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Emerging Economic Frauds in the Banking Sector

Introduction

Money is a major factor in people’s lives in the modern world. With the transition from cash to banknotes to credit-rated playing cards, there is a clear rise in financial fraud. It has become necessary for third parties to help with transaction processing, buyer-seller mediation, storage of products and cash, money transportation, and even revenue accumulation to deal with these intricate currency structures. Banks have a right to fulfil this intermediate role, and bankers are mediators. As the variety of these intermediaries grew over time, more government regulation was required to monitor, regulate, and change their operations.

To date, there is no proper definition of attempted financial institution fraud by anyone. For gifts, the section under the IPC protects against fraud, concealment, forgery, embezzlement, breach of belief, criminal conspiracy, etc. It is used in all bank fraud cases. There is no proper section that deals with financial institution fraud and finds standards for committing and punishing such fraud. While these financial frauds cause substantial damage and loss to financial institutions and banks, they are not called scammers in India. Things are exploding right now and the types of these scams are increasing tremendously with our growing knowledge of the times. In 2001, after massive fraud such as Harshad Mehta fraud, vanishing agency rip-off, plantation company fraud, NGO fraud, mutual budget fraud, and Ketan Parekh rip-off.

As the economy slows, frauds increase

Financial institutions have seen a startling seven-fold surge in fraud instances in only five years.

90% of total fraud sums and 55% of total fraud coverage are attributable to Public Sector Bank (PSB) fraud. This year, there was more PSB fraud. A recent Rajya Sabha probe, according to the finance minister, revealed a very high amount of PSB fraud.

The State Bank of India registered the biggest loss due to the order in which bank losses occurred. Following it are the Baroda Bank with Rs 8,273 crore and the Punjab National Bank with Rs 10,822 crore. According to documents published in 2017 by the National Criminal Records Bureau (NCRB), the number of charges for financial offenses (as defined by the Indian Penal Code, or IPC) has increased to 111. Here, an economic crime includes offenses like ATM-related fraud, counterfeiting, and banknote forgery. White-collar crime has been dubbed the epicentre of Jaipur, and Chennai has been claimed by several leases.

Reporting also leads to an expansion of the fraud’s scope. Cases were thoroughly documented, and her RBI put up a Central Fraud Registry to aid with case monitoring. Additionally, the RBI commanded that any defective goods with costs exceeding Rs. 500 crores be checked for potential fraud. These offenses don’t just affect big banks; they also affect little institutions.

In general, slowing down might make these scams worse. According to one theory, it might be attractive to further reduce fraud as a corporation expands and fights to get out of a more debt-ridden scenario. PNB recently reported a bank quarter scam involving DHFL accounts for Rs. 3,688.58 billion. These frauds come in an increasing variety. The RBI detected fraud in financial institutions in 2019 of Rs 71,500, although state-owned banks were responsible for 90% of these losses.

There are no codified laws prohibiting such fraud in overseas prisons, therefore instead of filing cases with police/CBI courts, there is no legal structure in place for such situations. In FY’22, banking frauds totaling more than 100 crores significantly decreased. In private and public regional banks, there were 118 fraud cases in FY22 compared to 265 in 2020–21. Banks reported fraud cases totaling 41,000 crores in 2021–22, down from 1.05 lakh crore the year before. This shows a dramatic decrease in frauds involving amounts exceeding 100 crores in the banking sector. Professional figures show that the number of fraud cases in private and public regional banks decreased from 265 in 2020–21 to 118 in FY22.

According to statistics, the overall number of fraud cases involving above $100 crores for public region banks (PSBs) reduced to 80 from 167 in FY’21, while for private region creditors, such cases decreased to 38 in FY’22 from 98 in FY’21. For PSBs, the overall amount has decreased from 65,900 crores in FY 21 to 28,000 crores. The discount for non-public regional banks is from 39,900 crores to 13,000 crores in FY’22.

The RBI has been taking numerous actions to detect frauds, including enhancing the effectiveness of the Early Warning System (EWS) framework, strengthening the governance and response system for fraud, enhancing statistics evaluation for tracking transactions, and establishing a dedicated Market Intelligence (MI) Unit for frauds. Public sector banks (PSBs) saw a decrease in fraud cases from 167 in FY2021 to 80 in FY2021, while private sector lenders saw a decrease from 98 cases in FY2021 to 38 instances in FY2022.

From £65.9 trillion in FY21 to £28 trillion in PSB, it has decreased cumulatively. The cut for private banks for FY2022 is between Rs. 39,900 and Rs. 13,000.

RBI Steps to check fraud cases

To check for fraud, the RBI will improve the effectiveness of its Early Warning System (EWS), strengthen its fraud governance and response system, expand data analytics to monitor transactions, and develop a dedicated Market Intelligence (MI)

Use of Artificial Intelligence

The rapid development of technology has opened up a new criminal arena. Cybercrime is currently a hot topic in India. Not surprisingly, India ranked third in the world for the number of reported cybercrimes in 2020, and the majority of these cases (up to 45% of cybercrimes) were online financial fraud. There are many online scams these days, including:

Phishing – Scammers propagate links via messages, attachments, advertisements, and other media to redirect their clicks to fake pages identical to their original website such as banks, e-commerce platforms, social media, etc.

