Internal Fraud

At the American Bankers Association Security and Risk Management conference in January, Stephen Alpert, from Arthur Andersen & Co. ran a well attended session on internal fraud and theft.

This was a timely topic, as any auditor can tell you. Financial institutions are dealing with an increasing number of incidents in this area-partly attributable to the morale of the banking industry, which at this time has the distinction of being third in the number of unemployed among U.S. industries. (Only the auto workers and computer field employees are ahead of bankers in the number of unemployed people.) As one banker aptly put it, "I'm so busy trying to keep my job that I don't have time to do my job!"

Money laundering gets all the publicity, but there are numerous areas where fraud and theft take place in a financial institution. Telephone toll fraud, illegally suppressing charges and over-riding on accounts are all examples of financial institution fraud. But of course our biggest problem is with the employee who steals money.

How do you identify the banker who is causing losses? A study completed by the Federal Bureau of Investigation describes the female embezzler in a financial institution to be between 19 and 30 years old, low or mid-level of management or below, who is either divorced or who has a husband who is not working. She often starts out "borrowing" with intentions of putting the money back. Losses are frequently between $1000 and $2500. Women account for about 40% of all embezzlement arrests.

A male embezzler in a financial institution is described as being an executive or administrator between 25 and 30 years of age. He often wants to maintain a certain life>
Why do employees steal? Most of them truly believe they won't get caught. They may feel that the financial institution has such lax internal controls that there is no way anyone will find out about what they are doing. They may feel overworked and underpaid and are out to "get back" the financial institution.

How do you spot embezzlers? They may be heavily in debt, have significant behavior changes, or be living an unexplained lavish life>
Mr. Alpert pointed out some common myths about fraud-the belief that most fraud goes undetected; that it is usually well concealed; that the financial institution will not prosecute.

The fact is, almost all fraud is discovered eventually, either by designed audits; observation of life>
And the requirement by regulators to report any theft by a banking employee on a Criminal Referral Form (CRF) almost assures the fact that the financial institution will prosecute. A copy of the CRF goes to five different locations (in most cases): the financial institution's files; the regulator; the Federal Bureau of Investigation; the local office of the U.S. Attorney; and the state banking office.

Every internal fraud costs the financial institution more than the dollars involved. There is the adverse publicity and the damaged public image to consider, not to mention the loss of morale and the trauma of those co-workers who thought the individual involved to be trustworthy.

Employees in financial institutions interested in doing their jobs as well as keeping their jobs, are going to be more interested in ever to be sure no internal fraud takes place that will damage their career or their institution.

Copyright © 1992 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 3, No. 1, 5/92