Malpractices and Irregularities in Banking Operation

Common Irregularities:

Account Opening & Operation of Deposit A/c.

► A/c Opened without Introduction or Improper Introduction.

► Not obtain necessary supporting papers.

► Not obtain Photographs.

► Signature of Introducer not properly Verified.

► Signature of A/c holder not properly Admitted.

► A/c Operated without Approval of the Manager.

► Particulars not been Verified by deposit in-charge.

► Special Instruction/ Standing Instruction not incorporated.

► Address of the opener of A/c not confirmed.

► Letter of thanks not given to Introducer.

► Not keept “Specimen Signature Card Box” in the Strong Room.

► Balance Confirmation does not send to the A/c holder.

► Pre-Advice System not followed in case of Corporation/Govt. A/c.

► Precaution not taken at the time of Crediting Proceeds of any Instruments

► Precaution not taken while issuing Cheque Book.

► Precaution not taken for frequent bouncing of Cheques (outward) & frequent returning of Cheques (inward) in a Particular A/c.

► Precautions not taken incase of Cancellation of Cheque of Joint A/c.

► Practice established for Payment of Late Cheque.

► Non-compliance of Special Instruction.

► “Guard File” not maintained under Joint Custody.

► ChequePaid ignoring Special Crossing/Restrictive Endorsement.

► “Statement of A/c” not regularly issued.

► Proper care not taken while A/c is Transferred/Closed.

Remittance: Common Irregularities and

Malpractices and Remedies, Precautions

Common irregularities generally committed by the branch are as follows:

1. Counter foil of D.D. Block is not initialed by two officers.
2. Office copy of TT/MT advice is not initialed by two officers.
3. Unused leaves of instruments are not balanced daily.
4. Signature of Officers of TT Confirmations is not regularly verified by an officer.
5. TT confirmation are not compared and kept with the original telegrams.
6. Balancing of books of accounts not done on fortnightly basis.
7. Objection memo is not sent to issuing branch while paying D.D. without relative advice.
8. Issuing branch is not contacted for sending advice even after a lapse of time in case of D.D. paid without advice.
9. Telegraphic intimation with test not sent to drawee branch where one party purchases more than one draft of below tested amount.
10. Amount of D.D. possessed by fraudulent means is collected through clearing house and withdrawn by fictitious account opening.
11. Leaf of lost Demand Draft is fraudulently used by ignoring Head Office caution circular.
12. Encashment of D.D. by any person other than the payee through account with bad intention under forged signature
13. Test number of Demand Draft is not properly tested by the authorized officer wherever needed.
14. In case of bigger amount of D.D. wherever needed is not confirmed by the issuing branch by telegram or by any other means.
15. Demand Draft is issued for personal gain of the officers without receiving cash and recording in the relevant register and book.
16. Withdrawal of money is done by means of duplicate D.D. under forged signature of the drawer and officers.
17. Signature of the payee of the D.D. is not verified for encashment in case of letter of introduction issued by the issuing branch.
18. Specimen signature of the drawer as recorded in the specimen signature card is not properly verified
19. Similarly signature of the authorized officer put on the D.D. are not tallied with signature Book-let as recorded.
20. Payment of money of unpassed D.D. may be used fraudulently.
21. Payment of newly open account against T.T. without confirmation.
22. Collection of fictitious D.D. by the bank employee through clearing house. IBC by forging Inter Branch Transfer responding vouchers
23. Alteration in amount of D.D.
24. Absence of use of cheque writing machine on D.D.

Remedies

General working guidelines for Inspection Officer to remove the irregularities are as follows:

1. To make physical checking of the unutilized leaves of DD/ TT/MT blocks under use and to see if similar balancing of the unused leaves are made daily by the in-charge on the inside cover slips of the books.
2. To check whether counterfoils of DD/TT/MT etc. are initialed jointly by two officers.
3. To check if any DD/TT/MT has been issued without receiving value for the same on the date of issue.
4. Any irregularity deviation from the set rules should be recorded by the Inspection Officer in the report.
5. To check the DD/TT/MT Issued & Payable Registers to ensure that the same are posted indexed no serial of DD/TT/MT either incoming/outgoing is missing the entries made in the register and duly checked by an officer.
6. To check of the credit advice blocks for DD/TT/MT etc. are entered in security Stationary register and kept under joint custody of 2 (two) officers.
7. Inspection Officer is to ascertain if the Test Key tables are being handled by the respective authorized officers properly and the Code Book is being kept in proper custody & if any staff has access to these.
8. Whether all outward tested messages are written in a Kutcha Register. Copies of the outward TTs should be checked to see whether the same bears initials of two officers.
9. To check if the Inward Telegrams (TT) are duty recorded and if test agreed, whether the same are being signed by two officers under appropriate rubber stamps marking the date of entry passed.
10. To examine if two parallel lines across the face of the inward TT (telegrams) or telephonic messages received are drawn to avoid duplication in passing entries for TT received.
11. To see if the name of the receiving officer under his signature with P.A. number is mentioned on the telephonic message received regarding inward TTs and also if the name and P.A. number of the transmitting officer are being recorded on such message.
12. To check whether the confirmation copies of the inward TTs received from other branches are tagged with the original messages after dully verifying the message and the officer’s signatures thereon.
13. In case of any long outstanding entry in TT payable A/c verification should be made by the inspection officer as regards the correctness of the TTs¾drawee branch from the issuing branches.
14. To check whether the entries passed for the Inward TTs/MTs have been routed through TT/MT payable A/c before crediting to the same in the party’s A/c.

