BANKING LAW

Legal Challenges in Banking Business

 Concept of Banking Fraud
• Unlike other business, the banking business has its own different and unique role and
responsibilities to protect the integrity of itself by working honestly and wisely to
protect the financial assets which it holds and keep its stakeholders secured. To
ensure the same, bank need to be specific while addressing the issues of banking
fraud.

• Banking fraud is defined as the immoral or unlawful act by a customer, banker or

other stakeholder to illegally attempt to possess or get money from a bank and
financial institution and misuse the property of the banking institution.

• Banking fraud is considered as a white collar crime which is indeed being in a secret
arrangement or deception intended to defraud a banking institution, to obtain its
money or property under its ownership.
• In Nepal criminal charge of bank fraud applies when an individual, banker or any
stakeholder knowingly attempts, tries to attempt or involved in the activities like the
followings;
Opening of account with Demand cash payment in unauthorized Issuance of cheque and bank
false documents manner statement in unauthorized way
Unauthorized Obtain/ make payment with Provide or take loan in
withdrawals unauthorized use of electronic means unappropriated manner
Misuse of bank’s credit Misuse of banking resources Forgeries done by altering the
bank’s ledger
Derive excess or false Carry out or be the cause of carrying
valuation out irregular transaction with the bank
 Types of Banking Fraud
The below various banking frauds are committed by the first party (the customer) or the
second party (the banker) or the third party (other than customer and bank).
• Accounting Fraud
– Deliberate manipulation of financial statements to represent false representation of the
firm’s financial soundness from the activities such as overstating of revenues, not recording
of expenses, overvaluation of assets and undervaluation of liabilities
– Carried out to mislead the investors and shareholders
– Mostly affects bank’s lending by being the main cause of wrong lending decision which turns
a loan to a non performing loan.
• Loan Fraud
– Accounting fraud leads to loan fraud but it is not just limited to misrepresentation of book of
accounts but also to the other false information provided by a person to obtain the loan.
– Loan fraud is the use of other’s identity and information to obtain a loan, it may not be
noticed early but ultimately comes into surface after piling up of dues.
– The intention of such borrowers are generally found getting the bank loan first and managing to be
declared as bankrupt after some time or taking loan in the name of non existent unit first then
escaping with a lot of bank’s fund fraudulently.
• Wire Transfer Fraud
– Frauds committed by the use of electronic communications, wire and internet.
– In such frauds, fraudster steals user id and password from various tools like malware,
phishing etc and uses them illegally to cheat funds from the accounts. They are used to
make someone out of money or value or to get financial gain for the perpetrator. Wire
transfer is used to move funds across accounts in the banking system.
• Phishing and Vishing
• Phishing activities include financial frauds carried out by using of internet or web via
fraudulent emails, disguised or fake sites, software etc to find out the necessary banking
information like account number, user id, password etc.
• Vishing activities are termed as the use of fraudulent telephonic conversation to find out the
banking information.
 Types of Banking Fraud
• Rouge Trader
– Rouge traders are the authorized employees making unauthorized transaction by
mismarking the securities or assets of the employer without the permission of the
appropriate authority and putting the bank into excessive risk.
• Demand Draft Fraud
– It is a sort of misrepresentation where the bank employees who know coding and punching
of DD, will eliminate or steal DD leaves from the bank’s supply and use them as a customary
DD to get payment from the other branch or associated bank and cheat the bank.
– Such frauds have been evolved due to localized software and late reconciliation of accounts.
• Bill Discounting Fraud
– Such fraudsters build good banking relations with their transactions including series of
collections of various bills first. When bank starts to trust the customer, they request the
bank to grant credit against the bills and gradually they start to get advances against fake
bills and finally escapes with the enormous advance amount leaving nobody to settle the
dues.
• Card Fraud
– Card frauds are done by cloning or stealing of the card after getting the pin code from the
innocent customers.
– While using cards, the card holders must be careful at POS and ATM machine in order to
avoid any unauthorized swapping of card in any other replica machine which may be
deigned to cheat the data of the card.
– One should not keep card and its password together and must treat it as personal belonging
to eliminate any cheating through it. Such frauds are often carried out by own family
members.
 Types of Banking Fraud

• Cheque Kiting
– It misuses the banking funds known in the disguise of float.
– When bank M discounts a cheque payable at bank N, it has to release the amount
before getting payment of the instrument from bank N. But when this purposeful
banking process is conducted to misuse the banking fund, the bank M delays to
present or even returns the purchased cheque back to the customer after specific
days when the party gets or arranges the funds from their temporary investment or
other sources.

