Banking Fraud – Prevention and Control

Banking Fraud is posing threat to Indian Economy. Its vibrant effect can be understood be the fact that in the year 2004 number of Cyber Crime were 347 in India which rose to 481 in 2005 showing an increase of 38.5% while I.P.C. category crime stood at 302 in 2005 including 186 cases of cyber fraud and 68 cases cyber forgery. Thus it becomes very important that occurrence of such frauds should be minimized. More upsetting is the fact that such frauds are entering in Banking Sector as well.

In the present day, Global Scenario Banking System has acquired new dimensions. Banking did spread in India. Today, the banking system has entered into competitive markets in areas covering resource mobilization, human resource development, customer services and credit management as well.

Indian’s banking system has several outstanding achievements to its credit, the most striking of which is its reach. In fact, Indian banks are now spread out into the remotest areas of our country. Indian banking, which was operating in a highly comfortable and protected environment till the beginning of 1990s, has been pushed into the choppy waters of intense competition.

A sound banking system should possess three basic characteristics to protect depositor’s interest and public faith. Theses are (i) a fraud free culture, (ii) a time tested Best Practice Code, and (iii) an in house immediate grievance remedial system. All these conditions are their missing or extremely weak in India. Section 5(b) of the Banking Regulation Act, 1949 defines banking… “Banking is the accepting for the purpose of lending or investment, deposits of money from the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.” But if his money has fraudulently been drawn from the bank the latter is under strict obligation to pay the depositor. The bank therefore has to ensure at all times that the money of the depositors is not drawn fraudulently. Time has come when the security aspects of the banks have to be dealt with on priority basis.

The banking system in our country has been taking care of all segments of our socio-economic set up. The Article contains a discussion on the rise of banking frauds and various methods that can be used to avoid such frauds. A bank fraud is a deliberate act of omission or commission by any person carried out in the course of banking transactions or in the books of accounts, resulting in wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank. The relevant provisions of Indian Penal Code, Criminal Procedure Code, Indian Contract Act, and Negotiable Instruments Act relating to banking frauds has been cited in the present Article.


Banking system occupies an important place in a nation’s economy. A banking institution is indispensable in a modern society. It plays a pivotal role in economic development of a country and forms the core of the money market in an advanced country.

Banking industry in India has traversed a long way to assume its present stature. It has undergone a major structural transformation after the nationalization of 14 major commercial banks in 1969 and 6 more on 15 April 1980. The Indian banking system is unique and perhaps has no parallels in the banking history of any country in the world.


The Reserve Bank of India has an important role to play in the maintenance of the exchange value of the rupee in view of the close interdependence of international trade and national economic growth and well being. This aspect is of the wider responsibly of the central bank for the maintenance of economic and financial stability. For this the bank is entrusted with the custody and the management of country’s international reserves; it acts also as the agent of the government in respect of India’s membership of the international monetary fund. With economic development the bank also performs a variety of developmental and promotional functions which in the past were registered being outside the normal purview of central banking. It also acts an important regulator.


Banks are the engines that drive the operations in the financial sector, which is vital for the economy. With the nationalization of banks in 1969, they also have emerged as engines for social change. After Independence, the banks have passed through three stages. They have moved from the character based lending to ideology based lending to today competitiveness based lending in the context of India’s economic liberalization policies and the process of linking with the global economy.

While the operations of the bank have become increasingly significant banking frauds in banks are also increasing and fraudsters are becoming more and more sophisticated and ingenious. In a bid to keep pace with the changing times, the banking sector has diversified it business manifold. And the old philosophy of class banking has been replaced by mass banking. The challenge in management of social responsibility with economic viability has increased.


Fraud is defined as “any behavior by which one person intends to gain a dishonest advantage over another”. In other words , fraud is an act or omission which is intended to cause wrongful gain to one person and wrongful loss to the other, either by way of concealment of facts or otherwise.

Fraud is defined u/s 421 of the Indian Penal Code and u/s 17 of the Indian Contract Act. Thus essential elements of frauds are:

1. There must be a representation and assertion;

2. It must relate to a fact;

3. It must be with the knowledge that it is false or without belief in its truth; and

4. It must induce another to act upon the assertion in question or to do or not to do certain act.


Losses sustained by banks as a result of frauds exceed the losses due to robbery, dacoity, burglary and theft-all put together. Unauthorized credit facilities are extended for illegal gratification such as case credit allowed against pledge of goods, hypothecation of goods against bills or against book debts. Common modus operandi are, pledging of spurious goods, inletting the value of goods, hypothecating goods to more than one bank, fraudulent removal of goods with the knowledge and connivance of in negligence of bank staff, pledging of goods belonging to a third party. Goods hypothecated to a bank are found to contain obsolete stocks packed in between goods stocks and case of shortage in weight is not uncommon.