Precautions;

► Security papers, books should be kept in proper safe custody.

► Carefully verify the signature

► Paper, printing, numbering, watermark should be properly checked

► Free from alternation

► Writing instrument without gap

► Daily balancing of losses security papers

► Balancing the books in a regular basis

► Don’t sign any instrument without supporting voucher and register

► Don’t take charge a remittance dept. without checking all things

► Duty discharged according to manual and circulars

► Proper keeping of records.

Fraud prone areas in Bank:

Fraud prone areas and their modus operandi: To look at the fraud prone areas we will have to look into the functions of banking and the type of activities a bank legally conducts:

Defalcation of Cash:

1. Cash is being taken out temporarily holding irregular cheque and cash debit voucher with the till money.
2. Cash is taken out by keeping of piece short in the bundles of different denominations.
3. Cash received from the cash-feeding branches and vice versa are not accounted for by the dealing officials.
4. Cash received by the Cashiers/Officers from various depositors is not accounted for.

Precautionary measures:

1. Physical verification of cash should be done frequently by the controlling authority.
2. Inter-branch cash transactions of the concerned branches should be checked.
3. Balance confirmation should be obtained from the account holders and pass books/ statement of accounts should be issued as per standing circulars.

Fictitious entries in ledgers:

1. Fictitious debit and credit entries in selected accounts are done without any supporting vouchers and the amount is withdrawn from the account where it is credited.
2. Manipulation is being done by inflating the credit balance of particular account and subsequently the fabricated amount is withdrawn.
3. Account of a depositor is not debited or less debited with the amount than the amount of cheque and subsequently the amount is withdrawn by another cheque in connivance with the party.
4. Amount kept in CD/SB miscellaneous account is subsequently transferred to an account other than the depositor and the money is defalcated.
5. Defalcation of money through pay slip against interest of FDR STD A/C by depositing these in the fake account instead of depositing the same in the real/actual payee.
6. Intentionally excess amount withdrawn is allowed from the customers account more than existing balance by cheque and subsequently benefit is taken from the account holder.
7. Defalcation through fake and duplicate printed cheque.
8. Obtaining cheque book fraudulently through fake indemnity and using it for withdrawls under forged singanture.
9. Defalcation of the value of pay slip, SDR, TT, DD, MT etc. without depositing in the respective heads of accounts.
10. By increasing the amount of small valued of DD, SDR, PO, etc and making fraudulent payment.
11. Opening account by stolen cheque, DD, FDD, etc. and defalcation of money after collection.
12. By debiting diferent dormant accoonts (saving, current etc) and depositing in and withdrawing from fictitious account.
13. Payment of one deceased account’s money to the fake successors without proper scrutiny of bond/succession certificate/ declaration and other concerned papers.
14. Defal-cation through inter-national concealment of balance while transferring the actual figure from one page to another and one ledger to another ledger.
15. Defalcation through transfer of long outstanding amount against margin, which iskept sundry deposit account.
16. Excess interest is paid to some selected deposit account on the basis of fictitious product and subsequency the amount is withdrawn in connivance with the party. On the contrary, less interest is charged on some particular loan account aad subsequently the benefit is taken from the loanee.

Precautionary measures:

1. Proper balancing of the ledgers as per Head Office Circulars and checking thereof by the concerned officers.
2. Checking of daily vouchers with ledger.
3. Periodical audit by audit and Inspection Division of Head Office and by R.M. Office.
4. Extra precautionary measures should be adopted during printing of security stationary and careful preservation of stock at Head office and branch level should be ensured.
5. Alertness during posting, supervision, cancellation and releasing of cheques from the ledgers should be maintained.
6. Product sheets and respective ledgers should invariably be checked by respective officer.
7. Unused cheque leaves surrendered by customers should be effectively destroyed strictly following the procedures laid down by tie bank.
8. Statements of accounts, confirmation letters and acknowledgement of stop instructions must be sent to the customers promptly.

Fixed deposit section:

1. Payments of FDR are being made to third party through debit cash vouchers without obtaining the concerned instrument in possession and beyond the knowledge of the beneficiary.
2. Issuance of FDR without receiving value.

