FRAUD: Prevention, Detection and Management for Microfinance

DEFINED –A deception deliberately practiced in order to secure unfair or unlawful gain or causing loss to another party Fraud may originate from employees of the bank and/or clients. Fraud can happen in all stages of the loan process – loan solicitation, collection, account monitoring, and delinquency management.

Workshop 1: Types of Fraud per Loan Stage

Objectives of the Workshop To draw from participants encountered fraudulent activities that happened in their institutions. Understand how this fraudulent activities happened.

Workshop Guide This workshop is a contest. Form the participants into 3 groups Each group will be given metacards to list down as many fraudulent activities encountered in their institutions ( 1 metacard, 1 idea). 10 minutes Each metacard will be classified under the columns: loan solicitation, collection, monitoring, delinquency management and others. The group who identified the most type of fraud, which the other groups were not able to identify, gets a prize.

DIFFERENT FACES OF FRAUD

“Ride-on” Loans Bribe Commissions “Processing Fee” Over-appraised collateral Dummy accounts Ghost accounts False identification Recycled Borrower

Fraud Type Possible Perpetrators Borrower Center Officers AOSupervisor Other Bank StaffOthers “Ride-on” Loans Accepting Bribes Commissions “Processing Fee” Over-appraised collateral Dummy Accounts Ghost Accounts False identification

Fraud Type Possible Perpetrators Borrower Center Officers AOSupervisor Other Bank StaffOthers Recycled Borrower

Altering MIS record Cashing-out cheques “Hold-up” Non-remittance of collection Non-issuance of OR Altering OR details Fake OR Lapping OR 1 OR 25

Fraud Type Possible Perpetrators Borrower Center Officers AOSupervisor Other Bank StaffOthers Non-remittance of collection Non-issuance of OR Altering OR details Fake OR Lapping Cashing-out cheques “Hold-up” Altering MIS records

Intentional Misposting Unauthorized withdrawal

Fraud Type Possible Perpetrators Borrower Center Officers AOSupervisor Other Bank StaffOthers Intentional Misposting Unauthorized withdrawal

“Foreclosure” scam Non-remittance of penalty fees Unauthorized restructuring or extension Writing-off recoverable accounts Penalty?

Fraud Type Possible Perpetrators Borrower Center Officers AOSupervisor Other Bank StaffOthers Non-remittance of penalty fees Unauthorized restructuring or extension “Foreclosure scams” Writing-off recoverable accounts

Overclaiming/ False claim of expense Stealing discounts “Private business” False benefit claims Financial reports manipulation

Fraud Type Possible Perpetrators Borrower Center Officers AOSupervisor Other Bank StaffOthers Overclaiming/ False claim of expenses Stealing discounts “Private Business” False benefit claims Financial reports manipulation

Workshop 2: List in Manila Paper practices and policies on how your bank prevent fraud

HANDLING FRAUD

“While fraud cannot be totally eliminated, it can be prevented and controlled.”

Essential components why fraud occurs –Motive –Pressure –Opportunity 1.Internal control systems are loose 2.Policies are not being followed 3.Managers and owners run the business on the basis of “trust” rather than “sound internal controls” The benefits of prevention outweigh the costs.

“Ultimately, reducing the risk of fraud is a matter of good management, of creating a work environment that reduces the incentives for employees to commit fraud.” Richard Hook Microenterprise Development Brief, June 1995.

Tips: –Minimize motivation to commit fraud: Institutionalize a culture of professionalism, to include honesty and compliance –Close the window of opportunity to commit fraud: Evaluate your bank’s Internal Control System effectiveness, its policies and implementation, based on identified risk areas. -SMS notifications to clients: Notifying clients of all payments, deposits, & withdrawals made each day via SMS can reduce unauthorized or unremitted transactions.

Best practices to prevent fraud: –Policies and procedures are written, simple/clear, available, understood, relevant, and implemented i.e Loan/Savings product and procedures manual, Restructuring manual, HR Management manual –Segregation of duties and instituting check & balances within functions Are the functions of receiving and processing loan payment and of bookkeeping performed by different employees? Are the functions of issuing, recording and signing of checks covering release of loan proceeds handled by different employees? Are credit monitoring reports obtained by an employee other than the lending officer?

Best practices to prevent fraud: –Safeguarding of assets, documents, and controlled forms –Continuous test of effectiveness of preventive controls and procedures in place Organizational structure Roles of internal auditors, Internal audit manual –Close monitoring and visibility of bank officers

Best practices to prevent fraud: –Efficient Management Information System and systematic record-keeping –Effective human resource system/ administration Hire and attract honest well-suited staff Do background check of applicants Properly orient and train on culture of honesty and zero tolerance. Values are caught, not taught. Provide reasonable and competitive staff remuneration Do employee lifestyle check Have policies for fraud and dishonesty

Best practices to prevent fraud: –Personnel rotation –Properly informed clients. With feedback handling system

Workshop 3: Create an advertisement ( poster statement) to encourage client feedback

Main ways in which fraud may be uncovered: 1.Discoveries by management, usually emerge from careful monitoring and internal controls; 2.Routine or specific audit checks of policies & systems; –Types of audit: regular, special, and spot 3.Operations review; 4.“Whistle-blower” or tip from a concerned individual – either internal or external party (clients) 5.By accident Learn to “think like a thief to catch a thief”

Tips: –Check proper implementation of management controls –Do documentation checks –Do trend analysis –Review properly-generated MIS reports –Have competent, courageous, and efficient auditors –Do regular operations review – preferably not from the operations team –Do field validation visits –Set-up customer hotlines

Workshop 4: List the DO’s and DON’Ts in account validation

Workshop 5: List and compare columns that can be found in your MIS-generated reports (performance report per AO, PAR Aging report, Delinquency Report and Listing of Loans). Analyze the accuracy and consistency of item value/amount/number across reports.

Managing the Investigation: –Consider how to minimize any further loss; –Ensure that adequate resources are provided to carry out the investigation; –Subject to appropriate disciplinary procedures from the Human Resource directorate; –Identify and preserve all original documents and other exhibits relating to the intended complaint –Submit timely reports to management, third-party stakeholders, and regulators –Define the timeline from report submission to implementation of sanctions

Recovery of Loss: –Quantify any loss and account for affected loans/deposits –Seek recovery of losses from: 1.Bonds – fidelity, property, cash 2.Personal assets 3.Legal action

Public Relations: –Coordinate any public relations work –Decide and manage information dissemination –send a clear and firm message that fraud is taken seriously and will not be tolerated

FRAUD: Can be prevented, detected and managed Maraming Salamat po!