Home Financial Fraud Financial frauds in India : all you need to know

Financial frauds in India : all you need to know

March 10, 2022

11926

This article is authored by Nidhi Bajaj, of Guru Nanak Dev University, Punjab. The article deals with the important aspects relating to financial frauds in India including its meaning, types, punishment, and the ‘Top 10 biggest financial frauds in India’.

It has been published by Rachit Garg.

Table of Contents

Introduction

Financial fraud is a white-collar crime that affects the general public and has a negative impact on the whole economy. Often, these frauds involve misuse or manipulation of public funds by the fraudsters to make huge profits for themselves. With the advancement in space of technology, cases of financial fraud are on the rise. We have witnessed big financial frauds perpetrated by fraudsters like Vijay Mallya, Harshad Mehta, and Nirav Modi. The cases of financial fraud committed in cyberspace are no less daunting. Fraudsters use the anonymity offered by the internet to commit online scams such as KYC frauds, identity fraud etc. Of late, technology has become the weapon of choice for fraudsters. This article deals with the crucial aspects relating to financial fraud including its meaning, types, punishment, and the 10 biggest financial frauds in India. Towards the end of the article, you will also find some tips to protect yourself from these types of fraud.

What is fraud

Fraud is the wrongful or criminal deception intended to result in financial or personal gain. It can also be defined as deceit, trickery, intentional perversion of truth aimed at inducing another person to part with something of value or to surrender a legal right.

What is financial fraud

It is difficult to give one exhaustive definition of financial fraud. One may define financial fraud as an illegal act intended to deprive you of your money for personal gains. Financial fraud means:

The intentional act of deception involving financial transactions for personal gains.
Taking money/other assets from someone through deception.
Illegal and unethical management of financial resources.
Manipulation, falsification alteration of accounting records.
Misrepresentation or intentional omission of amounts, misapplication of accounting principles, and marking misleading or false disclosures.

Typically, there exists an element of deceit, subterfuge, or abuse of a position of trust in cases of financial fraud.

Common types of financial frauds

Ponzi schemes

A Ponzi scheme is an investment fraud that generates returns for earlier investors with money taken from later investors. In this type of fraud, the clients are promised huge profits with little to no risk. The focus of the fraudster companies is on attracting new clients whose investments are then used to pay off earlier investors. Once the flow of money by way of investments from new clients stops, the whole scheme falls apart.

For instance, in 1920, Charles Ponzi made approximately $15 million in about 8 months by convincing lenders that he could make them rich with investments in international postal reply coupons.

Pyramid schemes

Also known as a chain referral scheme, a pyramid scheme is a fraudulent business model wherein members are recruited with their payments tied to their ability to enrol new members. As the membership expands, there comes a point where further recruitment becomes impossible which consequently makes the whole thing unsustainable. A pyramid scheme might appear as legitimate multi-level marketing (MLM) practice. But the scheme involves no legitimate sales as the earlier investors are paid from the funds received from new investors. There is no product sold and there are no true profits.

The SpeakAsia Scam is one example of the fraud committed through a pyramid scheme. A Singapore based company SpeakAsia Online Ltd. asked investors to pay Rs. 11,000 and fill up online surveys to earn Rs. 52,000 a year. The company promised additional rewards for those who enrolled other people into the scheme. The fraudsters made away with Rs. 2,276 crores from 24 lakh investors.

Identity theft and identity fraud

In simple terms, identity theft is the use of someone’s identifying information without their permission. Identity theft occurs when someone steals your personal financial information such as your bank account number by way of deception and uses that information for economic gain. This can happen in a number of ways, say in a public place via shoulder-surfing wherein a fraudster catches you typing your CVV code into your phone, etc., or when you opt to reply to a spam email that promises you a reward but first asks for identifying information and personal details. Identity theft can be committed simply by guessing your passwords or accessing your details from your social media or it might involve complex methods such as installing malware, etc. Your personal data such as bank account number or credit card number is then used to make fraudulent withdrawals from your account. Fraudsters might use your information to open a credit account in your name leaving you liable for the charges. Identity theft leads to identity fraud when the fraudster impersonates you using your stolen information in order to access accounts and obtain financial services.