SCOP FOR IRREGULARITIES AND MALPRACTICES

 IN LOANS AND ADVANCES:

1. Undue/unauthorised allowing overdraft in an account (frequently).
2. Allowing overdraft in a fictitious account.
3. Extending loans and advances in benami/fictitious borrower.
4. List of borrowers submitted by chairman including fictitious names.
5. Proposals prepared and sanctioned to a fictitious project.
6. Loan/working capital extended without having any business installation.
7. Project/Industrial loans extended without installation of machines based on fabricated business forecast and without proper evaluation of the project and on submission of false installation certificate.
8. Loans extended to a project where the owner/management have no knowledge or experiences about the project.
9. Overdraft allowed to several accounts against only one financial instrument.
10. Frequently excess over limit allowed even after expiry with ill motive.
11. Transport, loan sanctioned and disbursement allowed (against fraudently made up documents) without purchasing transport.
12. Fund diverted by the borrower without the knowledge of lending banker.
13. Loan sanctioned and disbursed against fictitious securities and false documents.
14. Loan disbursed showing over valuation of securities.
15. Advance allowed in pledge account without any pledge of goods.
16. Borrower delivered goods for pledge but quality, quantity and price are falsely shown.
17. Borrower sold the pledged/ hypothecated goods without the knowledge of the bank
18. Drawings are allowed on falsely shown D.P. (Drawing Power).
19. Insurance covered wrongly in case of pledge and hypothecation
20. House building / Commercial building-loan sanctioned against fictitious properties, overvaluation, without approved plan, no objection certificate, and permission in case of govt. property are not obtained.
21. Loans sanctioned and disbursed against defective mortgage of property in respect of location, valuation, ownership etc.
22. Unauthorized advances allowed against limit not approved by competent authority.
23. Non-realization/part realisation of interest on advances.
24. Issuance of guarantee without any record in the branch.
25. Packing credit allowed on false document without shipment of goods.
26. Fraudently prepared bill purchased without shipment of goods.
27. Overdraft allowed against false FDR without marking lien.
28. Rescheduling of loan violating guidelines principles
29. Interest on loan waived without any justification.
30. Proper follow-up- Monitoring not done aad timely and properly recovery steps not taken.

► Some references for further reading:

(i)  The Banking Companies Act, 1991 (with up to date amendments) (Specially section 14, 22, 24, 25, 27, 28A, 33, 34, 35, 38, 39, 44, 45, 46, 47, A48)

(ii) Transfer of Property Act-GaziShamsur Rahman-1882.

(iii)          The Contract Act, 1872.

(iv)           Registration Act (with up to Amendment July, 2004).

(v) The Stamp Act, 1899.

(vi)           The Limitation Act, 1908.

(vii)         Money Laundering Prevention Act, 2009.

(viii)         Money Loan Court Act, 2003.

(ix)           Bangladesh Bank guidelines for rescheduling and write off of loan.

(x)            Policy guidelines of B.B. relating to different types of loans and advances and credit information for borrowers from B.B. (CIB).

Case to case precautionary measures :

1. A) Benami / Fictitious Loans:
2. a) Proper identification of the applicant from Chairman, Municipality/ Union Parishad together with Trade Licence to be obtained.
3. b) Supervision of controlling Officer.

1. Loans /Working Capitals extended without having any business installation or Industry:

Proper field verification/inspection by responsible officer prior to sanction and disbursement of the loans should be done.

1. C) Project/ Industrial loans extended without installation of responsible and based on fabricated and manufluent business forecast (Production and sales programme) without proper evaluaion of the project and on submission of false certificate of installation:
2. a) Field inspection by expert Officials of the Bank or if required expert from outside the Bank may be engaged.
3. b) To obtain market report regarding marketability, demand of the product before sanction of the loan.

1. D) Loan extended against false and fraudulently made up documents. Precautionery measures:
2. a) Physical verification of proposed mortgaged property should be conducted before sanction and Banks signboard to be displayed on the property before disbursement of the loan.
3. b) If necessary legal notice may be served in the local dailies regarding mortgage of the property.

1. E) Advance allowed in Pledge account without any pledge of goods. Drawings are allowed on falsely shown stock, DP, quality, quantity, price etc.:

Physical verification of stock, market report and expert opinion in case of chemicals / machiniries, etc. to be obtained before disbursement, if necessary

1. F) Non-realisation / part realisation of interest on advances:

Proper checking of interest vouchers by the in-charge of the department / Manager of the branch should be done

1. G) Unauthorised Advances allowed against limits not approved by competent authority:

1. a) Supervision and review of advance statements by the controlling offices.
2. b) Timely administrative action for the irregularities.

1. H) Issuance of guarantee and L/C (Inland) without keeping any record in the branch

1. I) Extention of packing credit facility on false TR/RR and on false lien confirmation without shipment of goods

Precautionery measures (of H & I):

Administrative action should be taken against officers / staff held liable to the Bank and credit facility of the party should be cancelled.

1. J) FDBP allowed on false / duplicate / Non-negotiable copy of bill of lading and other false documents without shipment of related cargo:
2. a) Document should not be negotiated without original bill of lading.
3. b) Dealing shipment agents may be advised to supply the Bank their authorised signatures put on the B/L may be verified during negotiation.

IMPORTS

1. K) Issuance of L’C without keeping any record in the branch (forged L/C) and clearence of goods there against.

1. L) Opening of LC based on false / fabricated quotation / indent.

Precautiotiery measures (of K & L):

1. a) Genuinity of the indentor should be verified by obtaining confidential opinion from their banker and from the market before issuance of L/C.
2. b) Credit report should also be obtained regarding supply of the-goods from their banker before shipment cf the cargo if not possible before opening of L/C.