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The Top 100 Bank Frauds, An Analysis

25 Dec, 2019 Divesh Mishra

Central Vigilance Commission (CVC) has released a list of top 100 fraud accounts as at 31/03/2017 but released this month, in October 2018. The publishing of report does not mean that there were only 100 fraud cases in the banking sector. This also does not mean that all these frauds have been committed by the customer and customer only. Negligence, overlooking or collusion by the bank staff has been there in many cases.

Apart from the colluding bankers, there has been involvement of third parties such as valuers, assessors, auditors, chartered accountants, suppliers, buyers and random shareholders.

By default, these accounts have been categorised as Non Performing Assets (NPA) for banks. But being fraud cases, that means the intention of the borrower being never to pay back, the chances of recovery of any monies by 1) selling the available assets, 2) invoking the personal guarantees of the guarantors, 3) trying to realise the left overs of receivables and 4) arresting and putting the fraudsters behind bars would be as good as negligible.

 

Major sectors where frauds have been committed are:

  1. Gem and Jewellery
  2. Manufacturing
  3. Agricultural
  4. Media
  5. Aviation
  6. Services
  7. Bill discounting
  8. Trading
  9. Information Technology
  10. Exports
  11. Fixed Deposits
  12. Demand Loan
  13. Letter of Comfort

 

The route followed by fraudsters has some commonalities. We refer to Gem and Jewellery sector below:

  • Inflating the price of imported diamonds (collusion of international and internationally reputed suppliers is not ruled out). In any case, Indian importer has a relative selling the diamonds overseas.
  • This resulted in bogus, inflated export bills which in any case was not going to be honoured. But these export bills were purchased and original packing credit were liquidated. Bills remained outstanding. Large, fictitious amounts were outstanding. Banks were promised that the realisations would be forthcoming and the gullible banks, on the strength of these outstanding debtors kept pumping in more money.
  • Pre-shipment credit was availed from one bank and the postshipment from another one leading to double financing.

 

Weaknesses in the banking system:

  • Due diligence reports on the overseas suppliers and especially buyers were not obtained.
  • No KYC. Loans to fictitious persons and businesses.
  • Anti Money Laundering provisions were not adhered to.
  • Work of the staff members not being supervised properly.
  • No check on the misuse / use of the bank staff’s authorisation powers.
  • Value of loans and transactions being disproportionate to the size of the balance sheet.
  • SBLCs were issued where these should not have been issued.
  • Balance Sheets were fudged and forged. Banks overlooked these flaws.
  • Circular transactions were made involving companies with same promoting families.
  • Compromising the banks’ SWIFT systems and passwords.
  • Compromise of the ‘Maker Checker’ concept of the bank approval systems.
  • Lack of supervision at the controlling offices.
  • No use of forensic search of the documents where the suspicions were raised.
  • Passing on the buck to the junior most officer.
  • No effective linking of various accounting systems within the bank or with the outside agencies.
  • Multiple Banking Arrangement (MBA) proving detrimental to the purpose of credit.
  • Culture of ‘Name Lending’.