An analysis made of cases brings out broadly the under mentioned four major elements responsible for the commission of frauds in banks.

1. Active involvement of the staff-both supervisor and clerical either independent of external elements or in connivance with outsiders.

2. Failure on the part of the bank staff to follow meticulously laid down instructions and guidelines.

3. External elements perpetuating frauds on banks by forgeries or manipulations of cheques, drafts and other instruments.

4. There has been a growing collusion between business, top banks executives, civil servants and politicians in power to defraud the banks, by getting the rules bent, regulations flouted and banking norms thrown to the winds.


A close study of any fraud in bank reveals many common basic features. There may have been negligence or dishonesty at some stage, on part of one or more of the bank employees. One of them may have colluded with the borrower. The bank official may have been putting up with the borrower’s sharp practices for a personal gain. The proper care which was expected of the staff, as custodians of banks interest may not have been taken. The bank’s rules and procedures laid down in the Manual instructions and the circulars may not have been observed or may have been deliberately ignored.

Bank frauds are the failure of the banker. It does not mean that the external frauds do not defraud banks. But if the banker is upright and knows his job, the task of defrauder will become extremely difficult, if not possible.

Detection of Frauds

Despite all care and vigilance there may still be some frauds, though their number, periodicity and intensity may be considerably reduced. The following procedure would be very helpful if taken into consideration:

1. All relevant data-papers, documents etc. Should be promptly collected. Original vouchers or other papers forming the basis of the investigation should be kept under lock and key.

2. All persons in the bank who may be knowing something about the time, place a modus operandi of the fraud should be examined and their statements should be recorded.

3. The probable order of events should thereafter be reconstructed by the officer, in his own mind.

4. It is advisable to keep the central office informed about the fraud and further developments in regard thereto.

Classification of Frauds and Action Required by Banks

The Reserve Bank of India had set-up a high level committee in 1992 which was headed by Mr. A… Ghosh, the then Dy. Governor Reserve Bank of India to inquire into various aspects relating to frauds malpractice in banks. The committee had noticed/observed three major causes for perpetration of fraud as given hereunder:

1. Laxity in observance of the laid down system and procedures by operational and supervising staff.

2. Over confidence reposed in the clients who indulged in breach of trust.

3. Unscrupulous clients by taking advantages of the laxity in observance of established, time tested safeguards also committed frauds.

In order to have uniformity in reporting cases of frauds, RBI considered the question of classification of bank frauds on the basis of the provisions of the IPC.
Given below are the Provisions and their Remedial measures that can be taken.

1. Cheating (Section 415, IPC)

Remedial Measures.

The preventive measures in respect of the cheating can be concentrated on cross-checking regarding identity, genuineness, verification of particulars, etc. in respect of various instruments as well as persons involved in encashment or dealing with the property of the bank.

2. Criminal misappropriation of property (Section 403 IPC).

Remedial Measure

Criminal misappropriation of property, presuppose the custody or control of funds or property, so subjected, with that of the person committing such frauds. Preventive measures, for this class of fraud should be taken at the level the custody or control of the funds or property of the bank generally vests. Such a measure should be sufficient, it is extended to these persons who are actually handling or having actual custody or control of the fund or movable properties of the bank.

3. Criminal breach of trust (Section 405, IPC)

Remedial Measure

Care should be taken from the initial step when a person comes to the bank. Care needs to be taken at the time of recruitment in bank as well.

4. Forgery (Section 463, IPC)

Remedial Measure

Both the prevention and detection of frauds through forgery are important for a bank. Forgery of signatures is the most frequent fraud in banking business. The bank should take special care when the instrument has been presented either bearer or order; in case a bank pays forged instrument he would be liable for the loss to the genuine costumer.

5. Falsification of accounts (Section 477A)

Remedial Measure

Proper diligence is required while filling of forms and accounts. The accounts should be rechecked on daily basis.

