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The East African : November 3rd 2013
4 FINANCIAL CRIME Kenyan banks lose $18.8m to savvy fraudsters Fo≥ensic expe≥ts said the majo≥ causes of f≥aud we≥e inc≥eased liquidity and weak cont≥ols in the banking secto≥ By MWAURA KIMANI AND PETERSON THIONG’O The EastAfrican L osses to fraud in Kenya’s financial institutions rose to Ksh1.6 billion ($18.8 million) for the first nine months of 2013 — nearly triple the Ksh655.6 million ($7.71 million) reported stolen in the first nine months of 2012 — new data shows, exposing the weak deterrence and investigation systems in the sector. Latest statistics from the Banking Fraud Investigations Department (BFID), show that of the money reported as stolen by financial institutions in the nice months to September, less than half — Ksh460 million ($5.4 million) — was recovered following investigations. Of the Ksh655.6 million ($7.71 million) reported stolen in the first nine months of 2012, only half, Ksh334 million ($3.94 million), was recovered. In the first nine months of 2011, fraudsters stole Ksh1.25 billion ($14.70 million) with banks recovering slightly below half, Ksh469 million ($5.51 million). The BFID data shows the Ksh1.6 billion ($18.8 million) stolen this year is higher than the total amount stolen on the whole of 2011, when fraudsters made away with Ksh1.1 billion ($12.94 million). Between January and December 2012, at least Ksh1.3 billion ($15.29 million) was reported lost by banks. BFID, in its monthly crime re- ports, which have been seen by The EastAfrican, cited identity theft, electronic funds transfer, bad cheques, credit card fraud, loan fraud, forgery of documents and online fraud as among the ways used to defraud financial institutions. “Embezzlement seems to be on the rise in the banking sector,” said BFID in its September 2013 report. Security experts said the amounts reported reflect only a small part of the real losses suffered since banks prefer internal disciplinary measures in cases involving thieving employees to avoid the reputation risk that comes with such cases going public. “We think that only a third of all fraud cases are reported, with most financial institutions choosing not to go public out of fear that it could erode their brand name,” said Robert Nyamu, Deloitte East Africa’s forensic services director. In the report released Wednesday by Deloitte East Africa, titled Financial Crime Survey 2013, financial institutions across the region are said to have lost in excess of $30 million, though the figure could be as high as $89.41 million since most institutions opt not to report fraud cases. Half of the cases are said to happen in Kenya, with the rest equally shared between Uganda and Tanzania. BFID statistics showed that a to- tal of 484 cases were reported during the first nine months of this year, of which only 185 were suc- Most of these banks depend on traditional detective methods.” Robert Nyamu, Deloitte East Africa’s forensic services director. Total amount lost /recovered in the nine months ending sept 2013 Total amount lost /recovered over the past three years (Amount in Ksh) The EastAfrican NEWS NOVEMBER 2-8,2013 cessfully investigated and suspects taken to court. Comparatively, in the first nine months of 2012, 460 cases were reported, 212 of which were successfully investigated. Forensic experts from Deloitte said the major causes of fraud were increased liquidity and weak controls in the banking sector, which make it attractive to fraudsters. BFID data shows that banks recover less than one-third of the money involved, exposing them to huge losses, although the lenders take up insurance covers to protect customer monies. The low level of recovery of cash lost to fraudsters, analysts said, points to the inability of the anti-fraud unit to investigate cases as well as the weak internal control in Kenyan banks. It also shows fraudsters are becoming smarter. “The banking fraud unit lacks the kind of tools needed to fully investigate fraud cases and is therefore unable to unravel very complex transactions. In most cases, the investigations are sketchy,” said a senior banking executive who asked not to be named. Analysts said banks need to in- vest more in systems that can detect fraud as it happens, as it then gives them a fair chance of recovering the funds. According to research by Deloitte, 67 per cent of Kenyan banks lack an IT system that can detect fraud as it occurs, meaning that there is always a lag between the time the fraud occurs and when the crime is detected. “Most of these banks depend on traditional detective methods like internal audits… so by the time the crime is actually detected, the money has already been moved or withdrawn, making it very hard to recover it,” said Mr Nyamu, adding the lack of a strong IT system makes it even harder to carry out investigations. “Normally, if you have the right IT system, you are able to see the system logs, which help to pick out the staff who were either accomplices to the crime or who didn’t carry out proper surveillance,” he added. CASHLESS TRAP Experts say the growing move towards a cashless society could open new avenues for fraud. According to a Central Bank of Kenya and Financial Sector Deepening (FSD) Trust survey, the number of Kenyans who own debit cards has risen from six per cent in 2006 to 19.7 per cent this year, with the number of Kenyans owning credit cards jumping from 0.8 per cent to 1.8 per cent in the same period. Fraudsters seem to be taking advantage of increased financial inclusion in Kenya. The survey shows that 67 per cent of Kenyans are now using formal as opposed to informal channels of financing. Experts said the liquid nature of the financial industry, coupled with weak or non-existent financial laws across the region, was the key driver of fraud. For example, though Kenya has enacted the Anti-Money Laundering law, that established the Financial Reporting Centre (FRC) — an institution that is expected to help cub fraud cases — the organisation remains weak and lacks the technical expertise to fight fraud. Uganda does not have a money laundering law, which could explain the high incidence of cheque fraud. “In Uganda, what they have is only prudential guidelines from the central bank, which though it addresses some issues like the know your customers (KYC) requirements, is not thorough and leaves a lot of space that fraudsters exploit,” said Mr Nyamu. According to Deloitte, cash theft, cheque fraud and asset misappropriation remain the three main avenues of fraud. Nearly 70 per cent of all financial crimes committed in East Africa last year were through cash theft. Cash theft was the highest in Kenya at 72 per cent, Tanzania at 71 per cent and Uganda at 61 per cent. Cheque fraud was highest in Uganda — where it accounted for half of the financial crimes, followed closely by Kenya. Execution of financial crimes in East Africa commonly involves collusion between internal and external parties, as a way of compromising internal controls.
October 26th 2013
November 10th 2013