Vishing/Telegraphic Fraud – Scammers posing as representatives of banks, corporations, insurance agencies, governments, etc. Contacting people via phone or other media to obtain information such as passwords, OTPs, and PINs. Get unauthorized access to your account by tricking or persuading.

Malicious Apps – Scammers encourage you to download unknown apps via installed messages, ads, giveaways, etc., thereby gaining access to the target device and stealing OTPs and already stored information such as credentials.

ATM skimming – ATMs are installed with a device that can copy data from the target ATM card and a PIN that can be used to withdraw money.

SIM card cloning – Scammers can clone their SIM (Subscriber Identity Module) card of a registered mobile number linked to a bank account to steal and scam a target’s identity.

QR Code Scam – Scammers can trick a target into scanning her malicious QR (quick response) code, which allows them to surreptitiously access the target’s device and retrieve information.

Surprisingly, following the introduction of Covid-19, the number of instances of financial fraud committed online has risen. These con artists use deception to get victims to test their medication as one method of catching tartar. Financial institutions are investing more than $217 billion in AI and machine learning (ML) solutions to address this issue. According to estimates, the deployment of such technologies cut down on investigation time by 70% and increased fraud detection accuracy by 90%.

Here are some ways AI and ML can be integrated into banking systems to keep consumers safe:

Numerous IT firms, including Teradata and Datavisor, are developing customized AI fraud detection tools for banks. AI software analyses consumer transaction patterns, create profiles using such information and may spot anomalous behavior. Uncanny Vision offers artificial intelligence (AI) monitoring at businesses and ATMs to track human behavior and notify you in case of questionable conduct. To confirm identity, biometric security scans a person’s distinctive biometric print, such as a finger, thumb, or retina. Using multi-factor authentication, Know Your Customer (KYC) integrates all data, including biometrics, to thwart illegal access. Security software alerts users to illicit app downloads that haven’t been verified by the user and could harm the device. Every minute, email platforms like Gmail find millions of spam messages that, if not deleted, might target users. Software that recognizes spam and fraud calls, like the True Caller app, alerts you in advance. Similar apps are also used by some insurance firms to identify probable fraudulent claims.

In addition to being secure and quick, using AI to fight fraud also improves user experience, offers individualized solutions, and lowers expenses and the possibility of human error. AI is a self-learning program that instantly updates and modifies itself to offer the most practical and successful answers.

The Bottom Line

While the progressive liberalization process has given the Indian banking industry a fresh coat of paint, it has also presented some significant obstacles. Fraud and a spike in her NPA are two of them. The banks involved have not suffered losses as a result of the fraudulent activity afflicting the financial sector, but their credibility has been further damaged.

Cases of bank fraud have increased recently in India. In India, bank fraud is frequently regarded as one of the costs of conducting business, but since liberalization, its prevalence, complexity, and associated expenses have all skyrocketed. Regulatory issues are affecting bank profitability and, consequently, the Indian economy.

References

  1. Akansha Barua, Emerging Economic Frauds in Banking Sector, LawBhoomi(22 July 2022) Available at: https://lawbhoomi.com/emerging-economic-frauds-in-banking-sector/
  2. The Editor, Banking frauds of over ₹100 crore see significant decline in FY’22, The Hindu(4 July, 2022) Available at: https://www.thehindu.com/business/Economy/banking-frauds-of-over-100-crore-see-significant-decline-in-fy22/article65595269.ece
  3. Pushpita Dey, ‘Banking Frauds Using Communication Devices Rose By More Than 65% Post Covid’ (Outlook India, 18 December 2021) https://www.outlookindia.com/website/story/business-news-bankingfrauds-using-communication-devices-rose-by-more-than-65-post-covid/405699 (22 Septl 2022)
  4. Internet Crime Complaint Center, Internet Crime Report 2020 (2021) 17 https://www.ic3.gov/Media/PDF/AnnualReport/2020_IC3Report.pdf
  5. PYMNTS, ‘How AI And Machine Learning Can Address Banks’ Fraud-Fighting Weaknesses’ PYMNTS, 09 July 2021) https://www.pymnts.com/fraud-prevention/2021/ai-ml-banks-fraud-fighting/  (22 September 2022)
  6. Shruti Sinha,BANKING FRAUDS: REFORMS BY GOVERNMENT AND ARTIFICIAL INTELLIGENCE,VOL. 1 ISSUE 3,Journal of Legal Research and Juridical Sciences,ISSN (O): 2583-0066 Available at: https://jlrjs.com/wp-content/uploads/2022/04/8.-Shruti-Sinha-1.pdf

This article has been written by Jay Kumar Gupta. He is currently a second-year BBA LL.B.(Hons.) student at the School of Law, Narsee Monjee Institute of Management Studies, Bangalore.

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