Ten ways to tackle bank frauds in India
All the major operational areas in banking represent a good opportunity for fraudsters with growing incidence being reported under deposit, loan and inter-branch accounting transactions, including remittances.
A broad analysis of various frauds that have taken place throw up the following high-risk areas in committing frauds:
· Misappropriation of cash by fudging accounts.
· Unauthorised withdrawal or transfers of funds, mostly from long dormant accounts.
· Opening of fictitious accounts to misappropriate funds from illegal activities ie. Laundering through the fictitious accounts
· Use of interbank clearing for accommodation, kite-flying and misappropriation.
· Cheating in foreign exchange transactions by flouting exchange control provisions.
· Withdrawal from deposit accounts through forged documents.
· Fraud in collusion with bank staff in emerging areas and services under the computerized environment. Frauds take place in a financial system only when safeguards and procedural checks are inadequate or when they are not scrupulously adhered to, leaving the system vulnerable to the perpetrators. Anecdotal evidence shows that whether the agency or individual committing the fraud works for the bank or deals with it, careful planning is done by the culprit before he attacks the system at its most vulnerable point.
The most effective defence banks could have against fraud is to strengthen their operational practices, procedures, controls and review systems so that all fraud-prone areas are fully sanitised against internal or external breaches. However, the huge expansion in banking transactions consequent to the transition of banks to mass banking and the large scale computerization have played a major role in the perpetration of the frauds.Hence mere reliance on the internal controls is of no use. The ten fold "INDIAFORENSIC" approach to tackle the bank fraud will definitely play a crucial role in coming days.
Expect fraud:
Nowhere in the world the fraud can be avoided hence the banks can be no exceptions. It is a human tendency of taking the risk to commit the frauds if he finds suitable opportunities. So it is wise to expect the occurrence of the fraud. If the fraud is expected, efforts can be concentrated on the areas, which are fraud prone. Fraud is the game of two. The rule makers and rule breakers. Whoever is strong in the anticipation of the situations wins the game of frauds. Fraud is a phenomenon, which cannot be eliminated, but it needs to be managed.Develop a fraud policy:
The policy should be written and distributed to all employees, Borrowers and depositors. This gives a moral tension to the potential Fraudster. Maintain a zero tolerance for violations. The Indian bank needs to roar against the action that is taken against the Fraudsters. The media publicity against the fraudsters at all the levels is necessary. The announcement by US president George W. Bush that the "Corporate crooks will not be spared" gave the deep impact to the Corporate America. In India also we need to consider it as a sever problem and need to fight against it.Assess Risk:
Look at the ways fraud can happen in the organization. It is very important to study the trend and the style of frauds in the bank. Some of the big nationalized banks maintain the databases of the fraud cases reported in their banks. But the databases are dumb. They yield nothing unless they are analyzed effectively. Establish regular fraud-detection procedures. It could be in the form of Internal audit or it could also be in the form of inspections. These procedures alone discourage employees from committing fraud. In addition to this the Institute of Chartered Accountants of India has issued a "Accounting and Assurance standard on internal controls which is a real guideline to test internal controls . Controls break down because people affect them, and because circumstances change.Segregate duties in critical areas:
It is the absolutely basic principle of auditing a single person should not have the control of the books of accounts and the physical asset. Because this is the scenario which tempts the employee to commit the fraud. Hence it becomes essential to see that no one employee should be able to initiate and complete a critical transaction without involving someone else.Most of the banks in India have the well-defined authorization procedures. The allocation of the sanctioning limits is also observed in most of the cases. But still the bankers violate the authorities very easily. They just need to collude with the outside parties. However the detection of the collusions is possible in most of the cases if the higher authorities are willing to dig the frauds.
Maintain the tone of Ethics at the top:
The subordinates have the tendency to follow their superiors. When the signals are passed on to the middle management about the unethical behavior of the top management the fear of punishment gets reduced and the tendency of following the superior dominates. Fear vanishes when the tendency of "If I have to die I'll take along the superior and die" tendency rises.Review and enforce password security:
The incidences of hacking and the Phishing have troubled the Indian Private sector banks to a great extent. In addition to this most of the Indian banks are running behind the ATM and credit cards to compete with each other but have conveniently forgone the fact that ATM cards and the credit cards are the best tools available in the hands of the fraudsters. Inappropriate system access makes it possible to steal large amounts of money very quickly and, in many cases, without detection. Hence the review and the enforcement of the security policy is going to be a crucial.Promote the Whistle blowing Culture:
Many of the surveys on Frauds have shown that the frauds are unearthed by the "TIPS" from insider or may be from outsiders. Internal audits and internal controls come much later. The message about contacting the vigilance officers is flashed in most of the branch premises. However the ethics lines are very rarely seen. The ethics lines are the help lines to the employees or the well-wishers of the bank which tells them whether a particular activity constitutes a fraud or not.Conduct pre-employment screening:
Since the raw material of the Banks is cash the banker needs to be more alert than any other employer before they recruit. Only testing the aptitude of a person is not of any use. Know whom you are hiring. More than 20 percent of resumes contain false statements. Most employers will only confirm dates of employment. Some times post employment condition might create the greed in the minds of employee,hence atleast the bankers should test check the characters of their subordinates by creating real life scenarios such as offering the bribes by calling on some dummy borrower.Screen and monitor Borrowers:
Bad borrowers cause the biggest losses to the banks. What are they ? Who they represent themselves to be? Look at their ownership, clients, references, and litigation history. In many cases the potential fraudsters have history of defaulting in some other bank or Financial Institution.The ten steps to combat the frauds is not the complete solutions but a direction to combat frauds.Detailed classification of the Bank frauds can be obtained through the Indiaforensic website.
About the author:
About Author
Author of this article is a Chartered Accountant and a renowned Forensic Accountant in India.He is the author of book Occupational Frauds and Money laundering and has promoted Indiaforensic Research Foundation.He can be reached at mayur_cfe@rediffmail.com
