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5- Most Common Types of Banking Fraud
1. Money laundering and sanctions screening
Money laundering is a leading source of compliance fines for financial institutions. Banks can use smart transaction segmentation to spot money laundering attempts right away and avoid being fined. By lowering the number of false positive and negative alerts, banks will spend fewer resources on catching bad actors red-handed.
2. Internal fraud
Dodgy employee expenses are more popular than you’d expect. The Association of Certified Fraud Examiners recently revealed that the median loss from a single case occupational fraud throughout the world .
3. Credit card fraud
That type of fraud is commonplace, but new tools using machine learning algorithms for risk management offer a light in the tunnel to solving the problem.
4. Mobile fraud
The mobile industry is no stranger to fraud. As mobile banking services grow, so do fraud attempts using mobile device capabilities.
5. Identity and social fraud
As criminals incorporate more advanced digital methods, banking customers need advanced solutions for protecting their identity and ensuring safe access to banking services.
There are a number of ways in which an individual can commit fraud by stealing cash from a business. Since cash is essentially untraceable once stolen, someone intent on stealing assets will be particularly focused on this type of asset. Here are several ways in which cash fraud can be committed:
Intercept at cash register. An employee could pocket cash at the cash register and never ring up the sale on the register. This approach can be detected after the fact by comparing actual inventory levels to the amount of sale transactions. If the inventory level is lower than indicated by the cash register transactions, someone may be removing cash.
Intercept in mailroom. Though rare, it is possible that a customer will send cash through the mail in payment of an invoice. If so, a mailroom clerk can pocket the mailed cash and destroy the letter in which it came. Since there is no in-house evidence that the cash ever arrived, a reasonable claim can be made that the payment was lost in the mail. This theft can be prevented by having two people jointly open the mail.
Intercept at cashier. The cashier can remove cash and simply not record the associated transaction in the accounting records. This issue can be detected after the fact by recording the amount of cash prior to delivering it to the cashier, and then comparing the initial record to the cashier's record of cash received.
Intercept in deposit pouch. The person delivering cash deposits to the bank can remove cash from the pouch on the way to the bank. This issue can be mitigated by handing off the cash to an armored truck for delivery. It can also be detected after-the-fact by comparing the deposit slip from the bank to the cashier's record of cash received.
Petty cash removal. One of the easier ways to abscond with cash is to take cash out of the petty cash box when it is unguarded. Another option is to steal the entire box, thereby ensuring that all cash and coins are removed. This can be prevented by switching from petty cash to the use of procurement cards.
Pay envelope removal. A person could remove cash from pay envelopes before they are delivered to employees. This issue can be detected by having employees count the cash in their pay envelopes and signing for receipt of the envelopes.
Sales and Accounts Receivables (Discuss three possible frauds).
Check Kiting And Lapping
Check kiting allows fraudsters to build up a balance in bank one by writing hot checks from bank 2. Perpetrators use the delay in processing checks (i.e., float period) to take advantage of an interest-free loan.
Bank 1 isn't aware that the check from bank 2 is insufficient funds. The fraudster can then write another hot check to cover any difference, thus going undetected. This scheme can and often does involve more than two banks, as funds are floated between all the involved banks to keep the fraud scheme going.
Lapping involves stealing a customer payment and using any additional payments from that customer to cover the theft. For example, a customer has invoice 1000 due for $1000. A perpetrator steals the $1000 received from the client for invoice 1000. Then invoice 1001 due for $1500 from the same customer is received. $1000 of the $1500 is used to cover invoice 1001. Then $500 is put toward the 3rd payment for this customer.
In the above lapping scheme, if the customer decides to leave and pays their final invoice, total invoice billings for this customer will not match total money received. That scenario will certainly throw a red flag. The fraudster will have to get more creative to cover up the shortfall in funds. In that case, they may even use a payment from an entirely different customer to cover the deficit.
As with many fraud schemes, lack of segregation of duties is often where things tend to break down. Skimming accounts receivable sales receipts involves an employee receiving customer cash, recording the payment and then charging an expense account. They pocket the money for the same amount of the expense charge.
Because the employee has financial access to such a broad range of financial duties, they can conceal their activities easily. Closer tracking of bank account withdrawals against expenses can help in detecting these types of schemes. Segregation of duties will go a long way to preventing such frauds as well.
Old Or Closed Accounts
Older or closed accounts are often not monitored as strictly as active accounts. These might includes accounts where customers tend to pay slowly. When funds are received, an employee can simply pocket them due to the lack of monitoring of these types of accounts.
Without proper oversight, a collection agency can collect customer funds and remit a smaller amount to the company. This scheme can work well if the employee in the company is the only point of contact with the collection agency. In fact, the employee would likely be receiving a kick back from the collection agency to ensure the fraud is not detected.
Since the collection agency is collecting what they can from customers, it can be difficult to know what amount was received. A periodic audit with the collections agency and verification with their clients involved can determine the accuracy of collections.
Accounts Receivable is not actual money in the bank. An employee can fabricate invoices, which will inflate accounts receivable. But who might this benefit since an invoice isn't the same as receiving cash?