6. Theft (Section 378, IPC)

Remedial Measures

Encashment of stolen’ cheque can be prevented if the bank clearly specify the age, sex and two visible identify action marks on the body of the person traveler’s cheques on the back of the cheque leaf. This will help the paying bank to easily identify the cheque holder. Theft from lockers and safe deposit vaults are not easy to commit because the master-key remains with the banker and the individual key of the locker is handed over to the costumer with due acknowledgement.

7. Criminal conspiracy (Section 120 A, IPC)

In the case of State of Andhra Pradesh v. IBS Prasad Rao and Other, the accused, who were clerks in a cooperative Central Bank were all convicted of the offences of cheating under Section 420 read along with Section 120 A. all the four accused had conspired together to defraud the bank by making false demand drafts and receipt vouchers.

8. Offences relating to currency notes and banks notes (Section 489 A-489E, IPC)
These sections provide for the protection of currency-notes and bank notes from forgery. The offences under section are:

(a) Counterfeiting currency notes or banks.

(b) Selling, buying or using as genuine, forged or counterfeit currency notes or bank notes. Knowing the same to be forged or counterfeit.

(c) Possession of forged or counterfeit currency notes or bank-notes, knowing or counterfeit and intending to use the same as genuine.

(d) Making or passing instruments or materials for forging or counterfeiting currency notes or banks.

(e) Making or using documents resembling currency-notes or bank notes.

Most of the above provisions are Cognizable Offences under Section 2(c) of the Code of Criminal Procedure, 1973.


The following are the potential fraud prone areas in Banking Sector. In addition to those areas I have also given kinds of fraud that are common in these areas.

Savings Bank Accounts

The following are some of the examples being played in respect of savings bank accounts:

(a) Cheques bearing the forged signatures of depositors may be presented and paid.

(b) Specimen signatures of the depositors may be changed, particularly after the death of depositors,

(c) Dormant accounts may be operated by dishonest persons with or without collusion of bank employees, and

(d) Unauthorized withdrawals from customer’s accounts by employee of the bank maintaining the savings ledger and later destruction of the recent vouchers by them.

Current Account Fraud

The following types are likely to be committed in case of current accounts.

(a) Opening of frauds in the names of limited companies or firms by unauthorized persons;

(b) Presentation and payment of cheques bearing forged signatures;

(c) Breach of trust by the employees of the companies or firms possessing cheque leaves duly signed by the authorized signatures;

(d) Fraudulent alteration of the amount of the cheques and getting it paid either at the counter or though another bank.

Frauds In Case Of Advances

Following types may be committed in respect of advances:

(a) Spurious gold ornaments may be pledged.

(b) Sub-standard goods may be pledged with the bank or their value may be shown at inflated figures.
(c) Same goods may be hypothecated in favour of different banks.


Frauds constitute white-collar crime, committed by unscrupulous persons deftly advantage of loopholes existing in systems/procedures. The ideal situation is one there is no fraud, but taking ground realities of the nation’s environment and human nature’s fragility, an institution should always like to keep the overreach of frauds at the minimum occurrence level.

Following are the relevant sections relating to Bank Frauds

Indian Penal Code (45 of 1860)

(a) Section 23 “Wrongful gain”.-

“Wrongful gain” is gain by unlawful means of property to which the person gaining is not legally entitled.

(b) “Wrongful loss”

“Wrongful loss” is the loss by unlawful means of property to which the person losing it is legally entitled.
(c) Gaining wrongfully.

Losing wrongfully-A person is said to gain wrongfully when such person retains wrongfully, as well as when such person acquires wrongfully. A person is said to lose wrongfully when such person is wrongfully kept out of any property, as well as when such person is wrongfully deprived of property.

(d) Section 24. “Dishonestly”

Whoever does anything with the intention of causing wrongful gain to one person or wrongful loss to another person, is said to do that thing “dishonestly”.

(e) Section 28. “Counterfeit”

A person is said to “counterfeit” who causes one thing to resemble another thing, intending by means of that resemblance to practice deception, or knowing it to be likely that deception will thereby be practiced.


1. Section 408- Criminal breach of trust by clerk or servant.

2. Section 409- Criminal breach of trust by public servant, or by banker, merchant or agent.

3. Section 416- Cheating by personating

4. Section 419- Punishment for cheating by personation.


1) Section 463-Forgery

2) Section 464 -Making a false document

3) Section 465- Punishment for forgery.

4) Section 467- Forgery of valuable security, will, etc

5) Section 468- Forgery for purpose of cheating

6) Section 469- Forgery for purpose of harming reputation

7) Section 470- Forged document.

