Frauds making fs companies uncompetitive parag deodhar

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Presentation made at the 1st Fraud Conference by ACFE Bangalore

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  • What is the impact of fraud on an organisation? At one end of the spectrum it leads to uncompetitiveness while at the other end of the spectrum it could shut down companies. We have seen examples of Lehman Brothers which shut down business, Enron, Worldcom etc. But these are extreme cases. If you apply the 80-20 rule, most companies are at the top end of the spectrum.
  • In the survey, 48% of respondents indicate that fraud has deterred them from engagingin business in at least one foreign country. Nearly two-fifths (39%) of respondents list atleast one type of fraud that had dissuaded them from doing business in a foreign market, and 36% name a country or regionwhere their experience or perception of fraud had deterred them from operating. The issue affects small and large companies alike.This is not merely a developing world problem: 7% of those surveyed say that fraud has dissuaded them from operating in NorthAmerica. Nevertheless, its biggest impact is on emerging economies. Fraud has deterred 11% of those surveyed from doing businessin China and Africa, and 10%, in Latin America. These respondents manage risk by simply staying out of these three regions,even though they may present a large investment opportunity.Moreover, developing countries appear to have more issues to clear up. In our survey, respondents were asked to rank the types offraud that had dissuaded them from entering certain markets. Twice as many types were listed for developing regions than for NorthAmerica and Western Europe. Globally, the leading worry is corruption. It has dissuaded 17% of all businesses – and 37% of thosewho have in fact been deterred – from investing somewhere. Consistent with the other findings in the survey, information theftis also an important concern, ranking second with 9% of all respondents and 19% of those deterred citing it as the reason not to invest.Although corruption is the most important deterrent to investment in every region, the impact is far from universal. Corruption wasnamed by 63% of respondents as the main reason for not doing business in Africa and by 59% for avoiding Central Asia. Bycomparison, only 21% of those who were dissuaded by fraud from doing business in North America list corruption as a leadingreason. In most geographies information theft is the second biggest deterrent to investment, but that varies widely, from 7% in WesternEurope to 31% in neighboring Central and Eastern Europe. China, where fraud deterred the most respondents, faces a range ofchallenges rather than a single, overwhelming issue. Corruption and information theft are the two most widespread issues (34% and33% respectively), but concerns about intellectual property, a long-standing worry for those operating in the country, were aleading factor for 23% of businesses dissuaded from doing business there. Clearly, many companies are willing to go into emerging markets knowing the risks: 21% believe that their exposure to fraud has increased because of entry into new, riskiermarkets in the last year. The survey also found, however, that fraud is exacting an economic price by causing companies to pass on potential opportunities, especially inunderdeveloped and emerging economies.
  • Information theft has become the most common form of fraud. In previous Global Fraud Surveys, the theft of physical assets or stockhas always been the most widespread fraud by a considerable margin. In 2009, for example, 28% of companies surveyed reported sufferingphysical theft, while the next most common fraud – management conflict of interest – affected only 20%. This year, however, as Chart 1 (overeaf) shows, information theft, loss or attack has become, by a small margin, the most commonly reported fraud. It is not that fraudsters are switching away from other methods: the increases and decreases in other categories are of the sort that could be expected in this type of survey. Rather,information theft grew significantly.This growing technological challenge, however, is not eliciting as large a response as might be expected. In the coming 12months, 48% of companies expect to spend more on information security. Although that figure makes this the most common field ofanti-fraud investment, it is actually down from 51% from last year.
  • The impact is financial and non-financial – both. But finally it hits the company – either on the topline or bottomline. World Bank has debarred one of the leading industrial houses in India.Partners – Service Providers
  • Over Rs 2,000 crore was lost by the country”s banking sector in frauds during 2009-10 with more than 200 of these incidents involving deception of above one crore each,“Banking Sector has lost as much as Rs 1,883 crore and Rs 2,017 crore during 2008-09 and 2009-2010, respectively.
  • Over Rs 2,000 crore was lost by the country”s banking sector in frauds during 2009-10 with more than 200 of these incidents involving deception of above one crore each,“Banking Sector has lost as much as Rs 1,883 crore and Rs 2,017 crore during 2008-09 and 2009-2010, respectively.
