cyber security, protection, cyber

Financial Fraud: An Econimic Disaster

Introduction

Financial fraud has never been an uncommon phenomenon in a country’s economy. However, in the past 34 years, India has seen a large number of unwanted frauds. However, with the recent outbreak of India’s largest bank fraud case (PNB Bank) which exceeds the amount of more than 11.400 crores has finally showed signs of caution in Indian economy. Over the past 11 years, India’s leading public sector bank (PSB), due to various bank frauds has lost near about 141,489.6 crore, and leading private banks lost nearly Rs. 20,523 crore of rupees. The various actions have been taken by the Reserve Bank of India to reduce the number of bank fraud cases, but its losses have increased over the years.[1]

In addition, non-performing assets (NPA) and especially PSB, are on the rise, thereby seriously affecting its profitability. There are several reasons attributable to risks NPA, including global and domestic slowdowns, but there is also evidence which link between fraud and NPA. The robustness of a country’s banking and financial system helps to determine the production and consumption of its goods and services. It is a direct indicator of citizens’ well-being and living standards. Therefore, if the banking system is plagued by high NPA, it becomes a concern because it reflects the financial distress of borrowers or the inefficiency of the transmission mechanism. The Indian economy is severely affected by these issues. This is my main motivation for conducting a detailed study of fraud in India and examining fraud from different angles and specially its impact on economy.

 A shocking analysis showed that Indian banks have reported huge numbers of financial fraud. The Reserve Bank of India found that 90.6% of frauds reported by banks in 2018-19, which occurred between 2000 and 2018. The data published by the banking regulator in the latest edition of the Financial Stability Report shows that between the years 2013-2016 nearly 40% of financial fraud cases occurred which were not reported. “The time gap between the date of fraud occurred and the date it was discovered is important,” said the Reserve Bank of India. The Reserve Bank of India is reviewing its policies and is considering additional measures to detect fraud before and take enforcement measures against the violations.  As per the report, the relative share of the state-owned banks fraud reported in 2018 – 2019 is higher than its relative share in credit. As of the end of March 2019, PSU Bank accounted for 96% of the reported frauds, while the banking industry average was 60.9%.

There has been a rapid growth in the financial or banking sector in India and plays a crucial role in growth of India’s economy. However, with the expansion in banks’ functionality there is a extreme increase in the frauds. In spite of introducing various laws to reduce the frauds, still it is observed that frauds are being committed.[2] The aim of the research paper is to study the number of financial frauds being committed, its impact on economy sector, loopholes for such crimes and how it can be prevented. The study of financial frauds and its impact on economy is important as such frauds or scams have never been a rare phenomenon in economy of any country. Bank failures have largely affected the economy of a country due to its financial links with other parts, termed as “network externalities”.

JURISPRIDENCIAL THEORETICAL ASPECT

1. Jurisprudential test of a good legal system: The competence of a government to tackle financial fraud is uncertain not only in India but also in the common law countries. Lord Ruskill’s Committee made 112 recommendations to intercept the financial fraud in England. As per the Serious Fraud Office (SFO), established in 1988, the committee report did not look into the philosophical base and the comparative strength and deficiency of the Common Law and the Civil Law system. In any legal systems, the effectiveness and efficacy of the legal system is determined by the following characteristics:

(a) Certainty, clearness and definite legal propositions;                  

(b) Predictability of decisions;                                                         

(c) Procedural equality in the rules as per the principles of natural justice;

(d) Appropriate institutional certainty and regulatory authority;

(e) Definite imperatives, both moral and physical; and

(f) Efficiency of the dispute resolution system based on proportionality to time, space and motion

Therefore it is necessary for any kind of law reform exercise to test the legal propositions suggested in the above mentioned characters. It may be pointed out that the post 1956 syndrome of law making process in India cannot pass through any of the above tests. Legal propositions are not acknowledge by the people for whom these are meant. There is uncertainty in the legal system both on account of insufficient and redundant provisions. Legal propositions are distant complicated to have clarity. Sometimes the appropriate authorities are not designed. If the authorities exist, training learning device is not properly planned. The sanctioning procedure is insufficient and overly complicated. As a result, it is necessary to examine and test the appropriate legal structure in light of the aforementioned requirements.

