Banking Scams in India – An Assessment of the Related Laws in India

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Submitted By: Ms. Gogula Madhavi Lakshmi

INTRODUCTION

The primary responsibility for preventing frauds lies with individual banks; however, the Reserve Bank of India (“RBI”) routinely advises banks[1]about major fraud-prone areas and the safeguards necessary for the prevention of frauds. This is done so that banks can introduce necessary safeguards by way of appropriate procedures and internal checks.

With growing usage and dependency on electronic forms of transaction, banks have employed more secured means and platforms separate from the normal channels of communication.

The authenticity and integrity of such a platform are ensured through the usage of specific software, which ensures the validity of the bank’s electronic documents. But has such processes ensured safe and secure banking? Or, are frauds still prevalent? Is online mode secure?

In this bulletin, we will discuss these crucial aspects and find out the current state of e-banking transactions, reporting requirements to be followed by banks, and how secure e-banking is for the consumers. There is some scam are here that is:

PNB SCAM

PNB filed the complaint on 29th Jan 2018 with CBI telling the fraudulent transaction with Nirav Modi’s firm along-with a related bank official. Further, on 04th Feb 2018, CBI issued a lookout notice against Nirav Modi.  PNB informed stock exchanges on 05th Feb 2018 regarding the fraud and its magnitude which is $ 1.77 billion on 14th Feb 2018. (Gayathri & Mangaiyarkarasi, 2018).

The fraudulent transactions were  “for the benefit of a few select account holders” The note had not mentioned the name of the Fugitive Diamond merchant but the media found out the name and the place which was the Mumbai branch of  PNB  where the branch had allegedly issued  LOUs for raising the buyer’s credit for this diamond trader  (Bandopadhyay, 2018)  The fraudulent transactions or  LOU  issuance had been taken place at  Mid Corporate  Branch  Brady  House, Mumbai. (Krishna, 2018) (PTI, 2019)

PNB  employees  (54  officials)  issued the fake  Letter of  Undertakings (LOU)  which could lead to funding the NOSTRO account of PNB  by the Axis and Allahabad bank  (Hongkong branches). Where this  NOSTRO account of PNB could fund overseas parties including that of Nirav Modi. (Roy, Kalra, & Rocha, 2018) The two employees of PNB directly used SWIFT and while doing it, they did not pay attention to the core banking system (CBS). The FIR contained the details like those two PNB employees were issuing LOUs in an unauthorized way for the last  7 years. 

Afterwards, one of them retired and the new employee came on his designation. In January, when the officials of the firm demanded fresh LOUs from PNB, the new PNB officer asked for collateral security. The officials of the firm mentioned that this had been never asked by the PNB manager in the last 7 years.

Now the bank got a signal that something wrong has been taken place. The new Bank officer got doubt on the past 7 years LOU issuance and he looked into the concerned matter in detail. After a detailed investigation, it found near about 100 LOUs issued to these firms without asking for collateral security. PNB became the victim of the fraud. It faced the problem amounting to about 11,400 crores. The PNB reported to the RBI and CBI.

Modi needed money to import pearls & diamonds. He wanted to have a foreign currency loan and his earning through exporting was in foreign currency. The most important thing is that he wanted to borrow without his loan account. Hence, he arranged LOU from the PNB to get cheap buyer’s credit in foreign currency, which is for the short term.

Ideally, Modi should have exported the pearls, diamonds & use the earnings for settling the due amount of LOU as & when demanded by the bank according to its standard procedure. Further, PNB needs to have paid back the loan it has raised in its NOSTRO account from the overseas banks. But he utilized the money for other purposes without paying it to the bank. These activities were happening for the last 7 years. Rather Modi used to pay back the principal & interest on the old LOU by a new one.

The total Lou’s taken by Nirav Modi & Mehul Choksi stood out at 293 according to investigation agencies’ detail. In this way, the cycle of fraud was repeating. Mr Gopalnath Shetty, who was been working at the foreign exchange department of the PNB branch in Mumbai since  31 March  2010, and his colleagues were allegedly using the SWIFT  system and no other Employees had attention to it. There was no linkage of SWIFT to the CORE system. (Bandopadhyay, 2018)

According to the FIR,  SWIFT  messages were issued to  Allahabad Bank and  Axis  Bank in  Hongkong. (Krishna, 2018) Nirav Modi was a diamond jewelry designer. According to Forbes, his rank was 57th  among the billionaire list of 2017. He was the founder of a chain of diamond jewelry retail stores. (Lall, 2019).

