This paper examines fraud in financial institutions, particularly the Bank of England, analyzing its causes, impacts, and prevention strategies. The paper explores how weak internal controls and inadequate oversight create environments where fraudulent activities thrive, drawing on case studies from corporate fraud and non-profit organizations. It presents four key priorities for tackling public sector fraud: collaboration across institutions, risk assessment and loss measurement, preventative resource investment, and zero-tolerance policies. The paper also addresses the challenge of reduced controls resulting from staff reductions and recommends adopting private sector best practices, including data analytics, employee education on ethics, whistleblower protections, and robust verification systems to detect fraud before it escalates.
Fraud is intentionally deceiving a person such that he or she incurs a loss and the fraudulent person makes a gain. Instances of fraud can include misappropriation of funds or assets, inappropriate expenditures, and fraudulent financial reporting. A recent FBI statistic explores the extent of fraud in non-profit organizations. In its report, the FBI alleged that approximately 2,300 websites that solicited help for victims of Hurricane Katrina were in fact fraudulent. Therefore, banks in general, and the Bank of England in particular, need to be cautious of such organizations. The best way to achieve that is to have clear-cut policy and understand operating procedures with regards to dealing with the non-profit sector.
The occurrence of fraud often costs non-profits a significant amount. They not only lose money but also suffer a huge dent in their reputation due to the bad publicity that such activities attract. Their credibility and reputation take a severe hit. Additionally, the bad publicity will certainly reduce their capability to raise funds in the future. Where lawsuits are involved, the organization often finds itself in the public eye for a long time. The staff and boards of these organizations are often hugely disrupted by such occurrences. In a charity situation, one dollar fraudulently lost leads to an equal amount being unavailable for charitable activities. Further, additional money will have to be spent in correcting the situation and covering legal costs. Recently, in a church fraud case, the amounts incurred during the first 30 days of the fraud's investigation was $100,000. The cost of lacking controls to curb fraud cost this church a considerable sum.
The Bank of England can learn from this and institute proper internal controls to curb any fraudulent activities that might be perpetrated by insiders. Bad publicity is harmful to institutions that are held in high regard by the public, such as central banks. A fraud in the central bank might send shivers through the stock market, which could lead to investors losing money. The bank has the resources to institute proper internal control measures, including developing good information systems and hiring personnel such as internal auditors.
Weak internal controls and a lack of measures to check on the activities of an organization's staff creates an environment in which fraud can thrive. The fraudulent activities that might take place include: inflated or unwarranted personnel expenses such as wages, benefits and travel costs; false payments to "ghost" workers; false expenses not incurred in the running of the organization; and collusion with suppliers to over-bill. How employees rationalize their actions will therefore widely vary. They could be disgruntled workers that think of fraud as compensating for the wrongs that the organization has done to them. They could be staff members who believe they are deserving of higher remuneration. Or they could be assisting other people who are in financial need. These rationalizations and justifications are bound to be numerous since motivations for humans are quite complex.
The Bank of England should therefore take the time to understand their employees. There should be open and clear communication channels that allow employees to share how they feel and the troubles they are currently undergoing. Remuneration should also be fair to ensure that no employees feel unappreciated and taken advantage of. The range of fraudulent activities is vast and may involve people of high profiles, such as top executives (as was the case in Enron, Tyco, WorldCom, and Adelphia Communications), as well as high-ranking government officials, investment bankers, and other prominent figures.
A charity organization in California had its Chief Financial Officer arrested in August 2008 as he was alleged to have embezzled approximately four million dollars from the organization. The funds were allegedly invested in the stock market. Due to uncertainties of the stock market, especially because of the unforeseen crisis in the oil sector and sub-prime lending, there were huge losses incurred. With proper measures, the Bank of England can ensure that no employees, even the high-ranking ones, have the power to access and withdraw funds without the knowledge of other workers in the organization. There should be at least two signatories for every withdrawal, and the use of funds should be transparently accounted for. Any project that an employee of the bank takes to further the mission of the bank should first go through the required approval procedures before being given approval.