2. The Concept of Fraud in Common Law[3] : Fraud, as a concept, involves both criminal and civil liability. In legal parlance, merely making a false statement does not constitute fraud. Fraud is said to be committed when one person induces another to act on a false belief through a representation that she or he does not believe to be true. As a result, a person may lack definite knowledge or belief that a particular statement is false.[4]

The principle of fraudulent misrepresentation is incorporated into English law as a ground for the recession of a contract or a binding transaction into which the parties were induced to enter. According to Derry v. Peek[5], fraud is proven when it is demonstrated that a false representation was made either knowingly or without belief in the truth, or recklessly or carelessly, whether true or false. The offence of conspiracy to defraud is also significant in the context of organised crime, such as financial fraud. At common law, it is an indictable conspiracy for two or more people to agree to act unlawfully, and it is also illegal to defraud a third party for this purpose. The offence is punishable by ten years in prison.[6] To prove conspiracy to defraud, it is necessary to demonstrate that the prejudice caused to the victim was intended to be caused by the conspirators, that is, either it was their intention or they were aware that this would be the result of what they had agreed to. Intention is such an important part of criminal law jurisprudence, the test must be the offender’s core intention. Using this logic, the Whisky label case appears to be resolved correctly. Because the main intention was to defraud Lebanese purchasers, the court correctly decided that the offence could not be punished due to jurisdictional issues. As a result, common law is riddled with ambiguity and uncertainty when it comes to defining what constitutes a financial fraud that should be prosecuted.

3. “Fraud” in India: Despite the fact that Bentham’s followers were intent on experimenting utilitarianism in the prescription of Indian legal systems since the days of the first Law Commission led by Sir Macauley, the codification of Indian laws was systematically based on the British Common law system. The term “fraud simpliciter” did not appear in the definition of any offence in the Indian Penal Code, 1860. Of course, some definitions and offences were culled from the realm of fraud in accordance with the Common law structure. Under this Act, a person is said to act fraudulently if he acts with the intent to defraud but not otherwise.[7] Except for the fact that intent is the most important factor in fraudulent behaviour, such a definition does not get us very far. The Roman law of suggestio falsi and suppresio vari also includes the element of intention, but anyone who suggests falsehood with the intent of suppressing truth where it is required to be expressed commits only a civil fraud. Naturally, any act committed fraudulently is not a crime. When fraud becomes cheating, it becomes an offence. Whoever, by deceiving any person, fraudulently or deceitfully 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 not so deceived, and which act or omission causes or is likely to cause injury or harm to that person.[8] Cheating by impersonation, breach of trust by a clerk or servant, breach of trust by a public servant, banker, merchant factor, broker, attorney or an agent, forgery, making a false document, forgery of valuable security, etc., forgery for the purpose of fraud, using a fake document as genuine are the other fraud-driven offences.[9]         

Types of Financial Fraud

There are numerous types of financial fraud to be aware of. It’s necessary to understand the various types of fraud, how they occur, and what people can do about it.

  1. Misappropriation of Funds:Misappropriation of funds is the most common type of financial fraud. According to statistics, misappropriation accounts for 90 percent or more of all financial fraud. Simply, misappropriation of funds occurs when someone takes money or payments that were not meant for them. For example, someone is cashing a social security check of a deceased is perpetrating misappropriation of funds.
  • Bribery and Corruption: Bribery is also a typical kind of financial fraud. It is estimated that almost 30% of uncovered fraud is caused by corruption and bribery. Although numerous stories of corrosion and corruption exist, Kellogg Brown & Root is one of the more prominent and expensive examples. This was Halliburton’s spin-off. It was charged with many scams in 2009, including paying hundreds of millions of dollars to Nigerian officials in order to make it natural.
  • Employee theft and Embezzlement: Employee theft and embezzlement cost the economy $50 billion per year. The average amount stolen is around $175,000. Embezzlement and employee theft occur in nearly every type of business across the country. Darryl McCauley, for example, was charged with stealing from his half-brother, Dane Cook. He stole millions of dollars over the years, which resulted in him serving prison time and having to repay the money.
  • Identity Theft: Identity theft is one of the most widely discussed types of financial fraud today. This happens when someone steals personally identifiable information and uses funds in the name of someone else. Identity theft occurs when a credit card or social security number is stolen and used. Because this is so common, many people are attempting to help crack down on it by obtaining a Bachelor’s degree in criminology and prosecuting the perpetrators.
  • Ponzi Schemes: Ponzi schemes are well-known in today’s world. This is a common type of investment fraud in which money is given to old investors that was previously given to new investors.[10] This money is passed off as investment returns, despite the fact that no actual investment was made in the majority of cases. Most Ponzi schemes share a few characteristics, such as unregistered investments, complex strategies, and high but consistent returns. There were 1,846 pending cases of securities and commodities fraud in 2011, with many of them being Ponzi schemes. It is not an easy task to investigate these financial frauds. With such different types of financial fraud, some of which are committed by individuals and others are of corporate level, it takes a trained and sharp eye to see what is going on in the majority of these cases.

