CHAPTER II REVIEW OF RELATED LITERATURE AND STUDIES For enhanced comprehension of the collected data
REVIEW OF RELATED LITERATURE AND STUDIES
For enhanced comprehension of the collected data, this section is intended to further address studies and literature related to the current research to steer towards new directions that would shed light on more facets of the different banking institutions regarding the fraud they experience. This chapter is composed of the researchers’ sift understandings of published and unpublished articles and other related literature, local and foreign researches and studies that gave sufficient information and facts regarding the subject matter.
With the objectives above, the researchers consulted to some substantial portions of the related literature that originates from the SHC’s Information and Media Center and Senior High Library and others come from related articles retrieved from the internet.
Banks are the engines that drive the processes in the financial sector, money markets and progress of an economy. With the fast developing banking industry, frauds in banks are also increasing very fast, and fraudsters have started using inventive procedures. Furthermore, the banking industry dubs rising fraud as “an inevitable cost of doing business.” With the advent of creative financial products and increasing range and magnitude of transactions through boundaries, frauds in the financial world have intensified to new heights. (Bhasin, 2015).
According to Nayak & Singh (2015), banking and financial systems have been the core of advancement and enhancement of all of mankind since the beginning. The strength of the banking and financial system of a country assists to determine the creation and utilization of goods and services within a nation. It is directly suggestive of well being and living principles of a country’s citizens. Therefore, if the banking system is plagiarized with great levels of non-performing assets on balance sheets of banks, the financial suffering of borrower clients and inadequacies in transmission, then it is a cause of concern for the economy.
Banks in utmost economies are the principal reservoirs of the people’s financial savings, the nerve center of the payment structure, the vessel capable with the capacity of money creation and allocation of financial funds and conduit through which monetary and credit policies are executed (Idolor, 2010). The triumph of monetary policy, to a great extent, relies on the shape and condition of the banking institutions through which the policies are fulfilled. Whatever difficulties which militate against the proper execution of the banking sector will invariably have multiplier impacts on the other areas of the economy. This is one of the explanations why it is vital to quickly identify any factor which may hamper the efficient functioning of the rural banking sector and immediately address such concerns.
As defined by Chakrabarty (2013), fraud is an act or omission which is projected to cause the unlawful gain to an individual and wrongful damage to the other, either by way of suppression of facts or otherwise. It is a measured act of omission or commission by any person, carried out in the course of a banking operation or in the books of accounts conserved by hand or under computer scheme in banks, ensuing into illegal gain to any person for a momentary period or otherwise, with or without any monetary loss to the bank. Fraud can be described as a purposeful act of cheating intended at getting an undue advantage at the outlay of individual or association losing belongings or some lawful privileges (Eseoghene, 2010).
On the other hand, the Institute of Internal Auditors (2010) explained fraud as any illicit act measured as deception, concealment, or damage to trust. Frauds are propagated by parties to attain cash, possessions or services; to evade payment or loss of services, or to assure private or business benefit. Yego (2016) added that bank experiences harm ensuing from insufficient or futile interior procedures, individuals, and schemes, or from outside proceedings.
Patnaik (2012) defined fraud as a hazard to an organization’s reputation and its relations and exchanges with external investors, such as clienteles, dealers, bankers, and business associates. Furthermore, bank fraud actions carried out by an entity or corporation that are acted in a deceitful or unlawful means, and are intended to provide an advantage to the perpetrating entity or corporation (Chapman, 2012). As reported by ACFE (2014), banking associations are getting more and more vulnerable to fraud over the ages though numerous control procedures have been laid in place. Similarly, fraud can end in enormous monetary reparations. As banking organizations participate in the broad and extensive scope of transactions, fraud might possibly distress not just various sectors, but also the banking institution itself.
Patnaik (2012) further explained that these frauds are now becoming more and more recurrent and can be deemed as one of the primary causes for harming the economy of the nation and with such great profile deceptions occurring all over the country, it has become compulsory to put an assessment to this type of crime and if workable to generate an extra stern code and decree to deal with these concerns.
As informed by the Net Guardians (2016), fraud is an immense business, costing the financial field $67 billion per year as reported by the Association of Certified Fraud Examiners. It’s a struggle nobody can disregard as companies strain to recuperate from the worldwide monetary issues and the world’s primary economies shake on the verge of economic decline. Most disturbing of all, its occurrence is accelerating. PwC (2015) also states that industry specialists suspect that this number is actually much greater, as businesses cannot precisely recognize and quantify losses due to fraud. In today’s unstable economic situation, the prospect and motivation to commit frauds have both increased. Occurrences of asset misappropriation, money laundering, cybercrime and accounting fraud are only accumulating by the day.
