Internal fraud creates a significant risk for banks. The people who work at the bank understand its processes, and they are often in a better position to commit fraud than an outsider. Reducing the risk of internal fraud at a financial institution is similar to fraud reduction processes at any business, but it is arguably even more important from both a fiscal and reputational standpoint.
Your internal fraud prevention strategy should center around creating checks and balances that prevent any single person from having too much control over or access to functions vulnerable to fraud. Here are the internal controls you should implement:
1. Don’t allow any single person control over every part of a financial transaction.
Every financial transaction should have a built-in control that prevents a single person from having complete control over the transaction. For example, if someone writes your payroll checks, another person should authorize them. Similarly, a manager should also audit employees’ timesheets.
2. Reconcile internal bank accounts every month.
You should reconcile the account you use for internal expenses such as utilities and payroll every month. For maximum protection, someone who doesn’t handle bookkeeping or check writing should handle the reconciliation. They should examine bank statements and canceled checks to look for checks issued out of sequence. They should also make sure that no unauthorized payments have been issued,
3. Restrict use of financial institution credit cards
If your financial institution has a credit or debit card for business purchases, limit the number of people who can use this card. Ensure that the card is only used for business purchases, and make employees submit receipts for purchases so they can be reconciled and tracked.
4. Create strong fiscal policies
Make sure your financial institution applies the same level of stringent oversight to internal financial matters as you do to the finances of your banking customers. Draft and implement strong fiscal policies around the following issues:
- Cash disbursements
- Purchasing
- Payroll
- Petty cash
- Employee attendance and mandatory time off
All of the financial elements should have a built-in set of checks and balances. Requiring employees to take time off ensures that you have not given an employee sole domain over issues without realizing it. By having employees periodically take over each others’ responsibilities on a routine basis, you reduce the risk of employee fraud and embezzlement.
5. Monitor employees carefully
Before taking on new employees, perform background checks. As well as looking for criminal issues, look for signs of financial distress such as poor credit management. Continue to periodically monitor employees during their tenure at the bank.
Also, monitor the news about local criminal and civil lawsuits, and listen if employees start complaining about their personal finances. Employees in financial distress can pose a higher fraud risk than others. Finally, hold exit interviews when employees leave the organization and change locks and passwords if necessary.
6. Lead by example
Internal fraud can come from intentional actions, omissions, and misstatements. Your risk exposure increases if your leadership team doesn’t act ethically. Many people who commit fraud against their employers, whether they’re financial institutions or any other type of business, don’t believe they are doing anything wrong. They feel justified in their behavior.
They may even draw some of their justification from how the financial institution’s leaders act, especially if leaders are unethical or even if they are just sloppy with their funds. Say for example that the owner of a small family-owned bank doesn’t record petty cash transactions or promotes unethical behavior such as not paying vendors if they don’t follow up on late bills.
Employees may adopt these attitudes and use them to fuel their own ethical position towards the financial institution. Reducing the risk of internal fraud requires more than strict policies and checks and balances. It also requires an organizational culture built on trust, honesty, and attention to financial details. This must come from the top.
7. Audit fraud risk reduction strategies regularly
To ensure you’re adequately protecting your financial institution from internal fraud, review the following regularly:
- Quality assurance and control procedures
- Third-party relationships
- Financial statements
- Controls designed to prevent fraud
- Controls used to detect fraud
Your fraud prevention and detection strategy will vary based on the size, complexity, and structure of your bank. Your tactics also need to be fluid enough to keep up with the latest fraud schemes.
At SQN Banking Systems, we have fraud detection and prevention solutions that can help financial institutions of all sizes. We can also review your financial institution’s current approach to fraud reduction and mitigation to ensure you’re taking the strongest stance possible.
Don’t let fraud bring you down from the inside — contact us today to talk about protecting your financial institution.