Investigating Banking Frauds

Riyaz Ahmed Bhat
RBI while issuing its Financial stability report in June 2019 has revealed that frauds detected and reported by the Banks in 2018-19 have been perpetuated earlier and reporting of these to the RBI has been delayed. Accordingly the regulator has indicated its intention of reviewing its master direction on reporting of frauds. As previously reported that majority of the frauds perpetuated on banks are from credit side which can be in called as loan frauds in common parlance. These loan frauds constitute availment of bank funds for non existent businesses, escalating cost of establishing businesses, siphoning of funds from businesses financed by the banks or obtaining of loans in violation of regulatory norms after paying due considerations. In these frauds it is a common perception that a conspiracy is hatched between culprits and players inside a banking system.
As per present mechanism most of frauds valuing more than rupees one lac are referred to outside investigating agencies like executive police, Crime Branch, CBI or Serious frauds investigation office (SFIO) and need a specialized teams to investigate to bring culprits to the book. It is a proved fact that when any investigating agency succeeds in winning conviction of an accused in a court of law then only it proves as deterrence to the crime in the society. Most of the time it has been observed that our investigation agencies have not succeeded in obtaining conviction of accused person in case of loan frauds because neither criminal intent nor execution of these frauds was established before the court of law. This happened because the accused persons belonging to the bank could convince the court that their actions were business in normal course hence legal and bonafide. Often the court passing strictures against investigative agencies has observed that though a unlawful loss to the bank may have happened but the same cannot be established beyond doubt to have been incurred by unlawful gain of accused person This becomes a pathetic situation which we may relate to a that theft has happened but thieves are still moving in society.
In foregoing backdrop it is necessary for any investigative mechanism to study what lags in our system in not being successful in obtaining conviction of these accused from the courts. This aspect of failure remains a subject to study and so far little work has been done in this direction. One such work done so far is by a professional banker working on deputation with an investigative agency documented his study which reveals that our traditional investigative officers are not either conversant with banking procedures or have not upgraded their skills with modern developments in banking which has progressed a lot. The banking at the core has remained same but now is handling a number of business operations.
Banks continue to trade in money and earn this money from same business of lending and after paying cost of money to their depositors. Since earning of money by unlawful means has remained a natural instinct of criminal elements hence any unlawful gain results in an unlawful loss which is a definition of fraud in every constitutional setup. To investigate a loan fraud several steps are initiated once a complaint is received or any deviation is observed by supervisory mechanism inside a bank. Then Investigation starts within a bank and once bank, after investigation, is convinced that a declaration of fraud is to be made as per regulatory directions reporting to RBI is done. This is followed by referring the case to outside investigation agency by lodging of First Information Report(FIR). The Investigating Officer while starting the indepth investigation concentrates on unlawful gain and loss theory and usually invokes relevant provisions of Indian penal code (IPC) which deal with criminal conspiracy, cheating and forgery. While investigating it becomes a challenge for any Investigating Officer to prove a criminal intent as the procedures in granting of loans in banks are not strict because business of banking being a business of risk mitigation wherein the risks are being evaluated to earn the profit. The fundamental of this risk mitigation is greater the risk more is the profit and banks have to maximize the profit after putting the risk management in place as per regulatory norms. Similarly while evaluating any risks in any case the banker has to take into consideration the repayment of loan advanced and time value of money to hasten the process of recoveries and these can be normal business decisions of any banking professional.
The Investigating Officers need not to waste time of investigation in questioning of banking officials for their delegations in recommending or appraising or sanctioning loans but prefer minning of data from banks to study it for further investigations. In a loan fraud no Investigating Officer can question the motive of a bank authority unless and until he has sufficient evidence to substantiate his accusation of consideration to prove that any action in the case was motivated by this consideration. As far as outside player’s involvement in a loan fraud is concerned here the IO has to look for the business transactions of the accused which may give sufficient clue of siphoning of money or payment of consideration for availment of loan or obtaining of a concession from the bank and this can help him to prepare a water tight case against accused persons to prove the preferred charges against them in court of law.
(The author is Chairman Jammu and Kashmir Bank Officers Forum)