Employees should be educated on the importance of ethics in the workplace. A whistleblower protection policy should be instituted so that employees are able to report any fraudulent activities without fear of being victimized. The Bank of England can begin by sending a memo to its employees. The memo should clearly define fraud and give examples of fraud. They should then encourage employees to provide feedback on the contents of the memo. By doing this, the Bank of England shall have educated the employees and communicated their intolerance to fraud to all staff members.
Public organizations like the Bank of England can always do more to help tackle this vice. Information sharing between the various departments has to improve. Since barriers in the organization hinder fraud detection and speedy resolutions, they should be removed. Such barriers only serve to prolong the problem. The public sector should adopt practices from the private sector in handling fraud. The private sector always detects fraud quickly and almost immediately notifies top management. Organizations freely share data, and strategies for fraud detection continuously improve. This should also be done in the public sector. The State of the State 2012, a Deloitte report, indicated that adopting private sector policies in fraud detection could help the public sector save up to ÂŁ8.5 billion every year. To minimize debt losses, the public sector, particularly the Bank of England, should be more proactive in collecting debts owed and manage its funds properly.
Fraud in all its many forms—from misrepresentation to impersonation—is still a big challenge in the financial services sector. The frequency of fraudulent activities is increasing by the day, and the complexities of their perpetration are becoming increasingly elaborate and ingenious. Economic problems like unemployment, business closures, and pay freezes have also contributed to the rise in fraud cases. CRIF studies in Italy revealed that only a measly 19% of fraudsters who engaged in identity theft and credit fraud were reported to the police. On identification of the fraudsters, it was realized that 42% of them were shop keepers or traders, while 23.7% of them were related to the victim. There has been a recorded decline in fraud cases perpetrated by acquaintances and friends, but the number is still high at 19.1% of all cases. Fraud involving former employees or business partners has grown and now stands at 7.6% of all cases.
The length of time it takes to detect fraud has increased significantly. 40% of the victims of fraud made the realization after two years following the taking out of the credit, while in 2009 the number was slightly above 25%. However, credit fraud detection in cases no older than 6 months dropped and now represents 24% of the total. Most people only became aware that they were victims of fraud after the credit facility contacted them (40%), or when they tried to get credit themselves (11%). Another 11.5% detected the fraud following the checking of their bank statements. To prevent such kinds of fraud, the Bank of England can put in place measures that would limit impersonation and identity theft. There are several technologies, such as the use of biometrics, that can ensure that impersonation is avoided. Storage of employee details should be highly safeguarded to ensure that no unauthorized person authorizes a transaction using the details of another employee.
"Verification and database-driven fraud detection methods"
Collaboration: The public sector must remove silos. All public sector organizations must collaborate and share information that can help in curbing fraud. They must develop capabilities that cut across all organizations, initiate joint missions and projects using joint data so as to cut costs. The Bank of England can especially benefit by using intelligence from government intelligence agencies. It can draw from government records from other government agencies to identify possible loopholes in its system so as to prevent fraud.
Assessment of Risk and Measurement of Losses: The risk of fraud should be assessed before any projects are launched. Any losses are to be reported via timeline reports. The Bank of England can employ personnel to help in risk management to evaluate the risk of fraud in specific projects. This will not only cut down on possible bad projects but also help in sealing the loopholes in viable projects undertaken by the Bank of England.
Prevention: Resources should be invested to prevent fraud altogether. As mentioned above, the Bank of England will make great savings in doing this. There will be less fraud as the system will be able to weed fraudulent attempts out before they are perpetrated.
Zero Tolerance: Fraud is unacceptable regardless of the level at which it occurs. In implementing these strategies, organizations in the public sector will prevent, detect, deter, and punish fraud. They will also be able to penalize offenders. The Bank of England will benefit from the extra vigilance since fraudsters usually attack all public sector organizations and exploit the running processes at the weak points. Combating this requires good collaboration.
The prevailing economic environment makes losses arising from fraud even more unjustifiable. The public sector has been forced to reduce spending. By tackling fraud, the public sector, including the Bank of England, will help the government achieve its priority of cutting the deficit. Guidance is increasingly being made available for public institutions to counter fraud. An example is the adoption of anti-fraud culture strategies. The Bank of England can draw from the works of the UK Government's HM Treasury and adopt the proposals.
"Staff reductions weaken controls; analytics strengthen detection"
Always verify citation format against your institution’s current style guide requirements.