Financial fraud is as old as banking itself. Common fraudulent incidents includes credit deposit or transfer proceeds of clients to the bank employees own account, running away with cash, involvement in forgeries or trade of payment documents, as well as customers trying to encash counterfeit checks among many others.
In 2012, The Association of Certified Fraud Examiner (ACFE) in its “Report to the Nation on Occupational Fraud and Abuse” report estimated that all over the world annually about 5 percent of the revenue is lost as a result of fraud. The total loss due to fraud in 2011 was estimated to be $3.5 trillion.
Banking fraud has been defined as “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 in wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank” by the Fraud Risk, a working group of the Reserve Bank of India (RBI).
Banks controls abundant cash resources which makes it an attractive target for misappropriation and fraud. The rapid automation of the banking services has also led to the banking transaction and account fraud by manifold. During the 2012-13 period, fraudulent activities quadrupled from that of 2009-10 to $1.5 billion, as reported by RBI. Furthermore, among all the activities, 65% were done through services that used technology including credit card, internet banking and ATM.
In Bangladesh, ATM and credit card fraud has been reported. Even the foreign banks were the victim of such incidents in Bangladesh. A third generation bank also reported a fraud incident where BDT 1.5 billion was transferred to a different account while changing their IT software.
Fraudulent activities in the banking sector surrounds banking transactions, loan and deposit accounts mostly through the use of IT devices, software and false papers. In most of the cases frauds are carried out by a group which often includes the employees from the customers office or third party IT service providers – often referred to as external fraud; or it might be internal fraud group involving the bank’s own employee. Frauds can broadly be divided into: (1) technology related; (2) deposit account related; and (3) asset/loan account related.
A prime question of interest is how can a bank combat increasing fraud incidents? Like other crimes, banking fraud cannot be totally eliminated. Though people having superior IT related skills and knowledge are getting involved in these activities, the incidence of fraudulent activities can however be minimized if proper mitigating initiatives and process control are implemented.
The first step to fight against inside or outside banking fraud is to deploy the right resources. Risk mitigation is needed enterprise-wide including: (i) higher spending in terms of investment in order to secure IT infrastructure; (ii) higher spending for developing prevention policies and faster detection; (iii) adequate compensation must be ensured for the employees and an effective performance appraisal system should be established; (iv) everyone should be accountable.
Some processes tend to enhance the information security without any money being spent such as password protection at all levels, the requirement for a supervisor’s approval in all transactions, and duty segregation among several departments. Another factor that it very important in combating banking fraud is - well functioning corporate governance. A separate department with adequate resources for internal control and compliance is also necessary for preventing fraud.
Historical data suggests that a significant contributor to the rise of fraud is internal fraud. The loopholes and inadequacies of the system are well known to the employees, who can at any time take advantage of the situation before a senior employee gets to understand what’s happening. There are evidences where the top-officials were found to disburse money even after being fully aware of the fraudulent documents. The Hall-Mark scam is the most recent example.
The impact of banking fraud is higher than in any other industry since the banking and financial intermediaries are totally based on goodwill and trust. The economic cost of a fraud incident is not just the money lost. The impact is multiplied manifold since disruptions are created in the banking process, payment system and on how the market works. The short run impact of the lost goodwill and trust might be fewer deposits in the bank, but the long run impact is the higher cost of doing business! At times a major banking fraud might destabilize the whole financial market, therefore proper measures must be taken when there is time in hand.
In 2012, The Association of Certified Fraud Examiner (ACFE) in its “Report to the Nation on Occupational Fraud and Abuse” report estimated that all over the world annually about 5 percent of the revenue is lost as a result of fraud. The total loss due to fraud in 2011 was estimated to be $3.5 trillion.
Banking fraud has been defined as “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 in wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank” by the Fraud Risk, a working group of the Reserve Bank of India (RBI).
Banks controls abundant cash resources which makes it an attractive target for misappropriation and fraud. The rapid automation of the banking services has also led to the banking transaction and account fraud by manifold. During the 2012-13 period, fraudulent activities quadrupled from that of 2009-10 to $1.5 billion, as reported by RBI. Furthermore, among all the activities, 65% were done through services that used technology including credit card, internet banking and ATM.
In Bangladesh, ATM and credit card fraud has been reported. Even the foreign banks were the victim of such incidents in Bangladesh. A third generation bank also reported a fraud incident where BDT 1.5 billion was transferred to a different account while changing their IT software.
Fraudulent activities in the banking sector surrounds banking transactions, loan and deposit accounts mostly through the use of IT devices, software and false papers. In most of the cases frauds are carried out by a group which often includes the employees from the customers office or third party IT service providers – often referred to as external fraud; or it might be internal fraud group involving the bank’s own employee. Frauds can broadly be divided into: (1) technology related; (2) deposit account related; and (3) asset/loan account related.
A prime question of interest is how can a bank combat increasing fraud incidents? Like other crimes, banking fraud cannot be totally eliminated. Though people having superior IT related skills and knowledge are getting involved in these activities, the incidence of fraudulent activities can however be minimized if proper mitigating initiatives and process control are implemented.
The first step to fight against inside or outside banking fraud is to deploy the right resources. Risk mitigation is needed enterprise-wide including: (i) higher spending in terms of investment in order to secure IT infrastructure; (ii) higher spending for developing prevention policies and faster detection; (iii) adequate compensation must be ensured for the employees and an effective performance appraisal system should be established; (iv) everyone should be accountable.
Some processes tend to enhance the information security without any money being spent such as password protection at all levels, the requirement for a supervisor’s approval in all transactions, and duty segregation among several departments. Another factor that it very important in combating banking fraud is - well functioning corporate governance. A separate department with adequate resources for internal control and compliance is also necessary for preventing fraud.
Historical data suggests that a significant contributor to the rise of fraud is internal fraud. The loopholes and inadequacies of the system are well known to the employees, who can at any time take advantage of the situation before a senior employee gets to understand what’s happening. There are evidences where the top-officials were found to disburse money even after being fully aware of the fraudulent documents. The Hall-Mark scam is the most recent example.
The impact of banking fraud is higher than in any other industry since the banking and financial intermediaries are totally based on goodwill and trust. The economic cost of a fraud incident is not just the money lost. The impact is multiplied manifold since disruptions are created in the banking process, payment system and on how the market works. The short run impact of the lost goodwill and trust might be fewer deposits in the bank, but the long run impact is the higher cost of doing business! At times a major banking fraud might destabilize the whole financial market, therefore proper measures must be taken when there is time in hand.