Consumer Issues
How not to become victims of bank frauds
There are many middlemen who meticulously study bank rules, to take advantage of the ignorance of depositors. How to stay clear of them?
 
You would have read the report last week that Reserve Bank of India (RBI) has slapped a penalty of Rs1.5 crore each on Bank of Maharashtra, Dena Bank and Oriental Bank of Commerce for violating know-your-customer (KYC) norms while opening bogus accounts for a private organisation and eight other public sector banks were also warned to adhere to these norms.  (Please read: RBI slaps Rs.4.5 crore penalty on Bank of Maharashtra, Dena Bank and OBC
 
The RBI, however, has not given the full details of the frauds perpetrated on these banks that necessitated the investigations into the failure of banks to comply with the KYC norms as stated in their press release. It is from the media reports that we can link the frauds committed in these banks during 2014 and the penalties imposed on them now. If only the RBI had given the modus operandi of these frauds it would have certainly helped the public to be wary of such traps laid out by unscrupulous people at least in future. 
 

What is the modus operandi of these frauds?

 
RBI has permitted banks to offer differential interest rates on large value deposits and most of the banks, depending upon their funds requirements, quote interest rates for bulk deposits on day-to-day basis, which are not publicised and not known to the ordinary depositors. There are several middlemen who meticulously study the banks’ rules and regulations, take advantage of the ignorance of depositors by offering higher interest rates and all types of baits to the potential depositors to lure them into their trap. They, therefore, contact cash rich corporates, trusts and high net worth individuals (HNIs). and entice them with tempting offers to place their surplus funds with the banks with which they have developed a rapport. Some even tempt these ultra-rich depositors with kickbacks to win them over to part with their money according to their wishes. (Kick back is a slang to mean an illicit cash payment made to someone in return for facilitating a transaction). 
 

What are RBI’s observations?

 
RBI in their press release of 29 April 2015, had explained the alleged fraud as under.
 
“On the basis of a complaint received by the Reserve Bank from a private organisation, a scrutiny of fixed accounts opened in its name in Mumbai based branches of certain public sector banks were undertaken in July 2014. With more complaints and involvement of other banks coming to light, a wider thematic review was conducted and in all 12 branches of 11 Public Sector Banks were covered. The scrutiny/thematic review looked into the modus operandi of the alleged frauds involving accounts of certain organisations in these banks, deficiencies / irregularities while opening Fixed Deposits (FD) and extending Overdraft (OD) facility there against. Besides the effectiveness of systems and processes in place pertaining to implementation of KYC norms / AML standards in respect of these accounts was also looked into.” 
 

How these frauds were committed?

 
Hindu Business Line of 28 August 2014 had reported as under:
 
“The Economic Offences Wing (EOW) of the Mumbai Police has registered nine first information reports (FIRs) against 10 people accused in the loans against fixed deposits scam. The accused, who are part of a syndicate, opened overdraft (loan) accounts in the names of existing fixed deposit holders and siphoned off Rs237.58 crore from various bank branches across the city, said the Deputy Commissioner of Police (EOW). 
 
The Central Bureau of Investigation (CBI) is already probing a similar scam in the country’s financial capital, wherein FDs aggregating Rs436 crore were misappropriated from Dena Bank and Oriental Bank of Commerce. 
 
Explaining the modus operandi of the overdraft-against-FD scam, a senior public sector bank official said some of the accused would approach cash-rich entities asking them to place FDs with bank branches. Since the accused acted on behalf of the entities, they had access to all the KYC (Know-Your-Customer) documents, including resolutions passed by trusts for placing deposits, and signatures on application forms required for the opening of FDs. 
 
Believing the accused to be representatives of the customers, the bank officials would hand over the FD receipts to them. The accused would retain the original receipts and give the customers phoney FD receipts. The possession of the original FD receipts and access to KYC documents made it easy for the accused to perpetrate the fraud, the banker said.” 
 
Putting the media report and the RBI press release together, it is possible to presume that the penalty imposed by RBI might be in respect of the fraudulent transactions that were reported in the media in August 2014. 
 
In short, the fraudsters, winning over the depositors by offering higher rates of interest, got large funds transferred to the bank of their choice, where they got the fixed deposit receipts issued in the name of the depositors. But they handed over only facsimile of these receipts to the depositors who did not suspect any foul play, as the deposit receipts were cleverly duplicated through the modern printers that produce colour prints which closely resemble the originals. 
 