Examples of identity theft include theft of ATM card, stealing your bank information and example of identity fraud includes making fake ID, passport, false credit card etc. and using it for personal unlawful gains.

Embezzlement

Embezzlement refers to the act of stealing, misappropriation, or retention of funds by a person who has been entrusted with those funds by an employer or an organisation. Typically, the person who embezzles money is the one who has legal access to another person’s money or funds such as an employee. This white-collar crime is seen as a form of property theft. Examples of embezzlement can be overbilling of customers, forging of cheques, refusal of the conductor to issue tickets to customers after collecting the fare etc.

Tax fraud

Tax fraud refers to the falsification of tax returns in order to evade the payment of tax to the government. For example, claiming false deductions by classifying personal expenditure as business expenditure or non-disclosure of income. When you pay less tax than what is due by hiding or understating or false reporting of your income, you are committing tax fraud.

Credit card fraud

Credit card fraud is the unauthorised use of someone’s credit card. Credit card numbers can be obtained through credit card theft or unsecured internet connections or by hacking into your system etc. It is advised that in case you lose your credit card or debit card, you should get your card cancelled immediately. Examples of credit card fraud include counterfeit and skimming frauds, card not received frauds, lost and stolen credit card fraud and incorrect card application fraud etc.

Insurance fraud

Insurance fraud occurs when a claimant wrongfully tries to obtain a claim from the insurance company that he is not entitled to or when the insurance company deliberately denies the claim legally due to the claimant. Insurance fraud can also occur in other forms such as selling policies from fake insurance companies, falsifying the medical history, impersonating other people for claims, cause of death being changed for accidental claims, etc.

KYC fraud

In this type of fraud, fraudsters usually send you an unsolicited SMS saying that your card or account will be blocked. The customer in a state of panic ends up responding to the message without considering its legitimacy. Now when you/customer calls that number given in the message, the fraudster pretends to be speaking from your bank and entices you to give your personal details such as debit card information, bank account details, OTP, etc. under the pretext of KYC verification. Sometimes, the fraudster might ask you to install some app on your phone which will give him full access to your phone. Before you know, withdrawals are made from your account and you will get a message that such and such amount has been debited from your account.

Phishing

This is an online scam wherein the users/customers receive tricky emails or pop-ups that appear to be from a legitimate source, say a bank or an insurance company or an internet service provider, etc. The fraudster will ask for your personal information through these emails and thereafter use that information for their unlawful gains. Phishing attacks include phishing emails, link manipulation, session hijacking, smishing, vishing, installing malware etc.

Advance fee scams

In advance fee scams, the fraudster will ask you to make an advance payment or upfront payment for goods and services that do not materialise. This includes career opportunity fraud, loan scams, lottery scams, work-from-home opportunity scams, etc.

Mortgage fraud

Mortgage fraud is any sort of material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase, or insure a loan. For example, intentionally falsifying the particulars on mortgage applications.

Mass marketing fraud

In this, mass mailing, calls, spam emails are resorted to for stealing the personal financial information of the target. This type of fraud targets multiple victims from different jurisdictions. Mass marketing fraud schemes typically fall into two classes, schemes that defraud numerous victims out of comparatively small amounts, and schemes that defraud comparatively less numerous victims out of large amounts. One example of mass marketing fraud can be ‘too good to be true payment schemes’.

Bank fraud

Banking fraud is an attempt to syphon or take funds or other assets from a financial institution. RBI defines fraud as, “A deliberate act of omission or commission by any person, carried out in the course of a banking transaction or the books of accounts maintained manually or under computer system in banks, resulting into wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank”. Some of the famous bank fraud cases are the PNB-Nirav Modi Scam, ABG Shipyard Fraud, Vijay Mallya scam etc.

UPI-related frauds

About 80,000 UPI frauds occur in India, every month. Fraudsters send you a ‘request money’ link and once you click on it and authorise the transaction, money gets deducted from your account. Also, sometimes the fraudsters will send you a fake URL and once you click on it, it infects your phone with malware designed to steal all your financial information. UPI-related frauds can occur in forms of phishing attacks, screen mirroring tools and through deceptive UPI handles.

