Bank fraud

Bank fraud is the use of fraudulent means to obtain money, assets, or other property owned or held by a financial institution. In many instances, bank fraud is a criminal offense. While the specific elements of a particular banking fraud law vary between jurisdictions, the term bank fraud applies to actions that employ a scheme or artifice, as opposed to bank robbery or theft. For this reason, bank fraud is sometimes considered a white-collar crime.

Banking fraud by country

Bank fraud in the United States

Under federal law, bank fraud in the United States is defined, and made illegal, primarily by the Bank Fraud Statute in Title 18 of the U.S. Code. 18 U.S.C. § 1344 (Bank Fraud Statute) states::"Whoever knowingly executes, or attempts to execute, a scheme or artifice—":"(1) to defraud a financial institution; or":"(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;":"shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both."State law may also criminalize the same, or similar acts.

The Bank Fraud Statute was passed following the Supreme Court's decision in "Williams v. United States", 458 U.S. 279 (1982), in which the Court held that check-kiting schemes did not constitute making false statements to financial institutions (18 U.S.C. § 1014). Congress responded by passing the Bank Fraud Statute (18 U.S.C. § 1344). Section 1344 has subsequently been bolstered by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, 103 Stat. 500.

The Bank Fraud Statute criminalizes check-kiting, check forging, non-disclosure on loan applications, diversion of funds, unauthorized use of automated teller machines (ATMs), credit card fraud, and other similar offenses. Section 1344 does not cover certain forms of money laundering, bribery, and passing bad checks. Other provisions cover these offenses.

Bank fraud in China

China has executed bankers for fraudulent activity; some recent cases (Sept '04) which ended in capital punishment include:
* Wang Liming, former accounting officer, China Construction Bank, Henan, with others stole 20 million yuan ($2.4 million in U.S. Currency) from the bank using fraudulent papers, executed.
* Miao Ping, an accomplice in the same case, executed.
* Wang Xiang, same bank in an unrelated case, also executed for taking 20 million yuan from the bank.
* Liang Shihan, Bank of China, Zhuhai, executed for helping cheat his bank out of $10.3 million US.

Mechanics of bank fraud

Rogue traders

A rogue trader is a highly placed insider nominally authorised to invest sizeable funds on behalf of the bank; this trader secretly makes progressively more aggressive and risky investments using the bank's money, when one investment goes bad, the rogue trader engages in further market speculation in the hope of a quick profit which would hide or cover the loss.

Unfortunately, when one investment loss is piled onto another, the costs to the bank can reach into the hundreds of millions of dollars; there have even been cases in which a bank goes out of business due to market investment losses.

Some of the largest bank frauds ever detected were perpetrated by currency traders John Rusnak, and Nick Leeson. Jérôme Kerviel, allegedly defrauded Société Générale of 4.9 billion euros ($7.1 billion) while trading stock derivatives.

Fraudulent loans

One way to remove money from a bank is to take out a loan, a practice bankers would be more than willing to encourage if they know that the money will be repaid in full with interest. A fraudulent loan, however, is one in which the borrower is a business entity controlled by a dishonest bank officer or an accomplice; the "borrower" then declares bankruptcy or vanishes and the money is gone. The borrower may even be a non-existent entity and the loan merely an artifice to conceal a theft of a large sum of money from the bank.

Wire fraud

Wire transfer networks such as the international SWIFT interbank fund transfer system are tempting as targets as a transfer, once made, is difficult or impossible to reverse. As these networks are used by banks to settle accounts with each other, rapid or overnight wire transfer of large amounts of money are commonplace; while banks have put checks and balances in place, there is the risk that insiders may attempt to use fraudulent or forged documents which claim to request a bank depositor's money be wired to another bank, often an offshore account in some distant foreign country.

