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The Bank Director’s Guide to Fraud

By   Jason Olson

August 30, 2017

As a bank director, you know that you have the difficult task of being responsible for providing oversight of your bank’s risks. Included in this responsibility is 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 check-up checklist for your financial institution.

Recent Fraud Trends in Financial Institutions|
According to the Association of Certified Fraud Examiners’ (ACFE) 2016 Report to the Nations, which is a biennial summary report of surveyed Certified Fraud Examiners, the banking and financial services industry had the most occurrences of occupational fraud at 16.8 percent of the 2,410 reported fraud cases. The ACFE defines occupational fraud as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” The median loss of these occupational fraud cases was $192,000. 

The most commonly reported fraud schemes (and their definitions) affecting the financial institution industry consist of:

  • Corruption (37.5 percent 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 (17.9 percent of cases) – An employee misappropriates cash kept on hand, such as in the vault.
     
  • Financial statement fraud (12 percent of cases) – An employee intentionally causes a misstatement or omission of material information in the organization’s financial reports, such as fictitious revenues, inflating assets or understating expenses.
     
  • Cash larceny (11.1 percent 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.
     
  • Non-cash (10.6 percent of cases) – An employee misuses non-cash assets of an organization, such as misuse of confidential customer information.

In addition to these fraud schemes, the following are other highlights from the 2016 Report to the Nations:

  • Lack of internal controls was cited as the primary contributor to the fraud schemes.
  • Asset misappropriation is more prevalent than financial statement fraud and corruption schemes.
  • Median duration of fraud schemes was 18 months.
  • Almost all of the fraud cases involved an attempt by the perpetrator to cover up their improper activities, with the most common concealment methods being creating and altering physical documents.
  • Most common detection method was through tips (39.1 percent of the cases).
  • The most commonly implemented anti-fraud controls put in place by victim organizations were external audits of financial statements and a code of conduct.
  • Losses caused by perpetrators were greater for those with a higher level of authority.
  • Most of the perpetrators were first-time offenders, however they often displayed common behavioral signs, such as living beyond means, financial difficulties, excessive control issues and “wheeler-dealer” attitudes.

FinCen Suspicious Activity Report (SAR) Statistics
To further examine occupational fraud trends in the financial institution industry, we extracted SAR filings related to fraud committed by employees, directors and owners from 2014 through July 11, 2017, from FinCen’s database. Below is a summary of fraud-related SAR findings by state in which Eide Bailly LLP has an office. 

Summary of SARs by State

Summary of SARs by State

As reflected in this table, the number of fraud-related SAR filings has remained fairly consistent on an annual basis. The table below reflects the identified perpetrators’ positions from these SAR fraud-related filings.

Summary of SARs by Position Type

Summary of SARs by Position Type

What You Can Do to Inspire an Anti-Fraud Environment
To mitigate fraud risks, you should consider having your organization conduct a fraud prevention check-up. The ACFE provides a complimentary, simplistic fraud prevention checklist for you to download on its website. If fraud prevention weaknesses are identified during this check-up, you can work with your organization’s personnel and/or our forensic accountants to ensure your organization develops the proper safeguards to protect its assets from common occupational fraud schemes. Conducting fraud prevention check-ups on a periodic basis is an excellent way for you to set the proper anti-fraud tone within your organization.