mohamed Ziauddin, 46, of Tristar Towers on Avinashi Road, lodged with city police commissioner V Balakrishnan on Friday.

Marketing head of IndusInd Bank on Avinashi Road, Ziauddin in his compliant said they had conducted an internal auditing based on a customer’s complaint and found that the deputy branch manager, Jagan Palani, 38, of Marutham Hillside apartment on Thondamuthur Road at Vadavalli, had connived with cashiers Nivedha, 23, of Coimbatore, and Sheik Ashraf, of Pollachi, and deposited 7.33 crore in the bank accounts of 12 IndusInd Bank customers and an ICICI Bank customer from June 2023 to January 5, 2024, without receiving money from the 13 and making entry into the two banks’ systems.

As per the complaint, they also carried out various transactions. Nivedha had paid 25 lakh to Kulothungam, an ICICI Bank customer, without making an entry in the bank system

The misappropriation of funds was done through various irregularities in financial transactions, unauthorized withdrawals and manipulation of bank records. “Three IndusInd Bank staff members and 13 customers were involved in the misappropriation of the bank fund. The discrepancies in transactions were reportedly detected during audit.

5.1 Another case of manipulation of accounts:

Case Overview:

The CBI had registered a case on July 31, 2009 against K. Bhaskar Rao and his wife K. Sailaja. The Bureau alleged that while working as a manager at the Sowcarpet branch of Union Bank of India during 2007-09 and also looking after the advances department of the branch, Bhaskar Rao had defrauded the bank and siphoned off funds.

For his personal benefits, he manipulated the entries in the Core Banking System (CBS) of the bank by using his own User ID and those of other officers. He had also made unauthorized transactions, such as reactivating the dormant SB accounts by creating fictitious loans against deposits and invested the money with various investment companies, on shares in his name and that of his wife, the police said.(source The Hindu)

  • Manipulating the accounts and records is common practice followed by fraudster, withdrawing amount from customers account and passing dummy reverse entry of the same in dormant account, converting the dormant accounts in regular accounts for this purpose, converting inoperative accounts to operative accounts without authorization is some of the examples of the same.
  • We can check compliance with banking norms for this purpose.

→ Cyber Fraud: A Growing Challenge for Professionals and the Banking Sector

The rise of Cyber-crimes has led to new risks for auditors, making it more critical to address these risks in statutory audits. Cybercriminals are becoming more sophisticated, targeting vulnerabilities in audit systems, and compromising the confidentiality, integrity, and availability of sensitive information.

Importance should be given to complaints received by bank from its customers and need to analyze carefully because most of the cases of frauds are detected due to these complaints of the customer. Bank policies and methods of addressing these complaints should also be considered and how each branch maintains records of its complaints received, addressed and pending during the audit period.

Statistics: A total of 1.13 million cases of financial cyber fraud were reported in 2023, according to a Lok Sabha reply on February 6. These 1.13 million cases had an amount involved of Rs 7,488.6 crore. The maximum amount was Rs 990.7 crore in Maharashtra. Telangana followed with Rs 759.1 crore. Next were Uttar Pradesh (Rs 721.1 crore), Karnataka (Rs 662.1 crore) and Tamil Nadu (Rs 661.2 crore). Lakshadweep had the least amount involved at Rs 0.2 crore (chart 2).( Source Business Standard ).

Conclusion: As the banking sector grapples with rising fraud incidents, it’s imperative for professionals to stay vigilant and proactive. By learning from past cases, fortifying internal controls, and addressing vulnerabilities, institutions can mitigate risks and protect themselves from financial losses. Additionally, with the growing threat of cyber fraud, prioritizing cybersecurity measures and addressing customer complaints diligently are essential steps in safeguarding the integrity of the banking system.

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Disclaimer: The case studies produced here are only for the purpose of education and knowledge and to help professional’s to make their audit plan. our aim is not to disrespect any entity here we have taken most of the data from news agency web sites so we can provide latest and real time data to our professionals. We hold utmost respect for all entities mentioned in the case studies, and our objective solely pertains to sharing educational, real-time data to aid professionals in their audit planning.

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