8) Section 471- Using as genuine a forged document

9) Section 477- Fraudulent cancellation, destruction, etc., of will, authority to adopt, or valuable security.

10) Section 477A- Falsification of accounts.


Issue of demand bills and notes Section 31.

Provides that only Bank and except provided by Central Government shall be authorized to draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand, or borrow, owe or take up any sum or sums of money on the bills, hundis or notes payable to bearer on demand of any such person


Holder’s right to duplicate of lost bill Section 45A.

1. The finder of lost bill or note acquires no title to it. The title remains with the true owner. He is entitled to recover from the true owner.

2. If the finder obtains payment on a lost bill or note in due course, the payee may be able to get a valid discharge for it. But the true owner can recover the money due on the instrument as damages from the finder.

Section 58

When an Instrument is obtained by unlawful means or for unlawful consideration no possessor or indorse who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such possessor or indorse is, or some person through whom he claims was, a holder thereof in due course.

Section 85:

Cheque payable to order.

1. By this section, bankers are placed in privileged position. It provides that if an order cheque is indorsed by or on behalf of the payee, and the banker on whom it is drawn pays it in due course, the banker is discharged. He can debit his customer with the amount so paid, though the endorsement of the payee might turn out to be a forgery.

2. The claim protection under this section the banker has to prove that the payment was a payment in due course, in good faith and without negligence.

Section 87. Effect of material alteration

Under this section any alteration made without the consent of party would be void. Alteration would be valid only if is made with common intention of the party.

Section 138. Dishonour of cheque for insufficiency, etc., of funds in the account.

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid. either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice.

Section 141(1) Offences by companies.

If the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.


Security implies sense of safety and of freedom from danger or anxiety. When a banker takes a collateral security, say in the form of gold or a title deed, against the money lent by him, he has a sense of safety and of freedom from anxiety about the possible non-payment of the loan by the borrower. These should be communicated to all strata of the organization through appropriate means. Before staff managers should analyze current practices. Security procedure should be stated explicitly and agreed upon by each user in the specific environment. Such practices ensure information security and enhance availability. Bank security is essentially a defense against unforced attacks by thieves, dacoits and burglars.


A large part of banks security depends on social security measures. Physical security measures can be defined as those specific and special protective or defensive measures adopted to deter, detect, delay, defend and defeat or to perform any one or more of these functions against culpable acts, both covert and covert and acclamations natural events. The protective or defensive, measures adopted involve construction, installation and deployment of structures, equipment and persons respectively.

The following are few guidelines to check malpractices:

1. To rotate the cash work within the staff.

2. One person should not continue on the same seat for more than two months.

3. Daybook should not be written by the Cashier where an other person is available to the job

4. No cash withdrawal should be allowed within passbook in case of withdrawal by pay order.

5. The branch manager should ensure that all staff members have recorder their presence in the attendance registrar, before starting work.

Execution of Documents

1. A bank officer must adopt a strict professional approach in the execution of documents. The ink and the pen used for the execution must be maintained uniformly.

2. Bank documents should not be typed on a typewriter for execution. These should be invariably handwritten for execution.

3. The execution should always be done in the presence of the officer responsible for obtain them,
4. The borrowers should be asked to sign in full signatures in same style throughout the documents.

5. Unless there is a specific requirement in the document, it should not be got attested or witnessed as such attestation may change the character of the instruments and the documents may subject to ad volrem stamp duty.

6. The paper on which the bank documents are made should be pilfer proof. It should be unique and available to the banks only.

7. The printing of the bank documents should have highly artistic intricate and complex graphics.

8. The documents executed between Banker and Borrowers must be kept in safe custody,


1. Section 91 of IPC shall be amended to include electronic documents also.

2. Section 92 of Indian Evidence Act, 1872 shall be amended to include commuter based communications

3. Section 93 of Bankers Book Evidence Act, 1891 has been amended to give legal sanctity for books of account maintained in the electronic form by the banks.

4. Section 94 of the Reserve Bank of India Act, 1939 shall be amended to facilitate electronic fund transfers between the financial institutions and the banks. A new clause (pp) has been inserted in Section 58(2).


In the banking and financial sectors, the introduction of electronic technology for transactions, settlement of accounts, book-keeping and all other related functions is now an imperative. Increasingly, whether we like it or not, all banking transactions are going to be electronic. The thrust is on commercially important centers, which account for 65 percent of banking business in terms of value. There are now a large number of fully computerized branches across the country.