  • World average – revenues lost to frauds is 5%
  • Your premium will be higher by 5% - the margins for insurerers are wafer thin already.
  • Today – in the networked world, all kinds of recipes are available on the Internet. There are underground sites which teach you hacking, provide free password crackers, paid services for cracking accounts, stolen credit card numbers – you name it.Organised crime syndicates are placing their people in organisations – we still don’t do a thorough background check
  • Today – in the networked world, all kinds of recipes are available on the Internet. There are underground sites which teach you hacking, provide free password crackers, paid services for cracking accounts, stolen credit card numbers – you name it.Organised crime syndicates are placing their people in organisations – we still don’t do a thorough background check
  • For FS companies, fraud is like a parasite. It thrives on the company and grows with it too. I would extremely surprised to find a FS company where fraud does not exist. If there is, it is probably not detected. That is extremely dangerous. Coz if it remains unchecked, it can strangle the company.
  • Frauds making fs companies uncompetitive parag deodhar

    1. 1. Frauds making Financial Services Companies uncompetitive<br />BANGALORE CHAPTER<br />1st Annual Fraud Conference <br />17 June 2011<br />ParagDeodhar<br />
    2. 2. Financial Services Companies<br />Uncompetitive<br />FRAUD<br />Business Losses<br />Shutdown<br />
    3. 3. Extent of fraud<br />Source: Kroll Survey Oct 2010<br />
    4. 4. 48%<br />36%<br />Fear of fraud is dissuading a significant number of companies from going global<br />Fraud has deterred them from engaging in business in at least one foreign country.<br />name a country or region where their experience or perception of fraud had deterred them from operating.<br />
    5. 5. Extent of fraud<br />Source: Kroll Survey Oct 2010<br />
    6. 6. Extent of fraud<br />Source: Kroll Survey Oct 2010<br />
    7. 7. …Hits where it hurts the most<br />Top line<br />Share prices<br />Business Relationships<br />Employee Morale<br />Bottom-line<br />
    8. 8. Cost of fraud – Banks in India<br />Source: CBI / RBI Reports<br />`Cr<br />Top 2 Cities – 1. Mumbai 2. Delhi<br />225<br />Cases > `1 Cr<br />
    9. 9. Cost of fraud – Banks in India<br />Top of the Charts…<br />Source: CBI / RBI Reports<br />3000<br />Average Cases reported annually by public sector banks <br />x 5<br />Average Cases reported annually by private sector banks <br />
    10. 10. Insurance sector seems to be the most vulnerable to frauds <br /> `15,171 Cr. per annum<br />1 in every 2 persons exaggerate their insurance claims. <br />10%-15% <br />of total health claims processed by TPAs are estimated to be fraudulent.<br />`600 Cr.false health claims every year.<br /> Revenues lost to the frauds 8.57%<br />Insurance Frauds in India<br />Hit on bottom line<br />Frauds are driving up overall costs to insurers – reducing profitability and threatening viability<br />5%<br />
    11. 11. Insurance Frauds - motivation<br />Response to the ABI’s fraud research who admitted to committing insurance fraud:<br /><ul><li>Almost 40% exaggerated a genuine claim to cover the excess. </li></ul> “I feel I pay enough to cover the whole of the loss yet insurance companies seem to have a lot of get outs. Paying an excess feels like I am paying twice for my cover”<br /> “To cover the excess so that I do not make a loss overall on something that is not my fault.”<br /><ul><li>25% exaggerated a claim/completely invented a claim, to replace worn or outdated items or to make good other damage that was unrelated to a genuine claim: </li></ul> “My laptop was getting past its best and I needed a new one and couldn't afford it.” <br /> “To cover the cost of another broken item that the insurance wouldn’t cover.” <br /> “I made a claim that I was hit in the rear and the driver never stopped. But really I was reversing and hit a gate! (My husband would not have understood and gone mad.)”<br /><ul><li>25% had exaggerated or invented claims to get back premiums they had paid over time. </li></ul> “To get more money from the insurance company - they can afford it. Nearly everyone else does it.” <br /> “Having paid out thousands of pounds in vehicle insurance over the last 20 years, I want something back.” <br /><ul><li>10% said they had exaggerated or invented claims out of financial hardship – some added that insurance fraud was an easy way to get money. </li></ul> “It was an opportunity that was too good not to take up.”<br />