Current Scenario:

There has been an increase in the prevalence of financial fraud in India. They are spreading rapidly throughout society. Despite the fact that it has been the most discussed issue in all spheres of social, economic, and political field, few stringent steps/actions have been taken to curb this menace.[11] The Indian Penal Code of 1860 is India’s first comprehensive and codified criminal law. It specifically deals with many offences that are closely related to crimes such as bribery and corruption, counterfeiting of coins and government stamps, offences relating to weights and measures, offences relating to adulteration of foodstuffs and drugs, misappropriation of public property and criminal breach of trust, cheating, forgery, and offences relating to documents and counterfeiting of official documents.[12]

The reports and inquiry of the Vivien Bose Commission, which investigated the affairs of the Dalmia Jain group of companies in 1963, focused on how industrialists engaged in crimes such as forgery, fraud, falsification of accounts, tampering with records for personal gain, tax evasion and, others. Justice M.C Chagla made relatable observations related with the case of business tycoon Mundhra, who wanted to build an industrial empire through dubious means. Between 1958 and 1960, there were 124 prosecutions against the business magnate and companies owned or controlled by him, with 113 of them resulting in conviction. The corruption and fraud cases which took place in India between the year 2010-2011, such as the 2G Spectrum scam, the Adarsh Society scam, CWG fraud, and various land scams, have harmed India’s reputation globally. Bribery and corruption account for 83 percent of all cases of infringement. A large portion of the frauds (71 percent) are also related to cybercrime and asset diversion (65 percent). According to the survey, the sectors most directly affected are financial services (33%) and information and entertainment (17%). Mr. Raju’s shocking disclosure, which shocked the corporate world, investor community, government, and a large pool of young professionals, pushed the fourth largest Indian IT company into a crisis, exposing it to acquisitions, and putting the future of 53,000 employees in jeopardy. Mr Raju admitted to the BSE that the balance sheet for September 30, 2008, contained fictitious and exaggerated revenue, financial gains, interest, and loan figures.

The PNB bank case: Nirav Modi and Mehul Choksi defrauded PNB of several thousand crores of rupees with the help of several senior and junior officials. These PNB officials fraudulently issued Letters of Understanding and Promissory notes on behalf of several of the duo’s companies in order to obtain credit from Indian banks’ overseas branches. None of the transactions were routed through the CBS (Core Banking Solution) system, allowing for the early detection of fraudulent activity, which had been occurring since 2011. 

In just one month (July 2014), more than Rs 450 crore was transferred to around six beneficiary companies based in Hong Kong and Sharjah (UAE) in the scam, which is now estimated to be worth around Rs 13,700 crore.  The money was later routed to shell companies linked to Nirav Modi and Mehul Choksi in Hong Kong and Sharjah via LoUs (Letters of Undertaking) or LoCs (Letters of Credit) issued by Punjab National Bank.[13]

Legal Provisions and Judicial Pronouncements

The Indian Penal Code, 1860, is the fundamental statute for controlling criminal offences in India, and related charges of fraud including dishonest misappropriation of property (S.403), criminal breach of trust (S.405), forgery (S.463), fabrication of accounts (S.477A), and cheating (S.415). Furthermore, the Ministry of Corporate Affairs (MCA) established the Serious Fraud Investigation Office (SFIO), which has the authority to detect, investigate, and punish white collar crimes and frauds with multi-disciplinary consequences or involving public interest.

The Central Vigilance Commission (CVC), the Central Bureau of Investigation (CBI), and the State Anti-Corruption Bureau (ACB) are the agencies in charge of bribery and corruption prosecution, investigation, and enforcement. The CBI investigates corruption matters under the Prevention of Corruption Act, 1988 (PCA) and the Indian Penal Code 1860, while the different states’ ACBs look into corruption cases.

Money laundering is defined as directly or indirectly engaging in, knowingly assisting, knowingly becoming a party to, or being involved in any process or activity related to the proceeds of crime, including their concealment, possession, acquisition, or use, and projecting or claiming it as untainted property under the Prevention of Money Laundering Act 2002 (PMLA).[14] The Directorate of Enforcement (ED) and the Director of the Financial Intelligence Unit of India (FIU) can use the PMLA’s exclusive prosecutorial and investigative powers in money laundering cases. The Financial Intelligence Unit (FIU) is an independent entity that answers directly to the Economic Intelligence Council and is in charge of coordinating national and international investigative and enforcement agencies in the fight against money laundering and related crimes on a worldwide scale. The Income Tax Act of 1961 additionally stipulates that certain professionals must keep books of accounts and other supporting documentation in order to comply with general financial record-keeping and disclosure obligations.

