Bank Fraud refers to deliberate acts of deception committed to unlawfully gain money, assets, or property from a bank or through banking channels. These frauds compromise the financial stability of banks, harm customers, and erode public trust in the banking system. In India, bank frauds are punishable under various laws such as the Indian Penal Code, 1860, the Prevention of Corruption Act, 1988, the Information Technology Act, 2000, and the Banking Regulation Act, 1949. This blogpost focuses on frauds like ponzi scheme and Cyber Fraud along with the remedies available against it.

Various Types of Bank Frauds

There are various types of bank frauds which are hereunder mentioned:

1. Loan Fraud: This occurs when borrowers intentionally misrepresent financial details or use forged documents to secure loans, often diverting funds for unauthorized purposes. Common sub-types include evergreening (renewing bad loans to mask NPAs), diversion of funds, and multiple loans on the same asset.

2. Forgery and Identity Theft: Fraudsters use fake KYC documents or impersonate others to open accounts or obtain loans. These acts are punishable under Sections 420, 467, 468, and 471 of the IPC(Now, 318(4), 338, 340(2) Bhartiya Nyay Sanhita, 2023 respectively).

3. Cheque Frauds: These involve forging signatures, altering cheque details, or issuing cheques with fraudulent intent. Impersonation of bank staff to issue fake chequebooks is a known tactic.

4. Cyber Frauds: Perpetrators exploit digital vulnerabilities by hacking systems, launching ransomware attacks, or stealing credentials via phishing. A notable case is the ₹94 crore Cosmos Bank cyber heist in 2018. We have further discussed this fraud and talked about its categories.

5. Credit/Debit Card Fraud: This includes skimming, card cloning, SIM swapping, and misuse of lost/stolen cards to make unauthorized transactions.

6. Phishing: Fraudsters pose as bank officials via email, phone, or SMS to trick individuals into revealing sensitive data. Such scams rise notably during tax seasons or RBI alert campaigns.

7. Internal Banking Fraud: Bank staff may collude with external actors to forge documents, approve fake loans, or conceal NPAs through internal manipulation.

8. Wire Transfer & Online Banking Fraud: Fraudulent fund transfer instructions are sent through spoofed emails or hacked accounts, often under the guise of senior officials (CEO fraud).

9. Accounting & Financial Statement Fraud: Companies, sometimes in collusion with bank staff, falsify financial data to hide losses or secure loans using fake collateral. The PMC Bank scam is a prime example.

10. Mortgage/Property Fraud: Forged property papers or double-selling practices are used to obtain loans illegally or deceive banks about collateral ownership.

11. Agricultural Loan Frauds: These involve the use of fake land ownership documents or false identities to exploit rural lending and subsidy schemes.

12. Ponzi Scheme Frauds via Banks: Ponzi scheme operators typically lure investors with promises of high returns and minimal risk. However, instead of generating genuine profits, they use funds from new investors to pay earlier ones, often siphoning off a portion for personal gain. Since there are usually no real earnings, these schemes rely heavily on a continuous influx of new money. They start to unravel when it becomes difficult to attract fresh investors or when many existing ones attempt to withdraw their investments at once.

Understanding Ponzi Scheme Through A Case Study

The Saradha Group and Rose Valley scams of West Bengal were two of the most notorious Ponzi schemes in India, particularly affecting the eastern states. The Saradha Group collected funds exceeding ₹2,500 crore from thousands of small investors, mostly low-income individuals, by falsely promising high returns through chit funds. The money was diverted into non-core businesses like media and real estate, leading to its collapse in 2013. Despite earlier warnings from SEBI, the scam continued until the Supreme Court handed it over to the CBI in 2014 after multiple arrests, including that of its head, Sudipto Sen.

Similarly, the Rose Valley Group ran an even larger Ponzi operation, amassing over ₹17,000 crore by offering inflated returns via investments in hotels, holiday packages, and real estate. It used a network of companies to illegally mobilize deposits and attracted investors by assuring double returns within a few years. SEBI later declared the schemes illegal, and the Enforcement Directorate arrested its founder, Gautam Kundu, in 2015. Investigations by ED and CBI are still ongoing.

