3 Fraud practices that lead to bankruptcy


3 Fraud practices that lead to bankruptcy

fraudImagine losing your life savings, not to a risky investment, but to a cunning thief. That’s the harsh reality of fraud in the banking world, a threat that’s not just about stolen credit cards. Fraudulent practices – a silent thief with devastating consequences.  This isn’t just a hypothetical nightmare. The Enloe State Bank, The First State Bank, PMC Bank, and WireCard all faced bankruptcy due to fraud.  In fact, 2023 saw four Indonesian banks and even a US institution, Heartland Tri-State Bank, crumble under the weight of fraudulent activity.  Don’t let your bank be the next!

The most dangerous fraud practices for the banking world

Fraud or mismanagement becomes the main reason behind these banking businesses failures. Fraudulent practices can manifest in different ways. However, there are at least three forms of fraud practices that banking professionals need to be aware of.

1. Loan fraud

This practice occurs when individuals or entities deliberately use misleading or fraudulent practices in the process of borrowing funds from financial institutions. Loan fraud can involve the provision of false or manipulative information, the use of false identities, or harmful actions to obtain loan funds without qualifying. Quite often, this practice involves employees of the bank institution. One such case is that of PMC Bank. Senior officials of the bank colluded with Housing Development & Infrastructure Ltd (HDIL) to provide disproportionate loans to borrowers without adequate documentation or collateral.

2. Employee fraud

Essentially, this form of fraud is committed by employees of financial and banking institutions. This practice includes embezzlement of funds, falsification of reports or records, and bribery. The First State Bank case is one example. In this case, a bank teller who was also the bank’s assistant vice president had access to manage the bank’s computer software.  Due to weak internal controls, she was able to alter the loan information that she and her husband received, allowing her to embezzle the bank’s funds undetected for some time.

3. Accounting fraud

Some forms of accounting fraud include manipulation of financial statements, concealment of debts or expenses, falsification of transactions, and ponzi schemes or fraudulent investments.Besides the famous Bernie Madoff case, there is also the WireCard case. The results of the investigation revealed that the fraud scheme was carried out by manipulating financial statements so that it appeared that the condition of the bank looked healthy and did not match the actual conditions.

Fraud mitigation

From the fraud cases above, there are several mitigation efforts that are important to be strictly implemented by banking institutions to protect themselves from harmful fraudulent practices:

  • Verification process. Tighten the verification process of debtor identity by conducting Know Your Vendor (KYC) procedures. This procedure involves rigorous vetting of prospective customers as well as monitoring of customer transactions. The bank identifies and verifies the identity of the prospective customer, including the ID number, place and date of birth, and home address, employment status, and whether or not there are loans at other banks. .
  • Segregation of duties and monitoring of employee activities. Implement strict segregation of duties and monitoring of employee activities, especially those with access to sensitive data or crucial financial processes.
  • Implement a whistleblowing policy. Each institution needs to provide a special website as a reporting channel for employees who find suspected acts of fraud. Institutions can work with the Canary Whistleblowing System platform. The reporting channel is equipped with the Canary Mute feature which allows users to report suspected violations or fraud anonymously and their identity is guaranteed. 
  • Monitoring and analyzing financial data regularly and thoroughly can help in the early detection of potential fraudulent activities.

Fraud isn’t just a minor issue, it’s a serious danger capable of wrecking a banking operation. Contact us via email at contact@integrity-asia.com or fill out the form here to learn more about effective fraud prevention and mitigation solutions.


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