PREAMBLE
• The biggest challenge facing the banking industry worldwide today is fraud.
• The banking industry loses billions of dollars annually due to fraudulent activities.
• Some of the scams are successfully executed by outsiders, while a reasonable number are successfully perpetuated with the collusion of an internal member or staff.
• Anyone can perpetuate fraud.
FALSE ASSUMPTION ABOUT FRAUD
Here are some false assumptions about fraud:
1. Most people will not commit fraud.
Answer: The vast majority of people, in certain circumstances, will commit fraud, especially if they are convinced that they will go unnoticed. Therefore, it must be assumed that everyone has a tendency to commit fraud.
2. The fraud is not material.
Answer: Fraud is very material and is capable of eroding the working capital of any organization, resulting in illiquidity and insolvency.
3. Most scams go unnoticed.
Answer: Most fraud is detected over time, especially if due process and procedure are followed.
4. Fraud can be well concealed and cannot be detected by the auditor.
Answer: Usually there is a loop hole that will eventually come to light. With a sound internal control procedure, eventually such fraud will be detected.
A well-trained auditor can easily detect fraud by following a properly designed audit program.
5. Those who are caught and prosecuted are not wise.
Answer: Staff with fraudulent intentions think the caught are not smart and the mindset of a first time scammer is: will I do it once or am I too smart to get caught.
COMMON TYPES OF FRAUD
Common types of banking fraud include the following:
1. Verify the replacement
2. Check removal
3. Verify the cloning
4. Check the equipment
5. Verify the alteration
6. Overcrowding and boarding
7. Claim for unearned overtime benefit
8. Dry publication
9. Accumulation of charges due to unauthorized and unofficial long-term telephone calls
10. Exaggerated Claims for Refund
11. Elimination of deposits
12. Add fictitious names to payroll
13. Overburdening customers
14. Withdraw money directly from the vault, cash register, petty cash, etc.
15. Obtain payments for false invoices, either self-made or obtained by the supplier or seller (for example, hotel, air ticket, etc.).
FACTORS CONTRIBUTING TO FRAUD
• Increasing complexity in the structure of an organization
• Increased speed of transaction dynamics
• Improved technological advancement that helps ease the completion of transactions.
• History of inattention from supervisors
• Lack of staff that could cause dual control failure
• Acceptance of a certain level of fraud as ‘cost of doing business’.
• Outdated and ineffective control measures that do not meet acceptable global standards.
• Increased staff turnover which, technically, could lead to understaffing.
• Aggressive accounting entries, all in an attempt to record profits.
SIGNS OF FRAUD
The following are characteristics of fraudulent staff that should put supervisors and associates on 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 showing resentment for not being treated fairly or for not being taken advantage of
6. Superiors who lack respect and appreciation for employees.
7. Very dominant senior management
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 bills from a copy instead of an original.
13. Unusual sequence of numbers on vendor invoices
EFFECTS OF FRAUD
Fraud has a far-reaching effect on the organization and society in general.
• Fraud can deplete any organization’s working capital, ultimately culminating in heartbreak.
• Disengagement from staff and the social risks associated with staff and their dependents.
• Loss of trust of customers, suppliers, creditors, contractors and shareholders in the organization and the industry.
FRAUD PREVENTION AND ALERT TIPS
1. Suppose everyone can commit fraud in the right circumstances.
2. Use your knowledge of internal control to “think dirty” and then verify your suspicions.
3. Remember that good documentation does not mean that something happened; just someone said it happened.
4. Pay attention to the documents themselves and the supporting paperwork, noting the consistency of numbers, number of dates.
5. Consider the reasonableness of account balances and journal 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. Look at hunches; first impressions are usually correct.
8. Be inquisitive; don’t accept explanations easily, especially if you don’t understand them.
9. Use statistical sampling to force you to look at items that you would not normally examine otherwise.
10. Look for unusual transaction patterns. (If it surprises you, it is unusual!)
CONCLUSION
