Fraud Risks in the Banking industry

Recent news items of cases of frauds and abuses in banks and financial institutions in India

  • Central Bureau of Investigation (CBI) had registered a case on March7, 2020 for alleged cheating, fraud, criminal conspiracy in sanctioning of loans by YES Bank and in exchange receiving kickbacks by Kapoor from DHFL promoter Dheeraj and Kapil Wadhawan.
  • Punjab and Maharashtra Cooperative Bank(PMC Bank) has been facing regulatory actions and investigation over alleged irregularities in certain loan accounts. The collapse of PMC bank exposed a harsh reality – poor regulation allowed the bank to flout rules for years. The bank is accused of lending money to a real estate company – Housing Development & Infrastructure Ltd (HDIL) – through dummy accounts in the name of dead

The Banks and Financial institutions in our country have witnessed several cases of fraudulent practices that are rampant from the top management level to being percolated down to the operational mid and lower management level. Only the tip of the iceberg gets into a national level debate – there are many more waiting to be discovered.

Why do you think that this is happening so often in the banking industry when people trust them and put their entire savings with these financial institutions?

The solution lies in taking a deep look into the internal processes and routines to find out whether there are enough checks and balances and controls – whether manual or software application controls – both are equally important.

It is a fact that vulnerabilities do and will exist in small or big, upcoming or established financial institutions. If the tell-tales signs are not recognised early enough, these organizations are sitting on a time bomb that could explode and damage their business, result in sanctions or even bankruptcy, temporary closure of offices and of course tarnished brand image. (See Annexure below for a sample checklist of fraudulent situations in banks / financial institutions that could result in losses, waste or abuse.)

Some of these early warning signals or “risk factors” should help in mitigation and avoid losses to the banks and financial institutions:

  1. Top management governance and oversight is poor, lacking or only ad-hoc – focus is on fire-fighting issues as and when they arise.
  2. There are only one or two officers in a bank / bank’s branch who have dominating control over all operations and decision-making.
  3. Records maintenance and documentation is inadequate, ineffective or even absent and the same is not questioned or given importance.
  4. Failure of periodic regulatory or compliance reports to the Central Bank of the country or other statutory bodies.
  5. Systems and applications have poor internal controls set up for critical transactions.
  6. By-passing systems through manual intervention is possible and policies and procedures are flouted.
  7. The above aberrations are not noticed because of poor audit programs or they are not reported by the audit team.
  8. Personnel working in critical areas like loan sanction, investment and treasury departments are not rotated and not sent on compulsory leave periodically due to weak vacation policies.
  9. Four-eye principle for approvals and authorizations not adequate or by-passed due to weak internal controls.
  10. Insufficient segregation of duties in processes.
  11. No background checks for new recruits and inefficiencies not addressed through proper training.
  12. Absence of continuous communication on important policies on ethics and business standards and evaluation of their practices.



This list is by no means exhaustive and it is the diligence of the banks’ audit (internal or external) that matters most. However, this may help in focussing for deeper analysis of fraudulent situations in several areas of banking operations.

  1. Loans:
    1. Forged or fictitious loans to non-existing parties,
    2. accommodation or helping round-tripping of loans,
    3. collusion with politically exposed persons,
    4. loans to insider-related shell companies,
    5. embezzlement of escrow accounts,
    6. commission or kickback on loans,
    7. diverted recoveries of charged-off loans.
  2. Collaterals for loans:
    1. Improperly valued or undervalued collaterals accepted,
    2. forged certificates issued by illegal offshore companies,
    3. round-tripping transactions for payments,
    4. taking collaterals and releasing them prematurely.
  3. Investment and trading in the securities market:
    1. Collusion between a bank employee and trader to transact at inflated prices,
    2. Unauthorized purchases and sales of securities and covering it up,
    3. Not disclosing trading losses to management,
    4. Placing personal trading contracts through accounts to take advantage of bank’s volume discounts on brokerage,
    5. Trades placed based on inside information by an employee for himself/ herself, thereby making personal gains.
  4. Deposits from customers:
    1. Dormant or inoperative accounts misused by personnel for unauthorized transactions like withdrawals or coverups,
    2. Fictitious charges not part of the authorized list of charges,
    3. Manipulating dormant account balances to balance Trial Balance,
    4. Unauthorized overdrafts granted to deposit accounts and covering up,
    5. Withholding checks without proper reason and manipulation of accounts where the bank personnel is acting in a fiduciary capacity,
    6. Setting up fictitious accounts and withdrawing embezzled amounts from the bank.
  5. Correspondent bank accounts:
    1. Unreasonable delay in recording funds transfer and keeping money in float,
    2. Fictitious debits and credits,
    3. Fraudulent letters of credit issued,
    4. Issuing drafts without corresponding recording of transactions,
    5. Fake collections recorded.
  6. Cashier’s desk and transactions
    1. Covering end of day cash shortage with receipts from next day,
    2. Repetitive excess and cash shortages,
    3. Theft of cash by teller – either singly or in collusion with another staff,
    4. Not reporting large currency transactions that are suspicious cash deposits or withdrawals.
  7. Accounting income and expenses
    1. Window dressing with inflated expenses,
    2. Fraudulent rebates and write-offs on loan interest to select clients,
    3. Hiding unreconciled accounts as suspense accounts in Trial Balance,
    4. Under evaluation or ignoring Non-Performing Assets (NPAs),
    5. Over or under provisions in the Profit and Loss Account.

4 Replies to “Fraud Risks in the Banking industry”

  1. When there is so little regulatory oversight and so much corruption such scandals are bound to repeat. Ultimately auditors have to do their job without fear or favour.

    • Thanks a lot Hari. Very truly said, but more than internal or external audit teams, it is the culture, ethics and standards within the banking system that can stem ythe rot.

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