Dr. Sanjay Chougule, International Head in Internal Audit & Financial Crime Prevention ICICI Bank Ltd., affirms that in the present day world, fraud is an endless and promptly sprouting danger. There is no such thing as flawless security, so it is analytically significant that the front-runners in the area of financial criminality prevention, function together to create solid connections and reliance, to avoid, identify and react to these perils commendably and proficiently.
Hence, bank fraud is the initial kind of threat that any organization takes on. Handling and alleviating the bank fraud of an association is a substantial argument for senior directors. A massive quantity of capitals, stage and strength are cast-off up in building Corporate Governance Policies, executing interior control schemes, risk supervision approaches and training staffs and personnel to observe to these methods. However, some untruthful, intellectual individuals, generally denoted as fraudsters, still succeed to discover means and techniques to outweigh schemes or trick honest persons into attaining admission to companies’ funds and properties. (Adam, 2011).
Arora et al. (2010) cited that banks are dealing with people’s money and hence it is authoritative that workers should implement due precaution and meticulousness in processing the dealings in banks. Modern growth in bank frauds appeals for scrutinizing of security systems. A resilient scheme of inner regulation is the most operative and efficient method of fraud deterrence. The banks should upsurge their works to nurture the level of safety consciousness in their administrations to battle frauds.
Fraud can be understood as an intended falsification, concealment, or exclusion of the truth for the objective of cheating or forgery to the monetary harm of an individual or a company (for instance, a bank) which also comprises embezzlement, theft or any attempt to steal or illegally acquire, and exploit or damage the properties of a bank. Hence, fraud has become a universal dilemma that is not set to subside in the coming years. It is corroding the productivity of firms with shattering consequences on the company’s solvency. Thus, bank fraud encompasses the fraudulent use of one’s status inside or outside of the bank for own enrichment by purposefully exploiting or embezzling the bank’s monetary capitals, possessions or other assets retained by the bank and gaining money from bank clienteles (investors), (Akelola, 2012).
Fraud is an essential distress commendable of argument, specifically in the present economy. According to the International Standard on Auditing, fraud consists of the usage of trickery to acquire an unlawful gain at the outlay of unwary victims. It is aa purposed act by an individual or a set of people between the organization, workers or third parties. World of fraud in banking organizations is very wide. It could range from employee fraud to customer fraud; from institutional fraud to individual fraud; and from accounting fraud to transactional fraud. It could also cover from identity theft, cheque fraud, counterfeit negotiable instruments, mortgage fraud, loan fraud, asset misappropriation, corruption, money laundering, credit card fraud and the list continues. (Isa et al., 2015).
The Federal Bureau of Investigation (FBI) in the United States cited that fraud is a criminal act which is regarded as treachery, concealment, or infringement of trust and which does not essentially rest upon the application or danger of bodily strength or violence. The FBI explanation of fraud can be contracted down to lying, theft, and cheating which reverberate with today’s fraud structures in banks that are theoretically cultured and refined. These descriptions show the varying sights and understandings about what creates fraud. (Silverstone et al., 2012).
In addition, under the Indian Penal Code, fraud has not been described directly under any exact segment, but it delivers for sentences and penalties for numerous acts which steer towards the commission of fraud. However, it contains dealing with deceiving, suppression, forgery, fabricating, misuse and violation of trust cover the same adequately. (Pandey, 2017). Fraud at times can be in the appearance of stealing, mishandling of properties and resources, and even falsification of records and mostly backed-up by covered theft. In other expressions, it is the transformation of embezzled assets or capitals. (Abilogun et al., 2017).
As stated by the PwC (2014), fraudulent documentation is one of the examples of frauds that most banks encountered. It clearly states that fraudulent documentation encompasses altering, changing or modifying a file to cheat another person or entity. It can also contain making false information catered in files and forms consciously.
Some cases include, an individual criminally acquires personal data or documents of somebody and takes a loan in the name of that individual. In addition, is when somebody presents fabricated data about his/her monetary status, such as income and other properties, and takes a loan for a quantity that outdoes his approved limitations with the purpose of non-repayment. The other instances of fraud documentation are when an individual takes a loan using a made-up name and there is an absence of a resilient structure referring to confirmations of address, the due persistence of managers or organizers, pre-sanction surveys, and recognition of defective or inadequate applications and negative or unlawful archives in customer history. It also consists of false documentation that is employed to bestow excess overdraft feature and withdraw cash. Another is when an individual falsifies export papers and files such as airway bills, bills of lading, Export Credit Guarantee Cover and customs purged numbers or orders dispensed by the customs agency. (Pwc, 2014).
