Blockchain could have blocked Ni­rav Modi

De­ploy­ing a blockchain sys­tem could pre­vent tam­per­ing of the SWIFT sys­tem

DQ Channels - - Channel pulse - ANUSHRUTI SINGH anushrutis@cy­ber­me­dia.co.in

“Un­for­tu­nately, the fraud­sters have also started us­ing in­no­va­tive meth­ods to mis­use the bank­ing sys­tem. At the same time tools and tech­niques such as real time neu­ral net­work based be­hav­ior mod­els and foren­sic ac­count­ing are al­ready chang­ing the face of fraud de­tec­tion and pre­ven­tion.”

DR. PREETI GOYAL , Pro­fes­sor — Fi­nance & Ac­count­ing, Great Lakes In­sti­tute of Man­age­ment

Bank­ing sec­tor is the en­gine of eco­nomic growth and any mal­func­tion in this en­gine sends shiv­ers down the en­tire econ­omy. In the re­cent years, banks have achieved phe­nom­e­nal growth which has pre­dom­i­nantly been en­abled by tech­nol­ogy. But hu­man in­ter­ven­tion can lead to sit­u­a­tion where one can not imag­ine. PNB fraud case is also a case of tech­nol­ogy v/s hu­man in­ter­ven­tion. If see­ing it from a tech­nol­ogy as­pect, the case could be con­sid­ered as a hack in the sys­tem how­ever it is in­deed more of a bank break-in rather than con­sid­er­ing as a cy­ber crime.

In the wake of PNB SWIFT-re­lated fraud in­volv­ing sig­nif­i­cant amount, RBI also re­it­er­ated its con­fi­den­tial in­struc­tions and man­dated the banks to im­ple­ment, within the stip­u­lated dead­lines, the pre­scribed mea­sures for strength­en­ing the SWIFT op­er­at­ing en­vi­ron­ment in banks.

SWIFT or So­ci­ety For World­wide In­ter­bank Fi­nan­cial Telecom­mu­ni­ca­tion is the tool used for in­ter­na­tional money trans­fer.

Dr. Preeti Goyal a pro­fes­sor of Fi­nance & Ac­count­ing at Great Lakes In­sti­tute of Man­age­ment in Gur­gaon says, “In the com­ing years this sec­tor is ex­pected to wit­ness ex­plo­sive changes and growth with the use of newer tech­nolo­gies such as NFC, block chains, robotic process au­to­ma­tion etc. Un­for­tu­nately, the fraud­sters have also started us­ing in­no­va­tive meth­ods to mis­use the bank­ing sys­tem. At the same time tools and tech­niques such as real time neu­ral net­work based be­hav­ior mod­els and foren­sic ac­count­ing are al­ready chang­ing the face of fraud de­tec­tion and pre­ven­tion. This is like a cat and mouse game be­tween the banks and fraud­sters and tech­nol­ogy re­mains both a root cause as well as the solution to this.”

While the Ni­rav Modi fraud has been high­lighted as a tech­nol­ogy fraud, the fo­cus should ac­tu­ally be on the lack of in­ter­nal con­trols, checks and bal­ances that led to this sit­u­a­tion. It is not that bank frauds did not hap­pen prior to the use of tech­nol­ogy. Many of us will re­call how Har­shad Me­hta duped the bank­ing sys­tem of crores of ru­pees in late 1980s – at that time it was said if banks were au­to­mated, it may have been pos­si­ble to pre­vent the fraud.

“There is no nir­vana to pre­vent bank fraud. The solution lies in strength­en­ing the in­ter­nal con­trols, checks and bal­ances and at the same time in­vest­ing in lat­est tech­nol­ogy and train­ing peo­ple to use it.” She adds.

While this fraud has oc­curred at one of the branches of PNB, it would even­tu­ally af­fect other Banks in In­dia and out­side In­dia due to na­ture of such con­tracts. If PNB backs out of its obli­ga­tions to pay and takes le­gal route, other banks will also a take a hot.