Through the illegal circulation of counterfeit currency and the harbouring of a terrorist, the Unlawful Activities Prevention Act 1967 (UAPA) covers offences such as conspiracy and commission of a terrorist act (that is, acts that threaten India’s economic security) through the illegal circulation of counterfeit currency. India’s counter-terrorism task force is the National Investigation Agency (NIA). It was established as the leading counter-terrorism investigation institution following the 2008 Mumbai terror attack, with the mission of investigating significant offences connected to terrorist operations that threaten the country’s sovereignty, security, and integrity. The Companies Act, 2013 incorporates certain mechanism, Section 211 of the Act authorises the Central Government to create a Serious Crime Investigation Office (SFIO) to investigate corporate fraud. Once a case has been assigned to SFIO, no other investigating agency may proceed with the investigation of any offence under the Act. The SFIO has the authority to arrest people if it has reason to suspect they are guilty based on the evidence they have. On completion of the investigation, the SFIO will submit a report to the Central Government. The Central Government may order SFIO to file a lawsuit against the corporation.

On March 12, 2018, the Indian government presented the ‘Fugitive Economic Criminals Bill, 2018′, to address offenders who flee criminal prosecution after committing economic crimes. A fugitive economic offender was defined in the Bill as someone who is involved in an economic crime and has a warrant issued against them for urgent arrest.[15] People who travelled overseas to evade criminal prosecution in India, as well as those who are already in a foreign nation and refuse to return to India, have been included. In recent case of Vijay Mallya and Nirav Modi are declared fugitive economic criminals under this Act, who are awaiting criminal prosecution in India after committing a financial crime here and fleeing to a foreign nation. Despite the fact that the Indian government enacted many laws in various domains of financial activities to combat financial crime, criminals have identified gaps in the system to exploit till they reach the helm. Economic offences do not have as many stringent restrictions as criminal offences. The financial offenders have a sense of relaxation, which has failed to set a precedent for future offenders not to conduct such crimes.[16] The goal of the law is to dissuade people from engaging in illegal action and to set an example for the rest of society to avoid doing so as well.  Financial offenders continue to live opulent lifestyles without being required to serve time in dreadful prison conditions. There is a lack of seriousness in addressing financial offences in the same way that criminal offences are treated. To combat the rising rates of financial crime, the government and its authorities must act quickly in the following areas.

Famous Case Laws:                                                                        

MUNDHRA SCAM: This scam is known as India’s first scam.Haridas Mundhra, an industrialist and stock speculator, defrauded the Life Insurance Corporation (LIC) by selling fictitious shares. Mr. Jawahar Lal Nehru, the then-Prime Minister, appointed a one-man commission to investigate, which was led by Justice Chagla. Justice Chagla concluded the case, and Haridas was found guilty and sentenced to 22 years in prison, while T.T. Krishnamachari, the then Finance Minister, resigned.

HARSHAD MEHTA SCAM:[17] Harshad Mehta and his partners manipulated the Bombay Stock Exchange by exploiting flaws in the banking system. He allegedly worked with bank employees to obtain fake bank receipts. These BRs were used to persuade other banks to lend him money under the guise of lending against government securities. Mehta defrauded nearly Rs 4,000 crore in total from bank. When his method of operation in the stock market was revealed later, banks realised they were in possession of worthless BRs.

 After a lengthy legal process, Mehta was convicted both by the Bombay High Court and the Supreme Court, and he was charged with 74 criminal offences. The Harshad Mehta scandal ushered in a slew of changes to India’s financial regulatory system. The Securities Laws Act of 1995 expanded the SEBI’s jurisdiction and allowing it to regulate depositories, FIIs, venture capital funds, and credit-rating agencies.

THE PMC BANK SCAM: The Punjab and Maharashtra Co-Operative Bank which is also known as PMC Bank is a multi-state co-operative bank, founded in 1983. Maharashtra, Goa, Karnataka, Delhi, Gujarat, and Madhya Pradesh are among the states where the bank operates. It is governed by the Reserve Bank of India and is registered under the Co-operative Societies Act. Housing Development and Infrastructure Limited (HDIL) had exposure of approximately Rs. 6500 crores, accounting for near about 73 percent of total advances made by the bank. The advances made were never repaid. According to the allegations, the bank created fictitious accounts for companies that borrowed small sums of money and fake reports in order to avoid regulatory oversight. It is alleged that the HDIL promoters conspired with bank management to obtain loans from the bank, and that bank officials failed to classify these loans as non-performing assets despite nonpayment. The banks had presented false financial reports in order to conceal the loans and were accused of conspiring with HDIL.