SIM swap fraud

Sim swapping is when you make a request to your service provider to swap your sim, who deactivates your old sim and gives you a new one. For example, when you want to upgrade your 3G sim card to a 4G one. This is a legitimate sim swap transaction.

However, in the case of sim swap frauds, the fraudster makes a sim swap request to the service provider using fake papers and pretends to be a genuine cardholder. The service provider deactivates your old sim and the fraudster gets a new sim card. He is then able to access all your financial information such as OTPS, card alerts, etc., and can manipulate the same in innumerable ways. For instance, in August 2021, a man lost Rs. 84 lakhs due to SIM swap fraud committed by some unidentified cyber criminals who cloned the victim’s sim card to get his bank details.

Corporate fraud

Corporate fraud involves falsification or misrepresentation or hiding of a company’s financial information and accounts to make profits illegally and to mislead the public. For example, insider trading, falsification of accounts to show a healthy picture in order to attract lenders and investors, misappropriation of assets, etc.

As per Section 447 of the Companies Act, 2013, fraud, in relation to affairs to a company includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

Legal provisions relating to financial fraud under various laws and punishment prescribed for such frauds

Indian Penal Code, 1860

Section 405: Criminal breach of trust	Section 405 defines criminal breach of trust as, “Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or wilfully suffers any other person so to do, commits “criminal breach of trust”.
Section 406: Punishment for criminal breach of trust	Imprisonment of either description for a term which may extend to 3 years or with fine or with both.
Section 409: Criminal breach of trust by public servant or by banker, merchant or agent.	Section 409 provides that the criminal breach of trust committed by banker, merchant, factor, broker, attorney or agent shall be punished with imprisonment for life, or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine.
Section 415: Cheating	Section 415 defines the offence of Cheating as, “Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property, is said to “cheat”.”
Section 416: Cheating by personation	Section 416 defines Cheating by personation in the following terms: “A person is said to “cheat by personation” if he cheats by pretending to be some other person, or by knowingly substituting one person for or another, or representing that he or any other person is a person other than he or such other person really is.”
Section 417: Punishment for Cheating	Section 417 provides punishment for the commission of offence of Cheating under Section 415 to be imprisonment of either description for a term which may extend to one year, or with fine, or with both.
Section 418: Cheating with knowledge that wrongful loss may ensue to a person whose interest the offender is bound to protect.	Section 418 provides that, “Whoever cheats with the knowledge that he is likely thereby to cause wrongful loss to a person whose interest in the transaction to which the cheating relates, he was bound, either by law, or by a legal contract, to protect, shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both.”
Section 420: Cheating and dishonestly inducing delivery of property	Imprisonment of either description for a term which may extend to 7 years and shall also be liable to fine.
Section 467: Forgery of valuable security, will, etc.	Imprisonment for life, or with imprisonment of either description for a term which may extend to 10 years and shall also be liable to fine.
Section 468: Forgery for purpose of cheating	Imprisonment of either description for a term which may extend to 7 years, and shall also be liable to fine.
Section 471: Using as genuine a forged document or electronic document	Punishable in the same manner as if the person had forged such a document or electronic record.

Companies Act, 2013

The Companies Act, 2013 contains provisions dealing with corporate frauds, which are provided as follows:

Punishment for fraud (Section 447)

Section 447 of the Companies Act, 2013 provides that any person who is found guilty of fraud, involving an amount of at least 10 lakh rupees or 1% of the turnover of the company, whichever is lower shall be punishable with:

Imprisonment for a term which shall not be less than 6 months but which may extend to 10 years, and
Fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

The first proviso to the Section lays down that in case the fraud in question involves public interest, then the term of imprisonment shall not be less than 3 years.

The second proviso to the Section states that where the fraud involves an amount less than 10 lakh rupees or 1% of the company’s turnover, whichever is lower, and does not involve public interest, then the maximum punishment that can be awarded to the person found guilty of such fraud shall be 5 years imprisonment or a fine which may extend to 50 lakh rupees or both.

