Frauds cloud financial services

The term fraud is defined as wrongful or criminal deception intended to result in financial or personal gain. While fraud is common across the business world, the financial services sector appears most prone to it. Fraudulent insurance claims are as old as the business itself. Bogus claims exist across every type of coverage provided, such as fire, medical and motor.

While the direct financial loss to the industry is estimated at billions of dollars annually, it is consumers who actually bear the brunt. Insurance fraud leads to higher premiums, as costs and losses borne by insurance companies are eventually passed on to consumers. Further, the checks in place to detect frauds may sometimes delay, or even deny payouts to genuine cases. The repercussions on an individual/ company are often greater than the direct financial loss (or delay). Individuals/ companies often do not have enough financial reserves, or even the ability to borrow in an emergency. The insurance payout is usually the only recourse available in cases such as medical bills for an individual or fire insurance for a company.

Over the last few decades, many innovative features have been introduced in the banking sector (ATMs, credit and debit cards, electronic money transfer and so on), substantially increasing convenience for customers. However, technology has also enabled an increase in the level of sophistication and scale of frauds against banks.

For example, in March 2013, $45 million was stolen across 20 countries by infiltrating the network of a credit card processing company in India. It is not unusual for individuals who have shared their account details with a presumed trusted source to find their life’s savings electronically withdrawn the next day.

Money laundering is the process through which large amounts of illegally obtained money (from drug trafficking, terrorist activity, or other serious crime) are made to appear as originating from a legitimate source. While banks and regulators bring in stringent anti-money laundering compliances and controls, these are often circumvented by rogue individuals. The reputational risk can be severe for banks found to be non-compliant. Regulators worldwide are enforcing stringent rules, including financial penalties, on institutions found negligent in implementing anti-money laundering measures.

Some banks have a long history of financial reporting/ book-keeping fraud to cover up losses. The most famous case is of Barings in 1995, which eventually led to the bank’s collapse. Likewise, recently, despite controls there have been many cases of losses hidden by rogue traders in reputed financial organisations, running into billions of dollars. The collapse of a financial institution delivers a huge blow to its deposit holders and their savings. Though some governments provide a certain amount of protection, it may not be enough to recoup the full amount.

The financial services market is among the most complex and regulated industries in the world. Despite billions of dollars spent on preventing and detecting fraud, there are significant systemic issues that impact industries widely — examples include the Libor rigging scandal, and the recent money laundering expose by Cobrapost in India. Financial institutions should enforce enhanced oversight and monitoring to curtail fraud.

The author is Director, Financial Reporting Advisory Services, Grant Thornton India LLP

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