On September 30, 2019, a case of forgery, cheating, and criminal conspiracy was filed against the former bank management and HDIL promoters. Waryam Singh, the bank’s former chairman, Joy Thomas, and Rakesh Kumar Wadhawan, the executive chairman of HDIL, and his son Sarang Wadhawan were all named in the FIR. The majority of those named in the FIR have been arrested.  

THE KARVY STOCK BROKING SCANDAL: It was founded in 1983, is known as financial services group that provides equities, commodities trading, depository, and wealth management services.[18] Its headquarters are in India, and it has branch offices all over the country. After beginning with stock brokerage and advisory services, the company expanded into other financial services. Karvy stock broking firm, has approximately 12 lakh clients with demat and broking accounts who buy and sell shares through Karvy and deposit the shares in the demat account. When a person opens a stock broking account, he gives the broker a Power of Attorney to debit the demat account in order to effect the transfer of stocks. Karvy opened a demat account in its own name and used individuals’ powers of attorney to transfer securities to their own accounts rather than clients’ accounts whenever clients purchased them. Around Rs. 2,300 crores accumulated in Karvy’s demat account were pledged for loans with HDFC Bank, ICICI Bank, Bajaj Finance, and Indusind Bank. The securities were used as collateral by the banks, who then made loans to the firm. Karvy Stock Broking had also given the banks an assurance that the securities pledged belonged to them and not to their clients. Karvy Stock Broking transferred approximately Rs. 1,096 crores to the group real estate entity Karvy Reality.

Karvy stock broking has been barred from accepting clients and executing trades by the Securities and Exchange Board of India. Karvy’s broking membership with the National Stock Exchange and the Bombay Stock Exchange has been suspended. The majority of depositors’ securities have been transferred to their respective accounts out of the approximately 95,000 clients affected. Karvy had filed an appeal with the Securities Appellate Tribunal against SEBI and NSE decisions, which were later dismissed in an interim order.

THE ROTOMAC PENS SCAM: The company allegedly borrowed Rs. 2,919 crores from a consortium of seven banks, including Bank Of India, Bank of Maharashtra, Indian Overseas Bank, Union Bank Of India, Allahabad Bank, Oriental Bank of Commerce, and Bank Of Baroda. The total outstanding amount, including interest, is Rs. 3,695 crores. It is alleged that credits sanctioned for specific export orders were diverted to various offshore companies and then remitted back into the company without any export orders being executed. Money disbursed by the bank for exports was not used for exports, and no export orders were executed, resulting in fund misappropriation, criminal breach of trust, and violation of FEMA guidelines. Rotomac allegedly worked for interest rate differentials in local and foreign currency, and even submitted forged documents to entice banks to lend money.[19] It is also claimed that the majority of the transactions were conducted with a small number of buyers, sister companies, and sellers, and that no genuine business was conducted.  

The CBI had opened a criminal investigation against Rotomac Global Pvt. Ltd., its director Vikram Kothari, his wife Sadhana Kothari, his son Rahul Kothari, and bank officials. The accused had been charged with money laundering by the Enforcement Directorate. The Income Tax Department had attached bank accounts in connection with the case’s tax evasion investigation.[20] Because the Loan Accounts were NPA, banks had made a full provision for the advances. Dues are being recovered in accordance with the provisions of SARFAESI, and suits are being filed at debt recovery tribunals. A petition for insolvency is also filed against the company with the National Company Law Tribunal. The investigations and actions are currently underway.

Preventive measures and Solution:

Financial Fraud is a major issue for many people and financial institutions. It is critical to understand the potential risks of fraud, whether you run a small business or a large commercial financial institution.[21] Naturally, you’ll want to learn more about the best ways to prevent and reduce fraud in your business institutions. Therefore, there are many tips, techniques, and strategies to secure the financial institution from such frauds:

  1. Assess the Risk of Fraud: The first step in reducing fraud risk is to conduct an assessment. A thorough assessment, whether performed internally or by a qualified third party, will assist in identifying the areas of weakness that could be exploited by those who are looking to commit fraud.

It will require a proper examination of safety procedures and protocols, as well as the training. The computers which are outdated are easy entry points for hackers to gain access to your data and your customers’ private information. Hence, the computers and software must be updated.

  • Educate your Employees about Fraud Awareness: Everyone in the organisation must be aware of the risks of fraud and the various ways it can occur. In today’s world, training, current software, and a cyber-security team must be capable enough to provide multiple layers of protection to your facilities and to your customers. In every six to twelve months, there should be a training programme for employees, because it will prepare the employee to deal with any of additional threat. This will give the idea of fraud detection and prevention.
  • Improved Cyber Security: Many people nowadays use the cloud to access their banking information. This presents new challenges for financial institutions. The systems must ensure that not only the data is safe from outside attackers, but also the people accessing the data are honest and genuine about their identities. Many institutions are combining to improve the cyber security with traditional methods.