• Fraudulent Loan
– Fraudulent loans are those loans where the borrowers are business entities actually
operated by a dishonest higher class bank employee in a disguised manner in the
name of an accomplice.
– The intention of such borrowers are generally found getting the bank loan first and
managing to be declared as bankrupt after some time or taking loan in the name of
non existent unit first then escaping with a lot of bank’s fund fraudulently.
 Cyber Crime
• Cyber crimes are those crimes which have been conducted by using personal computer or
any other electronic devices as instruments for various unlawful closures such as
committing various financial frauds, child trafficking to illegal erotic entertainment,
stealing intellectual property, stealing other’s identity or violating other’s privacy etc.
Cyber crime, particularly including the internet, represents to an expansion of existing
criminal conducts close by some novel criminal operations.

• Along with the increase in use of web and electronic devises in various personal, trades
and financial activities, it has also opened doors for new opportunities for high tech
criminal activities as well. Along with the good uses of the internet there are equal
chances of use of it in illegal and criminal activities as well. Now a days, criminal activities
are not limited to the physical assaults only but also to the assault on data of people,
organizations, the Government or more specifically on the virtual body which characterizes
them in the internet platform.

• So far as cyber crime issues are concerned, Nepal is one of the most vulnerable countries
in view of adopted standard of security systems, prevailing cyber laws, capabilities of the
investigation agencies for cyber crime issues, awareness of cyber crime related issues
among the users etc. The majority of individuals are ignorant about various modes of
cyber crimes, network protection and safety as well as security issues.

• Besides, the Government has also incapable structures and guidelines in regards to cyber
crime along with the absence of experts of online security to control the present day
highly advanced cyber crimes like ATM assaults, POS assaults, distributed denial of
service(DDOS), ransom ware, phishing, privacy leaks, data breaching, social media
related violations, dispersal of bogus data etc.
 Common Cyber Crimes in Nepal
• Criminal Copyright Encroachment
– Unacknowledged use of someone’s protected innovation or intellectual property to get any
end goal of personal benefits.
– Use of somebody’s copyrighted or secured works without proper consent or to encroach
the elite rights of the copyright holder by using the copyrighted items.
• Character Misrepresentation or Identity Theft
– It is the wrongdoing by opting the other’s personal and financial data for the sole reason of
expecting to use that person’s identity or name or personality on electronic medium for own
personal benefit.
– We can find many instances of such cyber crimes with using information of others in order to
conduct not only for card and bank misrepresentation but also for other criminal activities like
extortions, dealing drugs, perpetrating cyber crimes, laundering illegal cash etc.
• Hacking
– Hacking is the most recognized cyber crime.
– It is the act of adjusting the main theme of a information technology framework, so
as to achieve an objective beyond the proprietor’s own purpose. Many individuals
conducting hacking exercises acknowledge it as a way of life.
– Hacking activities are further easier in our country due to feeble network protection,
poor mechanism of investigation and poor cyber law.
• Cyberstalking
– Cyberstalkers often follows certain targets in order to hassle and harass them with
electronic correspondences like email, text messages appearing in public platforms
etc and they largely depends upon the obscurity of the internet which permits them
to perform being unidentified.
 Common Cyber Crimes in Nepal
• Spams and Phishing
– Spams are the undesirable or spontaneous computerized correspondence emails
conveyed in mass to take important data information from singular client like card
details, banking details, identities etc in order to take illegal financial benefit from
using it.
– Spams and phishing activities are carried out from internet gatherings, instant
messages, email sending etc targeted to mass of people in such a way that benefits
could be drawn out if few of the targets only gets trapped from such activities.
• Trade of Illicit Products
– Trading of illicit products and services like drugs, sexual services or any prohibited
beverages online also comes under the definition of cyber crime.
– The platforms like chatrooms, announcement sites, newgroups, social platforms etc
may be illegally used for such types of trading.
• Malvertising
– It is a hybrid of malicious advertising which denotes infusing malevolent code in
online advertisements to taint unwary clients.
– It is our general assumption that the famous sites like facebook, youtube etc are
trusted ones but they are also not free from the possible tainting from the
malwares. They often target the trusted sites and make them contaminated with the
malwares in the disguise of advertisements which can easily tunnel into the viewer's
personal computers and programs.
– Later on, they bargain with the trusted sites for the correction or required antivirus.

