Multinational bank fraud perpetuated by trusted insider

In the last week of the old year the main topic making newspaper headlines was the 40 m$ or Indian Rupees 200 crore scam perpetuated by a relationship manager from a leading multinational American bank in India. The relationship manager was alleged to have duped large corporate HNI clients into investments endorsed on allegedly forged endorsement certificates by the bank. The relationship manager opened several accounts in the same bank, in which money was deposited and reinvested, presumably in stock instruments. The wife of the relationship manager was an employee of the same bank branch.

In a few of my earlier blogs, I highlighted the dangers of insider threats, where trusted insiders with a thorough knowledge of how internal systems work, and equipped with additional privileges connive to commit fraud. This is one such classic case has three facets of key interest.

1.       The customers trusted the relationship manager and therefore did not question the genuineness of the banks endorsement. The first warning signals came when the return on the investment was stopped perhaps due to a declining stock market and inability to repay the investment.  The scheme however promised higher than expected returns which are classic signs of fraud and should have triggered a warning signal to the clients who were CFO’s of reputed organizations. Employees of Customers may also be in league with the relationship manager and help propogate the fraud. Therefore the investing corporate should also have investment reviewand monitoring systems in place.

2.       The relationship manager and his wife worked in the same branch. This may have resulted in violation of procedures in account opening, transaction monitoring and access to privileged information due to inadequate segregation of duty and monitoring systems. Segregation of duties prevents a doer (or a person related to a doer) from checking his own work.

3.       An employee on salary opens multiple accounts and begins trading in high value transactions which did not flag internal or regulatory systems. Although the bank claims that it did and thereafter constituted an inquiry, I feel that this may be due to customer complaints rather than proactive measures.

Recommendations

Trusted insiders can subvert normal systems and cover their tracks. In this case the loss was directly incurred by customers resulting in reputational damage to the bank and perhaps regulatory fines. A few crucial steps can be taken by managements to reduce these incidences. 

·         Be aware that insider frauds and threats are a reality

·         Ensure independence of audit

·         Build monitoring systems to raise alerts when employees are seen to be spending/ dealing with monetary transactions beyond their means, are in debt or indulges in vices like gambling. Most fraud is created due to a need for money or revenge

·         Ensure segregation of duties particularly between related individuals and institute job rotation for sensitive functions. Job rotation prevents an employee from covering his tracks as another employee takes on his role for a period of time

·         Strengthen and regularly review internal systems, processes and controls. Systems once set are never fool proof and always face implementation issues

      WHEN WE AS INDIVIDUALS INVEST IN SCHEMES THAT PROMISE EXTRAORDINARY RETURNS WE FALL PREY TO SIMILAR FRAUDS. MANY TIMES THESE ARE ENDORSED BY CLOSE FRIENDS AND RELATIVES WHO HAVE BEEN SIMILARLY FOOLED BY AN INITIAL PERIOD OF HIGH RETURN FOR THEIR INVESTMENT AND INTURN MARKET THE SCHEME TO OTHERS THROUGH INCENTIVE PROGRAMS.