Author – KALPNA, Student from DR. RAM MANOHAR LOHIA NATIONAL LAW UNIVERSITY, LUCKNOW
INTRODUCTION
A sound and efficient banking management system is a critical requirement for each nation’s overall financial performance. Banking activity has a big impact on how smoothly the foreign exchange markets run. It also acts as a tool for organizing resources and guiding them in the direction of beneficial outcomes.
Nevertheless, it has been noted during the past 50 years that even advanced nations and established financial institutions have encountered serious banking failures and problems as a result of the expansion of fraud.
The “ABG Shipbuilding Scam” which was observed at the beginning of the year 2022 has been described as the largest bank scam in India to date.[1] This is not the first instance of bank fraud in India such a significant bank scam has occurred before as well. Even though several scams, including the Vijay Mallya bank fraud and the Harshad Mehta scandal, have already severely harmed India’s economy, little action has been taken to stop them.
We will comprehend the definition of bank fraud in this post. Following an understanding of the laws governing bank fraud, we will examine the problems and potential solutions in the context of India.
WHAT IS BANK FRAUD?
Fraud is a careful act to get an illegal benefit or profit, whether for a person or organization, by employing deceit or false ideas, deceit or concealment of facts, or any other immoral tactics that others accept. Using any of the above-mentioned listed methods to deprive any individual, organization, or entity of a gain to which they are owed is also fraud. 2022 (Editor) Fraudulent acts might involve a variety of things.
- Conflicts of interest and ethical lapses
- Embezzlement is the second type of fraud.
- Unauthorized access file modification or alteration
- Exploitation or misappropriation of educational resources (e.g., finances, materials, technology, facilities, service, inventories, or other resources)
- Authorization or acceptance of payments for products not delivered or assistance not rendered
- Document fabrication or modification
- Fraudulent financial reporting is number seven.
- Approval or receipt of wages or benefits that were not obtained
Bank fraud is defined as any hostile behavior aimed at deceiving a bank or financial institution to steal a percentage of money. Central banks, deposit insurance firms, mortgage loan agencies, and any other entity that receives treasury bonds or money deposits are all considered financial organizations. Generally, any purposeful or willing activity intended to defraud a financial organization is considered bank fraud. It might also entail using false information to get funds, resources, stocks, properties, or credit from a commercial bank.
LEGISLATIONS GOVERNING BANKING FRAUDS IN INDIA
In India, there is no explicit statute that addresses bank fraud. Banking frauds are often prosecuted under the IPC, which is the criminal code, and occasionally under other common laws like the contract act, the IT Act (if the fraud involves internet banking), the RBI Act, etc. Let’s take a closer look at the laws about bank fraud under the IPC and contract legislation.
Indian Penal Code, 1860[2]
Despite the Indian Penal Code, 1860’s lack of an explicit definition for “fraud,” the sections for cheating (Sections 415 to 420), concealment (Sections 421 to 424), forgery (Sections 463 to 477A), counterfeiting (Sections 489A to 489E), misappropriation (Sections 403 to 404), and breach of trust (Sections 405 to 409), could be applied while dealing with banking frauds.
LEGAL SOLUTIONS AND PUNITIVE MEASURES FOR THE FRAUDULENT CHEATING OFFENSE
As a deterrence for the offense of cheating, Section 419 of the Indian Penal Code, 1860 stipulates incarceration of any sort for a time that may exceed 3 years, with a fine, or with both.
Cheating is a prima facie violation that cannot be released on bail. A first-class magistrate conducts the trial. Under Section 156(3) of the Code of Criminal Procedure, 1973, an FIR or application may be made, and in the case of a private complaint, under Section 200.
· CONCEALMENT
According to Section 421 of the Indian Penal Code, 1860,[3] stealing or concealing assets to avoid distribution to creditors is punishable by any type of prison for a time that may last up to 2 years, a penalty, or even both.
The offense is not cognizable, bailable, triable by any judge, and, with the court’s approval, compoundable by the aggrieved creditor.
· FORGERY
Forgery is punishable by imprisonment of any type for a term that may not exceed two years, a fine, or both under Section 465 of the Indian Penal Code, 1860.[4]
· COUNTERFEITING
According to Section 489 A of the Indian Penal Code, 1860[5], counterfeiting paper currency or bank notes may result in a life sentence in jail or a period of either kind of prison that may last up to 10 years, as well as a fine. Therefore, it would be appropriate to cite the relevant RBI Master Circular.
· MISAPPROPRIATION
Deceitful misappropriation of any moveable property is prohibited under Section 403 of the Code of 1860[6] and is punishable by any type of prison for a time that may not exceed 2 years, by a fine, or by both.
· BREAKING THE TRUST
Criminal breach of trust is punishable by the prison of any type for a period that may not exceed 3 years, a fine, or both under Section 406 of the Indian Penal Code, 1860.
THE INDIAN CONTRACT ACT, 1872[7]
By Section 17 of the Indian Contract Act of 1872, Fraud is defined as any of the following actions conducted by a contractual party, their connivance, or their agency to induce another party or their agency to agree. The following list of circumstances that might lead to fraud:
1. The proclamation of an untrue statement as truth by a person who does not consider that statement to be true.
2. When somebody who knows or believes something intentionally conceals it.
3. Making a promise without intending to keep it.
4. Any other behavior intended to mislead.
5. Any deed or omissions that the law expressly declares to be dishonest.
COMPOSITES OF FRAUD
1. A factual proposal should be made.
2. The stated fact shouldn’t be accurate.
4. The proposal must have been made with the intention of either misleading or persuading the other party to sign the contract. The suggestion must also have been made by someone who does not believe it to be true.