Transaction monitoring is also important. Whether the transactions are entering or leaving the financial institution, there should be alerts for anything out of the ordinary or exceeding a certain dollar amount. Many fraudsters are aware that financial institutions will be looking for large movements of money, so they will try to keep their transactions to smaller amounts. Installing software that detects unusual money movements and training employees to look for them can help reduce fraud.

  • OFAC Checks: When new customers, whether individuals or businesses, open accounts, they should always be subjected to an OFAC check to ensure their legitimacy. OFAC checks the entire name and address on a regular basis. The right digital system can delete old customer information from the system which is not of any use. This ensures that no orphaned names remain on the data files. It speeds up and simplifies the process of adding new customers and retrieving customer information.
  • Consider Providing Customer Education:  Give your customers some advice on how to avoid becoming a victim of fraud. You could provide guidance on your website, in newsletters, in a pamphlet of the institution.

There must be some basic information and warning must be given to customer:

  • Do not give out any personal information or sensitive information to anyone over the phone.
  • Immediately report and replace stolen credit and debit cards, as well as driving licenses.
  • Monthly financial statements should be reviewed.
  • Never share the information of your PIN or password.
  • Use strong passwords and change them on a regular basis.  
  • Install antivirus and antispyware software on your devices.

Comparative Analysis with Other Countries:

Legal Regime Governing Financial Fraud in the United Kingdom:

In the United Kingdom, the Serious Fraud Office is in charge of dealing with cases of serious fraud. If a financial fraud is deemed to be serious and complex, the SFO assumes responsibility for investigating and prosecuting the perpetrators. The SFO was established by the Criminal Justice Act of 1987.[22] The SFO went into full operation in 1988. Its main aims are: 

1. The creation of a unified approach to the investigation of serious fraud;

2. The acquisition of expertise in specialised fields such as stock exchange fraud, insurance fraud, and computer fraud;

3. More effective application of the new procedures established by the Criminal Justice Act, 1987 in order to prosecute serious and complex fraud; and

4. Cases are presented in new and more accessible ways so that juries can understand them and comprehend the issues.

The SFO reports to the Attorney General and Parliament through its Director. The Director is required to submit an annual report to the Attorney General on the performance of her or his duties. In addition to the Director, the SFO employs a Deputy Director, a Chief Accountant, and a hierarchy of assistant directors (lawyers or accountants), other lawyers, investigators, and accountants, as well as administrative personnel.

  • Investigation of Fraud in United Kingdom:  In the United Kingdom, there is no statutory definition of serious fraud. The Director of the SFO is authorised by Section 1(3) of the Act of 1987 to “investigate any suspicious offence which appears to him on reasonable grounds involving severe and serious fraud”. Because there is no clear definition of substantial fraud, the Davie Report presented recommendations for the SFO to consider when evaluating whether or not to take a case. The following are recommendations and suggestions:

1. The sums involved in the cases should be in the order of £1 million or higher.

2. Cases those are likely to result in national attention and widespread public concern.

3. Cases in which the investigation and prosecution of the case were likely to necessitate highly specialised knowledge of, for example, stock exchange practices or regulated markets;

4. Cases with a significant international component;

5. Cases in which legal, accounting, and investigative skills were required; and

6. Cases that appear to be complicated and in which the use of Section 2 powers is required.

When a case is referred to the SFO, it is reviewed to determine if it should be accepted for the further investigation. The vetting process includes factors such as the nature of the allegation, the case’s suitability for investigation by the SFO rather than another body, and the resources available to deal with any investigation. When a case is accepted, a case team comprises of lawyers, accountants, police officers are formed. The team is led by a lawyer who, as a case controller, is responsible for ensuring an efficient and effective investigation as well as any subsequent prosecution.[23]

Investigating major fraud frequently necessitates examining massive amounts of documents that have been purposefully obscured and fragmented. To properly evaluate the information contained in such documents, experts such as police officers, accountants, lawyers, bankers, stockbrokers, and computer specialists examine the documents with the goal of producing the information in court. Throughout the investigation, case conferences are held at regular intervals to provide a forum for agreeing on joint lines of action. They are composed of representatives from the case team’s including prosecuting counsel, who are involved at an early stage. A final conference is held at the end of each case to review the case.