Forged or fraudulent documents

Forged documents are often used to conceal other thefts; banks tend to count their money meticulously so every penny must be accounted for. A document claiming that a sum of money has been borrowed as a loan, withdrawn by an individual depositor or transferred or invested can therefore be valuable to a thief who wishes to conceal the minor detail that the bank's money has in fact been stolen and is now gone.

Uninsured deposits

There are a number of cases each year where the bank itself turns out to be uninsured or not licensed to operate at all. The objective is usually to solicit for deposits to this uninsured "bank", although some may also sell stock representing ownership of the "bank". Sometimes the names appear very official or very similar to those of legitimate banks. For instance, the "Chase Trust Bank" of Washington D.C. appeared in 2002 with no licence and no affiliation to its seemingly apparent namesake; the real [http://www.jpmorganchase.com/ Chase Manhattan Bank] is based in New York.

There is a very high risk of fraud when dealing with unknown or uninsured institutions.

The risk is greatest when dealing with offshore or Internet banks (as this allows selection of countries with lax banking regulations), but not by any means limited to these institutions. There is an annual list of unlicensed banks on the [http://www.occ.treas.gov/ftp/alert/2004-4a.pdf US Treasury Department] site which currently is fifteen pages in length.

Demand draft fraud

Demand draft fraud is usually done by one or more dishonest bank employees. They remove few DD leaves or DD books from stock and write them like a regular DD. Since they are insiders, they know the coding, punching of a demand draft. These Demand drafts will be issued payable at distant town/city without debiting an account. Then it will be cashed at the payable branch. For the paying branch it is just another DD. This kind of fraud will be discovered only when the head office does the branch-wise reconciliation, which normally will take 6 months. By that time the money is unrecoverable.

Forgery and altered cheques

Thieves have altered cheques to change the name (in order to deposit cheques intended for payment to someone else) or the amount on the face of a cheque (a few strokes of a pen can change $100.00 into $100,000.00, although such a large figure may raise some eyebrows).

Instead of tampering with a real cheque, some fraudsters will attempt to forge a depositor's signature on a blank cheque or even print their own cheques drawn on accounts owned by others, non-existent accounts or even alleged accounts owned by non-existent depositors. The cheque will then be deposited to another bank and the money withdrawn before the cheque can be returned as invalid or for non-sufficient funds.

Stolen cheques

Some fraudsters obtain access to facilities handling large amounts of cheques, such as a mailroom or post office or the offices of a tax authority (receiving many cheques) or a corporate payroll or a social or veterans' benefit office (issuing many cheques). A few cheques go missing; accounts are then opened under assumed names and the cheques (often tampered or altered in some way) deposited so that the money can then be withdrawn by thieves. Stolen blank chequebooks are also of value to forgers who then sign as if they were the depositor.

Accounting fraud

In order to hide serious financial problems, some businesses have been known to use fraudulent bookkeeping to overstate sales and income, inflate the worth of the company's assets or state a profit when the company is operating at a loss. These tampered records are then used to seek investment in the company's bond or security issues or to make fraudulent loan applications in a final attempt to obtain more money to delay the inevitable collapse of an unprofitable or mismanaged firm.

Accounting fraud has also been used to conceal other theft taking place within a company.

Bill discounting fraud

Essentially a confidence trick, a fraudster uses a company at their disposal to gain confidence with a bank, by appearing as a genuine, profitable customer. To give the illusion of being a desired customer, the company regularly and repeatedly uses the bank to get payment from one or more of its customers. These payments are always made, as the customers in question are part of the fraud, actively paying any and all bills raised by the bank. After time, after the bank is happy with the company, the company requests that the bank settles its balance with the company before billing the customer. Again, business continues as normal for the fraudulent company, its fraudulent customers, and the unwitting bank. Only when the outstanding balance between the bank and the company is sufficiently large, the company takes the payment from the bank, and the company and its customers disappear, leaving no-one to pay the bills issued by the bank.

Cheque kiting

Cheque kiting exploits a system in which, when a cheque is deposited to a bank account, the money is made available immediately even though it is not removed from the account on which the cheque is drawn until the cheque actually clears.

