How to Prevent Fraud in Your Bank

March 13, 2020 | Article

As a bank director, you have the difficult task of being responsible for providing oversight of your bank’s risks. This responsibility includes being charged with governance of management and ensuring internal controls are adequate to mitigate risks, including fraud.

This can be a daunting task, as fraud is alive and well across all industries, especially the financial institution sector. It’s imperative you stay informed on fraud trends as well as consider a fraud prevention checkup checklist for your financial institution.

Fraud Trends in Financial Institutions
Banking and financial institutions have a significant occurrence of occupational fraud. The median loss is typically $110,000.

The most commonly reported fraud schemes affecting the financial institution industry consist of:

  • Corruption (36% of cases): An employee misusing his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit, such as bribes or kickbacks.
  • Cash on hand (23% of cases): An employee misappropriates cash kept on hand, such as in the vault.  
  • Cash larceny (14% of cases): An employee misappropriates incoming cash payments after being recorded in the organization’s books and records, such as theft of cash and/or checks before being deposited.
  • Financial statement fraud (12% of cases): An employee intentionally causes a misstatement or omission of material information in the organization’s financial reports, such as fictitious revenues, inflated assets or understated expenses.    
  • Non-cash (11% of cases): An employee misuses non-cash assets of an organization, such as confidential customer information.
  • Billing (11% of cases): A fraudulent disbursement scheme in which a person causes his or her employee to issue a payment by submitting invoices for fictitious goods or services, inflated invoices or invoices for a personal purchase.

How to Prevent Fraud in Financial Institutions
Fraud is incredibly prevalent within the banking industry. There are ways, however, to help prevent it from occurring.

Tips for Fraud Prevention
Establish dollar thresholds that require additional review/authority to distribute funds. One fraud detection analytic is to perform queries of transactions just below these thresholds for anomalies.

Have employee account reviews in place to identify anomalies such as unknown sources of deposits. Situations in which these employee account reviews failed to detect red flags include:

  • The person who was to complete the employee accounts did not have their own accounts reviewed by another employee.
  • Senior management personnel’s accounts were not subject to the employee account review process.
  • The person performing the employee account reviews lacked formal training and/or education to understand what they should be looking for when performing these reviews for anomalies.

Maintain up-to-date technology. Financial institutions are holding onto large quantities of sensitive client data. The technological capabilities, or lack thereof, of your bank can make it ripe for fraud.

Ensure internal controls are in place. Internal control weaknesses are the leading cause of fraud. A system of internal controls that allow management to measure performance and a continual review through internal audit can help prevent a lapse in controls from occurring.

Your bank is never too small for an internal audit.

Bank Secrecy Act
The Bank Secrecy Act of 1970 requires financial institutions to assist U.S. government agencies in detecting and preventing money laundering. Through these programs, financial institutions have various queries set up to detect potential placement of ill-gotten funds by looking for suspicious activities, such as:

  • Deposits at several branch locations or within several different accounts under the reporting threshold
  • Numerous purchases of prepaid cards for large amounts inconsistent with normal account activity
  • Use of ATMs to make deposits below the reporting threshold
  • Questionable customer identification responses to your “Know Your Customer” questionnaires
  • Individual asks about your institutions reporting and/or record-keeping requirements

The Benefit of Fraud Prevention in Your Bank
To mitigate fraud risks, you should consider having your organization conduct a fraud prevention checkup. If fraud prevention weaknesses are identified during this checkup, you can work with your organization’s personnel and/or forensic accountants to ensure your organization develops the proper safeguards to protect its assets from common occupational fraud schemes. Conducting fraud prevention checkups on a periodic basis is an excellent way for you to set the proper anti-fraud tone within your organization.

What do you do if fraud does occur?

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