The banking sector is being bombarded by scandal. With scams related to Libor, Money Laundering and so on, surfacing at regular intervals, it has been a traumatic last quarter for the already battered banking sector. What went wrong? Who is to blame? Is it the failure of the banking system as a whole? Are banks’ IT systems competent enough to handle their complex operations? These questions are but natural.
During the time when the Indian banking industry was coming to terms with the Citibank fraud of INR 40 billion – engineered by a relationship manager and unnoticed for 7 to 8 years – the international banking sector came in for a massive shock in the form of an unprecedented Libor rate rigging scandal involving the treasury departments of some of the best banks in the world. And then came the aftershock – a large bank was pulled up by the U.S. senate for failing to check money laundering activities benefiting terrorists, drug dealers and some blacklisted countries.
Analysis of banking fraud reveals that most of it is committed by bending simple day-to-day processes, and not by manipulating complex processes as is commonly believed. The fact is that most banking IT solutions in use have the inbuilt capability – in the base product itself – to identify and report such deviations. So, why do they come to light years later?
The truth is that while IT systems should identify and report deviations in business processes, it’s not their job to blow the whistle. That is the responsibility of the users, especially top management, who must go through these reports and take evasive action against fraud. Unfortunately, they often fail to do so, leaving the door wide open for calamity.
So, banks must not only ensure the competence of their banking solutions but also the hygiene of internal operations. Some of the ways in which they can do this are:
a) Propose robust operational processes
b) Educate their employees on the changes and updates to banking regulation
c) Enhance the quality of internal as well as external audit
d) Institute a whistleblower policy and reward mechanism
At the end of the day, it is human beings with their superior intelligence, and not inanimate systems, who are responsible for fraud. And it is once again human beings, who must take responsibility for its prevention.