By: Meghana Senthil
India has witnessed multiple major bank frauds over the course of the last decade. As per the Annual Report of the Reserve Bank of India (“RBI”), the reported bank fraud cases have increased by 159% in value during the fiscal year of 2019-2020. The increased complexity and costs involved in them are serious points of concerns for regulatory bodies like the RBI. However, despite its wide occurrence, bank fraud is not exclusively recognised as an offence in the Indian Penal Code, 1860 (“IPC”), as it exists today, or in any other statute. As a result, in status quo, various provisions in Chapter XVII of the IPC are attracted depending on the factual nature of each bank fraud offence. Owing to the aforementioned statutory lacuna, this article seeks to track the conceptual insufficiency of Chapter XVII of the IPC in dealing with major bank frauds. It concludes that the IPC lacks both definitional and conceptual clarity when concerning major bank frauds, and that Chapter XVII needs to be reconceptualised to address the same.
Bank Frauds – Lacunae in the IPC
As noted by the Supreme Court in CBI v Jagjit Singh, major bank frauds impact not only the concerned bank, but all its customers and society at large. A bench of Justices S J Mukhopadhaya and Ranjan Gogoi reasoned that this is so, because they involve questions of moral turpitude that require adequate liability to be attached to each element involved. Although regulatory bodies like the RBI have promised to strengthen regulatory frameworks to reduce the instances of bank frauds, the gaps in the country’s general penal code are still stark and require to be bridged. Prima facie, there exist three foundational flaws in the IPC relating to major bank frauds, and may be characterised as follows: first, a definitional gap; second, a conceptual gap; and third, an overlap in the multiplicity of laws.
(i) Definitional Gap in the IPC
The IPC does not define “fraud” in its text. Although S. 25 of the IPC defines the term “fraudulently”, it does so while using the phrase “intent to defraud” and hence brings us back to the initial question of what the legal definition of “fraud” is in the first place. S. 17 of the Indian Contract Act, 1872 (“ICA”) is the only statutory provision that defines the term and provides a fourfold characterisation of actions that a person or their agent may commit in order to induce another to enter into a contract. Although the text of S. 17 ostensibly covers multiple possible scenarios, it merely furthers a contractual understanding of fraud and not a criminal one, since it fails to account for the mens rea element of the crime. Furthermore, not all fraudulent activities carried out over the course of a major bank fraud involve contracts, which could therefore preclude the application of the ICA definition in the very first place. Owing to the definitional lacuna in the IPC and the deficiency of S. 17 of the ICA, the IPC could instead adopt the RBI’s definition of bank fraud, which reads as follows:
“A deliberate act of omission or commission by any person, carried out in the course of a banking transaction or in the books of accounts maintained manually or under computer system in banks, resulting into wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank”
The above definition is comprehensive since it exhaustively enumerates all possible scenarios in which a bank fraud may be committed. Further, it also accounts for both the actus reus and mens rea elements of the bank fraud – the omission or commission of an action during the course of a banking transaction constitute the actus reus element, while the “deliberate” nature of it and the result of causing “wrongful gain” or “wrongful loss” constitute the mens rea element. Such a definition catering exclusively to bank frauds is present in other jurisdictions such as the United States as well. The provision in the United States had a specific purpose – it was introduced to fill up a prosecutorial void created, whereby prosecutors could no longer prosecute individuals who defrauded financial institutions using certain schemes. Similarly, the lack of an applicable definition to bank frauds in India is a statutory void that requires to be filled. However, merely resolving the definitional gap is insufficient since the inadequacy of the IPC is also supplemented by various conceptual gaps.
(ii) Conceptual Gaps in the IPC
Apart from the primary definitional gap highlighted in the previous section, there also exist gaps in the ways offences against property have been conceptualised. Chapter XVII deals with “offences against property” and covers ten broad offences. However, the Chapter does not sufficiently address multiple offences that could be committed in a bank fraud, in a conceptual sense. This gap is highlighted in the RBI Master Directions on Frauds (“MDF”) which presents a list of fraudulent activities and reporting mechanisms. It provides a non-exhaustive list of frauds based on the IPC, in clause 2.2. However, the very last sub-clause 2.2(g) states that other types of frauds, not already listed in the clause, would also invoke the provision. This evinces the conceptual gap in the IPC – although the MDF seeks to lists all fraudulent activities taking cue from the IPC, it still adds an additional provision which accounts for “any other type of fraud not coming under the specific heads as above”. The additional clause indicates that other actions that do not fall within the IPC could be elements of bank frauds as well. However, there is no indication as to what these “other type(s) of fraud” could be, or where they could be inferred from. Even if one were to apply the rule of ejusdem generis, which is to infer the meaning of “other type(s) of fraud” from the offences already listed in the clause, there are no other codified offences in the IPC to take cue from.
