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Banks' vaults under attack

By | November 9th 2010

By Morris Aron

Even as all eyes focus on mainstream public corruption with prosecutions going on left, right and centre, on the sides of this mega vice is another emerging trend - banking fraud - that is slowly mauling up the economy.

In this emerging trend, banks, across the board, have lost close to Sh1 billion to fraudsters in the first and second quarter alone and the amount is growing by the day, as new technology expose them to cyber crime cheats.

The fraud is slicing the economy like a razor, with the banking and insurance sector bleeding the most. Of late, the phenomenon has been sending shivers down the spines of many chief executives and is talked about in hushed undertones in the insurance industry and rarely mentioned in the banking halls or any place that is potential for a hard cash outlet.

A stunning report by the Banking Fraud Investigation Department (BFID) availed to The Financial Journal blankly reveals the number of banks affected, with authorities managing to recover less than half of this cash so far.

Kenya Bankers Association chairman, John Wanyela reluctantly admits the magnitude of the problem, but is categorical as to why banks are hesitant to make such information public.

“Fraud gives an institution a bad name. You don’t want to be associated with it,” said Mr Wanyela.

“It may scare customers away because even if it is a genuine concern, the public misreads the development to mean that an institution is careless and dishonest or both.”

Mr Wanyela, however, agrees that with the increase in the level of technology and the headlong rush by financial institutions towards the same to reach their customers, there is bound to be more exposure to fraudsters.

According to the BFID report, Equity Bank had the highest number of staff defrauders, given its size and wide network.

Major scandals

In the second quarter of the year, ten employees of Equity Bank colluded in major scandals — it is not clear whether individually or together — to defraud the bank close to Sh70 million. The report, however, notes that all the amounts were later recovered.

Diamond Trust Bank was defrauded the most, with Sh204 million stolen through only three bank employees. Again, like the case of Equity, all the money is said to have been recovered.

Barclays Bank, on the other hand, suffered the highest amount of fraud from a single bank staff, who is reported to have defrauded a cool Sh30 million from the bank.

For the case of Barclays, Sh5 million is yet to be recovered, while at Standard Chartered, Sh7 million is yet to be recovered in a fraud linked to a single bank employee.

PostBank lost just over a million shillings from an individual employee, while Kenya Commercial Bank and K-Rep lost over Sh1.5 million each. Banking insiders say even when recovery is reported, it does not necessary mean all the cash is secured, but recovery process may be ongoing through freezing of bank accounts or assets of those implicated.

The worrying trend shows that electronic fund transfers (be it ETR, RTGS or Swift) was responsible for the highest amounts stolen, followed by embezzlement and card fraud.

In one single ETF transaction, a medium sized bank almost lost Sh500 million.

“Fraud (in the banking industry) has become a phenomenon which needs a drastic resolution so as not to cripple the economy,” reads the report.

“And in as much as various measures have been taken to minimize the incidence of fraud, it still rises by the day as fraudsters always device tactical ways of committing fraud.”

The BFID report reckons that insider information from bank employees, or the employees themselves, contributes to the largest percentage of all the types of fraud witnessed in the banking circles.

“It is instructive to know that many banking operatives (employees) have different reasons for joining various banks,” said the report citing that, “Many have the intention of working for a short time with an aim of fraudulently enriching themselves, just in the same way there are those who join to honestly pursue their careers.”

Experts say incidences of fraud have been increasing since 2009.

“Generally, the fraud cases that are being witnessed are not new,” explained Ms Faith Basiye-Omolo, the head of forensic services for Kenya Commercial Bank, speaking on her own behalf.

“Tech-based fraud — though effort is being made to counter the development— is generally on the rise, with more and more attempts being reported in each quarter.”

No fraud was reported for pension funds, stock or commercial paper or conveyance fraud. In addition, there was no forex fraud, computer fraud or fraud as a result of theft by directors.

As expected, incidences of cheque fraud and forgery —seen in industry circle as old school, was the highest.

