Combating Fraud Risk in Payment Systems

1. Combating Fraud Risk in Payment Systems Many of you would have attended the training on SWIFT, so you would be aware of the various fraud prone areas in branches, and what we must do to prevent frauds in our day to day activities. The moment you hear the word FRAUD, you know something wrong has happened somewhere. Someone somewhere has illegally gained by exploiting a loophole in an otherwise watertight process, at the expense of someone else. That �someone else� could be a customer of the bank, or it could be the bank itself. Frauds are a real menace in the financial world and pose a serious threat to the credibility of a financial institution, who constantly endeavour to protect it's depositors money. As employees of a premier financial institution in the country you have a great responsibility towards protecting the reputation of the bank from the menace of fraud. To be able to do so, you need to understand what constitutes a fraud, why and how they occur and what you can do to prevent their occurrence.Many of you would have attended the training on SWIFT, so you would be aware of the various fraud prone areas in branches, and what we must do to prevent frauds in our day to day activities. The moment you hear the word FRAUD, you know something wrong has happened somewhere. Someone somewhere has illegally gained by exploiting a loophole in an otherwise watertight process, at the expense of someone else. That �someone else� could be a customer of the bank, or it could be the bank itself. Frauds are a real menace in the financial world and pose a serious threat to the credibility of a financial institution, who constantly endeavour to protect it's depositors money. As employees of a premier financial institution in the country you have a great responsibility towards protecting the reputation of the bank from the menace of fraud. To be able to do so, you need to understand what constitutes a fraud, why and how they occur and what you can do to prevent their occurrence.

2. 2 Defining �Fraud� �..a deliberate act of omission or commission by any person, carried out in the course of a banking transaction or in the books of account maintained manually or under computer system in banks, resulting into wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank.� (Report of the Study Group On Large Value Bank Frauds issued by RBI) Deliberate Act means � someone knowingly doing it. Omission or Commission � Purposely leaving out some controls or doing something that facilitates the instance of a fraud �Person � Can be a person transacting with the bank, service provider to the bank or employee of the bank. �Wrongful gain � A gain for which the person is not entitled to in a normal business / transaction scenario. �Whether temporary or otherwise � The amount involved may or may not be recoverable. The gain to the person could be for any period of time which may help him or some other person solve his/her requirement temporarily. The funds maybe recovered later. With or without monetary loss to the bank � The fraudulent act may or may not result in loss to the bank. Still, the very act is fraudulent and hence a �fraud�. These acts leads to affecting the reputation of the bank.Deliberate Act means � someone knowingly doing it. Omission or Commission � Purposely leaving out some controls or doing something that facilitates the instance of a fraud �Person � Can be a person transacting with the bank, service provider to the bank or employee of the bank. �Wrongful gain � A gain for which the person is not entitled to in a normal business / transaction scenario. �Whether temporary or otherwise � The amount involved may or may not be recoverable. The gain to the person could be for any period of time which may help him or some other person solve his/her requirement temporarily. The funds maybe recovered later. With or without monetary loss to the bank � The fraudulent act may or may not result in loss to the bank. Still, the very act is fraudulent and hence a �fraud�. These acts leads to affecting the reputation of the bank.

3. 3 Payment Systems Key participants Reserve Bank of India CCIL, Stock Exchanges Clearing Houses Banks Other entities Mission: To ensure that all the payment and settlement systems operating in the country are safe, secure, sound, efficient, accessible and authorised Apex body: The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)

