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
Bribe
Commissions
“Processing Fee”
“Ride-on” Loans
Over-appraised
collateral
Ghost accounts
Dummy accounts
False identification
Recycled Borrower
Possible Perpetrators
Fraud Type
Other
AO Supervisor Bank Staff Others
Borrower
Center
Officers

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
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Accepting Bribes
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
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
Commissions




“Processing Fee”





“Ride-on” Loans
Over-appraised collateral
Dummy Accounts




Ghost Accounts








False identification
Possible Perpetrators
Fraud Type
Recycled Borrower
Borrower
Center
Officers

Other
AO Supervisor Bank Staff Others


Non-remittance of
collection
Non-issuance of OR
Altering OR details
Fake OR
Lapping
Cashing-out cheques
“Hold-up”
Altering MIS record
OR 1
OR 25
Possible Perpetrators
Fraud Type
Borrower
Center
Officers
Other
AO Supervisor Bank Staff Others
Non-remittance
of collection


Non-issuance of OR


Altering OR details






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
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
Fake OR
Lapping
Cashing-out cheques
“Hold-up”
Altering MIS records

Intentional Misposting
Unauthorized
withdrawal
Possible Perpetrators
Fraud Type
Borrower
Center
Officers
Other
AO Supervisor Bank Staff Others

Intentional Misposting
Unauthorized
withdrawal



Penalty?
Non-remittance of
penalty fees
Unauthorized
restructuring or
extension
“Foreclosure” scam
Writing-off
recoverable accounts
Possible Perpetrators
Fraud Type
Borrower
Center
Officers
Other
AO Supervisor Bank Staff Others
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
Possible Perpetrators
Fraud Type
Borrower
Center
Officers
Other
AO Supervisor Bank Staff Others
Overclaiming/
False claim of expenses



Stealing discounts



“Private Business”




False benefit claims
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


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.
2.
3.
Bonds – fidelity, property, cash
Personal assets
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!