Banking Lawyer

                    Banking Frauds and role of a Financial Lawyer

Banking was in existence in India during the Vedic times also. Money lending was regarded as an old art and was practiced in the early Aryan days. Debt is often mentioned in the ‘Rig Veda’ reflecting a normal condition prevalent in the Vedic Society. During that period banking had become a full-fledged business. 

In the Buddhist period, even the Kshatriyasand Brahminsstarted taking banking as a business. Rules for safeguarding the interest of borrowers were introduced. Chanakya in his Arthashastra mentioned the maximum rate of interest which could be charged by the lenders. The bankers during this period were known as Mahajans. 

Indigenous banking was in its prime in Mughal period. There was hardly any village without its money-lender who financed trade and commerce. 

The British came to India in the 16th century. The East India Company established its agency houses in Bombay, Calcutta & Madras. 

Some of the important banks which were established later were Bank of India, Central Bank of India, Bank of Baroda, etc.

Similarly financial frauds have been in existence for a very long time. Chanakya, in Arthashastra painted a very graphic detail of what we, in modern times, term as ‘fraud’. Kautilya describes forty ways of embezzlement, some of which are: “what is realised earlier is entered later on; what is realised later is entered earlier; what ought to be realised is not realised; what is hard to realise is shown as realised; what is collected is shown as not collected; what has not been collected is shown as collected; what is collected in part is entered as collected in full; what is collected in full is entered as collected in part; what is collected is of one sort, while what is entered is of another sort.” As you would all agree, some of the above actions continue to be the modus operandi adopted in many instances of financial fraud that have hit the headlines in recent times. This shows that very little has changed over such a long period in the basics of fraud.

The amount involved in the frauds reported by the banking sector in India has more than quadrupled from Rs. 2038 crore during 2009-10 to Rs. 8646 crore during 2012-13. Scandals like Enron, Worldcom, etc. have caused major upheavals in western nations and their impact has been felt not only in the individual institutions or countries but across the global financial system. India too has witnessed a spate of fraudulent activities in the corporate sector over the last decade in the form of Satyam, Reebok, Adidas, etc. In the previous years, banking and financial services industry continues to be among the most commonly victimized sectors as far as fraud is concerned. What the above statistics reveal is that the frequency, volume and the gravity of instances of fraud across various sectors, particularly in the financial sector, has gone up tremendously over the past few years. With the sweeping changes in the scope and magnitude of banking transactions witnessed in the past few decades, the emergence of hybrid financial products, the increasing trend of cross border financial transactions and the dynamics of real-time fund movement and transformation, the vulnerability of the system to the menace of fraud has become higher than ever before. 

Let us revisit the definition of the term ‘Fraud.’ Fraud can loosely be defined as “any behavior by which one person intends to gain a dishonest advantage over another". In other words, fraud is an act or omission which is intended to cause wrongful gain to one person and wrongful loss to the other, either by way of concealment of facts or otherwise. Fraud, under Section 17 of the Indian Contract Act, 1872, includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract.

RBI has, per se, not defined the term ‘fraud’ in its guidelines on Frauds. Though RBI had not given a specific definition of the term, it has, for quite some time now, been monitoring the nature, volume and magnitude of frauds in certain sections of the financial sector that fall under its jurisdiction.

Critical government regulations exist that subject banks to certain requirements, restrictions and guidelines. This legal area is known as "Banking Law." Banking Law includes Banking Law and Practice. Banking business is so vast, that it is connected with many laws likeLaw of Contract, Pledge and Mortgage, Partnership and Companies Act, laws related to Foreign Trade etc.

State and national banks must follow certain requirements so that individual consumers, financial institutions and our economy as a whole are well-protected. They seek to protect bank customers, depositors, shareholders, and borrowers through state laws. By thoroughly supervising various financial groups, it helps to provide the financial institutions with a sense of accountability. It also allows for consumers to be able to trust where their money is going and that it will remain safe. Public awareness of this area of law is perhaps at an all-time high due to recent troubles, bank failures and issues of misdealing that have plagued the country and been highly-covered in the news for the last several years. 

In business circles, the common question these days is “How is the economy affecting your business?” For each person and business, the answer varies. The legal profession is no exception. Ask most lawyers about the economy and you often hear – “We will be okay, there is usually an increase in litigation, which will help our business”.

