Criminal Liability Of Banks For Fraudulent Transactions
Legal Framework in Nepal
Banks in Nepal operate under a combination of banking laws, criminal law, and regulatory frameworks. The main laws covering criminal liability for banks in fraudulent transactions include:
Bank and Financial Institution Act (BAFIA), 2073
Governs the operations of banks and financial institutions.
Provides for penalties if banks are involved in mismanagement or fraudulent transactions.
Muluki Criminal Code (2074)
Section 165: Cheating and misappropriation.
Section 171: Criminal breach of trust by a person entrusted with property.
Section 172: Criminal conspiracy in financial fraud.
Nepal Rastra Bank (NRB) Regulations
Banks must follow prudential norms; violation may lead to administrative and criminal action.
Prevention of Money Laundering Act, 2064
Addresses laundering of illicit money via bank accounts.
Types of Bank Fraud Leading to Criminal Liability
Unauthorized transactions (e.g., debit without consent, fake loans).
Misappropriation of client funds by bank officials.
Facilitation of money laundering knowingly or due to gross negligence.
Collusion with third parties to cheat customers or the state.
Issuance of fraudulent checks or bank guarantees.
Case Examples of Criminal Liability of Banks in Nepal
Case 1: 2019 – Misappropriation by Bank Officials at Nepal Bank Limited
Facts:
Several employees of Nepal Bank Limited in Kathmandu misappropriated depositors’ funds through fake withdrawal slips and unauthorized online transfers.
The fraud amounted to approximately Rs 50 million.
Legal Issues:
Criminal breach of trust under Muluki Criminal Code, Section 171.
Cheating and collusion between officials and third parties.
Outcome:
Bank officials were suspended and later prosecuted.
Some employees were sentenced to imprisonment, and the bank reimbursed affected customers under NRB supervision.
Significance:
Highlights bank’s vicarious liability if internal controls are weak.
Case 2: 2020 – Loan Fraud in Rastriya Banijya Bank
Facts:
Several corporate borrowers colluded with bank employees to obtain loans without proper collateral.
Total fraudulent loans: Rs 200 million.
Legal Issues:
Criminal breach of trust and collusion.
Negligence of bank officials in due diligence.
Outcome:
Investigation led to the prosecution of both bank employees and corporate borrowers.
Bank had to write off some loans but was held accountable for internal control failures.
Significance:
Demonstrates liability when banks fail to follow prudential norms for lending.
Case 3: 2021 – Electronic Banking Fraud in Everest Bank
Facts:
Hackers exploited weak online banking security, transferring funds from multiple clients’ accounts.
Amount: Rs 30 million.
Legal Issues:
Bank potentially liable for negligence in safeguarding clients’ funds under BAFIA.
Cybercrime charges against perpetrators.
Outcome:
Perpetrators were prosecuted and arrested.
Bank compensated affected clients to prevent regulatory penalties but implemented stricter cybersecurity measures.
Significance:
Shows that banks can face liability if technological safeguards are inadequate.
Case 4: 2022 – Facilitation of Money Laundering by Siddhartha Bank Officials
Facts:
Bank officials allowed several shell companies to transfer large sums into offshore accounts.
Amount involved: Rs 500 million.
Legal Issues:
Violation of the Prevention of Money Laundering Act.
Gross negligence or collusion with clients.
Outcome:
Several officials were suspended and prosecuted.
NRB imposed fines and stricter compliance obligations.
Significance:
Illustrates direct criminal liability of banks when facilitating illegal financial transactions.
Case 5: 2023 – Fake Letters of Credit at Nepal Investment Bank
Facts:
Some bank officials issued fake Letters of Credit to help exporters receive funds without proper export.
Total fraudulent amount: Rs 150 million.
Legal Issues:
Cheating, criminal breach of trust, collusion with exporters.
Outcome:
Officials were prosecuted, some imprisoned, and bank faced fines from NRB.
Policies on Letters of Credit were revised.
Significance:
Demonstrates accountability for fraudulent trade financing.
Case 6: 2024 – ATM Fraud and Customer Compensation Dispute at Kumari Bank
Facts:
Customers reported unauthorized ATM withdrawals due to card skimming.
Bank initially refused to compensate citing “customer negligence.”
Legal Issues:
Bank’s liability for failing to secure ATM services and protect customer funds.
Outcome:
Court ruled in favor of customers; bank had to reimburse funds.
NRB issued guidelines on ATM security standards.
Significance:
Establishes that banks are criminally and civilly liable if negligence leads to fraud.
Key Lessons from These Cases
Internal Control is Critical: Banks can be liable if staff misuse authority or internal safeguards fail.
Collusion Can Attract Criminal Charges: Both internal employees and third parties can be prosecuted together.
Technology Negligence is Liable: Weak cybersecurity can expose banks to liability for fraud.
Regulatory Oversight Matters: NRB monitors compliance; violations can trigger fines and criminal action.
Customer Protection is Essential: Courts often rule in favor of customers if banks fail to secure deposits.
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