Deposit $1000 in one bank, write a cheque on that amount and deposit it to your account in another bank; you now have $2000 until the cheque clears.

In-transit or non-existent cash is briefly recorded in multiple accounts.

A cheque is cashed and, before the bank receives any money by clearing the cheque, the money is deposited into some other account or withdrawn by writing more cheques. In many cases, the original deposited cheque turns out to be a forged cheque.

Some perpetrators have swapped checks between various banks on a daily basis, using each to cover the shortfall for a previous cheque.

What they were actually doing was check kiting; like a kite in the wind, it flies briefly but eventually has to come back down to the ground.

Payment card fraud

Credit card fraud is widespread as a means of stealing from banks, merchants and clients.

Booster cheques

A booster cheque is a fraudulent or bad cheque used to make a payment to a credit card account in order to "bust out" or raise the amount of available credit on otherwise-legitimate credit cards. The amount of the cheque is credited to the card account by the bank as soon as the payment is made, even though the cheque has not yet cleared. Before the bad cheque is discovered, the perpetrator goes on a spending spree or obtains cash advances until the newly-"raised" available limit on the card is reached. The original cheque then bounces, but by then it is already too late.

Stolen payment cards

Often, the first indication that a victim's wallet has been stolen is a phone call from a credit card issuer asking if the person has gone on a spending spree; the simplest form of this theft involves stealing the card itself and charging a number of high-ticket items to it in the first few minutes or hours before it is reported as stolen.

A variant of this is to copy just the credit card numbers (instead of drawing attention by stealing the card itself) in order to use the numbers in online frauds.

Duplication or skimming of card information

This takes a number of forms, ranging from a dishonest merchant copying clients' credit card numbers for later misuse (or a thief using carbon copies from old mechanical card imprint machines to steal the info) to the use of tampered credit or debit card readers to copy the magnetic stripe from a payment card while a hidden camera captures the numbers on the face of the card.

Some thieves have surreptitiously added equipment to publicly accessible automatic teller machines; a fraudulent card stripe reader would capture the contents of the magnetic stripe while a hidden camera would sneak a peek at the user's PIN. The fraudulent equipment would then be removed and the data used to produce duplicate cards that could then be used to make ATM withdrawals from the victims' accounts.

Empty ATM envelope deposits

A criminal overdraft can result due to the account holder making a worthless or misrepresented deposit at an automated teller machine in order to obtain more cash than present in the account or to prevent a check from being returned due to non-sufficient funds. United States banking law makes the first $100 immediately available and it may be possible for much more uncollected funds to be lost by the bank the following business day before this type of fraud is discovered. The crime could also be perpetrated against another person's account in an "account takeover" or with a counterfeit ATM card, or an account opened in another person's name as part of an identity theft scam. Next decade, this scenario may become a thing of the past due to the emergence of ATM deposit technology that scans currency and checks without using an envelope. [http://www.carreker.com/main/solutions/payments/RO/scs_atm_capture.htm]

Impersonation

Impersonation has become an increasing problem; the scam operates by obtaining information about an individual, then using the information to apply for identity cards, accounts and credit in that person's name. Often little more than name, parents' name, date and place of birth are sufficient to obtain a birth certificate; each document obtained then is used as identification in order to obtain more identity documents. Government-issued standard identification numbers such as "social security numbers" are also valuable to the fraudster.

Information may be obtained from insiders (such as dishonest bank or government employees), by fraudulent offers for employment or investments (in which the victim is asked for a long list of personal information) or by sending forged bank or taxation correspondence. Some fictitious tax forms which purported to have been sent by banks to clients in 2002 were:
* W-9095 Application Form for Certificate Status/Ownership for Withholding Tax
* W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding
* W-8888

The actual origin of these forms is neither the bank nor the taxman - they're sent by would-be identity thieves and W-8888 doesn't exist, W-9095 is also fictitious (the real W-9 asks much less info) and W-8BEN is real but may have been tampered to add intrusive additional questions. The original forms on which these fakes were based are intended to collect information for income tax on income from deposits and investment.