PUNISHMENT FOR FRAUD
1. Since the punishment for committing fraud consists of both a fine and an amount of time behind bars, it cannot be compounded. With the development of technology, there has been a surge in online fraud, and as a result, it is now a severe penal offense.
2. The Companies Act of 2013’s Section 447 penalizes fraud. The Act has over 20 provisions that are devoted to revealing frauds perpetrated by a company’s directors, senior managerial personnel, and/or corporate officials.
3. A person who is found guilty of fraud in violation of Section 447 may receive a prison term of between six months and 10 years.
RESPONSIBILITIES OF THE AGGRIEVED PARTY IN CONNECTION WITH FRAUD
In a fraud case, the plaintiff has two choices:
1. The plaintiff has the right to back out of the agreement, or terminate it, and ask for compensation for their losses.
2. Verify the contract and initiate a lawsuit for damages against the defendant. (For instance, if the asset’s value has decreased.)
Based on the particulars of the case, it may be possible to demonstrate the defendant’s malice or criminal intent. The accused may then be subject to legal action, which could result in penalties or even a jail term for the accused.[8]
SUGGESTIONS
- As has already been said, there is no special law against banking fraud. Due to a lack of such regulation, there is also an increase in financial fraud and poor management in the banking industry. It would be simple for the judiciary and government to punish criminals and reduce fraud in India if there were specific legislation for banking scams. Hence separate legislations must be established to deal with bank frauds.
- The absence of Vigilance committees in the banks is yet another factor contributing to banking fraud. To monitor the activities of the bank, vigilance committees must be established. The committee must be impartial toward the bank and should retaliate harshly if anything untoward is discovered.
CONCLUSION
Due to inadequate management, there’s been a worrisome spike in the number of interruptions in Indian banks during the past several years. The deception serves as a reminder that banking operations now have wider implications and that the collapse of the banking system might hurt the stability of the whole financial system. It provides a compelling argument for regulating all banking activities rather than just banks acting as deposit-taking organizations. All interested parties must work together to combat the threat of these crimes and violations at this time when banking frauds pose a serious threat to India. The RBI is primarily in charge of regulating several regulations in India that are dedicated to combating financial fraud, however, the issue is that these rules are not being properly implemented. To prevent financial fraud, the banks must raise public awareness in this respect. The only issue facing banks is not, however, preventing banking fraud. It is a serious threat that calls for concerted efforts from the banking industry, consumers, and law enforcement.[9]
REFERENCES
- Banerjee O, ‘All You Need To Know About Bank Frauds In India – Ipleaders’ (iPleaders, 2022) <https://blog.ipleaders.in/all-you-need-to-know-about-bank-frauds-in-indi/#The_Indian_Contract_Act_1872> accessed 7 July 2022
- Kumarar j, ‘The ABG Shipyard Scam: Inaction On Red Flags As India’S Biggest Bank Fraud Unfolded’ (The Economic Times, 2022) <https://economictimes.indiatimes.com/news/india/the-abg-shipyard-scam-inaction-on-red-flags-as-indias-biggest-bank-fraud-unfolded/articleshow/89613817.cms> accessed 7 July 2022
- Senguptata A, ‘Top Bank Frauds That Grabbed Headlines In FY22 – ET BFSI’ (ETBFSI.com, 2022) <https://bfsi.economictimes.indiatimes.com/news/banking/top-bank-frauds-that-grabbed-headlines-in-fy22/90545177#:~:text=In%20the%20latest%20development%20around%20the%20Rs%201267.79,Lal%20Khandelwal%20and%20others.%20SBI%2C%20ICICI%20Bank%2C%20others> accessed 7 July 2022
- Bhasin M, ‘MENACE OF FRAUDS IN THE INDIAN BANKING INDUSTRY: An Empirical Study’ (2015) 04 Australian Journal of Business and Management Research
- Sharma A, ‘From Hawala Scam To Coalgate: An Analysis Of Financial Scams In India’ [2013] SSRN Electronic Journal
[1] jagath kumar, ‘The ABG Shipyard Scam: Inaction On Red Flags As India’S Biggest Bank Fraud Unfolded’ (The Economic Times, 2022) <https://economictimes.indiatimes.com/news/india/the-abg-shipyard-scam-inaction-on-red-flags-as-indias-biggest-bank-fraud-unfolded/articleshow/89613817.cms> accessed 7 July 2022.
[2] Indian Penal Code, 1860 (act number 45 of 1860)
[3] Indian Penal Code, 1860 §421 (act number 45 of 1860)
[4] Indian Penal Code, 1860 §465 (act number 45 of 1860)
[5] Indian Penal Code, 1860 §489A (act number 45 of 1860)
[6] Indian Penal Code, 1860 §403 (act number 45 of 1860)
[7] Indian contract act, 1872 (act number 9 of 1872)
[8] Oishika Banerjee, ‘All You Need To Know About Bank Frauds In India – Ipleaders’ (iPleaders, 2022) <https://blog.ipleaders.in/all-you-need-to-know-about-bank-frauds-in-indi/#The_Indian_Contract_Act_1872> accessed 7 July 2022.
[9] Madan Lal Bhasin, ‘MENACE OF FRAUDS IN THE INDIAN BANKING INDUSTRY: An Empirical Study’ (2015) 04 Australian Journal of Business and Management Research.