The Legal Regime Governing Financial Fraud in the European Union:

The European Union has shown an interest in dealing with fraud issues seriously, as financial fraud is seen to have far-reaching consequences for the economic health of the community as a whole. In terms of revenue, 2 percent of the fraud cases discovered account for 66 percent of the amounts at stake, according to statistics. On the expenditure side, 8% of the cases account for 74% of the total amount at serious risk. All National Criminal Codes or equivalent bodies of legislation provide for offences that can involve both the Community’s and member states’ financial interests. The most serious of these are obtaining by deception, forgery and issuing forged documents, and fraudulent conversion. Some member states (for example, the Netherlands) list dozens of provisions found in a large number of separate laws enacted that can be used against fraudsters, depending on the form of the fraud. The majority of member countries believe that ordinary criminal offences are sufficiently defined to safeguard the Community’s financial interests. Assimilation for enforcement purposes is implied by provisions that create offences and punishments that are applicable in the same way: to Community and national interests.[24]  

Notwithstanding, it is clear from some of the reports that the tendency is toward making fraud against the financial interests of the Community a separate crime. The trend gained traction with the signing of the Convention on the Protection of the Financial Interests of the Community on July 26, 1995, following an agreement reached in Cannes. Article 1(2) requires member states to implement the necessary and appropriate steps to transpose the provisions of Article 1(1) (defining what connotes fraud against the Community’s financial interests) into their criminal law, so that the conduct described therein becomes a criminal offence.[25] The goal, as stated in the explanatory report, is for member states to make fraud either a specific or express offence, or to include it in the general definition of the offence of fraud. There is a trend toward the creation of multidisciplinary control structures that are responsible for all aspects of fraud prevention and have broad investigative powers. The member states hope that by doing so, more effective steps can be taken to fight organised financial crime, which is not limited to a single sector.

The Convention on the Protection of Financial Interests of the Community stipulates that member nations must prosecute the fabrication or supply of false, inaccurate, or incomplete statements or documents in order to combat financial fraud effectively.[26] Participation in or incitement of any type of fraud is also being considered for criminalization. It also specifies that Member States’ punishments must be proportionate, effective, and deterrent.  In the case of major fraud, where the monetary limit exceeds ECU 50,000, the Convention requires that Member States impose penalties that include deprivation of liberty, which might lead to extradition. In the case of transnational fraud, the Convention calls for cooperation between the concerned Member States in the investigation, prosecution, and enforcement of sentences, as well as in all other stages of the investigation.

Conclusion:

Financial frauds in India do not have the same legal status as other offences, and as a result, they carry light penalties that do not deter people from repeating similar crimes in the future. Because of their propensity to have an immediate impact on the national economy, financial crimes are sometimes considered more serious than criminal offences. The government has enacted regulations to combat financial crimes, however due to offender’s ability to find loopholes, no significant reduction has been recorded. There is no guarantee that the measures proposed will be sufficient to reduce the crime, but they will undoubtedly strengthen the government’s system in this area.

It is a common assumption that no crime can ever be linked to a beneficial social consequence. Similarly, financial crimes have a significant detrimental impact on the economy. It has a variety of effects on the country growth and development. It endangers the country stability and harms its worldwide reputation. As some of the major effects of financial offences on the country economy can be highlighted as there is an observation of unequal distribution of resources among the population; an abundance of counterfeit currency, i.e. money not accounted for during the calculation of national income in a fiscal year; and the creation of a parallel economy with people investing in fictional sources that are not registered with the government. Furthermore, there are some additional consequences that require attention: the slowdown of government development projects across the country, which undermines citizens; trust in the government’s efficiency, and a sharp increase in the level of corruption. Many notable fraud incidents have been reported in connection with fix deposits, loan disbursements, credit and debit card frauds, and ATM-based frauds. All of these frauds demonstrate that they not only adversely affect profits, service reliability, and operational efficiencies, but they can also have an impact on society and the organisation itself. The increasing gravity of such incidents is having an impact on the sector’s profitability, and there is an increase in NPAs. This increase in non-performing assets is a serious threat to the Indian banking industry, as the strength of a country’s financial industry determines the quality of products and services.

Considering the number of defaults in recent times, detailed scrutiny and prompt reporting to the RBI are required while granting loans to large business houses. Because of their inability to repay loans, many small and needy businesses are denied minimum-loan amounts by banks. On the other hand, large sums of money are loaned to large corporations, who then fail to repay them, causing massive losses to banks. A proper policy in this regard is required to ensure the proper flow of money from the banking system into the economy. Banks must take appropriate measures at both the individual and system levels to reduce defaults by customers, particularly those who have received large advances.