    12. 12. Escalating frauds<br />Greater professionalization of fraud practices. <br />“Crash for Cash” scams – professional car crashers<br />Cheque discounting<br />Hackers on hire<br />Parallel companies<br />Increased “sharing” of fraud practices between fraudsters<br />“Fraud Recipes” available online<br />Underground sites - Password crackers / Credit card number generators <br />Smarter attacks, especially online, result in bigger payoffs, in turn attracting more talented criminals<br />Techies involved in crimes<br />Phishing scams<br />Techie held for Rs 29-lakh ATM theft<br />Bangalore-based computer hardware professional, was arrested for allegedly stealing Rs 29 lakh from an SBI – ATM. With a sound knowledge of computer software, opened the lid of the machine, downloaded the programme and withdrew cash on many occasions.<br />
    13. 13. Latest Phishing attack<br />From: RBI <saftyalert@rbi.org.in>To:Sent: Thursday, June 16, 2011 3:53 AMSubject: Alert: One Time Password (OTP) Registration<br />Dear CustomerStarting from June 30, 2011 all Internet Based transactions made via Online Web Interface will require an additional One Time Password (OTP).This requirement has been made mandatory by the Reserve Bank of India (RBI). Introduction of OTP is intended to reduce the possibility of fraudulent transactions and would safeguard you, the customer.Kindly submit the form attached to this email in order to enroll your Online Account in the new online protection System.If you are using Internet Explorer please allow ActiveX for scripts to perform all datatransfers securely. Some E-mail Account users like gmail and sify might view a warning signal at the header of this message. Kindly note that this is normal. RBI Netbanking team Beware of Phishing<br />
    14. 14. Escalating frauds<br />More fraud perpetrated from offshore locations and through organized crime<br />Nigerian Fraud<br />Calls from our neighboring country (+92) <br />More brazen activities<br />Fraudsters taking over the bank accounts of legitimate customers or visiting a branch in person to open their own fraudulent accounts<br />ATM scams<br />More collusion: between merchants, fraudsters and INSIDERS<br />
    15. 15. Other Drivers for increasing fraud & cyber crime<br />Volumes growing – fraud increasing<br />High growth in financial services<br />Multiple accounts, multiple credit cards<br />Technology adoption<br />Making our lives complex, so many cards, passwords, PINs, to remember.<br />Internet Banking, Mobile Banking, Wireless Networks<br />Social Networking<br />Casual Approach<br />Passwords sharing<br />Sharing “information” over social networking sites – leaking answers to your secret questions<br />Transactions from open / free wi-fi networks<br />Crime syndicates<br />Lucrative profession to join<br />Work from home / part time option available!!! <br />Laws not strong enough – law enforcement yet playing catch up <br />
    16. 16. Ammunition to fight fraud<br />INSIDERS<br />Background Checks<br />Information sharing – fraudsters getting new jobs<br />Checks and Balances<br />TRAINING – employees and customers<br />Regulations<br />RBI Guidelines – mandatory leave, job rotation, vigilance department <br />Insurance – not as advanced<br />Technology<br />Use of data analytics tools to flag suspicious cases – prevention and detection<br />Invest in technology - Implement and update tools – allocate adequate budgets and teams<br />Governance<br />Who owns fraud? <br />Enterprise approach to fighting fraud<br />Dedicated Fraud Investigation Teams - working closely with Risk, Information Security teams, Law enforcement, Industry Groups – Data sharing<br />3rd Layer of Defence – Internal Audit<br />
    17. 17. Fraud – a parasite<br />Fraud starts off as harmless parasite <br />If unchecked, it can strangle the organization<br />
    18. 18. THANK YOU<br />BANGALORE CHAPTER<br />1st Annual Fraud Conference <br />17 June 2011<br />

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