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August 23, 2010


Payments Spotlight podcast explores impact of economic downturn on insider bank fraud

Play Play podcast: Payments Fraud and the Economic Downturn (MP3 8:23)       TranscriptTranscript

The recent economic crisis has taken a toll on the finances of many U.S. households. Many Americans are still grappling with unemployment, foreclosures, and lost savings. Unfortunately, these types of financial pressures can sometimes cause otherwise good people to do bad things, including steal from their employers.

Employee, or insider, fraud can be a problem for all types of organizations but may be particularly challenging for financial institutions that have the fiduciary responsibility to hold and protect their customers' money and personal information. Consequently, managing this risk is of utmost importance in maintaining the trust relationship between customer and bank.

We explored this issue and others in our interview with Shirley Inscoe, director of financial services solutions at Memento, a provider of enterprise fraud management software. Inscoe previously spent 29 years in the banking industry, during which she held various senior positions in payments strategy and enterprise fraud. She also recently co-authored a book on insider fraud titled Insidious: How Trusted Employees Steal Millions and Why It's So Hard for Banks to Stop Them.

Potential for insider bank fraud can reach beyond branch network
The branch network presents obvious vulnerabilities to fraud because bank employees have direct access to cash, the general ledger, customer data, and other critical systems. Consequently, most people think of tellers, customer service representatives, and branch managers as having the most opportunity to commit fraud in a bank. However, as Inscoe points out, there are many other types of employees who are involved because there are many other ways that employees of financial institutions can commit fraud.

Inscoe explains that there is opportunity for fraud in the lending area, whether it is in the form of mortgage fraud, fictitious loans, or loan lapping. Loan lapping is a scheme involving lenders who make fictitious loans over a period of time. The lender makes new loans and uses part of the proceeds to make payments on or to pay off older loans—and pockets the rest. An FBI case from earlier this year illustrates how a similar scheme can be perpetrated with certificates of deposit. A former bank employee was sentenced to 27 months in federal prison for making more than $962,000 in unauthorized withdrawals from CD accounts over a six-and-a-half year period. In this case, the employee monitored the CDs' maturity dates in order to replace what had been taken by making additional unauthorized withdrawals from other CD accounts.

Organized crime rings target bank employees for fraudulent schemes
In addition, there have been numerous cases in recent years of gangs getting involved in fraudulent bank activity. The comparative ease of committing financial crimes has made it appealing to street gangs as a way to support their other criminal activities. Inscoe related three ways that organized crime rings—both internal and external to the United States—are involved in insider bank fraud.

First, they infiltrate the financial institution by having their members hired into targeted areas of the bank. Not surprisingly, one target area is the loss prevention department. The gang members are acutely aware that this is where they can find out when the bank changes its parameters or policies on loss prevention systems so they can adapt their fraud attempts accordingly.

Second, gang members use threats to coerce bank employees into committing fraud. They may threaten the employees with kidnapping a child or loved one if the employee refuses to cooperate. Inscoe suggested that banks educate their employees about what to do if they are threatened.

Third, the gangs solicit bank employees with bribes. For example, employees may be offered payment to not put a hold on a check or to approve a loan. According to Inscoe, the current economic environment has made it easier for fraudsters to find easy targets within a bank. Even the most loyal, long-standing employees may be susceptible to these types of bribes if they are experiencing financial difficulties.

Proactive approach needed to address problem
The economic downturn may have fueled more incidents of insider bank fraud, but employee fraud is an ongoing challenge for institutions of all sizes. In most cases, it will require a multi-pronged solution that involves employee training, monitoring systems, and detailed analytics. Ultimately, the institution has to assume a proactive approach in addressing the issue in order to minimize any losses and protect its customers.

By Jennifer Grier, senior payments risk analyst at the Atlanta Fed

August 23, 2010 | Permalink

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