4. 4 Frauds in Payment Systems Paper based Cheques Dividend/Interest warrants Demand Drafts/Pay orders Electronic CTS (Cheque Truncation System) RTGS/NEFT ECS � Debit and Credit ATMs Credit cards including prepaid Internet Banking Mobile Banking Fraudulent encashment through forged instruments : Duplicate or colour xerox copy of a cheque is presented with the false signature of the customer to get the money. Manipulation of Books of Accounts : This kind of fraud is found from both the side i.e internal and external. Internal means internal to the organisation, this involves window dressing of the books of accounts for passing wrong entries. E.g. Existing FDR's in the system closed and recycled as new FDR's to meet the sales targets. From the external side it means manipulation of books of accounts and presenting a good picture of Balance sheet to procure a higher amount of loan. Creation of fictitious Accounts : Opening the account in the bank by submitting the wrong/forged documents of identity or address and then using the account for illegal activity. There can be possibilities of identity thefts too for perpetrating frauds. Conversion of property :Basically Home loan related frauds, E.G Borrowers applied to the Bank for Home Loan by submitting documents such as income documents and identity documents to purchase flats. Due to non-receipt of EMI payments detailed investigation was carried out. The property visit revealed that there is no such property and instead there exist Hotel on the same plot. Though there are registered documents available, no such property exists at the location for the loan disbursed as on date. The borrower and the builder are not traceable. Unauthorised credit facilities for illegal gratification : Loans given to non-deserving companies after taking kickbacks. or cash withdrawn for the intra-day period from a branch and given to outsiders for personal benefit of the branch manager. Cash shortages : Instances have been found like the cash shortage has been shown in the accounts of the bank, but in reality it is pilfered by the cashier. Cheating and forgery : Cheating and forgery cases are widely increasing the country. Example, the fraudsters pilfer dividend warrants/cheques by intercepting the instruments from the couriers and then chemically change/forge the payee name and present the instrument in clearing/cash. Phishing, smishing, vishing all fall in this category Misappropriation or criminal breach of trust : If a employee fraudulently shoulder surf's another employee's password and commits a fraud on his login. eg. long pending funds from the DD/PO account are transferred to his accounts for fraudulent encashment Hence the generation of fraud can be taken in to two parts i.e internal and external frauds. By internal it means frauds done by or done with the help of a person within the organisation. External frauds are perpetrated by individual's other than the bank's employeesFraudulent encashment through forged instruments : Duplicate or colour xerox copy of a cheque is presented with the false signature of the customer to get the money. Manipulation of Books of Accounts : This kind of fraud is found from both the side i.e internal and external. Internal means internal to the organisation, this involves window dressing of the books of accounts for passing wrong entries. E.g. Existing FDR's in the system closed and recycled as new FDR's to meet the sales targets. From the external side it means manipulation of books of accounts and presenting a good picture of Balance sheet to procure a higher amount of loan. Creation of fictitious Accounts : Opening the account in the bank by submitting the wrong/forged documents of identity or address and then using the account for illegal activity. There can be possibilities of identity thefts too for perpetrating frauds. Conversion of property :Basically Home loan related frauds, E.G Borrowers applied to the Bank for Home Loan by submitting documents such as income documents and identity documents to purchase flats. Due to non-receipt of EMI payments detailed investigation was carried out. The property visit revealed that there is no such property and instead there exist Hotel on the same plot. Though there are registered documents available, no such property exists at the location for the loan disbursed as on date. The borrower and the builder are not traceable. Unauthorised credit facilities for illegal gratification : Loans given to non-deserving companies after taking kickbacks. or cash withdrawn for the intra-day period from a branch and given to outsiders for personal benefit of the branch manager. Cash shortages : Instances have been found like the cash shortage has been shown in the accounts of the bank, but in reality it is pilfered by the cashier. Cheating and forgery : Cheating and forgery cases are widely increasing the country. Example, the fraudsters pilfer dividend warrants/cheques by intercepting the instruments from the couriers and then chemically change/forge the payee name and present the instrument in clearing/cash. Phishing, smishing, vishing all fall in this category Misappropriation or criminal breach of trust : If a employee fraudulently shoulder surf's another employee's password and commits a fraud on his login. eg. long pending funds from the DD/PO account are transferred to his accounts for fraudulent encashment Hence the generation of fraud can be taken in to two parts i.e internal and external frauds. By internal it means frauds done by or done with the help of a person within the organisation. External frauds are perpetrated by individual's other than the bank's employees

5. 5 Instrument frauds Forgery Colour photo copy Colour photo copy with MICR coding Scanned image printed on security paper Large value cheques issued without balance in account

6. 6 Electronic frauds Fraudulent RTGS/NEFT requests Physical requests Through internet banking Speedy dissemination of fraud funds to various banks Withdrawal across the country through ATMs or cheques ECS frauds Changing account numbers for credit/debit

7. 7 Channel frauds ATMs Social engineering Skimming Unauthorised reversals Internet Phishing Vishing Mobile Banking

8. 8 The challenge to a Bank� Financial Loss Brand Image & Reputation Customer confidence Regulator confidence Shareholder confidence

9. Combating the Challenge��� The �TAP� concept :