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In an interesting development of how even tech savvy CEOs often become victims of Cyber Crimes, it is reported (See the Report here) that Flipkart CEO’s E mail was hacked and two mails were sent from it to the company’s CFO asking for transfer of $80000/-.

Fortunately, the CFO decided to personally check with the CEO Mr Binny Bansal who immediately confirmed the fraud so that further damage could be prevented.

The incident highlights that Cyber Criminals use well directed targeted attacks. Some times they may use sophisticated methods but many times, simple methods also work.

Preventing such frauds require building up of  an enterprise level culture of Information Security which does not stop at technological approach to information security but extends to legal and behavioural aspects.

Naavi

In a bid to check fraudulent practices by sellers, Flipkart has instituted a “Mystery Shopping” team and found several malpractices including,

a) Supply of substandard products

b) Selling of Counterfeit products

c) Buying out competitor’s products and returning them

d) Buying own inventory to benefit from cash back offers

(Refer Article in ET)

The exercise carried out over a period of 6 months resulted in about 250 sellers being black listed. Feedback were taken on about 600 sellers. Some of them were guilty of inefficiency in the form of wrong labeling or packaging and are being given training to improve their performance.

It is said that there are about 85000 sellers on the platform. It is understood that Paytm has blacklisted around 3000 sellers last year and similar exercise is done by other E-Commerce agencies as well.

Recently, three persons were arrested in Nagpur for floating an entire e-commerce website along with a payment gateway to defraud the public through fake transactions. (Refer Article in TOI here).

Fake websites in the Government sector have also been used to defraud Netizens. (Refer Article here)

It was therefore natural that frauds do take place in the platform of reputed e-commerce players both by sellers and even some buyers.

Flipkart and other E Commerce players need to therefore be ever on the vigil to check such malpractices.

Naavi

Section 6 of the Negotiable Instruments Act 1881 defined the term “Cheque” as follows:

A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

This section was amended and expanded  by the Negotiable Instruments (Amendment and Miscellaneous Provision) Act 2002 with effect from 6th February 2003 to include “Cheques in Electronic Form”.

The amended section then read:

6. “Cheque”.– A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Explanation 1.–For the purposes of this section, the expressions–

(a) “a cheque in the electronic form” means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

Explanation II.–For the purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.

The above amendment had a relation to ITA 2000 since “Cheque in Electronic Form” was one of the electronic documents to which the ITA 2000 applied.

Now the NI Act has been further amended with “The Negotiable Instruments (Amendment) Act 2015” passed on 29th December 2015 with effect from 15th June 2015.

This amendment inter-alia re-defines the  term “Cheque in Electronic Form” by replacing the explanations which now now read as follows:

Explanation 1.–For the purposes of this section, the expressions–

(a) “a cheque in the electronic form” means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or with electronic signature, as the case may be;
(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

Explanation II.–For the purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.

Explanation III.—For the purposes of this section, the expressions “asymmetric crypto system”, “computer resource”, “digital signature”, “electronic form” and “electronic signature” shall have the same meanings respectively assigned to them in the Information Technology Act, 2000.’.

The amendment is meaningful and confirms what was already understood with the passage of ITA 2000 (effective from 17th October 2000) which recognized the electronic document and digital signature as equivalent to paper and written signature.

In the earlier system, there was a need to scan  a cheque to transform into an electronic form and cancel the physical cheque simultaneously. It was not practically convenient and it is good that RBI realized its mistake and corrected the system.

Now any document which is an unconditional order to a banker affixed with digital signature can be called a Cheque in Electronic form.

However, it will be necessary for Banks to make an addition to their Account operational instructions to include instructions on how a  non standard format satisfying the definition given in Section 6 (2015 version) received by the Bank would be handled.

It may however be necessary to take note that the amendment does not make any changes in the “Presentment” of  or “Payment in Due Course” or “Collecting Banker/Paying Banker responsibilities” of an electronic cheque.

Now that the definition of the cheque in electronic form has been  added to the NI Act without further changes to other aspects of NI Act, Banks should be prepared to receive an e-mail from a customer attaching a digitally signed cheque in electronic from issued by another customer of the same Bank or another Bank and take a decision on what to do.

Presently the clearing system operates on truncated cheque system and there is no defined system for clearing the new Cheques in Electronic form. RBI needs to take action on introducing a system of clearance of such cheques.

Since the NI Act has not been further amended to re-define the concepts of endorsement in electronic form, holder in due course of an Cheque in electronic form, etc, there are several aspects of NI Act which needs to be interpreted for Cheques in Electronic form.

An interesting phase of development in electronic banking is now before us. There will be certain adverse implications of the amendment not being comprehensive enough. Probably, there will be a need for a quick further amendment to reduce the uncertainties created by the amendment-2015

Naavi

Copy of the Amendment Act

(More on the implications of the new NI Act will be discussed in these columns in the coming days. I invite comments and views from readers in this regard)

While we are frequently discussing the sophisticated Digital Crimes, some times it is the simple crimes that pose a challenge to the system. One example of this is the report that appeared today in TOI about the busting of a “Cheque Cloning” gang in UP.

According to the report, a gang of five persons were involved in a fraud involving encashment of forgery of bank cheques. The modus operandi appears too complicated in this era of digital crimes and set to fail, but it also exposes the vulnerability of the Banking systems to simple frauds.

According to information in the press, the gang first tried to get a photograph of cheques issued by companies by loitering around in the Bank premises, then duplicated the cheque by chemically altering the number and forging the signature by tracing the signature. They also called the Bank and obtained the balances in the account giving some details such as the “last payment made”.

It appears that they used the cheque leaves issued to themselves while opening the account and created the forged cheques by altering the Cheque Number. They also encashed the same as account payee cheques.

As an Ex-Banker, I feel that the Bankers involved here were naive enough not to be able to detect the chemical alterations and not recognize forged signatures. They were also guilty of revealing the balance in the account to an unauthorized persons.

There were also negligence in the collecting bank where the fraudulent cheques were encashed and withdrawn.

I suppose the customers have been provided immediate credit of the fraudulent withdrawals without banks raising any objections about customer negligence.

While the Police will take care of prosecuting the fraudsters, we need to take a look at the systems that might have enabled commission of this fraud.

Presently, Banks are following the “Truncated Cheques” system of clearance where the paying bank does not receive and verify the cheque. It receives only a digital copy of the cheque forwarded by the collecting bank. The Collecting Bank is therefore responsible for recognizing  the material alterations which they have failed to do. The paying bank is however responsible for the non recognition of forgery in the signature.

Again just as the “Truncation” conceals the chemical alterations, the Banker’s verification of signature using only a digital image of the signature is also a reason why finer aspects of forgery cannot be detected.

Hence part of the problem can be attributed to the use of digital images in replacement of the physical cheques in the processing.

Another problem could be the over dependence of the staff on the computerised processing where the arithmetical accuracy overrides the verification of the genuinity of the transaction and passing of cheques becomes a routine that is handled by the systems with the human being reduced to pressing a few computer buttons.

Since digitization of banking is irrevocable, we need to only discuss how to mitigate the risks of using digital images in replacement of physical instruments for payment. This requires a change of mindset in the bank employees of the current generation who are born into an era of digitization and are unaware of the risks associated with the physical instruments particularly when a “physical instrument is used in a digital state”.

It would be interesting to see how the Bankers would respond to this “Cheque Cloning” fraud.

Naavi