“As we have seen in past, such frauds are not lim­ited to one branch and we may see other Banks un­earthing sim­i­lar frauds in near fu­ture in one of their branches. Con­sid­er­ing that Pub­lic sec­tor Banks in In­dia are Gov­ern­ment backed, there is no im­me­di­ate threat on ex­is­tence of any of banks. How­ever, such news weak­ens the faith of In­dian Pub­lic and In­ter­na­tional in­vestors in the Bank­ing sys­tem. This is not a good news and will have long term reper­cus­sions for In­dian bank­ing sys­tem as a whole. This is also a fi­nal wake up call for banks to put their house in or­der.” Says Ra­jeev Ma­ha­jan, Co-Founder, CEO and Di­rec­tor at Ant­works Money, also the Ex-Se­nior Pres­i­dent – MNC In­fra­struc­ture, Yes Bank.

WHOM TO TRUST

“Tech­nol­ogy can pro­tect you from in­va­sion or hack­ing, but tech­nol­ogy can­not pro­tect you from hu­man ten­dency to per­pe­trate fraud. It is im­por­tant to min­i­mize hu­man in­ter­fer­ence and max­i­mize tech­nol­ogy-based trans­ac­tions.” Says Prasad Ajgaonkar, CEO, iReal­i­ties Pvt. Ltd (The com­pany spe­cial­izes in of­fer­ing tech­no­log­i­cal in­no­va­tion, dig­i­tal ser­vices.)

Gokul­nath Shetty, re­tired deputy branch man­ager with an­other ju­nior em­ployee mis­used the So­ci­ety For World­wide In­ter­bank Fi­nan­cial Telecom­mu­ni­ca­tion or SWIFT codes; as he had pass­words to them. He has worked in the bank for a long time and he man­aged to cover up the whole mess for years. While, there are also other peo­ple who have been ar­rested from au­tho­rized sig­na­tory of the ac­cused firms.

A big ques­tion arises here is whom to trust as mod­ern day bank­ing ne­ces­si­tates work­ing in hand with partners, agents and ven­dors, etc. be­sides out­sourc­ing, pe­riph­eral and sev­eral op­er­a­tional ac­tiv­i­ties in­volve de­ploy­ing and trust­ing out­side agency’s em­ploy­ees.

In the mist of the PNB Fraud case, there is need to have vig­i­lant back­grounds checks for the em­ploy­ees work­ing in fi­nan­cial in­sti­tu­tions. CEO of SecUR Cre­den­tials, a back­ground screen­ing com­pany Rahul Belwalkar says, “Cur­rently, the num­bers of PSU’s that opt for Back­ground screen­ing are low be­cause of HR Prac­tices that have been in­grained through the years and their re­sis­tance to change th­ese prac­tices. We also sus­pect that there are push backs from unions as well be­cause of which HR poli­cies haven’t changed in a while. There has been a rise in num­ber of pri­vate sec­tor banks and NBFCs that are not only con­duct­ing back­ground screen­ing but are also do­ing reg­u­lar credit checks on their em­ploy­ees who at the end of the day han­dle large amounts of clients’ money. In this case too, right from gen­eral man­ager level and other 18 em­ploy­ees have been ac­cused of the fraud; hav­ing proper and sys­tem­atic em­ployee back­ground ver­i­fi­ca­tion is the need of the hour.”

WHAT SHOULD BE DONE

As the risks aris­ing from the po­ten­tial ma­li­cious use of the SWIFT in­fra­struc­ture, cre­ated by banks for their gen­uine busi­ness needs, has al­ways been a com­po­nent of their op­er­a­tional risk pro­file. RBI had, there­fore, con­fi­den­tially cau­tioned and alerted banks of such pos­si­ble mis­use, at least on three oc­ca­sions since Au­gust 2016, ad­vis­ing them to im­ple­ment the safe­guards de­tailed in the RBI’s com­mu­ni­ca­tions, for pre­empt­ing such oc­cur­rences. Banks have, how­ever, been at vary­ing lev­els in im­ple­men­ta­tion of such mea­sures. Even Fi­nance Min­is­ter Arun Jait­ley has also said that it is in­cum­bent upon the state to chase those who cheat the bank­ing sys­tem.

