Financial Sector includes Banks, Microfinance institutions, SACCOS e.t.c.In the context our country banks are the key prayers in financial sector and they are highly affected by fraud due to the nature of its operations mostly known as Bank fraud.
Bank is defined as an organization deals with financial functions such as, receiving, paying, transferring, collecting, lending and exchanging of money to both domestic and internationally.
FRAUD IN BANKING.
Fraud is any intentional activity which may result into financial loss or reputation of which may be performed by employees or external individual. Bank fraud is very organized as its impact affects nation economy at large due huge amount of money involved just in single incidence. Imagine in 2012 it was reported by local magazine (This day) that Tshs 2 billion was stolen at NBC through overdraft and transferred to Dubai bank. Also in 2013 it was reported in the DAILY NEWS that case at high court involved Tshs 400 million withdrawn at Stanchart bank through cheque issued by China Construction Company. The drawer is claiming that a cheque was stolen from custody and signatures were forged so is requesting refund from his banker. The two mention cases are just few scenarios of fraud within the banking sector which totally amounted of a loss of Tshs 2.4 billion. Generally speaking, excessive fraud within the financial sector could harm the image of bank as secure place for money custody.
Management of bank is responsible to design and implement adequate control In order to minimize fraud risk and reduce huge financial loss. Effective control within financial sector will increase trust from society as result deposit will increase.
CONTROL.
Control is management actions which are put in place in order to ensure established goals are accomplished. An adequate and effective system of internal control provides reasonability that goals will be achieved.
Various types of control implemented in banking sector including preventive, directive and detective depending on risk and nature of transactions. Confirmation is among a key control in daily operations of banking business. If it is properly designed and well understood by bankers there is possibility of decreasing fraud risk rate in a particular bank and industry as a whole.
From audit point of view Confirmation is a process of verify validity, genuine and legality of transactions from its source or legally authorized person. It is also a process of verifying ownership and character of prospective customer before being recruited by a bank.
Implementations of Confirmation as preventive control tool;
In normal tradition banking deposit taking and lending are key activities hence confirmation as control may be implemented in various sub- activities as follow; Account opening, Lending, Fund transfers transaction, Third parties cheque payments, Large Cash withdrawals and Collateral registration. Confirmation as control may be applied as preventive or detective control depending on how it was designed, risk exposure and process transaction in a particular bank. Confirmation may be applied as preventive control in the following banking activities;
Account opening; It has been reported that some of accounts used in fraud cases were opened purposely for that intention especially company accounts. Those accounts were deposited with stolen cheque or transfer .Therefore a prudent banker is required to confirm the legality of that company by submitting their details to authorized institution which is BRELA for the case of our country before opening the account. This will prevent opening of fictitious accounts for fraudulent transactions.
Lending; Due to nature of our economy lending for many commercial banks is mainly focusing into retail business or most known as Small and Medium Enterprise (SME).SME faces various risks among them is ownership and management as most of them are not regally registered and owned by family. If bank a lends money to a retail business without confirming its ownership and character to independent source apart from the applicant there is possibility of financial loss as the money will not be repaid. It has been reported that bankruptcy of many banks was caused by poor screening of borrowers therefore confirmation is a key preventive tool. Confirmation of ownership and character is advised to be done to Local Government leader, Municipal, Business association, suppliers and owner of business premises.
Cheque payments; Most of business payments are processed through cheque. Due to advancement of technology cheque forgery has resulted to huge money loss into banking sytem.It is advised that a bank should put in place a confirmation process to a drawer of cheque through telephone or physical visit in order to verify validity of that payments.
Fund transfer transactions; As mentioned in example above Electronic fund transfers is a banking function which is also affected by fraud as large amount can be moved in minute. Bankers are advised to confirm source of deposit if it genuine before processing the transactions in order to prevent fraudulent transactions.
Confirmation as detective control in banking operations.
Fraudulent Cash withdrawals; It has been established that most of bank frauds are performed by employees.Dishonsest staff can purposely transfer fund from one account to another of his or her relative or friend thereafter withdrawal that money. Through verification of deposit source before processing of withdrawal the money transferred fraudulent may be detected before moved out of the bank. However due to introduction of ATM cash can be taken without entering the bank hall. For this case it is advised for bankers to review source of deposit for accounts which have high ATM withdrawal transactions.
Finally, it is advised that management should consider risk exposure in terms of amount before designing a confirmation as a control tool. This is because if every transactions will be confirmed the benefit of control will be less than cost of implementing. However bank employees should not stick into procedure from its design they should also think to confirm even transactions of low amount if seems to be suspicious.
BY
Wilbert Gugamwa