A switchover from cash-based transactions to paper-based transactions is being accelerated. Magnetic Ink character recognition clearing of cheques is now operational in many cities, beside the four metro cities. In India, the design, management and regulation of electronically-based payments system are becoming the focus of policy deliberations. The imperatives of developing an effective, efficient and speedy payment and settlement systems are getting sharper with introduction of new instruments such as credit cards, telebanking, ATMs, retail Electronic Funds Transfer (EFT) and Electronic Clearing Services (ECS). We are moving towards smart cards, credit and financial Electronic Data Interchange (EDI) for straight through processing.

Financial Fraud (Investigation, Prosecution, Recovery and Restoration of property) Bill, 2001

Further the Financial Fraud (Investigation, Prosecution, Recovery and Restoration of property) Bill, 2001 was introduced in Parliament to curb the menace of Bank Fraud. The Act was to prohibit, control, investigate financial frauds; recover and restore properties subject to such fraud; prosecute for causing financial fraud and matters connected therewith or incidental thereto.

Under the said act the term Financial Fraud has been defined as under:

Section 512 – Financial Fraud

Financial frauds means and includes any of the following acts committed by a person or with his connivance, or by his agent, in his dealings with any bank or financial institution or any other entity holding public funds;

1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

2. The active concealment of a fact by one having knowledge or belief of the fact;

3. A promise made with out any intention of performing it;

4. Any other act fitted to deceive;

5. Any such act or omission as the law specially declares to be fraudulent.
Provided that whoever acquires, possesses or transfers any proceeds of financial fraud or enters into any transaction which is related to proceeds of fraud either directly or indirectly or conceals or aids in the concealment of the proceeds of financial fraud, commits financial fraud.

513(a) – Punishment for Financial Fraud

Whoever commits financial fraud shall be: (a) Punished with rigorous imprisonment for a term, which may extend to seven years and shall also be liable to fine.

(b)Whoever commits serious financial fraud shall be punished with rigorous imprisonment for a term which may extend to ten years but shall not be less than five years and shall also be liable for fine up to double the amount involved in such fraud.

Provided that in both (a) and (b) all funds, bank accounts and properties acquired using such funds subjected to the financial fraud as may reasonably be attributed by the investigating agency shall be recovered and restored to the rightful owner according to the procedure established by law.


The Indian Banking Industry has undergone tremendous growth since nationalization of 14 banks in the year 1969. There has an almost eight times increase in the bank branches from about 8000 during 1969 to mote than 60,000 belonging to 289 commercial banks, of which 66 banks are in private sector.

It was the result of two successive Committees on Computerization (Rangarajan Committee) that set the tone for computerization in India. While the first committee drew the blue print in 1983-84 for the mechanization and computerization in banking industry, the second committee set up in 1989 paved the way for integrated use of telecommunications and computers for applying technogical breakthroughs in banking sector.

However, with the spread of banking and banks, frauds have been on a constant increase. It could be a natural corollary to increase in the number of customers who are using banks these days. In the year 2000 alone we have lost Rs 673 crores in as many as 3,072 number of fraud cases. These are only reported figures. Though, this is 0.075% of Rs 8,96,696 crores of total deposits and 0.15% of Rs 4,44,125 crores of loans & advances, there are any numbers of cases that are not reported. There were nearly 65,800 bank branches of a total of 295 commercial banks in India as on June 30, 2001 reporting a total of nearly 3,072 bank fraud cases. This makes nearly 10.4 frauds per bank and roughly 0.47 frauds per branch.

An Expert Committee on Bank Frauds (Chairman: Dr.N.L.Mitra) submitted its Report to RBI in September 2001. The Committee examined and suggested both the preventive and curative aspects of bank frauds.

The important recommendations of the Committee include:

o A need for including financial fraud as a criminal offence;

o Amendments to the IPC by including a new chapter on financial fraud;

o Amendments to the Evidence Act to shift the burden of proof on the accused person;

o Special provision in the Cr. PC for properties involved in the Financial Fraud.

o Confiscating unlawful gains; and preventive measures including the development of Best Code Procedures by banks and financial institutions.