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 Innovative Banking and Its Products
• Innovative banking refers to the implementation of innovative banking products as an outcome of
converting thoughts towards designing customer friendly products which make honor and also add
values for which target customers never remorse for their payment. To be materialized, idea must be
converted to a product at a lower cost and should also fulfill the need of the targeted customers.
• It covers a deliberate utilization of data, creative mind and activity for achieving enormous values
from the resources utilized, and incorporates all procedures by which ground breaking ideas are
created and converted into valuable items, services and process which eventually leads to next era of
business. Innovation are of two types evolutionary and revolutionary.
• The recent products of innovative banking are the following six items namely Cloud Computing, Big
Data and Analytics, Artificial Intelligence, Machine Learning, Robotic Process Automation, Distributed
Ledger Technology and Internet of Things in which we are lagging behind.
• As per the global scenario of advancement in the use of information technology in banking industry,
Nepalese banks have also implemented different innovative products such as digitization of banking
process, automated teller machine, through out the day banking, internet banking, mobile banking
etc and they have also brought significant positive impact in banking experience of the customer.
• Some innovative banking practices executed in Nepal are as follows;
– Digitization of process and services
– Facilities like ATM, cash deposit machine and cheque deposit machine
– Plastic cards services (Credit, Debit and Prepaid Cards)
– Throughout the day banking services
– ABBS
– Internet or online banking
– Mobile banking facilities
– Interbank deposit system
– Facilities of Real Time Gross Settlement (RTGS)
– Services through Point of sale (POS) and payment service provider (PSP)
 Anti Money Laundering
• Act of money laundering is understood as the unlawful process of making lot of cash
actually generated from various illegal and criminal activities seem to have originated from
authentic sources in the legal way.
• Money launderers utilize a wide assortment of money laundering strategies to make
unlawfully earned money or assets to show up them clean. Internet banking and other
modern banking tools have also made it simpler for launderers to transfer and pull back
cash without getting caught or physically involved. Following there steps are used in money
laundering process by the launderers;
1. Placement : puts the grimy money in legitimate banking system.
2. Layering : conceals the source of money through a series of transactions and accounting tricks
3. Integration: laundered money is withdrawn from the legitimate account to be used for
whatever purposes the launderers have in mind for it.
• Money laundering is the persisting global phenomenon which has contaminated the banking sector
to be used for the purpose of legalizing the grimy cash. There is an estimation of around 5%
money of the world's GDP money laundered globally in one year which is nearly USD 2 trillion. As
per reports, Nepalese banks are also not free from being used in money laundering activities.
• To combat the same, Nepal has established Department of Money laundering Investigation
responsible for fighting money laundering and terrorist financing (AML/CFT). Besides, NRB has also
set up Financial Information Unit (FIU) for combating money laundering and terrorism financing,
which is now called financial intelligence unit. The FIU has formulated the five year national level
strategy and action plan but it is not enough to combat in the current context of advancements in
financial data, innovation, technology communication which permits cash to move anyplace on the
planet without hardly lifting a finger. Besides, inadequate law and legislation and it implementation
hassles are other constraints. The more profound “grimy cash” gets into the financial framework,
the more troublesome is to recognize its cause and various covert ideas to do so has made it hard
to measure the aggregate sum of cash that goes through the laundering processes.
 Electronic Banking with Prospect and Consequence
• Electronic banking is all types of banking administrations and transactions
performed through the electronic means. It provides framework solution
empowering the bank and its individual or corporate customers to get
information of accounts, execute business transactions and/or to gain
information regarding the offered financial services through the use of web
and information technology. Banks have branded it as e-banking, virtual
banking, online banking etc.

• Through e-banking, customer can access their accounts from own personal
computer or cell phone and carry out transactions. Furthermore e-banking
products are designed for the convenience of the customers to allow them to
carry out the banking transactions in off banking hours too (24*7). The e-
banking products offered by Nepalese banks are as follows;

Internet Banking Mobile Banking Plastic Cards

Automated Teller Branchless Banking Electronic Fund

machine (ATM) (BLB) Transfer System
Online Merchant Online utility payment
Payment
 Electronic Banking with Prospect and Consequence

Prospects of E-banking
• Enhances the customer’s convenience
• Enables low charges services
• Enabling transactions beyond banking hours
• Banking services become secured, healthy and efficient
• Reduce the scope of human error
• Reduces the paper work and no geographical barriers.