KINGFISHER SCAM

Vijay Vittal Mallya was born in Bantwal, Karnataka, on 18th December 1955 to Vittal Mallya, who was a successful businessman and chairman of the United Breweries (UB) Group, and Lalitha Ramaiah Mallya. He graduated from St. Xavier’s College, Kolkata, with a B.com degree in 1976. At the age of 27, he became the chairman of UB Group, which is a conglomerate company most famous for its selling of beer and liquor, after his father’s death.

While he was very young and inexperienced for the position, the employees, who were working from his father’s time and were much experienced than him, believed from the beginning that he is not an ordinary young man and would take the company to the next level of success, which later became true.

Initially, the turnover of the company was at Rs. 350 crores at the time of his father. With his consistent hard work and determination, the company’s valuation rose from Rs. 40 crores to Rs. 6,000 crores. In 2007, Forbes magazine declared him as the 40th richest man in India.[2]It was a golden moment for him.

He, further, tried to expand his business by investing in different sectors such as the newspaper, chemical industry, and the engineering sector. However, he learned that the most profiting business was the selling of beer and liquor; hence, he only focused on it. He ambitioned to expand his business globally.

Consequently, his company spread over 57 countries, and in 2015, it became the second-largest selling of beer and liquor brand in the world and received a doctorate in business Administration’ from the University of Southern California.

The Indian Ministry of Health (IMH) conducted research and found that the consumption of cigarettes, liquor, and beer is extensively harmful to health. Therefore, it imposed a complete ban on advertisement and branding for its promotion.[3] On 8th September 2008, Cable Television Network (Regulation) Amendment Bill was passed by the parliament, which prohibits the advertisement of beer and liquor in India.

However, India, which is the second-largest populous country in the world with approximately 1.3 billion people, is a good source of money for the business of selling alcoholic beverages. So, the companies use surrogate methods for their advertisement and branding such as displaying it in movie scenes and T.V. shows in the name of soda.

Similarly, Vijay Mallya used different ways to promote his brand, named Kingfisher. He kept the name of his residence as the ‘Kingfisher Villa,’ hence, whenever his house was shown on the news, ultimately, the brand was promoted. Moreover, he started sponsoring events and bought one of the IPL teams named ‘Royal Challengers Bangalore,’ to promote the Kingfisher liquor brand. This enabled him to become the second-largest brand in the world.[4]

Facts of the Kingfisher Scam

On 9th May 2005, Vijay Mallya launched Kingfisher Airlines (KFA). It was a completely new experience for him to have a business in the aviation industry. He had the same ambition of expanding KFA to a global level as his initial business. For this, he ensured luxurious facilities for flight passengers. According to him, the passengers should be treated like his guests, and nobody should go with disappointment after using their flight.[5]Gradually, it became the most luxurious and the second-largest domestic flight in India, having one-fourth share of domestic travellers of India.

As soon as he received success in domestic airline services, he aspired to achieve the same for international flights. According to the then rule by the Indian Ministry of Civil Aviation, the criterion for having a business of international flights was a minimum requirement of five-year experience in domestic service and twenty airplanes for international flights.[6]To expand KFA at a global level, he had to wait for another three years for eligibility.

Changes after the Kingfisher Scam

Following the Kingfisher scam, the Central Vigilance Commission (CVC) directed the PSU banks to make the loan verification more robust and stricter by hiring consultancies or by setting up a new division for the second time verification of the documents based on which the loans are granted by the banks. Moreover, SBI affirmed to protect the bank’s interest and public money after the lessons learned from the kingfisher scam.

BANK OF MAHARASTRA SCAM

State-run bank of Maharashtra (Bombay) had reported 156 accounts as those involving fraud to the tune of Rs3,409.58 crore to the reserve bank of India (RBI) for the March 2020 quarter. of this, 153 cases involving a sum of rs3,408.16 crore are credit-related fraud there were 14 cases where the amount involved is more than rs50 crore. interestingly, only one account Bhushan power & steel accounts for more than 30% of the fraud involving rs1,065.27 crore.

Bombay is just one example here. such type of fraud reporting takes place in every public sector bank (PSB), but in the end, it just remains a report. the information shows the total number of frauds of rs1 lakh and above in Bombay have increased substantially during fy2019-20. during this year, the bank reported 156 cases of fraud, which involved rs3,409.58 crore, compared with 93 cases and rs1,395.79 crore it reported for last year.