It is pertinent to note that the Companies Act, 2013 empowers the Serious Fraud Investigation Office (SFIO) with powers to probe companies suspected of fraud. Also, the Act authorises the auditor to report fraud to the central government.

Other Sections under the Companies Act dealing with fraud

Section 36	Punishment for fraudulently inducing persons to invest money.
Section 38	Punishment for personation for acquisition, etc., of securities.
Section 229	Penalty for furnishing false statements, mutilation, destruction of documents.
Section 251	Fraudulent application for removal of name.
Section 448	Punishment for false statements.

Punishment for money laundering

Section 4 of the Prevention of Money Laundering Act, 2002 provides for a punishment of rigorous imprisonment which shall not be less than 3 years but which may extend to 7 years, and a fine for the offence of money laundering.

Information Technology Act, 2000

The Information Technology Act, 2000 contains provisions dealing with cyber fraud and financial frauds committed using computer resource.

Section 43A: Compensation for failure to protect data	This section makes a body corporate liable for wrongful loss caused to a person due to the negligence of such authority in maintaining reasonable security practices. It provides that, “ Where a body corporate, possessing, dealing or handling any sensitive personal data or information in a computer resource which it owns, controls or operates, is negligent in implementing and maintaining reasonable security practices and procedures and thereby causes wrongful loss or wrongful gain to any person, such body corporate shall be liable to pay damages by way of compensation to the person so affected.”
Section 66C: Punishment for identity theft	This section provides for punishment for identity theft. It states that any person who fraudulently or dishonestly makes use of the electronic signature, password, or any other unique identification feature of any other person, shall be punished with imprisonment of either description for a term which may extend to three years and shall also be liable to fine which may extend to rupees one lakh.
Section 66D: Punishment for cheating by personation by using computer resource	This section states that, “Whoever, by means of any communication device or computer resource cheats by personation, shall be punished with imprisonment of either description for a term which may extend to three years and shall also be liable to fine which may extend to one lakh rupees.”

Tips to protect yourself from financial frauds

Beware of shoulder surfing

Shoulder surfing refers to watching over someone’s shoulder while they are using an ATM or filling in personal details in the phone etc. to steal their data. It is the most common danger associated with using ATMs. While you are using the ATM, ensure that no one is trying to shoulder surf you by standing too close to you. The fraudsters attempt to see your identification number(PIN) and once that PIN reaches into the hands of a fraudster, they can use it in numerous illegal ways. So the next time, you go to an ATM, make sure to cover your hand while punching your PIN.

Robust passwords, safe clicking

The most basic thing that you must do to avoid being a victim of financial fraud is to use a strong password with multi-factor authentication. Also, do not click on every pop-up or link. Practice safe clicking.

Other simple tips to keep yourself safe

Avail of the facility of setting and modifying your transaction limits on your cards and account.

Create a separate user account when you are using a personal laptop for work.
Keep your systems and software updated.
Do Not share personal information relating to your finances on social media.
Do Not respond to calls that ask for sensitive information. Don’t give them your details.
Keep your PINs secret.
Don’t give your account details to a person or fill them on some website unless their identity can be verified.
Place your money in an authorised financial institution. Don’t give your money to someone who offers to place it in the bank on your behalf in return for a higher rate of interest.
Be vigilant. Read about the newer and most common types of fraud happening around you.
If you noticed some suspicious activity in your bank account or while using your card, report it.
Check your monthly credit card statements carefully.
Be careful while you make payments on the internet. Enter your Card Verification Value(CVV) only on secure payment websites.
Be careful when signing any financial contract and always read the small print carefully.
Do not reply to spam or unsolicited emails that promise you some reward.
Don’t fall into the trap of fake lotteries scams. No one can win a lottery in which they have not participated.
Install a trusted antivirus on all your devices.
Do Not share your OTP with anyone. Make sure that the OTP generated is for the transaction initiated by you.