Both scams shared common traits: unregulated collective investment schemes, misuse of banking channels, political links, and the exploitation of public trust, ultimately leaving thousands of small investors financially devastated. The Supreme Court gave following directions under mentioned legal framework:

1. Transfer of Investigation to CBI: The Supreme Court in 2014 transferred the probe to the CBI, citing multi-state operations, large-scale fraud, and possible political shielding. The Rose Valley scam was also assigned to CBI and the Enforcement Directorate (ED) for comprehensive investigation into financial crimes and money laundering.

2. Attachment of Properties: Courts allowed the ED to attach assets under the PMLA(section 5,8,17,19,50), including real estate, media companies, and personal holdings worth hundreds of crores, to facilitate auction and recovery.

3. Refund and Compensation to Investors: The Court directed SEBI and state authorities to auction seized properties and create a framework for investor compensation. Though West Bengal had initially launched a relief fund, the Court stressed refunds should stem from recovered assets. The court has recently ₹450-crore assets to be repaid to cheated investors in Rose valley scheme.

4. Criminal Proceedings: Key accused like Sudipto Sen (Saradha) and Gautam Kundu (Rose Valley) were arrested, with chargesheets filed under IPC(section 120B, 406,409,420,467,468,470) PMLA (section3,4) and SEBI laws.

5. Regulatory Crackdown: The Court also called for tighter regulation of Collective Investment Schemes (CIS). This led SEBI to enforce stricter compliance and monitoring, aiming to prevent similar frauds in the future.

Other Available Remedies

Approaching the Consumer Court (Under Consumer Protection Act, 2019): If the fraud falls under unfair trade practices, such as charging hidden fees or misrepresenting loan terms, victims can approach the Consumer Court. The court may order the bank to refund the defrauded amount, award compensation, or even pass an injunction to prevent further unfair practices.

Recovery of Funds from Insurance: Some fraud-related losses may be covered under bank insurance policies, especially if the fraud is a result of a technical failure, data breach, or cyber attack. The customer may file a claim under the bank’s fraud insurance policy or related indemnity coverage, depending on the circumstances and bank policies.

Compensation from the RBI: In some cases, the RBI may intervene and assist with compensation, especially if the fraud occurred due to a systemic failure or regulatory lapse. RBI has guidelines for compensating customers for frauds where banks have failed to take appropriate preventive measures.

Filing a Complaint with the Banking Ombudsman: If the issue remains unresolved at the bank level or if the victim believes the bank's response is inadequate, they can file a complaint with the Banking Ombudsman.The Banking Ombudsman can mediate disputes, issue awards for compensation, or direct the bank to take corrective actions. Compensation can range up to ₹20 lakh, including for mental agony or loss of time.

Cyber Fraud

Cyber banking fraud involves the use of digital platforms and technologies to deceive financial institutions, steal sensitive information, or perform unauthorized transactions. With the increasing use of online banking, mobile apps, and e-wallets, cyber criminals exploit vulnerabilities to gain access to bank accounts and perform fraudulent activities.

Types of Cyber Banking Frauds:

1. Phishing: Fraudsters impersonate legitimate banking institutions or other trusted entities via email, SMS, or websites to trick users into revealing confidential information (e.g., account numbers, passwords, and PINs). For example, A fake email from a bank requesting the user to verify their account details by clicking on a link.

2. Account Takeover: Cyber criminals gain unauthorized access to a person’s bank account by obtaining login credentials through phishing or other methods. Once accessed, they perform unauthorized transaction. For example, Accessing an individual’s online banking credentials and transferring funds to an unknown account.

3. Malware Attacks: Malicious software is installed on a victim’s device without their knowledge, often through phishing emails, fake apps, or compromised websites. The malware can monitor keystrokes, capture passwords, or redirect funds to fraudulent accounts. Example, Keyloggers or ransomware infecting a user’s device to steal personal details.

4. Man-in-the-Middle (MITM) Attack: Fraudsters intercept communication between the user and the bank, allowing them to capture login credentials and sensitive financial data.Example, An attacker intercepting online banking login details through unsecured Wi-Fi networks.