In the light of this case; lead­ers in the in­dus­try have sug­gested some of the mea­sures that should not be avoid. Prasad Ajgaonkar CEO of iReal­i­ties sug­gests that it is ex­tremely im­por­tant to ed­u­cate all stake­hold­ers in the bank­ing ecosys­tem on in­for­ma­tion se­cu­rity, as bank­ing frauds are not tech­nol­ogy frauds but process frauds.

“Mak­ing in­for­ma­tion se­cu­rity train­ing com­pul­sory for all bank em­ploy­ees is an im­por­tant step in sig­nif­i­cantly re­duc­ing bank frauds. For one of the largest pri­vate sec­tor banks, we have cre­ated and de­ployed a com­pre­hen­sive in­for­ma­tion se­cu­rity train­ing module, which they are suc­cess­fully run­ning for the last 3 years.” He says.

There should be a sys­tem or mech­a­nism to im­me­di­ately make the changes in the

“How­ever, such news weak­ens the faith of In­dian Pub­lic and In­ter­na­tional in­vestors in the Bank­ing sys­tem. This is not a good news and will have long term reper­cus­sions for In­dian bank­ing sys­tem as a whole. This is also a fi­nal wake up call for banks to put their house in or­der.” RA­JEEV MA­HA­JAN Co-Founder, CEO & Di­rec­tor Ant­works Money

“Tech­nol­ogy can pro­tect you from in­va­sion or hack­ing, but tech­nol­ogy can­not pro­tect you from hu­man ten­dency to per­pe­trate fraud. It is im­por­tant to min­i­mize hu­man in­ter­fer­ence and max­i­mize tech­nol­ogy-based trans­ac­tions.” PRASAD AJGAONKAR, CEO, iReal­i­ties Pvt. Ltd

“Cur­rently, the num­bers of PSU’s that opt for Back­ground screen­ing are low be­cause of HR Prac­tices that have been in­grained through the years and their re­sis­tance to change th­ese prac­tices.” RAHUL BELWALKAR CEO SecUR Cre­den­tials

patches in the sys­tem, and it can be made se­cure. For this, the sys­tems should be open sys­tems. Banks should also have a crises man­age­ment sys­tem in place, for im­me­di­ate ex­ter­nal and in­ter­nal com­mu­ni­ca­tion.

BLOCKCHAIN CAN HELP

The long term solution that banks can look at for prompt de­tec­tion and pre­ven­tion of fraud­u­lent trans­ac­tion is by de­ploy­ing a blockchain based sys­tem. Blockchain con­sen­sus is de­pen­dent on the en­tire ecosys­tem and not an in­di­vid­ual. Hence, it would re­ject such a trans­ac­tion im­me­di­ately, since in nor­mal cir­cum­stances, it is only one/few in­di­vid­u­als who are re­spon­si­ble for the fraud and not the en­tire net­work of the bank. It also pro­vides ef­fec­tive pro­tec­tion against fake LoUs.

“Blockchain tech­nol­ogy can suc­cess­fully pre­vent process frauds in banks, be­cause no one sin­gle au­thor­ity has full con­trol over the move­ment of as­sets. If the core bank­ing sys­tem is in­te­grated with blockchain, any breach of lim­its can be im­me­di­ately tracked and stopped. In the PNB fraud, only one of­fi­cer had au­thor­ity to ex­e­cute the trans­ac­tion end-to-end, so the fraud was not de­tected as it by­passed the core bank­ing sys­tem.” Says Ajgaonkar.