Forged or fraudulent documents are frequently exploited to cover other embezzlements or thefts; financial intermediaries have a tendency to count their cash accurately so all of the funds must be accounted for. A document appealing that a sum of capital has been used as a credit, withdrawn by a single investor or transmitted or capitalized can, therefore, be vital to someone who desires to hide the slight aspect that the bank’s money has in fact been stolen and is now vanished. ( Ramana, V. ; Krishna, G. 2017).
Another fraudulent incidence that is prominent in the banks recently is the siphoning of funds. It takes place when resources lent from financial organizations are exploited for objectives unrelated to the terms and agreement of the borrower, to the loss and damage of the financial health of the firm or of the creditor. It also comprises of relocating resources to some set of firms, the financing in other corporations by purchasing shares without the consent of creditors, the insufficiency in the usage of capitals as associated to the quantities spent or drawn, with the difference not being accounted for. (PwC 2014).
Pani et. al. (2016) added that the siphoning of funds takes place when resources were lent from financial institutions are applied for intentions not connected to the business of the debtor. It can comprise any one of the succeeding instances: The usage of short-term working resource funds for long-term obligations not in compliance with the terms of authorization and permission, the utilization of borrowed reserves for the creation of assets other than those for which the loan was certified.
As stated by the Net Guardians (2016), the other fraud that triggers the reputation and financial health of the banks nowadays is the identity theft. Though the public might consider of fraud as the act of carrying out forbidden business dealings, data theft plays a very essential role in enabling the crime and is a zone of great distress for banks and their controllers. Banks hold very large amounts of delicate information on their clienteles and privacy is a principal prospect of any bank client. Stealing of personal data is therefore harmful to a bank’s status and profile, even if there is no direct monetary damage as a result. Identity thefts can take place as a consequence of outsiders acquiring entree to information schemes but are just as likely to the outcome from interior breaches carried out by workers or employees with a high degree of access, such as database and schemes managers. There is a flourishing black market on the internet in embezzled client data, comprising online bank and credit card particulars.
In the most well-known fresh example of a huge data theft, computer professional Herve Falciani stole the information of 24,000 private banking customers from an outlet in Geneva while employed on an IT project in 2007. He afterward passed the embezzled documents to French tax authorities. In this occurrence, the data theft did not facilitate fraud counter to the bank or its clienteles, although it did generate a resilient response from the bank’s controllers because of the critical breach of customer privacy that resulted. In current years monetary managers have stepped up pressure on banks to develop their panels around information security and to offer the better security of customers’ privacy.
The Association of Certified Fraud Examiners (ACFE) (2014) gave details on fraud occurrences of which 36.6% take place in the banking and monetary services, government and civic administration, and industrial services. The uppermost number of fraud instances is in the financial and monetary services (17.8%), with an average loss of $200,000. They added that fraud is pervasive; it doesn’t differentiate its manifestation. And whereas anti-fraud rules and jurisdictions can efficiently lessen the probability and potential effect of fraud, the reality is that no organization is resistant to this threat.
Tanna (2016), on her study entitled: “Forensic Accounting: An Emerging and Promising Career Option” stated that fraud in the modern context occurs in fewer instances but intensified monetary bearing: According to the RBI, while the quantity of fraud situations has weakened from 24,791 cases in 2014– 2015 to 13,293 cases while in 2012–13 — a 46% decline—the amount concerned has escalated noticeably from 2037.81 crore INR to 8646.00 crore INR—i.e. an increase of 324%.
Banking frauds have shown its presence for decades, with the early well-known frauds relating to internal trading, stock alteration, accounting anomaly/ overstated assists etc. As the years go by, frauds in the banking area have become more refined and have stretched to technology-based services presented to clienteles. In line with this, the assessment of Deloitte in 2015 shows that 93% of their respondents answered that there has been an escalation in fraud occurrences in the banking sector for the last two years. And more than half of the participants answered that the monetary sector has seen more than a 10% growth in fraud cases in the last two years.
Fraud has grown into a global dilemma that is not set to subside in the years to come. It’s eroding the productivity of industries with alarming impacts on organizations’ liquidity and creditworthiness. On the study: “The Impact of Fraud in the Banking Industry: A Case of Standard Chartered Bank” written by Yego (2016), shows that there is no a sole monetary business that is resistant to fraud and that a common business loses 5-7% of its yearly income to fraud. The inquiry discovered that fraud is considered to be a primary delinquent within the bank, even though the comparative scope of frauds accompanied was naive and relatively minor.