5. SIM Swapping: Cyber criminals gain control of a victim’s mobile phone number by convincing the telecom service provider to switch the number to a new SIM card, allowing the fraudster to intercept OTPs (One Time Passwords) sent for transaction verification. Example, A fraudster using the victim’s phone number to reset passwords and access their bank account.

6. Card Not Present Fraud (CNP): Fraudsters use stolen credit/debit card details to make online purchases or transfers, typically through e-commerce platforms that do not require physical card authentication. For example, Using stolen card details to make fraudulent purchases on an online shopping site.

7. Ransomware in Banking: Cybercriminals use ransomware to encrypt a bank’s files or systems, demanding a ransom for their release. Ransomware may also be used to lock bank employees out of systems to extort money. Example, The attack on Cosmos Bank (2018), where malware was used to siphon off ₹94 crore from ATMs.

The exceptional remedy against this type of fraud is Cyber Crime Cell Complaints where In cases of online banking fraud, one of the most effective avenues for redressal is lodging a complaint with the Cyber Crime Cell. Victims can report such frauds either by visiting their nearest Cyber Crime Police Station, which is present in almost every major district, or by calling the national cyber crime helpline number 1930. Alternatively, complaints can also be registered through the online portal cybercrime.gov.in, especially for crimes involving phishing, SIM swapping, unauthorized transactions, hacking, or email fraud. Once a complaint is received, the Cyber Crime Cell initiates a preliminary investigation, including tracing IP addresses, freezing fraudulent bank accounts, and collaborating with banks and telecom service providers to block further misuse. In many cases, if reported quickly, the stolen amount can be retrieved or transaction reversed. The Cell also has the authority to file an FIR and initiate criminal proceedings under relevant sections of the Information Technology Act, 2000 and Indian Penal Code (IPC). This mechanism plays a vital role in addressing the growing threat of cyber frauds in the digital banking ecosystem and acts as a deterrent against tech-enabled financial crimes.

In State Bank of India v. Pallabh Bhowmick & Ors. [WA/364/2022], decided on 13 September 2024 by the Gauhati High Court, Further upheld by the Supreme Court in 2025. In a landmark case, Mr. Pallabh Bhowmick from Assam became a victim of cyber fraud while attempting to return a blazer purchased online from Louis Philippe. A fraudster, exploiting a data breach on the retailer’s website, impersonated a customer service agent and tricked Mr. Bhowmick into installing a malicious application. This enabled unauthorized access to his State Bank of India (SBI) account, resulting in a fraudulent withdrawal of ₹94,204.80. Despite promptly alerting SBI and filing complaints with the Cyber Crime Cell and the RBI Banking Ombudsman, no remedial action was taken. SBI argued that it held no responsibility since the transaction occurred via Google Pay, a third-party platform. The Gauhati High Court, however, held the bank accountable for its failure to act swiftly, noting it did not file a complaint or initiate a chargeback with the beneficiary bank. The Supreme Court upheld the High Court's ruling, emphasizing that banks must actively safeguard customer accounts and follow due diligence in such cases. It directed SBI to refund the lost amount and recover it from the apprehended fraudster.

This judgment reinforces the accountability of banks in safeguarding customers against cyber fraud. It sets a precedent that financial institutions must proactively implement effective security measures and respond promptly to incidents of unauthorized transactions. If banks don’t take timely action and show negligence in addressing aggrieved person’s complaint, Legal proceedings before the Courts can very well take place. Hence, courts have time and again proven to safeguard the victims of cyber fraud in these changing times.

In conclusion, bank frauds, Ponzi schemes, and cyber frauds represent serious threats to financial security and public trust in the banking system. These crimes exploit regulatory loopholes, digital vulnerabilities, and public ignorance, often resulting in massive financial losses for individuals and institutions. While legal remedies and regulatory measures, such as CBI and ED investigations, SEBI crackdowns, consumer forums, and cyber crime cells, provide avenues for redressal, prevention remains key. Keeping up with the dynamic environment of crime conmmission, legal frameworks need to be more concrete, financial literacy, enforcing strict compliance mechanisms, and promoting transparency in investment schemes are essential to curbing such fraudulent practices and ensuring a safer financial ecosystem.