Ten Steps to avoid employee frauds in banks. It is no exaggeration that the greatest fraud risk that Banks face, walks through their doors every morning and sits down to work. The Indian Banking industry is well regulated and supervised, and presently the best recipient of the IT insurgence. Online exchanges like NEFT, RTGS, IMPS & ECS have provided a quick and prompt rollover of cash enhancing the GDP. With computers, new forms of internet violations called ‘Digital Wrongdoings’ have surfaced. Bank fraud is a big business in today’s world. With more educational qualifications, banking becoming impersonal and the banking sector spreading far and wide, the daily robbing of banks through white collar crime has increased. The worst development is the parasitic involvement of bank staff in stealing money, through fraudulent transactions and remittances.
Frauds carried out by bank employees are a global problem. In 2020 2,504 cases of internal fraud from 125 countries were reported, which led to estimated losses of Rs.25000 crores. The number of bank frauds in India increasing with the passage of time. Private lender ICICI Bank penalised the highest number of employees for defrauding bank assets in the last three years. Of the 60 scheduled commercial banks operating in India, ICICI topped the list of those taking action against staff.SBI stood next in terms of employee fraud, followed by PNB.
In a year of lockdowns and restrictions, cybercriminals have not been deterred. More Indian adults fell victim to identity theft in the past 12 months. As per RBI’s annual report, bank frauds of ₹100,000 and above have more than doubled in value to ₹1.85 lakh crores in FY20 as compared to ₹71,500 crores in FY19. Also, the number of such cases has increased by 28% in the same period. A large number of these frauds are traced to bank employees who are uniquely placed to discover and take advantage of weaknesses in internal controls, by abusing access to the bank’s IT systems or by targeting dormant accounts. Abuse of administrator privileges is the key internal fraud risk. Their high-level access creates opportunities to carry out fraud. Given that banks tend to check user access profiles only monthly, the continuing access to the system enables a rogue employee enough time to commit fraud. Weak controls play a central role in 70 percent of internal frauds in Europe and more than 60 percent globally. Most internal fraudsters are just ordinary staff under financial distress.
Weak systems open up opportunities for such employees to fulfill the desire for status symbols, a bigger house, a new car, and overseas visits.
The Four Eyes Principle is the most popular mitigant that requires staff to obtain validation from a colleague for payments above a specified amount. This practice is a vital part of controls that banks put in place to prevent internal fraud. Fraudsters evade this control by stealing a colleague’s system credentials and signing in their identity to validate fraudulent transactions. Staff who leave their session open while away from their desk leave the bank vulnerable to such attacks.
Internal frauds are committed both by employees on a standalone basis or in groups. Frauds involving multiple conspirators make up a major portion of frauds. Solo frauds tend to be carried out by younger and junior employees. Although most surveys indicate that around two-thirds of internal fraudsters tend to be aged between 36 and 55, youth is an important factor in a significant number of cases.53 percent of the perpetrators are aged between 21 and 30 using technology to defraud. Studies show that up to 60 percent of perpetrators in technology-enabled frauds are aged between 26 and 45. The signs are that as younger, more tech-savvy employees climb through the ranks, the incidence of technology-related fraud is likely to rise. Though the banking in- industry is generally well regulated and supervised, the sector suffers from its own set of challenges when it comes to ethical practices, financial distress, and corporate governance.
RBI defines fraud 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 in banks, resulting into wrongful gain to any person for a temporary period, with or without any monetary loss to the bank”.The delays in legal procedures for re- porting have been considered some of the major reasons for fraud.
Ten steps can be initiated to curb fraud by bank employees:-
1. Creation of National Registry of Fraudsters
Names of employees caught in internal frauds should be entered in a National Registry of Fraudsters. Persons finding names in the Registry should be barred from employment in the Public and Private sectors. No loan should be given. Should be disqualified from holding Public Office.
2. Overnight Disablement of Pass Words of Bank Employees
Presently the bank employees carry passwords for access to bank data 24X7, facilitating remote non-home branch frauds. With the End of Day(EOD) reconciliation post business hours, all passwords should be
automatically disabled for the night and revived the next working day.
3. Make Fraud a Non-Bailable Offence
Cheating and vilifying the trust of innocent or deceased customers is a non-pardonable crime against humanity. Fraud by bank employees should be made a non-bailable offense under the Indian Penal Code. The rule should be applicable to third parties and colluding auditors as well.
4. Setting up of Special Courts to Settle Bank Frauds
Summary Courts should be set up to deal with employee frauds to expedite deterrent punishment. Passports may be impounded.
5. Seizure and Auction of Assets of Fraudster Bank Employees
The fixed assets and bank accounts of fraudster employees should be frozen immediately on discovery of fraud to recover the loss.
6. Know Your Markets:
In addition, to know your vendor and know your customer, the banks should also focus on know your markets. Cash guzzling areas like vegetable and trade markets should have strict monitoring of daytime cash holding of cashiers who defraud banks in unauthorised parallel lending of cash during working hours for undue gains.
7. Financial Literacy of Customers
Many times, the customer does not know the nuances of fraud risks and thus needs to be educated regarding this aspect. Therefore, learning sessions in areas of fraud detection should be imparted to customers at the time of opening of account.
8. Establishment of Fraud Data Bank
All case histories of internal bank frauds are uploaded here for study.
9. Introduction of Confidential Banking Whistle Blower Awards
Whistle-Blowers of internal frauds be rewarded with foreign postings
10. OTP Based Banking & Fraud Immune Software
Credits above Rs.5000 and all debits to be electronically intimated to account holder lives, to make banking fraud immune.
Rightly said: Give a man a gun, he will rob a bank; give a man a bank, he will rob the world.
– Hargovind Sachdev
About Author
Mr. Hargovind Sachdev is an Ex-Banker, GM(Retd) of State Bank of India. Has over 39 years of experience in banking, having occupied senior positions in UCO Bank, United Bank of India, State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt, Germany
from 2006 to 2011 covering 15 countries of Central Europe.Has undergone International Banking Training from Asian Institute of Management, Manila, the Philippines in the Year 2003 and a Multi-currency lending-technique training at the Euro Money Institute, London in 2009.
He has specialisation in Credit, Foreign Exchange, Vigilance, Monitoring & appraisal of Corporate Loans, MSME Credit, Gold Loans, Agricultural Loans & NRI Business Management in assets & liabilities. As a Forensic Auditor, he has conducted various Transaction Audits allotted by Banks.
He was felicitated by the Central Vigilance Commissioner, Sh. C.V Chowdhry for winning first prize for best article on Preventive Vigilance in 2015. He is also an accomplished Public Speaker having conducted multiple Motivational Seminars for institutions like ONGC, the National Housing Bank & the Bank of Baroda. He is an Independent Director & consultant to various big entities in the corporate sector at present.