Thus it can be concluded that following measures should necessarily be adopted by the Ministry of Finance in order to reduce cases of Fraud.

o There must be a Special Court to try financial fraud cases of serious nature.

o The law should provide separate structural and recovery procedure. Every bank must have a domestic enquiry officer to enquire about the civil dimension of fraud.

o A fraud involving an amount of ten crore of rupees and above may be considered serious and be tried in the Special Court.

The Twenty-ninth Report of the Law Commission had dealt some categories of crimes one of which is “offences calculated to prevent and obstruct the economic development of the country and endanger its economic health.” Offences relating to Banking Fraud will fall under this category. The most important feature of such offences is that ordinarily they do not involve an individual direct victim. They are punishable because they harm the whole society. It is clear that money involved in Bank belongs to public. They deposit there whole life’ security in Banks and in case of Dacoity or Robbery in banks the public will be al lost. Thus it is important that sufficient efforts should be taken in this regard.

There exists a new kind of threat in cyber world. Writers are referring it as “Salami Attack” under this a special software is used for transferring the amount from the account of the individual. Hence the culprits of such crimes should be found quickly and should be given strict punishment. Moreover there is requirement of more number of IT professionals who will help in finding a solution against all these security threats.

3 Reasons Why You Should Regularly Reconcile Bank Statements For Your Small Business

There are several reasons an accountant will tell you to reconcile your bank statements regularly, but a lot of small businesses do not make this a priority task, and do not do a month end reconciliation once their bank statements arrive. Why? Well not everyone sees the importance of doing this, especially when cash flow is good and you don’t need to be keeping a close eye on going overdrawn.

The truth of the matter is that bank reconciliation should be prepared each month once you receive your bank statements by mail or through e-mail. The process of performing reconciliation verifies the actual amount of cash available in your bank account.

Employee Theft

It would be nice to think you can trust everyone that works for you, but even officers and partners have been known to loot the bank account, and you may not necessarily find out about this until it is too late. Lot’s of companies have signature stamps these days so not all business owners get to sign and/or see each and every check. Also bear in mind that you may have issued some company debit cards to select employees, officers, or partners, so this expenditure needs to be reconciled each month and verified through receipts.

Cash Flow Forecasting

We all know the state of the economy right now, and even in a good economy a lot of businesses struggle with tight cash flow. If you planned correctly you should have created annual cash flow forecasts for your business, so you can determine your upfront investment, as well as seasonal peaks and troughs in your sales that may require you to inject more capital during leaner periods. If you do not conduct regular monthly bank account reconciliation, you will not be able to accurately compare your projected cash flow forecasts with your actual cash on hand.

Higher Interest Bearing Accounts

Most people have a personal checking and savings account, and they usually leave enough money in their checking account to cover monthly bills and expenses. Any money in excess of normal monthly expenses, inclusive of a buffer, usually gets transferred in to a savings account so you can earn a higher rate of interest on your money. Some families’ budget a year in advance and even split their paycheck so part of it goes in to their checking account, and the other part goes directly in to their savings account. This is smart planning, and depending on how much money you are able to put away in to savings, it can result in a few hundred extra dollars per year, or even a few thousand. This of course depends on interest rates as well.

Why not do the same with your business? Many banks offer higher interest bearing accounts for your business. If you regularly reconcile your business checking account and know roughly on average how much you need in your checking account at any given time to cover your monthly costs, the rest of the excess funds can be transferred to a higher interest bearing account which will ultimately put more money towards your bottom line.

If you are someone who is not reconciling your bank accounts on a monthly basis, seriously considering doing so right away to protect and safeguard your business, and maybe even put a few extra dollars in your pocket!

Electronic Signatures-Esign Origins, Understanding Laws, and the Affects

On June 30, 2000 President Clinton signed the “Electronic Signatures in Global and National Commerce Act” (ESIGN) using his electronic signature ID, and thereby established the validity of electronic signatures for interstate and international commerce.

In the fours year prior to this Act’s passage a dozen states had passed similar laws and guidance for state specific business purposes, and in the five years since the Act’s passing every other state has passed similar laws and legislation. What does it all mean, and in the end how can it benefit businesses, individuals and the nation or world as a whole?

The best way to answer a question like this is to take a look at the origins of the law, and understand the reasoning behind its passage and the passage of the state specific laws.

The Birth of the Electronic Signature – Faxing

In the 1980’s companies and even some progressive individuals began using fax machines for high priority or time sensitive delivery of paper based documents. Today, the fax machine is a staple of the business world. Most people do not even consider the original hurdles this new medium created, nor do they consider its impact on the speed of communication and the advantages of its use. However in its infancy many of the same issues surrounding electronic communications and electronic signatures had to be resolved when utilizing the facsimile.

