Occupational Fraud: Is Your Bank at Risk?

Thoughtware Article Published: Feb 18, 2014
Calculator, change and a magnifying glass

Fraud is nothing new in the banking industry.  It is not unheard of for a loan customer to fudge financial statements here or there in order to obtain a loan.  You have procedures in place for that.  You may have reviewed a few overvalued appraisals during your career.  You have procedures in place for that.

But do you have appropriate procedures in place to combat occupational fraud—the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employer’s resources or assets?  According to the Association of Certified Fraud Examiners 2012 Report to the Nations, financial institutions suffered a median loss of $232,000 due to occupational fraud.  What could your organization do with that missing $232,000?

The top three types of fraud committed against financial institutions by their employees are corruption, cash theft and fictitious or inappropriate billing.

Corruption Schemes

Corruption schemes refer to an employee’s misuse of his or her influence in a business transaction in violation of the duty they owe their employer in order to gain a personal benefit.  A common form of corruption in the banking industry involves the payment of kickbacks to loan officers in exchange for extensions of credit.  Corruption schemes can be particularly difficult to detect as the “benefit” often will not run through the bank’s financials—it often is paid in cash to the loan officer once the borrower has received the loan proceeds.  Therefore, you need to pay attention to close relationships between loan officers and specific borrowers.  Be cognizant of evidence that an employee’s lifestyle is beyond the reach of his or her paycheck.

Cash Schemes

Cash schemes involve an employee’s theft of cash kept on the bank’s premises.  Such schemes can involve stealing large sums of money out of the bank’s vault or in the account opening process for depository accounts.  To combat cash schemes, surprise audits are a must.  In addition, look closely for violations of dual control and segregation of duty requirements.  Also, make sure to review any stale items in suspense or seldom-used general ledger accounts and take a look at vault reconciliations to see if the amount/denominations of cash and coin make sense.

Billing Schemes

In a billing scheme, the employee causes the bank to issue a payment by submitting invoices for fictitious goods or services, inflated invoices or invoices for personal purchases.  Often, the employee sets up a shell company and bills the bank for goods or services not actually received.  The employee also may set up the fictitious company as a pass-through vendor or intermediary between the bank and the actual vendor.  In this scheme, the employee inflates the cost of the actual good or service and takes a cut.

One of the most common billing schemes involves charging personal items to the bank, disguised as business expenses.  This can be particularly prevalent in travel expenses and reimbursement.  When it comes to billing schemes, detailed reviews and common sense go a long way.  Ask yourself if the purchase makes sense—is there a business need for the purchase?  Pay attention to employee travel reimbursement requests that coincide with vacation time.  In addition, you need good vendor and accounts payable controls to combat this type of fraud.

Look for the following:

  • Invoices for unspecified consulting or other services
  • Unfamiliar vendors
  • Vendors whose addresses match the address of an employee
  • Vendors with PO boxes and no available physical address
  • Multiple monthly billings
  • Invoices for round dollar amounts

When it comes to occupational fraud, vigilance in these areas can make a significant difference.  However, the one antifraud control that no bank should be without is a fraud or ethics hotline.

The Report to the Nations indicates occupational fraud is more likely to be detected by a tip from an employee than by any other method …, including internal audits, management reviews or external audits.  Therefore, it makes good sense to give your employees a way to alert you to any potential fraud or unethical behavior.  An appropriately implemented, confidential hotline service makes your employees part of your fraud prevention/detection program and can result in significant reductions in the frequency and magnitude of potential frauds.  The Report to the Nations indicates hotlines help detect frauds 12 months faster and result in a 44 percent reduction in median losses.  In addition, confidential third-party hotlines are available at cost-effective pricing structures for even the smallest institutions.

Occupational fraud should be of concern to every bank, regardless of size.  Again, what could your organization do with that missing $232,000?

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