Consequences of E-banking
• No system provides full security, possibilities to be hacked.
• Technology and server interruption may cause service delay
• Limitations on transactions made by regulatory body can create hurdles for
customers.
• No personal relation with banker.
• Limited scope of services, all banking services could not be rendered through
e-banking.
 Challenges of Electronic Banking

• Lack of equipment to match the technological advancement

• Customer knowledge regarding electronic means like computer, laptop, mobile and
use of internet
• Trust of customer on electronic banking
• Lack of specialized work force
• Customer concerns about security of the system
• Government rules and regulations
• Lack of awareness of electronic banking facilities and their benefits
• Lack of infrastructural development like telecommunication and ISPs
• Dominance of low income people failing to afford e-banking accessories or
instruments.
• Fewer merchant points offering such facilities
 Global Access in Bank Services
• World is being a single business space opened from banking sectors throughout
the world.
• Must be strong in capital base
• Must be technologically advanced and friendly as per global standard
• Have to compete globally to be in the business relevance.
• Innovation is required.
• Continuous development of existing products as per customer’s feedback is
necessary to create market relevance intact
• Investment in data security system is the main concern.
• Acquiring best manpower to meet global standard and practices.
• More vigilance required as risk is increased due to both inbound and outbound
business exposures.
• Have to be service oriented and develop customer friendly products to gain a
good market share or even to keep existing market share intact.
Various Dimensions
• Geographical reach
• Affordability
• Inclusive Banking
• Diverse banking services
• Technological Innovations
• Regulatory Strength
 Challenges in Todays’ Banking
The rise of fin tech in non banking financial institutions have dramatically attracted the
serious competitive environment among banks for providing required customized
financial services. As the development of information technology is a pervasive
phenomenon across all of the sectors, the challenges of security, regulatory and
compliance concerns have emerged as the most significant aspect in today’ context.
Despite of the challenges of being intact for addressing the various concerns while
adapting with the pace of digitalization, there is no any alternative to today’s banking
other than to step in the competition of unstoppable customer service innovations in
order to remain in the today’s banking market. The following points describe the various
challenges in today’s banking.

• Increasing Competition
– Due to the technological innovation in thee field of financial services, banks are not
competing with banks only but have to compete with various innovative non
banking digital companies like F1soft as well.

• Cultural Shift
– As we have now entered into the era of AI, the traditional banking process,
technology and ideology may not work due to change in way of life. In other words
digitization has let minimum scope for manual works which is further decreasing day
by day.
– Bank should identify the technology driven resolutions for every challenges faced
which demands to create culture of technological innovation to streamline the
existing process and services for greater effectiveness.
 Challenges in Todays’ Banking
• Regulatory Compliance
– The increased scope of growing regulations has become one of the significant challenge in banking
industry.
– Banks need to perform and operate by complying these regulatory guidelines prescribed by Nepal
Rastra Bank which can significantly strain resources and reduce profitability of the banks.
• Rising Expectation of customers
– The expectations of present intelligent customers demand dynamic and prompt technological
advancements and conglomerate products of digitization from the traditional banking
establishment as well. To be able to satisfy the growing customer expectation is the greatest
challenge in today’s context.
• Rising Expectation of shareholders
– Amidst strict compliance imposed by regulator and decreasing spread, it is very hard to fulfill the
dividend expectation of the shareholders. CEOs are always in pressure to carry out AGM without
any disturbances by fulfilling the demand of the shareholders at optimum level.
• Security Breaches
– Events of security breaches like high profile hacking, ATM interventions and SWIFT frauds in
various banks are the examples of the major technological challenges persisting in the today’s
banking.
– In order to eliminate the cope of technological driven frauds, banks need to invest in security
measures and practice like end to end encryption, biometric verification etc.
• Requirement of Continuous Innovations and updating Technological Products
– The technological products of banking should be quick, efficient and peer to market. Banks cannot
sell outdated technological products so they need to be updated and developed under a
continuous process as per the feedback of the users. To assess the appropriateness or
effectiveness of own products is the another challenge.
– Banks need to invest in technological innovations as a continuous process to make the existing
product marketable and also to present innovative noble financial solutions to address the ever
changing customer expectations.