Over the period covered, there were 33 incidences of cheque fraud, and another twenty-one for forgery. In total, Sh23 million was lost to cheque fraud, with only Sh11 million recovered to date, while close to Sh6 million was lost through forgery, with only Sh1.6 million recovered.

The mobile money transfer services have also not been left off the hook.

Though not directly mentioned, industry sources indicate there is a prevalence of individuals taking advantage of the system to deposit fake money, which then finds its way into the mainstream economy.

“The department is advising that all mobile banking agencies train and provide their agents with a currency validation machines to enable them verify the currencies before they are deposited,” said the BFID report.

Mobile money transfers

The vulnerability of the mobile money transfers also played out in March this year, when technology-savvy fraudsters stole an estimated Sh21 million from Kenya’s revolutionary mobile phone-based money transfer system, M-pesa, even as Safaricom insisted the operation had reported suspected or actual fraud in the modest range of 0.006 per cent of its total transactions since its inception three years ago.

Jimmy Mwithi the chair of the Association of Certified Fraud Examiners Kenya Chapter (ACFE-K) says such a trend, as depicted by the BFID report, was to be expected.

“Most of the fraud, actually across all sectors, relies in one way or another on the some form of inside information, whether intended or otherwise,” said Mr Mwithi.

“The level of impact of fraud on any institution will also depend on the level of exposure of the very institution, and the systems it has put in place to cover against such occurrence starting with who exactly one employs,” he explained.

According to Mr Mwithi, something as simple as carrying out a background check on an employee could save institutions a whole lot of trouble later on.

“There are a lot of financial institution employees who were fired from one bank or resigned under some mysterious circumstances, but still end up in another financial institution across the street.”

In what may now be a wake up call to all the stakeholders involved to focus their energies on fraud, another report prepared by the Kenya Bankers Association (KBA) depicts a similar trend .

In the KBA summary report of the banking industry for the year 2009, close to half a billion was lost to fraud in 2009, that is after end year recoveries.


The KBA report, which was meant to be an eye opener to the financial service heads, indicates the actual industry losses cannot be ascertained, as banks are reluctant to share information, citing legal issues.

On one part, fraudsters are being blamed for carrying out the unlawful act; on the other hand, the financial institutions themselves are to blame for laxity in sharing vital information.

According to both reports, the reluctance by financial institutions themselves to provide full information on the extent of fraud has, in itself, contributed to the upsurge in the vice. Industry experts reckon financial institutions could trade tricks used in the perpetration of frauds from each other.

“Members of KBA continuously review their systems to learn from past mistakes, and seal loopholes that fraudsters exploit,” Mr Wanyela, however, contends.

As the full magnitude of fraud begins to sink in, financial and fraud experts are weighing the implications, and what measures that could be used to counter the growing trend.

Aly Khan Satchu, an investment analyst, says such a precedent, if allowed to continue, may have dire consequences on the mainstream economy, as costs of financial services provisions could rise sharply.

“The high level of fraud in the system is a cost that is being borne by the end consumer, and might well be partly responsible for the very wide spread between Government’s Interest Rate Curve, and the commercial lending rate,” said Mr Satchu

“I think banks are reserved about releasing the number because it is optically large and would cause a ‘Sticker Shock.’”

The term “sticker shock” is widely used in the United States to refer to an exclamation of surprise at the high price tag on an item.

Mr Wanyela agrees that the cost of fraud affects financial institutions’ bottom lines.

“When the bottom line is affected, shareholders returns are depressed.”

Going forward, both the reports are recommending tough measures to curb fraud in the industry.

For a start, it recommends institutions should assist employees whenever there is a genuine financial request, particularly in emergency situations. It also states that financial institutions should adopt a good hiring and a training policy, as a first step in the battle against fraud. Besides, there should be regular job rotation and the idea of keeping a staff in a unit or a section for too long may encourage fraud.

Financial institutions are also asked to adopt computer aids and tools for fraud prevention and control.






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