Author: Vinayak Sonkar

College: University of Petroleum & Energy Studies, Dehradun

Recommendations:

To overcome this serious certain recommendations to be followed:

  • Re-KYC, when done properly, enables in the detection of fraudulent activities, particularly on the liability side.
  • Banks should also prioritise market knowledge. Each bank should have a cell that evaluates the company/firm to which they are lending as well as the macroeconomic environment of the concerned industry or market where products are marketed.
  • In banks, a special fraud monitoring agency with highly trained officials should be established. A specialised investigating agency with expertise from agencies such as the CBI, RBI, SEBI, and commercial banks is also required.
  • New cases of fraud should be reported to all bank officials. Currently, because each bank has its own intranet system for communication, a simplified mailer with the officers’ / parties’ names morphed can be distributed.
  • Training sessions for employees on early fraud detection and prevention should be held on a regular basis.
  • Banks should implement cyber risk management programmes to achieve three critical capabilities: security, vigilance, and resilience

Bibliography:

  • BOOKS:
  • The Great Indian Fraud: Serious Frauds Which Shook the Economy by Smarak Swain
  • Banking Frauds in India by Dr. Anil Dogra.
  • Financial Fraud Prevention and Detection: Governance and Effective Practices

[1] “Fraud in the banking sector – causes, concerns and Cures”, speech by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, during the National Conference on Financial Fraud organised by ASSOCHAM, New Delhi, 26 July 2013.

[2] https://www.tbsnews.net/international/business/frauds-rise-indias-economy-slows

[3] Ms. Juhi Mehta & Ms. Deepa Bharathi Sharma, Research Scholars from NLSIU, Bangalore compiling and commenting on the issue.

[4] Abichandani, R.K., Pollock and Mulla on Indian Contract and Specific Relief Acts, Volume 1, N.M. Tripahti Pvt. Ltd., Bombay, 1994 at 241. English law also recognises the concept of ‘constructive fraud’. This means that a court of equity will set aside a transaction entered into as a result of conduct, which though not amounting to actual fraud or deceit, is contrary to good conscience. Such conduct, which is described as constructive fraud includes the procurement of a gift or other benefit by the exercise of undue influence and the making of an unconscionable bargain. For details see: Infra n.2, para 838.

[5] (1889) 14 App. Cas 337 HC, c.f. Halsburys Laws of England, Volume 11(2), 4th edition, Reissue 1990, para 780.

[6] Section 12(3) of the Criminal Justice Act, 1987, c.f. Aldridge and Parry on Fraud at 45.Conspiracy to defraud is now a statutory offence under English law.

[7] Section 25 of the Indian Penal Code, 1860.

[8] Section 415 of the Indian Penal Code, 1860.

[9] Section 474 of the Indian Penal Code, 1860.

[10] https://everythingfinanceblog.com/10575/5-types-financial-fraud-thatll-cost-freedom.html

[11] G. Nagarajan & Dr. J. Khaja Sheriff, White Collar Crimes in India, International Journal of Social Science &

Interdisciplinary Research

[12] International journal of legal development and allied issues, Vol. 4 issue 3, may2018

[13] Available at https://www.businesstoday.in/sectors/banks/pnb-fraud-companies-owned-by-nirav-modi-mehulchoksi-received-rs-427-crore-in-july-2014/story/272700.html

[14] The print. (2020). Retrieved from https://theprint.in/india/fatf-review-of-indias-anti-money-laundering-regime-postponed-to-early-2021-due-to-covid/468581/

[15] https://www.unafei.or.jp/publications/pdf/RS_No67/No67_22PA_Bharti.pdf

[16] https://timesofindia.indiatimes.com/india/bail-in-economic-offences-will-hamper-probe-supreme-court/articleshow/71001667.cms

[17] Harshad Shantilal Mehta vs. Custodian & Ors 1998(4) SC 323

[18] Karvy Stock Broking Limited vs.The Union of India and others.

[19] Frauds in the Banking Sector: Causes, Concerns and Cures (legalbites.in)

[20] Economic crime: people,culture & controls. India: PricewaterhouseCoopers.

[21] Actionable Fraud Prevention Tips for Your Financial Institution (fpsgold.com)

[22] The S.F.O. finds its origins in various commissions and committee recommendations made to the UK

government. In 1983, Lord Roskill as the chairman of a Fraud Trials Committee recommended the

establishment of a unified organisation responsible for all the functions of detection, investigation and

prosecution of serious fraud”. These recommendations gave rise to the Criminal Justice Act, 1987 which

set up the S.F.O.

[23] Serious Fraud Office: What it does and how it works, http://www.sfo.gov.uk/

[24] http://www.sfo.gov.uk/

[25] http://www.jus.unintn.it/transcrime/papers/wp13.htm

[26] http://www.isrcl.org/Smith.htm