Sales people who work on a commission will benefit from an increase in accounts receivables, as it will show an increase in sales. To make this work, someone in control of accounts receivables will have to be in on the fraud.
Red flags for this type of fraud are invoices to fake customers or invoices that do not match the type of business a customer might generate. At some point, these invoices might simply disappear as part of the fraud and go undetected. Internal controls that monitor this type of activity can help with detecting fictitious sales.
Delays In Deposits
A person in a financial controller position has oversight of payment collections and knowledge of the checks and balances to ensure proper accounting and possibly fraud. That is, assuming such checks and balances are reliable or even exist.
Delays in payment deposits can be a sign of potential fraud. If the controller decides to collect cash payments directly from customers, this fact can be hidden by writing a receipt of payment and creating a corresponding deposit ticket. While the bank account isn't increasing, the paper trail can be enough to cover up the fraud.
This type of fraud means the controller will have to allow for some payments to make it into the account. Otherwise, there will be a significant gap between what the bookkeeping states and what the bank account states.
Inventories (Discuss two possible frauds).
Inventory is one of the biggest assets on a manufacturer’s balance sheet. It’s also one of the hardest assets to measure and track. Thousands of transactions flow through the inventory account each year — and many of these journal entries require subjective estimates, such as overhead allocations, write-offs and valuation adjustments. In addition, many employees have direct daily access to inventory or inventory accounting records, providing an ongoing temptation to steal or cook the books.
Case in point
Consider ABC Manufacturing, a fictitious company that fell victim to a $300,000 inventory fraud scheme involving three trusted employees. Their scam was simple: The shipping clerk sent most finished goods to legitimate customers or company-owned retail outlets. But a few shipments to retail outlets were redirected to the home of the payables clerk. Later, the controller picked up the stolen goods to resell them on the Internet.
ABC’s retail outlets weren’t invoiced for shipments at the time of delivery. So there was no paper trail identifying what had happened to the redirected shipments. Without physical inventory counts, the perps were able to pull the wool over the owner’s eyes for more than 18 months. Eventually, the shipping clerk became overwhelmed with guilt and confessed the scheme to the owner. With stronger internal controls, the scheme might have been detected sooner — or prevented from ever occurring.
Inventory is vulnerable to fraud because it’s eventually closed out to cost of goods sold (COGS). This is an expense account that winds up as part of retained earnings at the end of the accounting period. The formulas for computing COGS are:
Beginning inventory + purchases = goods available for sale
Goods available for sale – ending inventory = COGS
These formulas make sense for retailers or distributors that don’t add value to the goods they ship and, therefore, handle only finished goods. But they’re oversimplified for manufacturers that process raw materials into finished goods.
Manufacturers typically possess three types of inventories: finished goods, work-in-progress (WIP), and raw materials. WIP inventories include charges for raw materials, direct labor and overhead. Sometimes there are additional charges when the production of components is outsourced to a third party or another division of the company.
In addition, manufacturers can use a variety of techniques to account for finished goods inventories under Generally Accepted Accounting Principles. These include the lower of cost or market; first-in, first-out (FIFO); and last-in, first-out (LIFO). The more complicated a company’s inventory reporting process, the more opportunities employees have to commit fraud.
Assessing your fraud risks
Global research company IBISWorld recently published its annual list of America’s riskiest industries for 2014 and 2015. Several types of U.S. manufacturers made the top 10 list, including apparel, computer, vacuum and small appliance, cigarette and tobacco, and recordable media manufacturers. Most of these have been in a state of decline due to changing consumer trends, overseas production and technological advances.
Managers in these sectors may feel intense pressure to meet stakeholder expectations, which could drive them to commit fraud to hide weak financial performance. If you operate in a declining market segment, regularly assess your fraud risks and talk to your financial advisors about ways to mitigate your vulnerability to financial misstatement and theft by employees.
Motives and methods
Small manufacturers often operate like families. Owners can’t fathom that a trusted “family member” would ever steal inventory. But it happens more often than you might think. When faced with a financial pressure and given an opportunity to steal, an employee may rationalize the theft of inventory.
For example, personal financial pressures or an addiction may entice an employee to steal inventory or overstate it — especially if he or she discovers a weakness in the internal accounting policies and procedures. The employee may rationalize the theft because he or she feels underpaid, underappreciated or overworked by an owner who takes frequent vacations.
Whatever their motives, employees use a variety of techniques to steal inventory. The most obvious is directly taking items for personal use or resale. Physical controls are the best prevention tools here. To illustrate, warehouses should have a limited number of doors with 24-hour surveillance inside and outside of the facilities, including dumpsters, trucks, foliage and parking lots.
Inventory fraud may also occur within the accounting department. For example, the controller or CFO may try to overstate inventory by artificially inflating inventory counts or values, recording false entries into the general ledger, or failing to write off old, obsolete or damaged items. Moreover, the inventory account may become a “slush fund” for other internal fraud schemes. Inventory overstatements might be used to manage earnings or to meet financial covenants.
To catch a thief
Unearthing financial misstatements involving inventory overstatements is less straightforward than catching people who directly steal physical assets. A forensic accountant can help you by benchmarking financial statement trends, verifying source documents and building a case that will help you prosecute fraudsters in your midst.