The fraudsters, holding original receipts, got them pledged as security for the loan or overdraft with the same branch of the bank by forging the signatures of depositors in all documents required by the branch. Once the loans were granted, they got the money transferred through NEFT/RTGS to their personal account by forging all documents sought by the banks. This happened because the depositors trusted them and gave all the KYC documents to them to be handed over to the bank, which made forgery of documents easy for the fraudsters. And the banks too possibly placed too much reliance on these middlemen who got them the deposits, and did not contact the depositors to verify the genuineness of the request for loan against these deposits.   
 
But it is not known as to whether any amount was recovered from the fraudsters and who finally had to bear the burden of loss caused by these fraudulent transactions.  
 

What lessons to learn from these frauds?

 
First and foremost, it is neither desirable nor necessary for us to entertain any middlemen or broker to handle our banking transactions, as it is difficult to know their credentials as well as their intentions. Moreover, do not get carried away by their smooth talk, which, more often than not, may be a calculated move to con us rather than help us. For clarification of any doubts, bank staff is generally helpful, but if you are not satisfied, you can meet the Branch Manager, who normally cooperates in responding to your queries, particularly when you place deposits with the branch. 
 
Secondly, though banks are allowed to give differential interest rates for large value bulk deposits, RBI has totally forbidden banks from giving any commission to middlemen for securing deposits. So any offer of cash incentive for placing the deposit with any particular bank is fraught with risk and should not be relied upon, even if the offer comes from a professional, whose credentials cannot be verified. 
 
Lastly, we should hand over the KYC documents to our bank personally as far as possible to ensure that they are not misused by any intermediary. If it is not possible to personally visit the branch, we should send the self attested copies of these documents through registered post to the bank to make sure that it does not get into wrong hands. 
 
The purpose of taking these precautions is twofold. First it ensures peace of mind for us. Secondly, even after taking these precautions if a fraud happens in our account, we can hold the bank squarely responsible for the loss caused by the fraud, as it would happen due to the negligence of the bank or the connivance of bank staff and it is easy to put the entire onus on the bank for any loss caused. 
 
(The author is a financial analyst and writes for Moneylife under a pen name ‘Gurpur’.)

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COMMENTS

B. Yerram Raju

2 years ago

Modus operandi of frauds need not be made public by either the Bank or the investigating agency. This would give lever for the fraudsters to innovate ways of getting over the pitfalls. Fraudsters are industry by themselves.
At one time, the SBI Monthly Bulletin carried the modus operandi of Savings bank account frauds and since they were written by a person of the rank of CGM, the articles were published. This gave spurt to innovating into SB and TDR frauds subsequently in a larger measure. Being SBI, its vigilance prevented further perpetration.

REPLY

S.S.A.Zaidi

In Reply to B. Yerram Raju 2 years ago

Dear Mr Raju
If Money laundering typologies can be compiled and published ,why not other fraud modus operandi.This helps in developing case studies for training purposes and strengthening the internal checks and control sytems/processes.just a thought to share with you
regds
zaidi

R S Murthy

In Reply to B. Yerram Raju 2 years ago

I agree modus operandi of any crime need not be publicised not because it increases the crime perpetrators but common man becomes scary.The one who wants to perpetrate a fraud finds his own way and means. Frauds in prenationalisation era were less because many of the staff are undergraduates happy with what they were getting. Post nationalisation and post computerisation era, they are on increase because qualified engineerss, MCAs were recruited who are highly talended and know the shortcomings in the systems. Banks require only basic skills of counting from 1 to 100, additions and deductions. Divisions and multiplication are not frequently used. With computerisatgion even this basic knowledge is also not required.

Anand Vaidya

2 years ago

I was told that it is safer to write the purpose (near the signature) of the KYC doc being handed over to an organization. eg: "PAN copy for new SB in SBI". Can you comment on this...

Also don't allow bank staff (or anyone else) to fill in any forms on your behalf.

REPLY

R S Murthy

In Reply to Anand Vaidya 2 years ago

Your first quiry is not clear. Will you please be little more clear.
Regarding the 2nd, it is always advisable to fill all forms by ourselves. There are several illeterate people who have to necessarily depend either on the bank staff or fellow customers. Several Dhan Jan Yojana accounts are opened in many banks. Majority of these customers are ignorant. This is going to be an excellent ground for perpetration of irregularities.

R S Murthy

2 years ago

Banks may be big and great but not its employees.In every organisation particularly in finanacial institutions, these frauds are routine & common. Customers have to take care of their own accounts and watchful.The growing impersonal transactions like ATM, online payments & transfers provides wider scope.Did we not see the recent exposure of the nexus between the big corporates and cetral secretariat staff in providing information. We all talk of honesty without being honest.