In some cases, a name/SIN pair is needed to impersonate a citizen while working as an illegal immigrant but often the identity thieves are using the bogus identity documents in the commission of other crimes or even to hide from prosecution for past crimes. The use of a stolen identity for other frauds such as gaining access to bank accounts, credit cards, loans and fraudulent social benefit or tax refund claims is not uncommon.

Unsurprisingly, the perpertators of such fraud have been known to take out loans and disappear with the cash, quite content to see the wrong persons blamed when the debts go bad or the police come calling.

Fraudulent loan applications

These take a number of forms varying from individuals using false information to hide a credit history filled with financial problems and unpaid loans to corporations using accounting fraud to overstate profits in order to make a risky loan appear to be a sound investment for the bank.

Some corporations have engaged in over-expansion, using borrowed money to finance costly mergers and acquisitions and overstating assets, sales or income to appear solvent even after becoming seriously financially overextended.

Prime bank fraud

The "prime bank" operation which claims to offer an urgent, exclusive opportunity to cash in on the best-kept secret in the banking industry, guaranteed deposits in "prime banks", "constitutional banks", "bank notes and bank-issued debentures from top 500 world banks", "bank guarantees and standby letters of credit" which generate spectacular returns at no risk and are "endorsed by the World Bank" or various national governments and central bankers. However, these official-sounding phrases and more are the hallmark of the so-called "prime bank" fraud; they may sound great on paper, but the guaranteed offshore investment with the vague claims of an easy 100% monthly return are all fictitious financial instruments intended to defraud individuals.

The fictitious 'bank inspector'

This is an old scam with a number of variants; the original scheme involved claiming to be a bank inspector, claiming that the bank suspects that one of its employees is stealing money and that to help catch the culprit the "bank inspector" needs the depositor to withdraw all of his or her money. At this point, the victim would be carrying a large amount of cash and can be targeted for the theft of these funds.

Other variants included claiming to be a prospective business partner with "the opportunity of a lifetime" then asking for access to cash "to prove that you trust me" or even claiming to be a new immigrant who carries all their money in cash for fear that the banks will steal it from them - if told by others that they keep their money in banks, they then ask the depositor to withdraw it to prove the bank hasn't stolen it.

Impersonation of officials has more recently become a way of stealing personal information for use in theft of identity frauds.

Phishing and Internet fraud

Phishing operates by sending forged e-mail, impersonating an online bank, auction or payment site; the e-mail directs the user to a forged web site which is designed to look like the login to the legitimate site but which claims that the user must update personal info. The information thus stolen is then used in other frauds, such as theft of identity or online auction fraud.

A number of malicious "Trojan horse" programmes have also been used to snoop on Internet users while online, capturing keystrokes or confidential data in order to send it to outside sites.

Money laundering

The term "money laundering" dates back to the days of Al Capone; Money laundering has since been used to describe any scheme by which the true origin of funds is hidden or concealed.

The operations work in various forms. One variant involved buying securities (stocks and bonds) for cash; the securities were then placed for safe deposit in one bank and a claim on those assets used as collateral for a loan at another bank. The borrower would then default on the loan. The securities, however, would still be worth their full amount. The transaction served only to disguise the original source of the funds.

Other related articles

*Nigerian 419 scam
*Wire fraud

External links

* [http://www.bankersonline.com/security/fraudgallery1002.html Bankers Online]
* [http://www.crimes-of-persuasion.com/Crimes/Business/bank_fraud.htm Crimes of Persuasion]
* [http://www.sec.gov/divisions/enforce/primebank/howtheywork.shtml US Securities and Exchange Commission]
* [http://www4.law.cornell.edu/uscode/18/1344.html US Code]

References