During the March quarter, the Bank of Maharashtra has classified 67 accounts as frauds involving Rs185.44 crore in total. here to the total number of fraud accounts involving an amount of rs1 crore and more have jumped more than four times to 157 with an amount of rs3409.58 crore on a cumulative basis at the end of March 2020. as per the note, there were six fraud accounts with an amount of rs1 crore and more.

Mumbai -based trimix it infrastructure & services ltd with rs93.38 crore tops the list. in the agriculture segment, the bank of Maharashtra says during the march quarter it found 50 accounts from the caudal branch from the Satara zone. in these cases, the bank says, the borrowers and guarantors submitted fake or fabricated 7/12 extract to avail maha bank Kisan credit card (MKCC) loan facility.

Bombay says category-wise analysis of fraud shows majority cases falling under misappropriation and criminal breach of trust with five accounts amounting to rs179.32 crore during the March quarter. however, the cumulative figure under this category as of march end was a whopping rs3,382.88 crore. As stipulated by the RBI, all banks do submit such reports periodically. However, what happens afterwards is not revealed.

At every level, there are committees, who also receive such account fraud reports. But still, such incidents of fraud keep increasing day by day, without any action by the bank or by the specialist committees that reaches up to the finance ministry level. Very few times, banks recover the entire amount involved in such frauds. but these involve only small account holders. many big borrowers use all avenues available to them to avoid paying their dues to the banks. Finally, such amounts end up as written off and are removed from the bank’s balance sheet.

LAKSHMI VILAS BANK SCAM

This is what can be seen in the Lakshmi Vilas Bank fraud case. After PMC Bank; it’s time for Lakshmi Vilas Bank to prove itself. An Rs. 723-crore loan by Lakshmi Vilas Bank (LVB) to the brothers Shivinder and Malvinder Singh, the erstwhile promoters of Ranbaxy and Fortis Group, is being investigated. The EOW on September 23 registered an FIR against key Lakshmi Vilas Bank directors for cheating, breach of trust, and criminal conspiracy.

The complaint was filed by Religare Finvest Ltd (RFL), which said it felt cheated as the loan to the Singh brothers was given in a personal capacity by Lakshmi Vilas Bank based on the company’s deposits with the bank. Religare Finvest, the lending arm of Religare Enterprises, alleged that money from its accounts had been siphoned off and diverted through a labyrinth of financial transactions

Religare Finvest Ltd and Religare Enterprises had invested around Rs.794 crores in fixed deposits with the bank in November 2016 and January 2017. Lakshmi Vilas Bank, in 2017, informed Religare Finvest Ltd that it had disbursed loans to RHC Holdings Pvt Ltd and Ranchem Pvt Ltd, the investment firms of the Singh brothers, against this FD.

As a desperate measure, RFL has filed a complaint with Economic Offences Wing (EOW). Mere registration of FIR does not mean anything at this stage. The Bank is committed to cooperating with investigations to bring out malicious attempts of RFL to mislead public to cover-up massive fraud indulged by their own promoters/employees/group companies.”

In the FIR filed on Monday, the Economic Offences Wing (EOW) of the Delhi Police said LVB “cheated” RFL and “misused” public shareholder money entrusted with the bank, and accused the Singh brothers of colluding with bank officials to siphon off the money.

RBI has put Lakshmi Vilas Bank under prompt corrective action (PCA) due to which the bank won’t be able to issue fresh loans nor open a new branch anywhere.  Also, negative return on assets (RoA) for two consecutive years and high leverage based on on-site inspection lead to this inspection by the RBI. “The PCA is aimed at improving the bank’s performance and will not have any adverse impact on its normal day-to-day operations, including acceptance/repayment of deposits in the normal course,” the bank said. RFL had also filed an interim application in the suit claiming attachment of the assets of the bank, its employees, directors, etc. 

PMC BANK SCAM

This bank was established on February 13, 1984, as a single branch Cooperative Bank. Punjab & Maharashtra Cooperative (PMC) Bank is a Scheduled Urban Co-operative Bank with its area of operation in the States of Maharashtra, Gujarat, Delhi, Goa, Karnataka, Madhya Pradesh, and Andhra Pradesh. The commencement of the banking business of PMC took place on February 13, 1984. 

