Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits

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Management of Financial Institutions - MGT 604

Lecture # 42

Banking Fraud & Misleading Activities

Bank fraud is a federal crime in many countries, defined as planning to obtain property or

money from any federally insured financial institution. It is sometimes considered a white-

collar crime.

Rogue Traders

A rogue trader is a highly placed insider nominally authorized to invest sizeable funds on

behalf of the bank; this trader secretly makes progressively more aggressive and risky

investments using the bank's money, when one investment goes bad, the rogue trader

engages in further market speculation in the hope of a quick profit which would hide or

cover the loss. Unfortunately, when one investment loss is piled onto another, the costs to

the bank can reach into the hundreds of millions of dollars; there have even been cases in

which a bank goes out of business due to market investment losses.

Fraudulent Loans

One way to remove money from a bank is to take out a loan, a practice bankers would be

more than willing to encourage if they know that the money will be repaid in full with

interest. A fraudulent loan, however, is one in which the borrower is a business entity

controlled by a dishonest bank officer or an accomplice; the "borrower" then declares

bankruptcy or vanishes and the money is gone. The borrower may even be a non-existent

entity and the loan merely an artifice to conceal a theft of a large sum of money from the

bank.

Wire Fraud

Wire transfer networks such as the international SWIFT inter-bank fund transfer system are

tempting as targets as a transfer, once made, is difficult or impossible to reverse. As these

networks are used by banks to settle accounts with each other, rapid or overnight wire

transfer of large amounts of money is commonplace; while banks have put checks and

balances in place, there is the risk that insiders may attempt to use fraudulent or forged

documents which claim to request a bank depositor's money be wired to another bank, often

an offshore account in some distant foreign country.

Forged or Fraudulent Documents

Forged documents are often used to conceal other thefts; banks tend to count their money

meticulously so every penny must be accounted for. A document claiming that a sum of

money has been borrowed as a loan, withdrawn by an individual depositor or transferred or

invested can therefore be valuable to a thief who wishes to conceal the minor detail that the

bank's money has in fact been stolen and is now gone.

Uninsured Deposits

There are a number of cases each year where the bank itself turns out to be uninsured or not

licensed to operate at all. The objective is usually to solicit for deposits to this uninsured

"bank", although some may also sell stock representing ownership of the "bank".

Sometimes the names appear very official or very similar to those of legitimate banks. For

instance, the "Chase Trust Bank" of Washington DC appeared in 2002 with no license and

no affiliation to its seemingly apparent namesake; the real Chase Manhattan Bank is based

in New York. There is a very high risk of fraud when dealing with unknown or uninsured

institutions.

The risk is greatest when dealing with offshore or Internet banks (as this allows selection of

countries with lax banking regulations), but not by any means limited to these institutions.

Theft of Identity

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Dishonest bank personnel have been known to disclose depositors' personal information for

use in theft of identity frauds. The perpetrators then use the information to obtain identity

cards and credit cards using the victim's name and personal information.

Demand Draft Fraud

Demand draft fraud is usually done by one or more dishonest bank employees. They remove

few DD leaves or DD books from stock and write them like a regular DD. Since they are

insiders, they know the coding, punching of a demand draft. These Demand drafts will be

issued payable at distant town/city without debiting an account.

Then it will be cashed at the payable branch. For the paying branch it is just another DD.

This kind of fraud will be discovered only when the head office does the branch-wise

reconciliation, which normally will take 6 months. By that time the money is unrecoverable.

Stolen Cheques

Some fraudsters obtain access to facilities handling large amounts of cheques, such as a

mailroom or post office or the offices of a tax authority (receiving many cheques) or a

corporate payroll or a social or veterans' benefit office (issuing many cheques).

A few cheques go missing; accounts are then opened under assumed names and the cheques

(often tampered or altered in some way) deposited so that the money can then be withdrawn

by thieves. Stolen blank cheque-books are also of value to forgers who then sign as if they

were the depositor.

Accounting Fraud

In order to hide serious financial problems, some businesses have been known to use

fraudulent bookkeeping to overstate sales and income, inflate the worth of the company's

assets, or state a profit when the company is operating at a loss. These tampered records are

then used to seek investment in the company's bond or security issues or to make fraudulent

loan applications in a final attempt to obtain more money to delay the inevitable collapse of

an unprofitable or mismanaged firm.

Stolen Credit or Debit Cards

Often, the first indication that a victim's wallet has been stolen is a 'phone call from a credit

card issuer asking if the person has gone on a spending spree; the simplest form of this theft

involves stealing the card itself and charging a number of high-ticket items to it in the first

few minutes or hours before it is reported as stolen. A variant of this is to copy just the

credit card numbers (instead of drawing attention by stealing the card itself) in order to use

the numbers in online frauds.

Fraudulent Loan Applications

These take a number of forms varying from individuals using false information to hide a

credit history filled with financial problems and unpaid loans to corporations using

accounting fraud to overstate profits in order to make a risky loan appear to be a sound

investment for the bank.

Can We Avoid Cheque Fraud?

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1. Reconcile your account; Reconcile your cheque account promptly and regularly. If

you hold business accounts, consider opening a separate account specifically for

higher value cheques, so they can be easily monitored.

2. Signing of Cheques; Never sign blank cheques, only sign cheques after all details

have been completed.

3. Preparation; Cheques must be completed in a way that deters fraudulent alternation.

Ensure that a strong bold and consistent font is used and that no gaps are left in

completion of the payee name, amount in words and in figures. Use permanent

ballpoint or ink (preferably black) when filling out a cheque.

4. Ordering and maintaining cheques; If cheques are lost or stolen contact your bank

immediately and ask them to load a `Stop Payment'. Notify bank, if you have not

received an ordered cheque book.

Protect your credit / debit card

Save your personal identification number (PIN). Don't use the same PIN for different cards

or equipment, and don't choose your birth date or any other easily identifiable number that

might be on something else in your wallet. Check statements and call your credit card issuer

immediately if you see anything suspicious on your bill. You could help the company

uncover fraud--and save yourself from paying un-authorized charges. Keep track of when

new and reissued cards should arrive, and call the credit card issuer if they don't come on

time. Make sure your mailbox is secure, and that only you and the postal carrier have access

to it. When you use your credit card online, make sure you are using a secure website. Look

for a small key or lock symbol at the bottom right of your browser's window. Never give

your card number to strangers or telemarketers who call you on the phone. Don't give your

card number unless you initiated the call.

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