The toll of frauds with banks to rise in India: Deloitte India Banking Fraud Survey

The Punjab National Bank fraud of $1.8 billion is probably one of the largest scams in the history of Indian banking system. The British professional services multinational Deloitte on Sunday said that such frauds will continue to rise with banks continuing to "lack a holistic anti-financial crime compliance programme".

The third edition of Deloitte India Banking Fraud Survey indicated that almost 84 percent survey respondents believes, there will be a substantial rise in bank frauds incidents. "Frauds are on the rise and will continue to rise. Banks appear to be underestimating their ability to prevent frauds and this may impact the nature of anti-fraud compliance programmes being developed," a Deloitte statement said here.

The Punjab National Bank Fraud Case relates to fraudulent letter of undertaking worth ₹14,356.84 crore (US$ 2.1 billion) issued by the Punjab National Bank making the bank liable for the amount. The fraud was allegedly orchestrated by jeweller and designer Nirav Modi and his uncle Mehul Choksi. Nirav Modi and his family absconded in early 2018, days before the news of the scam broke in India.

Deloitte survey respondents identified the top four types of frauds experienced by them as fraudulent documentation, cybercrime, overvaluation/non-existence of collateral and siphoning/diversion of funds.

The "kind of fraud" being highlighted here perhaps indicate the ineffectiveness of existing controls to prevent such occurrences. Considering none of these frauds are new for banks (cybercrime being the exception), it is important to know why they remain prevalent," said K.V. Karthik, Deloitte India Partner (Forensic Financial Advisory).

Apparently, the main cause responsible for increase in fraud incidents appears to not having been adequately, said the reports.

"Respondents appear to have a strong Fraud Risk Management (FRM) policy on paper. However, what seems to be missing is the use of technology tools, intelligence gathering, conducting regular fraud risk assessments, fraud awareness training and workshops, vendor due diligence and social network analysis," the report said.

"In our experience, the current fraud risk management framework and processes tend to be reactive rather than proactive in the ability to detect fraud incidents, the inability to identify emerging threats and run periodic fraud risk assessments basis those findings, as well as the limited use of technology tools," Kartik said.

About 32 per cent of respondents indicated currently using artificial intelligence (AI) applications to detect fraudulent behaviour and/or to identify suspicious patterns and red flags.

"However, in our experience and as highlighted by the respondents, the availability of skilled talent, limited understanding of this technology and data security of AI applications are real challenges that need to be overcome in order to sustain any success experienced so far."

In the area of stressed assets, or bad loans, responses received "indicate that banks are affected by concerns related to suspected shell companies (highlighted by 59 per cent) and lapses in the due diligence process during loan disbursement having inadvertently led to higher stressed assets (67 per cent)", the report said.