The Cheat Highway: How customers defraud banks
Adesola Afolabi was a businessamlive reporter and Head of Financial desk.
The cheat highway returns as promised looking at the other side of last week’s topic. Banks and their staff were identified as shortchanging their customers in various ways, including delayed posting of cash deposits, card maintenance and chequebook charges, amongst others.
So, let’s go to the business of the day. Contrary to the assumptions that Nigerian banks have robust internal controls and IT systems to checkmate fraudsters, business a.m. investigation shows that customers at some points are smarter than the controls and experience of staff.
Our findings reveal that the fraudulent customers are mostly loan or card ones who deliberately put assets or other property owned or held by financial institutions under threat of loss. Although banks make provisions to cover these losses, the magnitude of such has been huge, given how technologically savvy customers have become.
Here are the subtle, but common, ways that custom- ers deliberately defrauded their banks.
Changes in loans terms and conditions
These types of fraudulent action used to be rampant when marketers and authorized signatories do not initial each page of offer letters. A customer applies for a term loan and an offer is made with requisite terms and conditions. A relation- ship officer delivers the offer letter to the customer who feigns busy and asked the of- ficer to come the next day or any appointed time to collect the signed duplicate copy.
The customers then study the font and character of the letter and then make chang- es to the conditions, which are mostly in the second page, to suit his intentions. He then prints and signs the doctored duplicate copy for the unsuspecting relation- ship officer who would now take the doctored copy for filling at the office.
The customer would then default, which would expose the discrepancies with the original terms, thereby causing dispute. Many banks have lost huge sum initially to this kind of fraud. Currently each page of offer letters are initialed to curtail this kind of fraud.
Impersonation/use of cloned/fake cheques
Customers have been caught on several occasions using counterfeit cheques to withdraw from another per- son’s account over the counter, a loss, which the bank would be liable when the transactions pull through.
Impersonation, the fastest rising form of fraud, was once too easy to commit; today it takes a certain level of expertise and guts, but it is still a frequent occurrence in the Nigerian banking halls today.
Mismatch of amounts in duplicate and original copies of deposit slip
There are cases of fraud perpetrated by customers who write an amount, say N10, 000, on a deposit slip and then writing maybe N100,000 on the duplicate copies (customer copy) of the same deposit slip. The customer pays N10,000 to the teller and the latter stamps the deposit slip (the original and duplicate copies) without crosschecking the duplicate copies.
The customer would come back to the bank on a later date to complain that N10,000 was wrongly posted into his account whereas he made a deposit of N100,000. The customer goes on to show proof (customer copy of the deposit slip showing N100,000). This has, however, reduced in recent times due to the introduction of over the counter direct payment or cash transfers adopted by some Nigerian banks.
Use of fake documents to obtain loans
Some customers also use fake documents and/or non-existent collateral to obtain loans. After obtaining the loan, they are off the radar and then it becomes a bad loan for the bank.
Signing on the wrong spot
Some customers deliberately sign outside the mar- gin of their loan acceptance document. If such customer decides to default on the loan, such document is in- admissible in a court of law, thereby rendering the banks at a loss. This has however been checkmated by the banks who now insist sign- ing across the stamp affixed at the signatory dotted lines.
Taking advantage of unauthorised loans
In the banking system, an unauthorized loan is granted at the branch level for known customers who usually fund their accounts regularly but need money within a short period, say 30 day cycle. Rather than go through a long tedious process of approvals at the central credit committee, staff driven by the need to improve their branches’ bottom lines grant such loans customers with interest rates as high as 44.75 percent. They however make internal provisions to cover up for such loans at month ends either by using their personal funds to paying into such accounts when they default. But fraudulent customers who must have observed the way the bank operates may decides keep his account un-funded for the period. In a bid to cover up system tracks, the bank staff now takes personal funds such customer’s account. However, when the customer gets his account statement for that period showing that all is well, he then keeps it as proof of not owing the bank.
Most account officers and branch managers have lost their personal monies in this way. But some others demand kickbacks for such unauthorized, which they keep away for the rainy day when a customer defaults.
Cheque Kiing
This is a form of check fraud, involving taking advantage of the float to make use of non-existent funds in a checking or other bank account. In this way, instead of being used as a negotiable instrument, checks are misused as a form of unauthorized credit.
Kiting is commonly defined as intentionally writing a check for a value greater than the account balance from an account in one bank, then writing a check from another account in another bank, also with nonsufficient funds, with the second check serving to cover the non-existent funds from the first account.
The purpose of check kiting is to falsely inflate the balance of a checking account in order to allow written checks to clear that would otherwise bounce. If the account is not planned to be replenished, then the fraud is colloquially known as paper hanging. If writing a check with insufficient funds is done with the expectation they will be covered by payday in effect a payday loan it is called playing the float.
Some forms of check fraud involve the use of a second bank or a third party, of- ten a place of retail, in order to delay the absence of funds in a transactional account on the day the check is due to clear at the bank.
Such acts are frequently committed by bankrupt or temporarily unemployed individuals or small businesses seeking emergency loans, by startup businesses or other struggling businesses seeking interest free financing while intending to make good on their balances, or by pathological gamblers who have the expectation of depositing funds upon winning.
It has also been used by those who have some genuine funds in interest bearing accounts, but who artificially inflate their balances in order to increase the interest paid by their banks. In recent
years, criminals have started taking advantage of the check float to pass fraudulent checks through solicited users of online auctions.
Accounting fraud
In order to hide serious financial problems, some businesses have been known to use fraudulent bookkeep- ing to overstate sales and in- come, inflate the worth of the company’s assets, or state a profit when the company is operating at a loss. These tampered records are then used to seek investment in the company’s bond or secu- rity issues or to make fraudu- lent loan applications in a final attempt to obtain more money to delay the inevitable collapse of an unprofitable or mismanaged firm. Examples of accounting frauds: Enron and WorldCom and Ocala Funding. These companies “cooked the books” in order to appear as though they had profits each quarter, when in fact they were deeply in debt.
Fraudulent loans
One way to remove money from a bank is to take out a loan, which bankers are more than willing to encourage if they have good reason to believe that the money will be repaid in full with interest. A fraudulent loan, however, is one in which the borrower is a business entity controlled by a dishonest bank officer or an accomplice; the “borrower” then declares bankruptcy or vanishes and the money is gone. The borrower may even be a non-existent entity and the loan merely an artifice to conceal a theft of a large sum of money from the bank. This can also seen as a component within mortgage fraud.
The way to go for banks is beyond technology and robust control infrastructure. They should regularly train their staff to ensure due diligence in all they do. This is so because the human aspect of fraud is equally critical as the technology and operational system.