Sushila Pursnani

2 years ago

To open a 3-in-1 account we approached the ICICI bank (Liberty Garden Branch), they insisted that an account can be opened only by the DSA and someone will call us to do the needful

Sure someone did call and collected the documents (forms duly filled by the applicant)

And after 2 months and a forgery we closed the bank account that was opened.

The bank staff and DSA representatives are in hand-in-glove to fleece the customers

c v manian

2 years ago

RBI should make the details and modus operandi public, so that common people do not get cheated like this.Common man also should be careful about handing over his/her money to such fraudsters, who smooth-talk people into giving all the details.
C V Manian

How frontline staff in banks can disrupt the flow of dirty money

By analysing customer behaviour to detect suspicious transactions, frontline staff in banks can help disrupt the flow of dirty money

 

Organized crime is a global challenge. To fund its operations it relies on funds raised through ransom for kidnapping, extortion, drug trafficking and funds transfers from one person to another across countries and continents. However, a single Suspicious Transaction Report (STR) can help stop this flow of illegal money, and help prevent the repercussions that financial crime causes. Frontline staff can serve as the first line of defence against such illicit transactions being passed through their organisation
The Financial Intelligence Unit - India (FIU IND) provides financial intelligence to assist law enforcement, revenue and national security agencies within the country to combat money laundering and terrorism financing. It also regulates entities that have obligations under the Prevention of Money-laundering (Amendment)  Act, 2012  to establish anti-money laundering and counter-terrorism financing (AML/CTF) programs and  to  meet compliance obligations by reporting transactions suspected of being linked to money laundering, terrorist financing, criminal proceeds, drug trafficking or other serious criminal activities. These reports are an essential contribution to the development of the financial intelligence resources that are used by country’s law enforcement, revenue and national security agencies.
 
The STRs led to detection of black money. FIU disseminates the information in STRs to the law enforcement agencies. The feedback received by FIU IND indicates that   the unaccounted money detected by the agencies was of Rs7,848 crore while the amount of assets seized, frozen and confiscated was about Rs195 crore within the country and abroad (source-FIU Director Report 2013-2014). The detection of  huge amount of black money could be possible  as the FIU received 61,953  STRs during 2013-14 as compared to a mere 31,731 STRs received during 2012-13. It shows about 100% jump in receiving the STRs. All banking, financial intermediaries, insurance companies, payment system operators and capital market operatives are required under PMLACT to submit STRs to the FIU.
 
Reporting entities can use indicators to recognise situations that may require scrutiny from an AML/CTF perspective. Indicators alone do not automatically evidence suspicious activity; nevertheless they should alert the AML/CTF official to activities that may require further examination and monitoring. Individual cases may show more than one indicator, if so, it suggests increased urgency to examine the transactions for suspicious financial or criminal activity. AML/CTF officials can also use the indicators for training staff and to develop consistent descriptions of behaviour to be included in a suspicious transaction report.
 
Most Frequently Observed Indicators
 
1) Large - Scale Cash Transactions
Criminals often accumulate large amounts of low-denomination notes as trades for illicit substances of goods are generally made in untraceable cash transactions. These criminals have to enter these notes into the banking system to give it a touch of legitimacy and realise the true value.
 
2) A Typical Or Uneconomical Fund Transfer To Or From Foreign Jurisdiction
Transfer of criminal funds brings several benefits to laundering operations. In a number of cases, fund transfers overseas with no supporting business explanation had been identified.
 
3) Unusual Business Activity or Transaction
Movements of funds that involve a loss or lower rate of return, without any visible compensating benefit for the customer may indicate that the business is more concerned with moving funds through the financial system, than with profitability. 
 
4) Large And / Or Rapid Movements of Funds
Money launderers often try to ‘layer’ funds by switching between several accounts in different institutions / jurisdictions in an attempt to confuse the audit trail. A legitimate businessman, however, would seek to minimise bureaucracy and bank charges.
 
5) Unrealistic Wealth Compared To Customer Profile
A number of cases include disclosures where individuals with little or no wealth / no employment pay large sums of money into accounts. Often these funds are directly derived from crime, or are being ‘looked after’ while the real criminal is being investigated by police.
 
6) Defensive Stance to Questioning
 
Inexperienced launderers may not be able to prepare a reasonable cover story concerning the origins of illegal funds. Generally, an ‘honest’ customer will always be willing to answer questions concerning his funds. 
 
Money launderers and terrorism financiers remain on the lookout for new techniques which will obscure the origins of the funds and give apparent legitimacy to their activity. They will quickly embrace new products and technologies. AML/CTF officials should on a regular basis review their products, services and individual customers to ensure AML/CTF programs, processes and training match the changing levels of ML/TF risk.
 
