PREAMBLE
• The biggest challenge facing the banking industry globally today is fraud.
• The banking industry loses billions of dollars annually due to fraudulent activities.
• Some of the frauds are successfully executed by outsiders, while a reasonable number are successfully perpetuated with the collusion of an insider/staff.
• Anyone can perpetuate a fraud.
FALSE ASSUMPTIONS ABOUT FRAUD
Here are some false assumptions about fraud:
1. Most people will not commit fraud.
Answer: The vast majority of people will, under certain circumstances, commit fraud, especially if they are convinced that it will go undetected. Therefore, it must be assumed that everyone has a tendency to commit fraud.
2. Fraud is not material.
Answer: Fraud is very material and is capable of eroding the working capital of any organization, consequently resulting in illiquidity and insolvency.
3. Most scams go undetected.
Answer: Most fraud is detected over time, especially if due process and procedure are followed.
4. Fraud can be well hidden and cannot be detected by the auditor.
Answer: Usually there is a loop hole that will eventually come out. With a good internal control procedure, such fraud will eventually be detected.
A well-trained auditor can easily detect fraud by following a properly designed audit program.
5. Those who are caught and persecuted are not wise.
Answer: Staff with fraudulent intent think that those caught are not smart and the mentality of a first-time scammer is: I’ll do it only once or I’m too smart to get caught.
COMMON TYPES OF FRAUD
Common types of banking fraud include the following:
1. Each replacement
2. Every Elimination
3. Check the cloning
4. Check the equipment
5. Every alteration
6. Filling and charging
7. Claim for unearned overtime
8. Dry Post
9. Accumulated charges due for long-term unauthorized and unofficial telephone calls
10. Exaggeration of refund requests
11. Removal of deposit
12. Add fictitious names to the payroll
13. Overcharging customers
14. Withdraw money directly from the vault, cash register, petty cash, etc.
15. Obtaining payment for false invoices, either from a vendor or vendor prepared by yourself or obtained (eg, hotel, airline ticket, etc.).
FACTORS CONTRIBUTING TO FRAUD
• Increasing complexity in the structure of an organization
• Increased speed of transaction dynamics
• Enhanced technological advances that contribute to the ease with which transactions are concluded
• History of neglect of supervisors
• Lack of personnel that could cause a breakdown of dual control
• Acceptance of some level of fraud as a ‘cost of doing business’.
• Outdated and ineffective control measures that do not meet acceptable global standards.
• Increase in staff turnover which could technically lead to staff shortages
• Aggressive accounting entries all in the attempt to post earnings.
SIGNS OF FRAUD
The following are characteristics of fraudulent personnel that should put supervisors and associates on their guard:
1. An employee who regularly borrows small amounts of cash from other colleagues
2. An employee who asks to “hold” his personal check before negotiating it
3. A staff that frequently closes late and does not go on vacation.
4. Employees with low or inadequate salary levels
5. Employees who show resentment for not being treated fairly or being taken advantage of
6. Superiors who lack respect and appreciation for employees
7. Very domineering senior managers
8. Employees who seem to be living and spending beyond their means
9. Split purchases
10. Irregularities in the bidding process
11. The same bidders over and over again
12. Payment of invoices from a copy instead of an original
13. Unusual sequence of numbers on supplier invoices
EFFECTS OF FRAUD
Fraud has a far-reaching effect on the organization and society in general.
• Fraud can deplete the working capital of any organization that will eventually end up in trouble.
• The dismissal of staff and the social risks associated with staff and their dependents.
• Loss of confidence of customers, suppliers, creditors, contractors and shareholders about the organization and the industry.
ADVICE FOR WARNING AND FRAUD PREVENTION
1. Assume that everyone can commit fraud under the right circumstances.
2. Use your knowledge of internal control to “think dirty” and then check your suspicions.
3. Remember that good documentation does not mean that something happened; just that someone said it happened.
4. Pay attention to the documents themselves and supporting paperwork, looking for consistency of numbers, amounts of dates.
5. Consider the reasonableness of account balances and accounting entries, especially adjustments
6. Develop relationships and pay attention to signs or rumors of wrongdoing. Follow up. Remember that people are often torn between their moral standards and their reluctance to get involved. They rarely tell everything they know in the first interview.
7. Check out the hunches; first impressions are usually correct.
8. Be inquisitive; Don’t easily accept explanations, especially if you don’t understand them.
9. Use statistical sampling to force you to look at items you usually wouldn’t look at otherwise
10. Look for unusual transaction patterns. (If it surprises you, it’s unusual!)
CONCLUSION