Some empirical thoughts as to why litigation remains steady or increases in hard economic times:

1. When one business is unable to pay its obligations, the solvent parties will often dispute who has to pick up the obligation. 

2. A tightening economy leads to layoffs and staff reductions, which leads to more employment litigation.

3. A distressed business or individual has “nothing to lose”. When a lawyer reviews a case, an important part of that analysis is the counterclaim. Particularly in business litigation, an injured party may have injured the other party, and the counter suit or threat of counter suit deters litigation and encourages settlement. However, when someone is close to bankruptcy, they are not worried about a counterclaim. If they get a million rupee verdict against them, they just bankrupt; if they prevail, then they can keep going.

There are easy ways to avoid financial litigations though, as a leading Indian corporate lawyer KislayPandey says, ‘Pay your taxes. Seems simple, but it can prevent most of your future troubles, business owners when faced with the choice between paying debt and taxes; the taxes both central and state like excise, service, vat, etc. should always be paid first’.

The banking laws differ from country to country and are currently being rewritten in most of them. The key objectives however are to be confidential, to minimize exposure to risk and to avoid corruption. A corporate lawyer represents businesses of all sizes, and can handle cases ranging from general company/commercial work to large, complex corporate transactions such as mergers and acquisitions. Commercial lawyers advise on specialist areas of law and represent clients where there is a business-related disputes.

As demonstrated by Paul Weiss, Adam Scott, KisleyPandey and other award winning lawyers, a good corporate lawyer also helps corporate clients in developing policy and strategy with advice based not only on the legal aspects of doing business but also on practical experience of commercial activities, including:

· Appearance in District Courts, High Court and Supreme Court.

· Corporate Laws and Capital Market Laws 

· Recovery Suits/Injunction Suits

· Company Law matters

· Criminal Cases & Appeals 

· Commercial/Firm/Cooperative/Company formation & Administration

· Writ Petitions/PILs

· Civil & Property related Matters

· Corporate Laws ( Mergers and Acquisition)

· SEBI and RBI

· Civil Litigation

· Intellectual Property Right Matters

· Building Bye Laws

· Execution Proceedings

· Rent Control Act matters

· Debt Recovery Tribunal matters

· Arbitration Cases

· Consumer Disputes at all levels​

The role of a commercial lawyer is to be a sound technician of the law to a sound business advisor. The lawyer must also be able to assist clients to achieve their business aims, by delivering a pragmatic, solutions-orientated commercial steer to their clients. Many commercial lawyers specialize in property, tax, employment, finance, intellectual property and competition law. Some of the renowned corporate lawyers are Mayer Brown, Reed Smith, Morrison &Foerster, KislayPandey, Paul Weiss, Vinson & Elkins, etc.

While the sheer number of frauds and the amount involved, when seen in isolation, may appear overwhelming, it is important to view the incidence of frauds in the banking sector in the context of the massive increase in the number of deposit and credit accounts in banks and the staggering volume and value of transactions that are processed by the banks every day. 

The impact of frauds on entities like banks, which are engaged in financial activities, is more significant as their operations involve intermediation of funds. The economic cost of frauds can be huge in terms of likely disruption in the working of the markets, financial institutions, and the payment system. Besides, frauds can have a potentially debilitating effect on confidence in the banking system and may damage the integrity and stability of the economy. It can bring down banks, undermine the RBI’s supervisory role and even create social unrest, discontent and political upheavals. The vulnerability of banks to fraud has been heightened by technological advancements in recent times.

The advantages of technology, communication and accessibility of data must be leveraged to put in place a system wide fraud mitigation mission. Any house is only as strong as its foundation and as weather proof as its insulation. It is necessary, therefore, that a strong foundation is built by leveraging robust IT systems, framing effective policies and procedures, laying down strict compliance processes, setting high integrity standards, developing efficient monitoring capabilities and initiating strict punitive action against the culprits in a time bound manner. It is also imperative that we insulate ourselves from unscrupulous activities by strengthening the fraud detection, mitigation and control mechanism through prompt identification, investigation and exchange of information. This is necessary not just for the safety of banks but for ensuring the stability and resilience of the overall financial system and sustaining the confidence that various stakeholders have in its strength and integrity.