The crux of this bank fraud is that the higher management of the PMC bank has given huge loans to the Housing Development and Infrastructure Ltd (HDIL) and its group entities. This fraud case is related to the transfer of 70% of the total credit facilities of the PMC bank to HDIL and its associated companies. If I talk about the total amount of the bank fraud then it was Rs 4,355 Crore. Now the total NPA of the bank has grown to 73%.

The PMC bank allegedly favored the promoters of Housing Development and Infrastructure Ltd (HDIL) and allowed them to operate password-protected ‘masked accounts’. It is found that around 21,049 bank accounts were opened by bogus names to conceal 44 loan accounts. The bank’s software was also tampered with to conceal these loan accounts.

This bank fraud case is busted by a bunch of women employees of the credit department of the PMC bank. These employees told the RBI that they were aware of the ghost accounts. When this case came in the light; then customers of the PMC bank rushed to the PMC bank to withdraw their hard-earned money but they were refused to give their deposited money and the withdrawal limit is set by the bank.

YES BANK LIMITED SCAM 

YES, Bank’s former managing director (MD) and chief executive officer (CEO) Ravneet Gill told the Enforcement Directorate (ED) that the bank had sanctioned huge amounts of credit to many corporations that were facing significant stress and liquidity issues.

An ED charge sheet quoted Gill as saying that the private lender on March 31, 2019, had put out a credit watch list naming several large corporate /borrowers. These included Reliance Group, Essel Group, Cox & Kings, Dewan Housing Finance, Omkar Group, Radius Developer, and others. “In this watch list, the bank took a contingency provision of Rs 2,000 crore as a measure of prudent accounting and transparency,” said the Enforcement Directorate (ED) charge sheet.

The charge sheet also contained statements made by other bank executives, alleging that co-founder Rana Kapoor had overruled objections by risk teams while extending loans to realty companies RKW Developers and Belief Realtor owned by DHFL promoters.

“It was classified as a red-flagged account in November 2019, on the ground of non-commensurate progress in the project vis-a-vis the amount disbursed. Of the total sanctioned a loan of Rs 1,700 crore, Rs 750 crore was disbursed on the same day of sanction,” according to a senior executive’s statement cited by the Enforcement Directorate The official said the bank had to cancel the additional loan of Rs 950 crore after the Reserve Bank of India (RBI) started special audit of the account. Rana Kapoor’s wife Bindu has been charged with being aware of the source of monies that were being routed through these companies.

“She was hand in glove with her husband, using the account of these companies and helping siphon off multiple accounts of other 100-plus subsidiaries and utilizing and projecting them untainted. She was abetting the crime, thereby being actually involved in laundering,” the report said. The special court of Prevention of Money Laundering Act (PMLA) has taken cognizance of the first charge sheet filed on Friday in connection with money laundering charges against Kapoor, his family members and their three companies.

“This is a complex case of financial frauds and there are many interlinked transactions and entities. These transactions have by design been conducted in a convoluted manner. Therefore, there are various indirect co-relations and suspected quid pro quo that will come to light only after a thorough investigation,” the ED said. It further said Kapoor and family were “controllers of financial institutions that are among the biggest in India and therefore enjoy immense clout and influence. Therefore, they are capable of designing very complex structures to hide their impropriety,” said the ED.

CONCLUSION

Ultimately, the general public is the one who suffers from the loss caused by the kingfisher scam since it was their hard-earned money collected by the government as tax for the welfare of everyone. Hence, instead of tying-up with the business tycoons in financial frauds, government officials must prevent it by saying ‘no’ to corruption. A huge amount of depositors amount is at stake.

The government, Courts, and authorities need to take strict actions in this regard to repay back the amount and help the depositors come out of this crisis. A strict investigation and action in this regard are required against the wrongdoers. A strict advanced lending and monitoring policy is required to be set up for the future to stop banks and business groups from indulging in malpractices.

REFERENCES

[1] http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5861 

[2] Sweety Gupta, Case Study From Riches to Rags: The Story of Vijay Mallya, Pacific Business Review International, January 2017, 

[3] Prohibited and controlled advertising in India, Lexology, May 2019,

[4] Ashok Panigrahi, A case study on the downfall of kingfisher airlines, Review Article, July 2019

[5] Kingfisher airlines, T.O.I., July 2019,

[6] Mahipal S. Rathore, 5/20 Rule of the Aviation, Study IQ, February 2020,


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