When the first contract was signed and faxed it created the basis for the discussion of electronic signature validity. After all it was the first time someone could sign something, place it in a machine, send it from one phone line to another and deliver a digitally reproduced signature. The path this signature took was not controllable or traceable, and in most cases it traversed miles of wire before reaching its destination, so how could it be considered a valid signature? The intentions of the signature were clear to everyone, but businesses wanted to know they could count on the validity of the signature, and if no one actually witnessed the action of one individual or of a corporation how could a business put any faith in it? This of course caused quite a stir and in rapid fashion the courts ruled this signature carried the same validity as if the parties were standing in the room together. With this, the fax became standard operating procedure world-wide.

The courts found validity in this method of signature capturing and businesses also felt secure in this method. Quite a leap of faith considering the complications caused by fax machines early on. Many people didn’t realize that the original fax paper’s ink would vanish after a period of time and you had to make another copy of the fax using a copier if you wanted to store it permanently. Also many times the quality of the image was poor or barely legible, but businesses understood the intention and would consider it signed even if there was only a partially legible signature. So in essence you had a copy of a copy of a digital image, and even with so many loopholes for alteration and criminal malfeasance the fax still worked and business flourished.

The business logic behind this thinking was easily justifiable. Before the fax machine, the contract could have been signed verbally between the sales person and the client, and then somewhere down the road a paper copy would have been signed and mailed. Many sales before the fax machine were consummated with a simple “OK let’s do it” comment over the phone. This drive to get business and make the wheels turn demonstrates the most vital point in an electronic communications based world, or for that matter in a digital world with no physical or direct contact, is most businesses can operate on trust. They provide a service to a customer and the customer trusts they will provide that service in a satisfactory manner, while the service provider trusts that the customer will pay for services rendered.

Trust is not a new thing in business; it was often indicated by a hand-shake or “You have a deal”, and that was all you needed to get a deal done. Has that changed today? I believe the answer is no, but what about the courts, and their opinion on the validity of the electronic signature? After all the courts’ goal is not just to keep the wheels turning and generate revenue, so why did they trust this type of signature and what was the legal question this signature answered? This line of thinking brings us back to Electronic Signatures in Global and National Commerce Act or as it is more commonly known, the (“ESIGN”) Act.

Electronic Signatures, the Courts and the Government

The Government Paperwork Elimination Act (“GPEA”), Uniform Electronic Transactions Act (“UETA”), Electronic Code of Federal Regulations (“e-CFR”), as well as the Electronic Signatures in Global and National Commerce Act (“ESIGN”) are all attempts by Congress, federal departments and the states to define the liability and validity of an electronic signature, and help the courts answer the questions about enforceability. These efforts all center around three primary concepts authentication, integrity and non-repudiation.


Authentication is the reasonable basis on which to believe that the entity electronically signing the file is who they say they are. This can be accomplished in many ways. In the traditional world it might be done by checking a driver’s license or other form of identification, but in the electronic world this is not always an option, so other methods must be used.

The most common and popular way of accomplishing this identity check is to use an e-mail based identifier. This is a process most people have experienced at some point while using the Internet. If you signup for a web based service you generally need to create a user name and password. When you create this account many systems will send a verification e-mail to the e-mail address you entered for your record, thus proving that you own this e-mail address. You then copy and paste this verification information into the confirmation system provided by the web site and you become a verified member. That process and most processes that use your e-mail address are known as e-mail based ID systems.

Another way to verify an identity is to use a known third party validation mechanism. In other words, use something that presumably has already verified the entity in question. There are several common methods for achieving this type of authentication. You may have experienced it with a web site requiring you enter in your home zip code, an account number or in some cases a credit card number. Many web sites will have you enter your credit card information into a form, allowing them to cross reference the information you provide them with a credit card merchant. Presumably if you told the credit card company the truth about you, then it will match with the information you provided the website.

The methods available and in use for identifying and authenticating individuals are countless, and presumably the higher the value of the transaction the more authentication methods should be implemented.