Although Chapter XVII enlists multiple offences against property, it is insufficient for the various elements involved in a major bank fraud. For instance, persons who commit large bank frauds commit willful defaults on a large scale with little to no liability attached, merely because there exists a statutory gap in the IPC. While other statutes propose punishments for the same, willful default is not a criminal offence by itself under the IPC. Even in statutes that do deal with the offence, there have been discrepancies with regard to the magnitude of penalty. In any case, as will be examined in the forthcoming section, the multiplicity of statutes dealing with the elements of bank frauds has caused inconsistencies in the law.
Furthermore, an investigation regarding the rising instances of major bank frauds has revealed that employees on all levels were actively involved in instances of bank frauds. Staff accountability is arguably the largest concern surrounding bank frauds. However, there exists an incongruity between the pragmatic importance and the statutory importance accorded to staff accountability since the IPC does little to address it. Although staff accountability is such a pervading concern, the IPC fails to attach sufficient liability to it since it does not adequately cover instances of staff misconduct in its provisions. In other jurisdictions such as the United Kingdom, statutory liability is clearly attached through provisions such as S. 4 of the Fraud Act, 2006, that has more conceptual clarity. In comparison, as will be analyzed in the forthcoming section, S. 409 read with S. 405 of the IPC does not conceptually cover other plausible instances of misconduct as much as other statues, such as the Prevention of Corruption Act, 1988, do.
The above two instances are merely indicative of the kind of lacunae in the IPC and are non-exhaustive. As a result of this conceptual inadequacy, multiple statutes and provisions are invoked in order to address the offences conducted in major bank frauds.
(iii) Overlap in the Multiplicity of Laws
In status quo, a major bank fraud invokes the application of a multitude of statutes since it has various civil and criminal ingredients. Since the IPC currently lacks coherent provisions tackling elements such as staff accountability, multiple other statutes and guidelines are applied in order to attach culpability to each of these elements. At the moment, the primary resorts in cases of bank frauds are statutes such as Prevention of Corruption Act, 1988; Prevention of Money Laundering Act, 2002; Companies Act, 2013; and Fugitive Economic Offenders Act, 2018; among others. Owing to the multitude of statutes that are invoked in case of major bank frauds, overlaps in offences and punishments are often caused. For instance, in multiple major bank frauds involving offences committed by bank officials, they are held liable under two provisions from two different statutes – under S. 13(1)(c) of the Prevention of Corruption Act, 1988 (“PCA”) and S. 409 of the IPC. Both provisions deal with misappropriation of property by public servants, including bankers. The only discrepancy is with relation to punishment terms – while the IPC prescribes either imprisonment for life or imprisonment for up to ten years in addition to a fine in S.409, the PCA prescribes a punishment of four to ten years, in addition to a fine in S.13(2). However, S. 403 and S. 409 of the IPC do not cover all instances of misconduct by a banking official. S. 13(1) of the PCA is more comprehensive and provides for multiple possible instances in its five subsections. The IPC merely accounts for instances where the property was entrusted with the accused bank official and therefore restricts liability only to those who have been entrusted with said property. Issues over “entrusted property” have been brought up in cases such as Jaswantarai Manilal Akhaney v The State of Bombay, which proves that the section is limited in its reach. While S. 13(1)(c) of the PCA does the same, the other four subsections of S. 13(1) cover other possible instances as well where property may not have been entrusted to the official. However, the possibility of according life imprisonment does not exist for such acts since they have not been envisioned in the IPC, and the PCA does not provide life imprisonment.
This overlap in the use of provisions is also evident in landmark cases such as Mallya v Governemnt of India, which surrounds the major bank fraud concerning Vijay Mallya and the Kingfisher airlines. In this case, the CBI charge sheet charged the bank officials involved in the fraud both under S.409 of the IPC and S. 13(1)(d) of the PCA. However, as examined earlier, both statutes provide differing punishments for the same offences. Further, S. 13(1)(d) of the PCA is broader than S. 409 of the IPC since it does not require the property to be entrusted with the bank official.
In addition to the above concerns, with a multitude of statutes addressing the same issue, concerns regarding the jurisdiction of courts also become pertinent. In Thanikaivelan v State, the High Court of Madras was faced with a question of jurisdiction where prima facie, both the PCA and the IPC seemed applicable to the case. Such conflicts regarding the very scope of application of the IPC are testament to the lack of conceptual clarity in the IPC. While other laws may address certain instances relating to major bank frauds on their own, the IPC still does not. This warrants the need to rethink Chapter XVII.
Major bank frauds have highlighted the lacunae in Chapter XVII of the IPC, which now needs to be amended to sufficiently account for these offences. The IPC fails to account for major bank frauds on three counts: in the definition, conceptually, and owing to gaps and contradictions in other laws. Apart from adding a definition for bank frauds, it is imperative that the provisions of Chapter XVII undergo a rethink that accounts for the increasing nuanced cases of major frauds.
 See also, cases like Monica Bedi v State of Andhra Pradesh (2011) 1 SCC 284, where other statutes like the Prevention of Corruption Act had to be invoked, in addition to the IPC, to attach sufficient liability to the actions of public servants.
[Meghana Senthil Kumar is a law student at NLSIU, Bangalore]