The presentation provides an overview of some of the big frauds that have happened in the Banking industry worldwide. The profile of the fraudsters included therein and their modus operandi, makes it interesting to know how they operated. Almost every big fraudster has been caught ...but not before they did enough damage to the system. There are several systemic learnings that come out of it....But the core of everything is sheer common sense. Stick to basics, do not compromise on basics - that remains the biggest learning. Fraudsters will always be one step ahead, but if basics are taken care of, frauds can be controlled significantly.

1. ‘CELEBRITY’ FRAUDSTERS IN
BANKING

2. Frank Abagnale – Became the youngest bank
fraudster ever. Seen ‘Catch me if you can’?

3. Frank Abagnale – born 1948
• First Victim – His Father : At 15, he used ‘Gasoline’ Credit Card of his father to buy
things like tyres, batteries etc. from Petrol pumps and encashed these items. His
father ran a credit card bill of ~ USD 3500.
• He went on to commit several other frauds like
• Opening multiple accounts with new identities (fictitious)
• Overdraw from accounts using cheques and then disappear with the money.
• Printed near perfect replicas of bank cheques and used them to withdraw
money from different accounts.
• Impersonated as security guard / pilot / doctor / teacher / lawyer – all with
an intent to defraud establishments
• Caught in 1969; Released after several years in prison with a condition to assist
FBI at ‘no-cost’, which he has been doing since last > 3 decades.
• Today he is a well-known fraud management consultant
• Movie – Catch Me If you Can
• One of the best known examples of ‘external fraudster’

4. Nick Leeson – The trader who brought down Barings Bank in
1995 – One of the oldest banks founded in 1762.
Seen ‘Rogue Trader’?

5. Nick Leeson – born 1967
• Was a Derivative Broker in Barings Bank. Derivatives ?
• Was placed in the Singapore Exchange; incharge of Derivatives trading
• Resorted to taking unauthorised positions on Derivatives (Futures); Initially made a
lot of profits for Barings Bank. As long as profits kept coming, Barings didn’t object.
They were happy and also gave him huge bonuses.
• Luck ran out when the markets took a turn and his future positions ran into losses.
• He hid the losses by using an ‘error account’ no. 88888.
• The losses significantly mounted – GBP 2 mn in 1992 and GBP 208 mn in 1994
• On 16th Jan 1995, he took a position in Tokyo stock exchange, hoping that it would
help him recover his losses. But on 17th Jan, Kobe Earthquake hit Tokyo killing ~
5000 people. The markets went in a tizzy. He couldn’t recover post that. Losses
kept increasing to over GBP 800 mn. By end of Feb 1995, Barings Bank was
declared insolvent.
• Nick Leeson was arrested and served sentence in Jail.
• Now he is out; And is a well-known speaker in conferences / after-dinner
meetings
• Movie – Rogue Trader
• One of the best known examples of ‘Employee Frauds’

6. Harshad Mehta (Big Bull) – Stock broker, who defrauded several
banks and manipulated the stock market. Seen ‘Gafla’?

7. Harshad Mehta – 1953 to 2001
• Used two instruments between banks - Ready Forward Deals and Bank Receipts.
• RF deal is a short term loan from one bank to another against government
securities. Usually 15 days.
• The government securities actually do not exchange hands…instead the borrowing
bank issues what is called Bank Receipts (BRs)….that states that the securities are
held by borrowing bank in Trust for the lending bank.
• He identified two banks – Bank of Karad and Metropolitan Cooperative Bank, who
issued fake BRs. (obviously some employees had agreed to help)
• He borrowed heavily against these fake BRs from other banks and placed the money
in stock market to shoot up the stock prices. His favorite stocks – ACC / Apollo Tyres
/ Reliance / Tisco / BPL / Sterlite / Videocon.
• When prices went up, he sold the stock and returned the money to the banks,
pocketed the profits.
• Scam size - ~ Rs.4000 crores
• When the scam got exposed by TOI reporter Sucheta Dalal, Banks started
demanding the money back and stock markets crashed. Banks were left holding
BRs that had no value.
• One of the best known examples of a Bank Scam.

8. Ketan Parekh (Pentafour Bull) – Stock broker,
who defrauded banks / investors through
manipulating stock prices of chosen companies

9. Ketan Parekh
• Protégé of Harshad Mehta
• K-10 list – ABCL / Mukta Arts / Tips / Pritish Nandy Communications / HFCL / Zee
Telefilms / Global Telesystems / Crest Communications / PentaMedia Graphics
• Bought Shares in Fictitious names from stock markets
• Funded his investments in by borrowing heavily against shares (through his
various associate firms) from Madhavpura Mercantile Coop Bank, GTB , BOI…at
times without adequate collateral.
• Banks were also at fault for having taken large exposures with such volatile
securities ;
• All went well, as long as stock market kept going up. From Mar 2000, there was a
fall as NASDAQ which impacted SENSEX; the K-10 list was impacted heavily.. K-10
shares crashed significantly by ~ 70% in 2 months. But in May 2000 they picked
up again. HFCL infact doubled.
• Then in Dec2000 when NASDAQ fell again / KP got into liquidity problems
• Estimated loss ~ Rs.2000 crores…
• Another example of a Bank Scam

10. SYSTEMIC LEARNINGS
• Clearly Banks went by what one can refer to as ‘Market Practice’
• Heavy reliance on Trust on internal employees / external parties
• Ignoring the Red Flags
• Frauds are not necessarily triggered by External Parties. In a large number
of cases, frauds involved internal collusion. Employees of the banks were
involved.
• Lack of proper due diligence by banks and at times alleged involvement
• Collusion at highest levels – involving senior officers
• Lack of close monitoring on group exposures
• Large lending against volatile securities in a volatile market
• Lack of dual controls / audits and double checks…..Taking things for granted.

11. SYSTEMIC LEARNINGS
Regulators – RBI and SEBI introduced various norms and tightened the
controls.
Impact – Significant financial loss to the system / loss of credibility on the
system / loss of credibility on regulators / Several heads in banks rolled
What about Employees who just did what they were told to do by their
bosses / senior colleagues? They were also impacted with suspensions / job
terminations and other negative actions by management.
DON’T DO ANYTHING ‘BLINDLY’

12. You just learnt some interesting information about some Big
Frauds in Banking and the systemic learnings…………………
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