Online financial frauds and the legal system


Online Financial Fraud

Millions of people in India own smartphones, yet the country has the world’s slowest mobile data rates. Personal information about a large number of individuals is shared on the internet, putting such data at danger of theft. Using the term “fraud” means intentionally inflicting harm to another party while gaining an unfair benefit for oneself. It’s a crime and a civil code violation under Indian law. Frauds committed in cyberspace through online media are referred to as “devices” under Section 2(1)(i) of the Information Technology Act, 2000 (hereafter the “IT Act”).

image source – The Financial Express

Types of Online Frauds

People on the internet fall prey to scammers. The following are some typical instances of online financial fraud in different industries:

Within the banking industry, scams may be classified as follows:

Ø Identity and Data Theft: Identity theft occurs when a fraudster poses as another person and makes fraudulent use of that person’s bank accounts, credit cards, and other forms of payment to benefit himself. Identity theft may now be conducted via intercepting ATM pins, compromising email passwords, and other means. Data from telecom providers’ sim card databases is accessed to learn about accounts associated with certain phone numbers.

Ø Funds Transfer: For the most part, the modus operandi is to send phoney emails imitating websites or service providers in order to mislead individuals into sending money to a false account where it would be utilized for other purposes.

Ø Skimming of Cards: This is a high-tech crime in which criminals place phoney card readers in ATM machines, etc., which capture the data on each plastic card as it goes through a skimmer, reading and storing data encoded on the magnetic strips of debit and credit cards.

Ø Insurance Sector: In the insurance sector, scams may be perpetrated by a fraudster salesperson who appeals to the buyer’s feelings of fear and greed. They may attempt to sell insurance policies from fictitious firms in order to extort money from a customer. Under the guise of verification, the scammers may ask for personal information such as social security numbers or account numbers in order to commit fraud. To claim their “unclaimed bonus cash, lest it be taken by the insurance agent,” scammers urge their victims to transfer money to fictitious accounts.

Ø Investment Sector: In the investment industry, fraudsters use many fraudulent schemes, and the scams are multiplying, particularly for smaller, private investors. Fake offices dubbed “boiler rooms” are set up, advance payments are requested, fraudulent investments in forex trading or offshore investments are pitched, and the most notorious Ponzi or pyramid schemes are implemented.

Ø E-Commerce Sector: Due to the popularity of online purchasing, the number of e-commerce scams has increased as well. Fraudulent accounts reroute online payments to legitimate ones instead of the original sellers are prevalent in e-commerce payment fraud.

A new method to make paper-cut slices for real buyers is via card-testing. These are often left unaccounted for due to their tiny size, making it difficult for the accounting department to keep track of them.

Legislative Action

Defining fraud in Section 17 of the Indian Contract Act, 1872 The Indian Penal Code, 1860, addresses forgery, fraud, and other general crimes. We can’t catch a cybercriminal due to lack of international collaboration and coordination, which is exacerbated by globalization. The IPC lacks capabilities to tackle digital fraud. Also, there are legal ambiguities in evidence collection, digital evidence processing, and court admission. Internet fraud cases face these challenges.

Thus, the IT Act of 2000 was enacted to supplement the IPC and particularly combat cybercrime. These sections impose severe punishments on anybody who destroys computer resources, including tactics used to commit online financial fraud. Apart from identity theft, Section 66 C criminalizes computer resource cheating. Sec. 66 D The punishment is a fine and a few days in jail, which is hardly a deterrent.

However, the IT Act was created to facilitate e-commerce rather than illegal conduct. It’s a reparative deed, yet the victim gets nothing. As a result, India’s cybercrime legislation is outdated.

Executive Action

The telecom and banking sectors, as well as those in insurance and investing, have established their own organizations to assist prevent, identifying, and investigating online fraud. India’s authorities founded the Telecom Regulatory Authority of India to oversee the telecom industry. The FTC regulates ISPs to protect customers from online fraud and other cybercrimes. Sections 12 and 13 empower it to investigate and give instructions.

The Reserve Bank of India also advises banks about fraud-prone operations and requires them to report frauds immediately. All banks must disclose suspected transactions. As a result, preventive measures are given. However, the SEBI and IRDA provide detailed guidelines for preventing investment and insurance fraud.

The CVC and the CBI both look into high-profile schemes. The Ministry of Electronics and Information Technology, in partnership with the Data Security Council of India, runs a cyber forensic lab in every metro city (DSCI). The Computer Emergency Response Team also educates the public. Officers lack the requisite skills and tools to track down cybercriminals.

Judicial Action

In general, online fraud cases have a higher acquittal rate due to technicalities like providing proof and understanding the scam’s operation. India’s courts and tribunals are still looking for cybercrime victims to compensate. The law considers online schemes like phishing as cybercrimes.

Rather than requiring customers to safeguard themselves against fraud, tribunals have routinely held institutions accountable for failing to do so. For example, a bank was compelled to compensate a client who was defrauded due to the institution’s negligence.


Cyber scams put all parties involved at jeopardy. It is a multi-national swindle. Since legislative and executive procedures have trailed far behind the need of the hour, courts have come up with “band-aid on a broken plate” remedies. Finally, the author offers these changes:

1. Internet fraudsters and other cyber criminals need to be dealt with immediately, thus cyber cells and cyber forensic labs must be ready.

2. Regulators in certain business sectors should be empowered to investigate and prosecute cyber fraudsters, as they have more industry understanding than traditional courts.

3. The government should start educating the public on data privacy and security.

4. Ongoing research and development are required to construct safe and impermeable barriers around online transactions.

5. ISPs should check their platforms for suspicious activities.

Financial fraud will rise as India’s economy grows and becomes more electronically connected both within and beyond the country. As a result, we must prepare our nation for whatever may follow.

Published by: Ifa Zamzami


Sahiti Annam
Sahiti Annam
Sahiti is a Law student pursuing BBA.LLB at Symbiosis International University, Pune. She also holds a Diploma in International Business laws & Indian Corporate Laws. Her primary interest areas are Bankruptcy Laws, Company laws, Blockchain & Data Protection Laws, Banking Laws, and Laws relating to Intellectual Property Rights. Having been a professional lawn tennis player and an avid sports enthusiast, she is capable of handling her wins and losses well. Her adaptability makes her an excellent team player.


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