1. OVERVIEW OF BANKING FRAUDS WITH
REAL LIFE EXAMPLES
By
Mirza Farrukh Baig
Managing Director
Lynchpin Consulting
2. 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
3. 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
4. What are the common bank fraudsTYPES
• Fictitious Lending
• Identity theft
• Accommodation cheques
• Forgery of documents
• Embezzlement of funds
Kabul Bank Fraud
A 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.
5. 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
6. 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
7. 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
8. 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!
10. 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??
11. 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
12. 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)