Top 10 biggest financial frauds in India

Satyam Computers Scam (2006-2008)	Satyam Computer Services Ltd. was founded in the year 1987 by Ramalinga Raju and his brother Rama Raju and soon the company became a significant IT player.Also called the mother of all scams, Satyam Computers Scam broke in the year 2009 when the founder and CEO of Satyam Computers, Ramalinga Raju confessed that the company has been falsifying its accounts and overstating its revenues for years. On January 7, 2009, Ramalinga Raju sent a 5-page letter to the SEBI and stock exchanges admitting a fraud of Rs. 7000 crores.The company committed fraud by overstating its revenues, forging bank statements, and manipulating the books by non-inclusion of certain receipts.Over the period of 5-6 years, the company’s revenue was overstated by Rs. 4783 crores and as per the SEBI’s probe, misstatements to the tune of Rs. 12,320 crores were found.On April 9, 2015, the CBI Special Court sentenced Ramalinga Raju and 9 others to imprisonment for 7 years. A fine of Rs. 5.5 crores was imposed on the Raju brothers.
Harshad Mehta Scam/ Securities Scam 1992	The man behind the massive Securities Scam in 1992 was the well-known and experienced stockbroker, Mr. Harshad Shantilal Mehta.Being a skilled broker, Harshad Mehta misused his knowledge of the stock market to cause manipulations and made huge profits. The scam involved the diversion of bank funds worth Rs 3,500 crore to a group of stockbrokers, led by none other than Harshad Mehta. These funds were then put into the stock market selectively, causing it to surge to over 4,500 points. The scam was first exposed by journalist Sucheta Dalal in April 1992.Thereafter, the banks realised that they were holding on to worthless bank receipts and the stock market too came crashing down.Harshad Mehta was charged with about 72 criminal offences including cheating, bribery, forgery, criminal conspiracy, falsification of accounts, etc., and over 600 civil suits were initiated against him.In September 1999, the Bombay High Court convicted Harshad Mehta and three others in an Rs. 380.97 million MUL fraud case (one of the many cases within the larger scam) and they were sentenced to rigorous imprisonment of 5 years.Harshad Mehta was out on bail in all cases including his conviction in the MUL case. But later, he was again arrested in 2001 for misappropriating Rs 2.5 billion from 2.7 million “missing shares” of 90 blue-chip companies. This time bail was denied to him.On 31st December 2001, Harshad Mehta passed away in Tihar Jail. His appeal against conviction in the MUL case was dismissed in 2003 and the rest of the criminal cases against him abated on his death.
Kingfisher Airlines/Vijay Mallya case	Kingfisher Airlines was launched by Vijay Mallya in 2005. Soon, the airline became the 2nd largest airline after Jet Airways. Mallya wanted to expand his company and hence he acquired ‘Air Deccan’.Mallya resorted to borrowings by over-valuation of his brand value. The mounting debts kept on increasing and eventually the company shut down. Even the government cancelled the licence of Kingfisher Airlines in December 2012.Mallya took huge loans from various PSU banks. The SBI issued a 1600 crore loan to Kingfisher airlines. He had taken similar loans from 17 different banks.He defaulted on the payment of loans worth Rs. 9000 crores from more than a dozen Indian banks around the year 2013.On March 2, 2016, Vijay Mallya left the country and in January 2019 he was declared a fugitive offender under the Fugitive Economic Offenders Act, 2018. Since then, efforts are being made to extradite him from the UK to India.In January 2017, the Debt Recovery Tribunal held Kingfisher Airlines, UB Group, and Vijay Mallya jointly and severally liable for Rs. 6,963 crores and interest at the rate of 11.5%.Offences with which Mallya was charged include Section 120B read with Section 420 I.P.C., Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988.
PNB Bank scam (2018)	PNB Scam is dubbed as the biggest fraud in the Indian Banking Industry. The main accused in the Punjab National Bank Scam was Nirav Modi(Indian businessman in the business of luxury diamond jewellery), his uncle Mehul Chowksi and other relatives, and some employees of the Punjab National Bank.Fraudulent letters of undertaking(LoUs) worth 11,000 crores(approx.) were issued by the Brady House branch of PNB, Mumbai in connivance with Nirav Modi, his relatives, and some PNB employees.The aforesaid LoUs were apparently issued for overseas payments by firms linked to Nirav Modi and Mehul Chowksi.Some employees of the PNB bypassed the bank’s core system to issue LoUs to the overseas branches of Indian banks, using the international financial communication system, SWIFT.The accused in the case were charged with the offence of criminal conspiracy, criminal breach of trust, cheating, corruption, money laundering, fraud, embezzlement, and breach of contract.In January 2018, PNB filed a complaint against the accused for commission for fraud and the CBI started an investigation into the matter.Both Nirav Modi and Mehul Chowksi fled India before the news of the scandal broke in public. Presently, the Indian government is attempting to extradite Nirav Modi from the UK who is currently lodged in UK prison and his extradition request was allowed by a UK Court on 25 February 2021.