Ad­vo­cat­ing the Blockchain us­age, CEO & Co-Founder of Ra­zor­pay, Harshil Mathur says, “A blockchain based sys­tem also pro­vides high trace­abil­ity with the records of trans­ac­tion be­ing made avail­able in the trans­ac­tion his­tory, through­out the life­time. This makes the sys­tem trans­par­ent and au­ditable, hence more im­mune to frauds.”

Soft­ware Com­pa­nies should work with the rel­e­vant busi­ness func­tion team to un­der­stand and iden­tify the de­pen­den­cies. Most of the con­ven­tional sys­tems have maker, checker and au­tho­rizer con­cepts em­bed­ded, how­ever, an­a­lyt­ics based au­dit hooks and rule based cross plat­form rec­on­cil­i­a­tions are sel­dom im­ple­mented.

Agrees with the same Vikram Pandya, Di­rec­tor Fin­tech of SP Jain School of Global Man­age­ment also ex­presses his thoughts, “With ad­vent of ma­chine learn­ing, bank­ing soft­ware can do re­al­time data an­a­lyt­ics and no­tify the man­age­ment about sus­pi­cious pat­terns. Soft­ware firms should also start of­fer­ing blockchain based so­lu­tions to bring more trans­parency and ef­fi­ciency to some of the pro­cesses where de­pen­dency of value chain is higher. RegTech should be part of the soft­ware of­fer­ing. In­ter­nal con­trols should be em­bed­ded within the sys­tem and check­list based ap­proach should be im­ple­mented.”

Mean­while, RBI also said it has formed a panel to look into rea­sons for fac­tors lead­ing to in­creas­ing in­ci­dents of frauds in banks. The panel will also look into rea­sons for high di­ver­gence in Non-Per­form­ing As­set (NPA) clas­si­fi­ca­tion and pro­vi­sion­ing by banks.

“In view of large di­ver­gences ob­served in as­set clas­si­fi­ca­tion and pro­vi­sion­ing in the credit port­fo­lio of banks as well as the rising in­ci­dence of frauds in the In­dian bank­ing sys­tem, it has been de­cided to con­sti­tute an Ex­pert Com­mit­tee un­der the chair­man­ship of Y H Malegam, a for­mer mem­ber of the Cen­tral Board of Di­rec­tors of RBI, to look into the rea­sons for high di­ver­gence ob­served in as­set clas­si­fi­ca­tion and pro­vi­sion­ing by banks vis-a-vis the RBI’s su­per­vi­sory as­sess­ment, and the steps needed to pre­vent it; fac­tors lead­ing to an in­creas­ing in­ci­dence of frauds in banks and the mea­sures (in­clud­ing IT in­ter­ven­tions) needed to curb and pre­vent it; and the role and ef­fec­tive­ness of var­i­ous types of au­dits con­ducted in banks in mit­i­gat­ing the in­ci­dence of such di­ver­gence and frauds,” Apex bank states.

The mem­bers of the com­mit­tee in­clude Bharat Doshi, mem­ber, Cen­tral Board of Di­rec­tors, RBI; S Ra­man, for­mer chair­man and MD, Ca­nara Bank and for­mer whole-time mem­ber, SEBI; and Nand­ku­mar Sar­avade, chief ex­ec­u­tive of­fi­cer, Re­serve Bank In­for­ma­tion Tech­nol­ogy Pvt Ltd (ReBIT). A K Misra, ex­ec­u­tive di­rec­tor, RBI will be the mem­ber-sec­re­tary of the com­mit­tee.

“A blockchain based sys­tem also pro­vides high trace­abil­ity with the records of trans­ac­tion be­ing made avail­able in the trans­ac­tion his­tory, through­out the life­time. This makes the sys­tem trans­par­ent and au­ditable, hence more im­mune to frauds.” HARSHIL MATHUR, CEO & Co-Founder, Ra­zor­pay

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