A systematic literature review on frauds in banking sector
| DOI | https://doi.org/10.1108/JFC-12-2021-0263 |
| Published date | 24 January 2022 |
| Date | 24 January 2022 |
| Pages | 285-301 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Deepa Mangala,Lalita Soni |
A systematic literature review on
frauds in banking sector
Deepa Mangala and Lalita Soni
Guru Jambheshwar University of Science and Technology, Hisar, India
Abstract
Purpose –Banking industry peculiarly has become soft target for several pernicious deceptive and
fraudulent activities. The purpose of this paper is to systematically reviewthe literature published in past
20years on bank frauds and present a holistic view on causesand consequences of bank frauds and measures
to curtailthis menace. Towards the end the paper providesavenues for future research.
Design/methodology/approach –A systematic literature review approach is used in this study and
articles are selected via pre-set inclusioncriteria. The literature is mapped on the basis of databases, year of
publication, countryof study and journal of publication. This paper is based on 70 selected articlespublished
in four prominentdatabases between 2000 and 2021.
Findings –This study reveals that fraudsin banking industry have become a matter of grave concernfor
almost all countries across the globe, causing significant financial and non-financial damages to banks,
customers, other stakeholders and economy. Numerous factors such as pressure and opportunity are
responsible for fraudoccurrence. This study further evinced that bankinginstitutions inevitably should have
a robust fraudrisk management in place to prevent, detect and respondto defalcation.
Originality/value –To the best of the authors’knowledge, this is the only paper among 70 selected
articles which systematicallyreviews the literature published in past 20years and provides a comprehensive
view on all aspects relatedto bank frauds.
Keywords Frauds, Banking industry, Fraud mitigation, Systematic literature review
Paper type Literature review
1. Introduction
The fulcrum of social-economic development of any country across the globe pivots around the
banking institutions which have the statutory competency to mobilize the savings from surplus
savers and provide credit facilities to needy individuals/institutions. Banking industry is
growing rapidly due to globalization and technological advancement. Notwithstanding, the fact
that banking sector is one of the most well-regulated sectors it has been continuously battling
with numerous threats. One of the major threats bedeviling the banking institutions is the
growing rate of financial crimes and the paucity of appropriate mechanism to combat this
menace has left the public and the banking sector at the wits end. Fraud is a ubiquitous crime
that impedes the sustainable development of economy and causes billions of dollar s in loss
every year. Recent study reveals that fraud costs the global economy more than $4.5tn every
year and the highest number of fraudulent cases are recorded in financial sector at 19.8%
(Association of Certified Fraud Examiners, 2020) with a median loss of $100,000–$110,000
(Association of Certified Fraud Examiners,2018, 2020). During the last two decades more than
ten banks got bankrupt due to frauds worldwide such as Northern Rock (2008, UK), Bear
Stearns (2008, USA), IndyMac (2008, USA), Lehman Brothers (2008, USA), WA Mutual (2008,
USA), Royal Bank of Scotland Group (2008, Britain), ABN-Amro (2008, Netherlands), Bankwest
Funding source: This research received no specific grant from any funding agency in the public,
commercial or not-for-profit sectors.
Frauds in
banking sector
285
Journalof Financial Crime
Vol.30 No. 1, 2023
pp. 285-301
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-12-2021-0263
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
(2008, Australia), Anglo Irish Bank (2009, Ireland), Hypo Real Estate (2009, Germany), Banco
Espirito Santo (2014, Portugal) and Wirecard (2020, Germany) (“List of corporate collapses and
scandals,”2021). The problem of fraud is a general phenomenon and not confined to any
economy, nation or contingent. Even the banking industry of developing countries is not far
behind in this race. “In the last 11 fiscal years, a total of 53,334 cases of fraud were reported by
banks involving a massive amount of `2.05 lakh crore, the RBI data said”(Press Trust of India,
2019). Banking institutions are more fraud fragile as these are the places where the abundant
cash resources are kept which attract various frauds and embez zlement activities. Association
of Certified Fraud Examiners (2011),defines fraud as “Any illegal acts characterized by deceit,
concealment or violation of trust. These acts are not dependent on the application of threat of
violence or physical force.”Frauds in banking sector are divided into three main sub-categories:
technology-related frauds, KYC-related frauds and advance-related frauds:
A closer examination of the reported fraud cases has revealed that around 65% of the total fraud
cases reported by banks were technology related frauds while the advances portfolio accounted
for a major proportion (64%) of the total amount involved in frauds (Chakrabarty, 2013).
Frauds in banking sector have three dimensions: insider fraud (exclusively perpetrated by
cunning staff), outsider fraud (committed by external party outside the institution) and
collaborative fraud (perpetrated via collusion of nefarious staff members with fraudsters
outside the banking institution (Sanusi et al.,2015;Repousis et al., 2019;Tade and Adeniyi,
2020). However, majority of frauds of big bucks are usually perpetrated or facilitated by
bank directors, executivesand loan officers who are supposed to operate the bank business
with prudence (Cheng and Ma, 2009;Hidajat, 2020). In India, the news media reported a
number of high-profile bank fraud cases such as Punjab National Bank (2018), Yes Bank
(2018), Punjab and Maharashtra Bank (2019) and Lakshmi Vilas Bank (2019), which were
successfully perpetratedthrough connivance with bank officials (Panchaland Sarkar, 2019).
The recent dismissal of top executivesin some banks owing to illegitimate advancing loans
testimony this. For example, Central Bureau of Investigation booked a number of top bank
officials to defrauding their own banks such as the former deputy general manager and
employees of Central Bank of India, former Deputy General Manager of Canara Bank,chief
manager and Managing Director of Syndicate Bank, Managing Director of Punjab and
Maharashtra Bank and many more who were found involved in nexuswith fraudster (“Big
Bank Scams: Frauds That ShookThe Indian Financial Sector”, 2018). Financial institutions
use several fraud prevention and detection measures to combat this peril. One major
obstacle in addressing the menace of frauds in banking sector is detecting fraudulent
transactions instantaneously and reporting them to the concerned authorities as soon as
they occur. Reserve Bank of India in its annual reportrevealed that:
While the frauds framework focuses on prevention, early detection and prompt reporting, the
average lag in detection of frauds remains long. The average lag between the date of occurrence
of frauds and their detection by banks/FIs was 24 months during 2019–20. In large frauds of Rs
100 crore and more, however, the average lag was 63 months (Mondal, 2020).
It is evident that bankingindustry is based on trust and reputation. All stakeholders such as
depositors, lenders and investors expect accountability and transparency in banking
services so in order to sustain the stakeholders’confidence in banking system, it is vital to
safeguard the image of banks from variousfraudulent practices. No matter how strong the
bank’s control mechanism may be, the fraudsters are so capriciousthat they find some way
or the other to circumvent the internal control mechanism; therefore, more time and
adequate resources mustbe allocated by banks in effective fraud risk management practices
to reduce the vulnerabilityof frauds (Sy and Tinker, 2019;Alazzabi et al., 2020). Although it
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