Ketan Parekh and the Stock Market Scam of 2001	Ketan Parekh, a CA by profession, managed his family’s brokerage business.Like Harshad Mehta, Ketan Parekh also manipulated the stock market through unlawful means. He syphoned off public funds to the tune of Rs.1200 crores.The fraud unravelled when the Bank of India alleged that Ketan Parekh had defrauded them to the tune of Rs.137 crores.CBI arrested Parekh and he was accused of insider trading. He was sentenced to rigorous imprisonment of 1 year and was prohibited from trading in the Bombay Stock Exchange for 15 years.
ICICI-Videocon Scam	Loans worth Rs. 1875 crores were given by the ICICI Bank to the Videocon group(controlled by industrialist Venugopal Dhoot). Ms. Chanda Kochhar was the CEO and MD of the bank at that time. Videocon group had made 258 proposals to the bank and 8 of them were accepted by the bank. In 4 such proposals, Chanda Kochhar was part of the sanctioning and recommending committee.The bank had granted loan to the Videocon group and its associated companies from 2009 to 2011 and most of these loans were granted in gross violations of the banking regulations and the policies of the ICICI bank.Within months of the sanctioning of the loan, Dhoot’s Supreme Energy granted a loan of Rs. 64 crores to NuPower Renewables, in which a 50% stake is held by Deepak Kocchar(Chanda Kocchar’s husband). There were allegations that the loan given was a part of a quid pro quo deal.The Enforcement Directorate investigated this multi-crore scam and Chanda Kochhar had to step down as the CEO.
Telgi Stamp paper scam	A fruit seller who later became a travel agent, Abdul Karim Telgi was arrested by police for forging immigration certificates. In jail, Telgi met Ratan Soni, and they became partners in coning the world by selling fake stamp papers.Telgi committed fraud worth crores by counterfeiting stamp papers, judicial court fee stamps, revenue stamps, foreign bills, brokers notes, share transfer certificates, etc.It was alleged that Telgi bribed a few officials of the Indian Security Press so that he could do his business on a large scale.The estimated value of the scam was Rs.20000 crores. Telgi was convicted for printing counterfeit stamp paper and was sentenced to imprisonment for 30 years and a fine of Rs.202 crores was imposed on him.
Saradha Scam(2013)	An umbrella company named Saradha Group in West Bengal defrauded millions of investors by running Ponzi schemes.The scam worth Rs.10000 crores came to light in 2013. Chairman and MD of the company Sudipta Sen and others were arrested on April 23, 2013.Sen wrote to CBI and confessed to the fraud and money laundering and also alleged that several prominent personalities including MPs and MLAs were involved in the scam.Since many investors belonged to the low income strata, the state government set up a relief fund to prevent the small investors from getting bankrupt.
ABG Shipyard Fraud	ABG Shipyard is perhaps the biggest known bank fraud case. In early February, the top officials of ABG Shipyard were charged with causing wrongful losses worth Rs.22,842 crores to an ICICI bank-led consortium of banks that included SBI.The fraud was unravelled after the submission of an audit report in January 2019. As per the report, the top officials of ABG committed illegal activities including diversion of funds, criminal misappropriation of funds, and criminal breach of trust.
SBI-Canara bank fraud	CBI had registered cases filed by Canara Bank and the State Bank of India regarding fraud to the extent of Rs.7,926.01 crore and Rs.313.79 crores respectively.The first case was filed against a Hyderabad-based private firm and some unknown public servants. There were allegations that the firm had availed multiple credit facilities from Canara Bank and has committed various financial crimes including falsification of accounts, tampering with balance sheets, misappropriation of funds, diversion of the loan amount, etc. The account became NPA and was declared a fraud.The second case was registered against a private company based in Chennai on the complaint filed by SBI. It was alleged that the said company availed a credit limit of Rs. 310 crores from the bank and diverted the funds to related parties. The account became NPA and was declared a fraud.