Frontline defences
 
Opportunities exist to identify money laundering at all stages of money transactions. The frontline staffs of banks increasingly play a bigger role in identifying and reporting suspicious transactions.
 
Nervous or uncooperative behaviour exhibited by customers such as avoidance of eye contact or reluctance to provide documents could trigger suspicion.
 
It is also known that introducing the illegal sale proceeds of small drug units into the financial system can be done through a bank teller.  Money presented in unusual condition – for example, damp, odorous or covered with a substance – or multiple deposits of small notes indicating the unit price of illicit drugs should all raise concern.
 
For financial services staff, creating a STR can be a monotonous and tedious job, but dirty money supports the weapons purchases, bribes and other corrupt activities and a single STR can help stop this.
 
As a rule, suspicious transactions are mostly inconsistent with the normal behaviour pattern of the customer.  By screening transactions for indicators, typologies and unusual activity, a suspicion of criminal activity may arise.  A transaction may have many factors that do not raise suspicion when considered individually, but taken in its entirety may suggest criminal activity.
 
A large transaction may be considered suspicious if it does not fit with the customer’s financial profile.  Comparing the transaction to previous account records might show this is unusual activity and may also suggest if any patterns indicating criminal activity exist.
 
Financial institutions must remain vigilant as criminals look for new ways to obscure their illicit activities. What constitutes a suspicious transaction or behaviour is unique to each financial institution and depends on their risk assessment and customer profile, and is not static. By analyzing customer behaviour to detect suspicious transactions that trigger a STR, frontline staff will help disrupt the flow of dirty money that supports drug-trafficking, weapons purchases, and other illegal activities that, ultimately, result in violence and serious crime.
 
(Saiyid (SSA) Zaidi is a training and development consultant as well as external subject matter expert at the Educom Group Banker's Academy in New York.)
 

User

COMMENTS

NASIR

2 years ago

Very informative article. It says a lot about the author's intellect and knowledge of the subject.

NASIR

2 years ago

This article speaks a lot about the author's intellect and knowledge of the subject. Very informative

Banks must follow rules for insurance policy: unions
Unions in the banking sector have cautioned their members to follow procedures while enrolling members under the government insurance schemes to be launched on May 9, said union officials.
 
Officials at some branches of nationalised banks told IANS that they were being pressured by the management to enrol account holders under the insurance schemes prior to its launch so as to show impressive numbers to the powers that be.
 
"Our top management has directed lower level officials to enrol customers under the insurance scheme by any means. So employees are filling up the forms in the names of customers," an official of a nationalised bank told IANS preferring anonymity for himself and his bank.
 
He said it is not known how the bank would proceed further on the issue.
 
"Whether the bank would debit the customer account's Rs.12 (for personal accident policy) and reverse the same if he objects to the debit is not known," he said.
 
The scheme clearly stipulates that express consent of the account holder is a must before enrolling him/her under the policy.
 
"In most branches the walk-in customer will be around 100-150 a day. But there are branches that claim collection of enrolment forms of around 300 in a day. This in normal course of business is not possible," he said.
 
"To satisfy myself, I had called around 150 customers to check out their views on their enrolment. While they agreed over phone and promised to come to the branch and sign the necessary papers the very next day, only one turned up as promised," he explained.
 
Thomas Franco, general secretary of the SBI Officer's Association, told IANS: "We are aware of the issue. The insurance scheme is good but the proper procedure is not being followed. We have asked our members to see the forms are duly filled so that no problem arises at a later date."
 
He said employees have been advised to get the Aadhar card details or any other proof with regards to the nominees.
 
As per the insurance scheme framework, an account holder aged between 18-70 would be provided a personal accident insurance cover (death, total disability) for Rs.200,000.
 
As a part of the enrolment form, an account holder also authorises the bank to debit his/her account each year by Rs.12 till contrary instruction is given.
 
The problem for the bankers would be high when there is a claim while the proposal form was not signed by the bank account holder.
 
"Going by the scheme of things, this may turn out to be a scam. There is no hurry in enrolling account holders. Banks can do this at their own pace rather than satisfying the egos of the powers that be," C.H. Venkatachalam, general secretary of the All India Bank Employees Association (AIEBA), told IANS.
 
"In the name of people schemes, the banking industry has become an extension counter of the government. While talking of giving autonomy for banks, the government is pushing its programmes through the banks," he said.
 
"The scheme is a good one. It will increase insurance penetration. But due to the pressure from the management, it may actually end up in a mess giving a bad name to the government," one banker warned.

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