OVERVIEW OF BANKING FRAUDS WITH

REAL LIFE EXAMPLES

By

Mirza Farrukh Baig

Managing Director

Lynchpin Consulting

About Myself• Originally from Pakistan, in UAE since 2004

Last Banking Job Held (2004 – 2012): • Unit Head Credit Risk – National Bank of Fujairah (Dubai)

Professional Qualification & Training Experience: • Chartered Accountant (ICAP) • Associated with Consulting, Training & Coaching: Since 1999

Distinctions & Certification• Gold Medal in Chartered Accountancy Examinations• Holds Certificate in “Entrepreneurship” from

Harvard Business School (USA) - 2013

How it happens?FRAUDS….

• Frauds by internal bank staff for self benefit• Frauds by customers with the help of internal

bank staff for mutual benefit• Fraud by customers due to negligence of internal

bank staff

70% of financial institutions saying they have experienced a case of fraud by one of their

employees in the past 12 months

Source: Actimize

What are the common bank fraudsTYPES

• Fictitious Lending• Identity theft• Accommodation cheques• Forgery of documents• Embezzlement of funds

Kabul Bank FraudA report by an independent auditor leaked in

November 2012 showed that the vast majority of the bank's loans - almost $900m (£561m) -were made to just 19 people and companies.

An earlier finding by Afghanistan's anti-corruption office said that $467m (£290m) of

outstanding loans had been made without appropriate collateral.

A..N Ventilation LLCEXAMPLE

Fraud by a “Good Customer”Company Facts:• Turnover approx USD 30 million• Staff: over 100 people• Operative since: 2004• Business: Manufacturing of Aluminum products

Loan Granted:Asset Financing of USD 3M secured against charge over machinery

How Fraud Happened?• Over the period of 6 months, all machinery was transferred to owner’s home country• One fine day owner left UAE!!

Why Bank was not aware of this?• As the loan installment payment was regular, the Bank Officer never visited the client

S.. Food SupplierEXAMPLE

Company Facts:• Turnover approx USD 10 million• Staff: over 10 people• Operative since: 2002• Business: Sea Food Supplier to Hotels in UAE

Loan Granted:Invoice Discounting (Factoring) facility for USD: 1 million

How Fraud Happened?• Client discounted fictitious invoices which were never raised to clients• One fine day owner left UAE!!

Why Bank was not aware of this?• Assignment of receivables was not obtained by Account Manager

A…. Flow Technical SuppliesEXAMPLE

Company Facts:• Turnover approx USD 5 million• Staff: over 10 people• Operative since: 2002• Business: manufacturer of brake pads

Loan Granted:Cheque Discounting Facility of USD 2million

How Fraud Happened?• Borrower discounted accommodation cheques of the company owned by his brother• Borrower bribed the bank officials• Bank officials submitted false information while discounting of cheques

Why Bank was not aware of this?• It was intentional by a senior bank official

• His team members were feared of revealing the crime information to his superiors

Common Fraud Products Tool!

• Taking loan for company that does not exist• False Financial Statements• Export Bill Discounting with false shipping

documents• Cheque discounting with accommodation• Assistance of bank employees in money

laundering• Personal loans in the name of employees

and used by company owner!

Prevention of FraudMEASURES

Fraud can only be prevented by adequate measure as when it is detected,

its too late!

Prevention of FraudMEASURES

Pre-Loan Approval Measure

• Have registered category of auditors• Set a minimum threshold of company’s period of

operation like min 3 to 5 years• Data check on owners• Dig out ultimate ownership of the company• Identify cash flow diversion in financial statements• Look out for real purpose of loan• Sense abnormally urgent follow-up by

Relationship Manager/Customer• Look for how the loan will be repaid??

Prevention of FraudMEASURES

Post-Loan Approval Measure – Before Disbursement

• Have a strong Credit Limit Activation Unit• Check that all pre-disbursal conditions/covenants

are complied with or not?• Legal documentation is complete

Prevention of FraudMEASURES

Post-Loan Approval Measure – AFTER Disbursement

• Check the pattern of account transaction• Match the source of funds for export discounting• Maintain a drawer limit for factoring facilities• Have a whistle blowing culture in organization• Set SLAs to avoid “Urgent” transactions• Have an active market intelligence unit (most important)

Thank You