Top global trends to watch in 2022 in the fraud landscape

Digital transformation

Digital transactions have increased to an unprecedented extent due to the impact of the COVID-19 pandemic. Now the customers have become more comfortable and confident in consuming digital services and are rather preferring the digital mode over the traditional one. It is true that even before the pandemic, the consumers were already moving towards digital but the pandemic has brought an upsurge in the number of new/inexperienced digital consumers that have become the target of the fraudsters. Globally, the average share of digital customer interactions has increased by 22%.

Increased automation

Automation is a double-edged sword. Automation streamlines customer experience by offering multiple conveniences such as auto-fill etc. However, this all comes at a price. Automation makes it easier for the fraudsters to launch attacks and in high volumes. A whopping 1.2 billion bot attacks occurred in the first half of 2021 and volume of bot attacks in financial services increased by 28%.

Adoption of new digital payments and methods

As we move forward in the digital age, new payment options have developed and are developing that allow the consumer to create accounts effortlessly and also gives them quick access to credit options. We all love the thought of ‘Buy Now, Pay later’ but these effortless and convenient options have also opened another door for fraudsters. The largest BNPL platforms have reported a significant increase in fraud, primarily from new account creation, account takeovers and repayments with stolen credit cards.

Increasing risk of payment frauds

The number and scale of digital transaction activity is increasing day by day but the data security awareness is not increasing at a similar pace. Globally, the digital payment market is projected to reach more than US $236 billion by 2028, a CAGR of 19.4%. The lack of security awareness is attracting more and more fraudsters and it is not so difficult for them to dupe naive, inexperienced users

Risk of synthetic identities

In the U.S., the creation of synthetic identities is one of the fastest growing online crimes. In synthetic Identity fraud, the fraudsters take legitimate data and combine it with fictitious and false information to create a new identity. It is one of the hardest types of identity theft to detect because there is no real person to report the fraud.

Escalating cost of fraud

Due to the increase in digital transactions, the global cost of fraud has also escalated to $5.4 trillion. In APAC, fraudulent transactions cost up to 3.87 times the value of the lost transaction, up from 3.40 in 2019.

Need for multi-layered fraud assessment

Fraudsters use complex methods and are continually coming up with new strategies to dupe people, manipulate the control systems and frameworks put in place for fraud prevention. In such circumstances, a multi-layered approach that includes physical identity, digital identity intelligence and behavioural biometrics is the best bet to mitigate the risk of fraud. Behavioural biometrics works in the following ways:

It looks at how a user-

Types on keyboard
Moves the mouse
Holds a phone
Taps on screen
Swipes in an app

The behavioural biometrics can be used to identify the good customer profiles, recognise unusual transactions and strengthen consumer trust.

Conclusion

The identification, prevention and minimisation of the incidents of financial frauds is the collective responsibility of all, including citizens, government and other key regulators (such as RBI) and investigating agencies as well. Financial institutions are working towards stringent implementation of their fraud control policies and reporting frameworks to generate information in a way that the level of fraud identified, prevented and actual losses incurred are identified. The focus is on enhancing the processes, controls, fraud risk management frameworks in order to minimise the opportunities for fraud and also reduce the time that goes by in detection of frauds. The RBI had also set up a Central Fraud Registry Portal which is a searchable database to help banks detect instances of fraud by borrowers early on. The portal can be accessed by all Indian banks.

The Hon’ble Supreme Court in its judgment State of Maharashtra Through CBI v. Vikram Anantrai Doshi and Others (2014), has held that the cases of financial frauds shall not be quashed on the ground of compromise as it is a social wrong and has immense societal impact.

Lastly, it is worth mentioning that the Central Government has launched a national helpline no. 155260 which is operated by the concerned state police. Victims of cyber fraud can call this number to report financial fraud.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity