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An Insight into Financial Fraud


There was time when people used to believe in honesty and hardwork and used to conduct all their activities diligently and without committing any cheating or fraud but unfournately now the times has changes and the competition has increased, in this fast and furious world everyone wishes to be ahead of each other and majority of the population wants to win this rat race by using unlawful and illegal and shortcut means and now a days the concept of hard work, honesty is slowly dying and people tends to get indulge in such unethical, immoral activities, in this research paper we would be discussing what is financial fraud, types of financial fraud, international cases of financial fraud and then I would be emphasising on comparative analysis between two nations and also would be covering some relevant topis related to financial fraud. Financial fraud exists when someone, by false, misleading, or other fraudulent activities, deprives you of your income, resources, or otherwise damages your financial wellbeing. This can be executed through different methods, such as investment fraud or identity theft, if any type of financial fraud occurs then it's important that one should report the crime to authorise agency and law enforcement as soon as possible, because in later stages it gets very difficult to trace the person responsible for committing such crimes, there are several victim compensation programme which unfournately do not cover the money which is lost through fraudulent schemes so only legal resort is left with the person despite suffering the severe financial loss is to file a suit in the the court and invest more money in the court proceedings. victims can retain crime-related documents, such as financial accounts, credit records, present and prior year tax returns, and continue to file significant details during the filing period. people who are mainly involved in financial fraud are white collar criminals these people are have name, a high status in the society also have the sufficient knowledge and skills to deceive the person and these people are not caught very easily because they are highly influential people and have strong political connections so by using all their strong and powerful connections they escape from the nation by causing great loss to nations wealth and reputation as well the people who are badly impacted is the common man of the country. There are several different types of theft, but most fraud methods are designed to enrich those interested in committing the crime.

With the help of several tactics, such as face-to-face conversations through phone calls, SMS and e-mails, fraudsters can target their future victims. The ease of verifying the identities and credibility of individuals and businesses, the use of fraudulent websites and the theft of personal financial information by attracting people's attention to such websites, the international horizons of the Internet and the ease of concealing the true status of fraudsters all contribute to the rapid growth of Internet fraud and with rapid growth and development in the technology and an easy and cheap internet access to everyone now it has become a very easy task to commit online financial fraud by using various tricks and with time financial cyber crimes are increasing.

History and evolution

fraud is not a new concept it has been existing since a long time the first instance was recorded during 300 BC in greece. Hegestratos changed the world as shipping merchant by refusing to confront the insurers of a shipload of valued merchandise by sinking his boat while holding the cargo, and declaring the damage instead. This is the first known instance of theft involving first party insurers. the first case of financial fraud happened in 193 AD during the time of roman empire, the praetorian guard made an attempt to sell the rights to the royal throne but they had no right to do as it didn't belong to them so they were held responsible for financial fraud. In previous times also there were many instances of counterfeit of money and coins. The first Ponzi scheme was seen in the 1920s, a form of investment scam carried out by Charles Ponzi it's a very famous case .

Identity Fraud and Cheque Fraud was also widespread in the 1900s. Frank Abagnale Jr., who had over 8 different personalities , including an airline pilot, a doctor, and a lawyer, this story has been depicted in a movie called 'Catch Me if You Can'.

We believe Sherlock Holmes to be the first forensic accountant worldwide, but it is not possible to disregard the involvement of our great scholars from ancient India. In India, during the ancient Mauryan Times (321-296 BC), Kautilya was the first person to list the forty forms of embezzlement in his famous Kautilya's Arthashastra." There are about forty kinds of embezzlement".

Modern times

Still there are various types of fraud committed every year but the only difference is now the method of executing the crime has changed and people indulging in such activities have become more skill, technology driven and are applying new tactics to defraud people like tampering the ATM machines, hacking the their devices and stealing all the important banking details, the internet is a dangerous place therefore it should be used cautiously, some example of recent fraud are contactless card fraud, employee fraud, benefit fraud, mobile banking fraud, internet banking fraud etc The fact that the internal audit was conducted objectively and independently, the activities of the senior management of the Audit Commission and the poor regulatory environment were found guilty of fraud in the financial statements. The report's findings shows that weak internal controls, a lack of ethical values, and a lack of legal action against fraudsters have created such atmosphere.


The 4 elements of fraud diamond theory are :-

1) Pressure

2) Opportunity

3) Rationalisation

4) Capability

The pressure means it creates a pressure on the person to commit financial fraud like if the person has lost his job or he has to take care of his family but he has no money to buy food , clothing or has no money to pay for the medical bills then this pressure on an individual motivates him to commit fraud and the person get indulge in unethical behaviour , the pressure can be financial or non financial. There are 3 types of pressure ie personal, employment stress and external pressure . there are other perceived pressure like greed , drug addiction , personal debt , gambling , family's financial or health problem etc

The second necessary element is


It means that people will take advantage of the circumstances available to them, suppose the person has great position in the company has the access to all the data , accounts and other sensitive information so that person has the opportunity to commit financial fraud and deceive the company and other people associated with it .the lower the risk of being the higher the chances that the fraud will be committed . the employee recognises the weakness of the organization and take the advantage of the situation by indulging in such unethical and unlawful activities


It means here the person is trying to justify himself for the actions he has committed by giving a excuse like that it was necessity , he was under influence , pressure or he wasn’t paid according to the work he did etc so the idea should be morally acceptable before indulging in some unethical behaviour and so these people try to give excuses like i did this for my family and my employers was cheating on me or if everyone is doing they why not i etc so basically trying to give excuse for their fraudulent actions.


It is situation of necessary skill and traits required for the commission of financial fraud , the fraudster has the opportunity to commit the fraud and turn this thing into reality or has the special skills and influence over other people to provoke or motivate them for the same . position , ego , stress , coercion etc are the supporting elements of capability .

LEGAL Provisions

"The Companies Act, 2013, is the legislation which focuses on issues related to corporate frauds. Fraud in relation to affairs of a company or any corporate body as defined in S.447 of the Companies Act 2013, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

Any person who is found guilty of fraud shall be punishable with imprisonment for a term which shall not be less than six (06) months but which may extend to ten (10) years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three (03) times the amount involved in the fraud.



If any person has made a declaration in any return, paper, certification, statement of financial position, brochure, statement, or other documentation needed by, or for the reasons of, any clause of this Act or the regulations made thereunder that:

• is inaccurate in any material details, believing it to be incorrect;

• misses any relevant truth, believing it to be material"

Section 211 gives the power to central government to establish the department called serious fraud investigation office (SFIO) to regulate and investigate frauds relating to companies.

Types of financial fraud

  • "Mortgage fraud: This financial crime includes different kinds of illegal schemes involving some form of misrepresentation or misstatement on mortgage forms and documents. The Fraud Enforcement and Recovery Act, or FERA, helped to expand the reach of federal law enforcement officials in cracking down on mortgage fraud.

  • Embezzlement: This crime happens when an individual steals money or property that he or she has the duty to manage. This is a very common crime in employment and corporate settings since the movement of money in between hands occurs often.

  • Identity theft: This is when someone illegally obtains and uses another person’s personal data and information in some way that involves deception or fraud, typically for economic gain. It’s one of the fastest-growing crimes in America because our sensitive data is being tagged to more and more outlets.

  • Tax evasion: When a person or company purposefully underpays its taxes, tax fraud or evasion is occurring. This crime is purposeful, so it’s important to know that mistakes on your tax returns are not fraudulent, but the IRS will be watching you if you make many errors over time.

  • Securities fraud: This fraud happens when someone makes a false statement about a company or the company’s valued stock, and other people make financial decisions based on that lie. This happens with companies often; an officer or director of a company will not accurately report the company’s financial information to its shareholders"

  • Bribery is another famous kind of financial fraud. Around 30 per cent of uncovered crime is projected to be from corruption and bribery. Though there are many bribery and corruption cases but Kellogg Brown & Root is one of the most popular and expensive cases.

  • card skimming - This is achieved by modifying the ATM such that the system records the PIN of the card and people are unaware of this act that the machine has been tampered. one should ensure that signs of tampering are checked, ATMs which are located in outskirts should be avoided and card PIN shouldn't be shared with anyone or always make sure when you are inserting your pin, nobody is keeping an eyes, and if any illegal transaction happens the incident must be reported immediately and the person should talk to bank authorities and ask them to block their card so that it can't be further misused.

  • PHISHING - In this scenario, a person pretends to be as a daily service provider or the bank where the victim has his or her account opened,. He/she then continues to request private details. one should refrain from responding to suspicious requests in order to avoid this even though they are from your usual internet service provider or bank, for example. Where in question, it is best to double check if a formal request has already been made by the organisation, bank, supplier or the respective individual.

  • Skimming- many times when the person is making an legitimate transaction then many of the fraudsters uses the devices like wedge which can record all the information which is linked to the magnetic strip.

  • Counterfeit cards- many of the fraudster uses various dirty tactics steal the important information and then they make fake cards by using that information or they sell the information to others.

  • fake prizes - many people make false claims of the fake prize which doesn't exist and then they ask the party to provide the credit card details and ask the person to pay for the shipping charges or other fee and in this way they fool the person and steal their money.

  • Ponzi schemes - This is a typical form of investment scam that gives money that has been collected from new investors to old investors. This money is signed off as dividends on a company, but a real investment has never been made in most situations. Most Ponzi schemes have a few features, including unregistered deposits, complicated tactics, and high and stable returns. There were 1,846 ongoing securities and commodity fraud lawsuits in 2011, half of which were Ponzi schemes.

International cases of financial fraud

Charles Ponzi

Charles Ponzi found that at a bargain, he could buy postal coupons, export them overseas, and market them at full price. His only lie was to overstate the financial advantages. Instead of a small 5% profit, he estimated that in just 45 days, the coupons would yield a 50 percent profit. When he paid early backers from the profits of subsequent ones, thousands of people literally hurled their money at him. The founders lost almost $10 million when the epynomial system eventually blew up, he fled the country and later and later on was found in poverty.


After a botched acquisition and, at the time, the biggest US bankruptcy, the Houston-based energy firm suffered a tremendous collapse in 2001. By overstating earnings, Enron committed fraud. Many executives have been found guilty of numerous offences, including obstruction of justice, insider training and money laundering.


  • Bernard L. Madoff Investment Securities LLC was a Wall Street investment firm founded by Madoff.

  • What happened: Tricked investors out of $64.8 billion through the largest Ponzi scheme in history.

  • Main players: Bernie Madoff, his accountant, David Friehling, and Frank DiPascalli.

  • How they did it: Investors were paid returns out of their own money or that of other investors rather than from profits.

  • How they got caught: Madoff told his sons about his scheme and they reported him to the SEC. He was arrested the next day.

  • Penalties: 150 years in prison for Madoff + $170 billion restitution. Prison time for Friehling and DiPascalli.

  • Fun fact: Madoff's fraud was revealed just months after the 2008 U.S. financial collapse.


  • Company: Telecommunications company; now MCI, Inc.

  • What happened: Inflated assets by as much as $11 billion, leading to 30,000 lost jobs and $180 billion in losses for investors.

  • Main player: CEO Bernie Ebbers

  • How he did it: Underreported line costs by capitalizing rather than expensing and inflated revenues with fake accounting entries.

  • How he got caught: WorldCom's internal auditing department uncovered $3.8 billion of fraud.

  • Penalties: CFO was fired, controller resigned, and the company filed for bankruptcy. Ebbers sentenced to 25 years for fraud, conspiracy and filing false documents with regulators.

  • Fun fact: Within weeks of the scandal, Congress passed the Sarbanes-Oxley Act, introducing the most sweeping set of new business regulations since the 1930s"

Bitcoin - Before the industry took off in late 2017, crypto-currency offences began. Trendon Shavers pleaded guilty to the first known Bitcoin-based Ponzi scam for stock and wire fraud. By 2012, through bitcoin savings and trust, Shavers had received 146,000 bitcoins, costing defrauded investors $1.2 million at the time.

Cases in India

Satyam's fraud cost the company 14000 crores.

This 2009 corporate scandal, also known as 'India's Enron Scandal,' revolves around B Ramalinga Raju and his Satyam Computer Services Ltd. The company admitted that its transactions totaling over Rs 14,000 crore were compromised with, skewed, in front of its executives, stock markets, creditors, and investors.

2G spectrum

The government came under attack in 2008 after it was claimed that they had undercharged mobile phone operators for channel allocation licenses that were used to create 2G spectrum subscriptions, and at the center of the dispute was the then Minister of Telecom. In 2012, the spectrum was deemed unfair and unlawful, and 120 licenses were revoked as a result.

Nirav Modi PNB Bank- Rs. 11,400 Crore

Diamonds are a man's or woman's best friend, but diamond makers such as Nirav Modi are not. This alleged crime was carried out under the Brady House brand of Punjab National Bank, which is one of the most well-known scams. Nirav Modi, his uncle Mehul Choksi, and senior PNB officials were not the only ones involved in this scheme. PNB lodged a complaint with the CBI in 2018, claiming that Nirav Modi and the companies to which he has been related failed to pay the margin amounts on loans in order to obtain Letters of Undertaking (LoUs) from PNB. This meant that if those organisations did not pay their debts, PNB would be responsible.

Vijay Mallya-9000 Crore scam

There was a time when people used to refer to him as the King of Good Times, but things are far from good for him today. We're talking about Baron Vijay Mallya's liquor. In 2016, after he was accused of fraud and money laundering in the region, Mallya fled the country and found asylum in the UK because he committed the crime of fraud and money laundering. he owes to various banks as he took the loan of rs9000 crore.


When signing every financial deal, be vigilant - read the print with caution a small print and ask for clarity and advice If required, from independent sources. Look out for calls, emails, e-mails or faxes calling for your assistance in putting huge amounts of money in an international bank.

Suspect any work advertised or uninvited by spam - For e-mails. Legitimate businesses send no spam. If the 'work given requires money management - collecting or exchanging funds or payments, it may be a 'false check' scheme. Do not respond to spam or unsolicited e-mails offering you any advantage.

Conclusion - This world has become a dangerous place so we have to act cautiously and be aware from all the fraudsters otherwise it can directly impact us and so one has to act smartly and take all the necessary precautions to save themselves from financial fraud. So we should be careful about Financial fraud. Any such fraud should be immediately be reported to the appropriate agencies and law enforcement as soon as possible. Any information like credit card number and Bank account number should not be shared in any condition. when these financial fraud occurs especially the ones which happens at a large scale they impact the economy of the country badly and they wreck the backbone of the nation and it takes several years for a nation to recover and reach a stable condition and the most impacted person is the common man when such scam happens, the middle class people suffers the most and the person responsible for all this flee the nation and live lavishly because of the loopholes in the laws, execution and the extradition treaty which must be resolved as soon as possible.


By Devangi Tiwari, Law Student

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