Integrity simply means providing a reasonable belief that any file electronically signed on a system cannot and has not been tampered with by anyone or anything. The concept is easy to understand and the requirement for it is certainly justified. When you are dealing with paper it is easy to give everyone a copy, and any discrepancies are easily found, but with electronic records it can be difficult to manually or even visually tell if the file has been altered. To demonstrate integrity electronic signature capture services generally use an encryption algorithm to lock a file once it has been signed. Even better services will continually validate a file all the way through the signature process and then create a final version once all signatures are finalized. Most technology used today for identification purposes can be more accurate than human DNA.


Think back to the Fax machine illustration. Someone can always say, “That is not my signature” and claim that the signature was forged. After all, someone could have placed an image of a signature on to a document, and faxed it back to you. The point is, under most circumstances you can never be 100% certain the person you are doing business with is who they say they are. Even in-person transactions can be at risk. Identity theft is the fastest-growing crime and criminals are not just buying and signing things online, they are going into banks, opening credit cards and walking into retail establishments. So what can be done to help protect businesses against fraud and abuse if they use electronic signatures?

Just as a notary verifies the intent of the signatory, electronic signatures can use verification methods to insure the signatory understood the purpose and the intent of the signature process. However, the road to a successful electronic signature implementation lies in the careful understanding that the electronic signature super highway has a minimum of three lanes. Each of the signatories has a lane of relationship “traffic” between them and the electronic signature service provider. The lane dedicated to the relationship between the sender and the recipient is just as relevant and important. It is this relationship that will help to legally define the intent of the signatories in various legal matters. Therefore, combining good business practices with a solid electronic signature capturing service will make non-repudiation less of an issue.

How Electronic Signatures Can Help You

In order to fully understand how electronic signatures can help you and your business we need to take a look at why we want to use them in the first place. Electronic signatures offer a wide variety of benefits to everyone involved in a transaction. They reduce costs associated with signing files by cutting overhead. Electronic signatures allow us to cut hard costs like paper, ink, printer wear, staples, pens, shipping and handling, but they also allow us to cut soft costs like storage, copying, filing, retrieval, auditing and tracking. Overall electronic signatures can save hundreds of dollars on a single contract for small contracts and thousands or tens of thousands for large contracts.

Let’s demonstrate how the savings can be realized. A business sends out 100 proposals per year that are approximately 150 pages long. It is primarily black and white ink. The client prints the 150 page proposal on regular stock paper 1 and binds it 2. The proposal is then placed in an overnight delivery envelope and shipped next day air, with a return envelope provided, which is also next day air 3. Once the client receives the proposal, reads it and signs their acceptance, the proposal is then shipped back to the business 4 in the provided overnight envelope. Once the proposal arrives at the business, the sales team and managers need to be notified, so they can engage the client. The proposal then needs to be filed and stored in a safe place. The person working at receiving desk will make three copies of the proposal 5, and distribute them to the required personnel, and subsequently file the original proposal in a filing cabinet 6. So what are the costs?

Total Cost of Using Paper = ($112.50) x (100) = $11,250

(1) 150 + Ink + Paper + Wear and Tear on printer = $3.

(2) Binding = $1.50

(3) Outbound Overnight Shipping = $20

(4) Inbound Overnight Shipping = $20

(5) 3 x 150 + Ink + Paper + Wear and Tear on printer = $9

(6) 150 Pages Storage Using Government Estimate = $19

Labor @ 2 Hours for Total Process = $40

2 Days Opportunity Time for Best Delivery Option = $Unknown

Total Cost of a Paperless Transaction = ($10) x (100) = $1,000

Labor @ 15 Minutes for Total Process = $5

Sending File Electronically = $5

Delivery Is Immediate = No Lost Opportunity Costs


Total Savings Using Electronic Signature Service vs. Paper = $10,250 Per Year

Having a technology available to your business that will reduce overhead on a single expense by 90% is attractive for any business, especially one that will benefit other areas as well.

Give Electronic Signatures a Chance to Save Your Business Money

Businesses today should look at the logistic benefits of electronic signature technology and contemplate how they might benefit their organization. If you have a fax machine then you should certainly have an electronic signature service as well. Electronic signature services provide unparalleled speed to users. They are faster and more versatile than fax machines, less expensive than overnight shipping options and the soft and hard cost savings are extraordinary. Electronic signature services can be used on any file type, including audio, video, photos, and all text documents. Electronic signatures are also easy to store, track and audit.

In the end electronic signatures will not change your life, but they may change how you operate your business day-to-day. Just like the fax machine did, it will make you more efficient and help you get the job done faster, and that may just be the difference that separates you from the competition.