News Overview

BB takes moves to check fraud in banking sector.

Published : Tuesday, 08 October 2013 Siddique Islam The central bank has taken some 'effective' regulatory initiatives including installation of software for checking fraud and forgery in the country's banking sector, an official said Monday. Under the latest moves, the Bangladesh Bank (BB) will introduce the software integrated supervision system (ISS) - today (Tuesday) for collection of financial statements on monthly basis from all bank branches across the country. The foreign exchange branch, officially known as authorised dealer (AD) branch, and headquarters of all banks have already been instructed to provide their key indicators including credit and deposit positions using the ISS. "We're going to issue a circular in this connection soon asking the chief executive officers of all scheduled banks to provide necessary information from all their branches using the ISS," Mohammad Naushad Ali Chowdhury, executive director of BB, told the FE Monday. He also said the central bank has taken the latest moves aiming to check irregularities in the banking sector through strengthening its monitoring and supervision. "We've undertaken different reformative and redesigned actions for the financial sector supervision framework with a view to energizing and encouraging supervision activity," the central banker said while explaining BB's latest moves relating to its monitoring and supervisory activities. As part of the moves, the BB has formed a four-member committee, headed by a deputy general manager, to update its procedural guidelines for inspectors for improving their quality of inspection. "The amended guidelines will help the inspectors to identify various irregularities in the banking sector through using latest techniques," another BB official said. He also said the check-list for core risk management guidelines inspection will be reviewed under the amended guidelines aiming to minimise financial risks of the banks.

The central bank earlier identified six core risk areas in the banking sector. The risk factors are: credit, asset and liability, foreign exchange, information technology, internal control and compliance, and money laundering. Besides, inspection strategies of the central bank have been amended to address the recent foreign exchange irregularities using accepted bills and inland bill purchases (IBPs) in both foreign and local currencies. During the inspection of AD branches, the inspectors are collecting different information including foreign bills' purchases (FBPs), loans against trust receipts (LTRs), payment against documents (PADs), loan against imported merchandise (LIM), forced loans and off-balance exposures.

Types of banking fraud

Identity theft: Identity theft is where your personal details are obtained to get some sort of financial or other benefit, leaving you the owner of that identity often in large debt with a negative credit history and in some cases with legal implications. Credit/Debit card fraud: Credit card and debit card fraud is a crime whereby your credit or debit card can be reproduced in order to use the credit balance to obtain a financial advantage. The creation and/or alteration of a credit/debit card occurs when the information contained on the magnetic strip is reproduced. This type of crime is known as skimming. Cheque fraud: Cheque fraud is the use of a cheque to get financial advantage by altering the cheque (payee/amount) without authority, theft of legitimate cheques and then altering them, duplication or counterfeiting of cheques, using false invoices to get legitimate cheques, depositing a cheque into a third party account without authority, depositing a cheque for payment knowing that insufficient funds are in the account to cover the deposited cheque. Electronic fraud Some emails inform the customer that their security details and passwords need to be updated by logging into an authentic looking, but fake website. The purpose of these websites is to obtain your log on details to access your bank accounts.

Others communicate security messages and advise you to install software from the email that checks and removes viruses. By downloading the software you are in fact tricked into downloading a virus.

Steps Taken by Bangladesh Bank

Bangladesh Bank has appointed a fraud detection adviser and taken some other supervisory steps to stop irregularities in the banking sector in the backdrop of the recent Hall-Mark loan scam. Introducing ISS Collecting different information including foreign bills' purchases (FBPs), loans against trust receipts (LTRs), payment against documents (PADs), loan against imported merchandise (LIM), forced loans and off-balance exposures. Check-list for core risk management guidelines inspection will be reviewed . Using accepted bills and inland bill purchases (IBPs) in both foreign and local currencies. Checking irregularities in the banking sector through strengthening its monitoring and supervision. The details of the 28-point supervisory measures were presented at a meeting of the BB board. A web-based corporate memory management system (CMMS) has also been developed to record violation of banking rules by the officials and directors of banks and other financial institutions. Some irregularities by bank officials and directors have already been recorded in the CMMS and these will be reviewed later for taking further actions. BB board advised the authorities to find out the reasons behind the Hall-Mark scam and wanted to know about the measures the central bank is going to take to stop such frauds. At the board meeting, the central bank made a presentation, which highlighted its existing and future measures to stop such financial irregularities. A BB report placed at the board meeting also portrayed the failure of Sonali Bank's treasury management, and gave details how a huge amount of money was embezzled by dubious Hall-Mark Group when the bank was going through financial crisis. The BB has asked the banks to form a separate risk management unit. The units will do risk modelling, determining their risk limit, and analysing and supervising all the existing risks. The BB has already taken actions against the officials concerned of these banks for which the volume of fraud-related bill purchase has come down now.

 Regular inspections are being carried out to ensure whether due diligence is being followed in case of inland bill purchase and accepted bills. The BB also has started regular preparation of diagnostic review report of the banks to bring the concerned banks under intensive monitoring after evaluating the gravity of irregularity through distant cautionary signal.

Conclusion
The impact of frauds on entities like banks, which are engaged in financial activities, is more significant as their operations involve intermediation of funds. The economic cost of frauds can be huge in terms of likely disruption in the working of the markets, financial institutions, and the payment system. Besides, frauds can have a potentially debilitating effect on confidence in the banking system and may damage the integrity and stability of the economy. It can bring down banks, undermine the central banks supervisory role and even create social unrest, discontent and political upheavals. The vulnerability of banks to fraud has been heightened by technological advancements in recent times. If the steps taken by Bangladesh Bank can be fully implemented, the threats of the frauds in banking sector will be removed.

Appendix & Bibliography

Financial Express (8 October, 2013) Daily Star. Bangladesh Bank Website Files & Folders. Journals & Articles.