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Source: This post is based on the article “The rise in the incidence of digital fraud” published in Business Standard on 17th Jul 22.
Syllabus: GS3 – Economy – Money and Banking
Relevance: Financial fraud in the banking sector and related issues
Context: Over the years, there has been a significant change in the types of frauds affecting the banking industry.
Moreover, the economic slowdown has only heightened the risk of fraud and money laundering for the banks.
Why managing financial fraud is significant?
Managing fraud has become more important for banks, due to a) increased regulatory scrutiny, b) increased stakeholder expectations and c) the detrimental effect of the actual fraud loss incurred.
Change in the nature of frauds
There is an increase in digital or technology-related frauds, such as ATM skimming, mobile/internet banking, and identity/data theft, in addition to cyber risks faced by banks.
Why cybercrime needs to be tackled effectively by banks?
Cybercrime and tech-related frauds cause a) reputational damage, b) diminished customer and investor confidence, and c) theft/loss of personally identifiable information. Together, these add up to substantial risks for financial services companies.
These issues ultimately have the potential to affect the financial ecosystem and, in extreme cases, may lead to a systemic crisis.
What are the measures that banks should initiate?
Banks should consider investing in technology to evolve their fraud risk management frameworks (FRM) to tackle newer and more complex challenges.
Banks and financial institutions (FIs) should consider the following proactive steps:
– Banks need to integrate a larger financial crime compliance agenda that will work across the business, compliance, legal, credit, and operations departments.
– Institutions need to take the time to measure the effectiveness, appropriateness, and efficiency of existing controls against an updated risk assessment.
– The current methods of FRM are plagued with a lack of centralised control/monitoring from various systems, and issues related to data availability and quality. This results in increased frauds and delayed detection.
– In light of impending risks from digital platforms, banks should consider building cyber-risk management programmes to achieve three essential capabilities: the ability to be secure, vigilant, and resilient.
Risks are inherent in the banking business. However, with frauds on the rise, organisations need to put their business in order by having effective control mechanisms in place.