Banking fraud: overlooking simple controls

Banking fraud comes in many forms and guises, most of which can be detected and stopped before they are carried out, but in the Gulf we still have some way to go to achieve this, as evidenced by the growing number of fraud cases under investigation. It is gratifying to note that more stringent controls are being assessed by the authorities in the region, and a wide-ranging anti-corruption drive is under way to restore public confidence in an attempt to stem recent falls in banking stock, particularly on the Dubai market. But there is a sense that authorities are merely reacting to events rather than setting up a new model of fraud prevention.

The list of fraud investigations in the Gulf is simply too long to put them down solely to errant executives. If Gulf states wish to be taken seriously as well-regulated financial hubs, responsibility must be assigned and fraudsters, whatever their status, severely punished. Banking is built on public confidence and trust, which cannot be seen or experienced like super towers and malls but can evaporate almost instantly.

Banking fraud, however, sometimes takes one completely by surprise by its sheer audacity and simplicity, despite all the controls in place. In a case a few months ago, Jagmeet Channa, 25, carried out the most audacious bank fraud in British history. Early one Friday, while working at HSBC's Canary Wharf headquarters, Mr Channa authorised two seemingly straightforward transactions. However, he used passwords stolen from colleagues and no one noticed this first lapse in internal control, given the size of the transactions and the relatively junior position of the new employee.

Unknown to colleagues, Mr Channa was apparently the inside man for a syndicate looking to orchestrate a crime that would have done more damage than the size of the fraud itself. Public sentiment about the health of the financial system was already rocky, and it would have caused even more turmoil. Mr Channa wired £48 million (Dh323m) to an account at the French bank Société Générale in Casablanca, Morocco, and moments later he dispatched £24 million to a branch of Barclays in Manchester. But criminals often make the simplest mistakes, and one of these is not keeping quiet. According to the investigating police, transcripts of telephone calls made from his HSBC landline that Friday revealed a series of calls informing several people that the fraud was successful. Attempts to uncover their identities have proved fruitless because they were using pay-as-you-use handsets.

But the fraud began to unravel before the weekend was over due to banking controls and common sense questioning by alert individuals along the transfer chain. Banking security officials in Malaysia had noted a double transaction, prompting "cause for concern". Mr Channa had used a global financial holding account into which vast amounts are paid and then removed. At the close of daily trading, the account should register zero, but Mr Channa had somehow forgotten to change it and his holding account was showing a massive debt. It was an elementary human error without which he might have just managed to pull off a massive financial crime.

Mr Channa's decision to commit the fraud on a Friday compounded his mistake. With trading frozen over weekends, security officials find it much easier to detect anomalies. Had Mr Channa committed the fraud during the busier trading of the working week, his scam might have remained undetected for long enough to allow his partners to empty the accounts. As it was, the £72m was frozen and returned to HSBC. Mr Channa had cheated. He had used deceptive methods to steal the personal details of colleagues and he used them to cover his tracks. Again, the most elementary internal precautions over control of personal identity had been broken, with colleagues being lax about how and where they left physical IDs or passwords.

The choice of Morocco as the final fund destination might also have been an obvious flaw in the scam, since it was again spotted by alert banking individuals who asked the simple question: "why Morocco?" Solving the Moroccan end of the fraud might help banks learn how international fraud syndicates set up and operate money-laundering accounts around the world. Mr Channa was a junior bank employee but the list of errant financiers awaiting investigation in the Gulf reads like a who's who of senior executives.

The more we rely on computers to do our thinking, the more likely it is that financial fraud on a massive scale will be perpetrated, unless financial institutions encourage that most versatile of computing miracles, the human brain, to ask basic questions and query what seems to be out of the ordinary, and ensure that good old-fashioned checks and balances are put in place. Modern information technology (IT) forensic science available to financial institutions has the ability to spot unusual account movements and employee behaviour. Gulf-based banks can carry out such discreet IT sweeps to uncover potential fraud before it happens, and the fact that such sweeps are being carried out will deter some but not all potential fraudsters from trying their luck.

Gulf regulators, as a matter of urgency, should be considering setting up a dedicated and empowered autonomous "serious financial fraud prevention and detection" unit since financial fraud investigations are just as complex to unravel and prevent as murders and other serious crimes. The collapse of several financial institutions in the West will inevitably attract some of their employees to the Gulf. While the majority are decent hard-working financiers, some will bring with them the same mindset when it comes to dealing that caused the institutions they worked for to collapse in the first place. It is important that a Gulf model of banking is in place that puts ethics first and foremost. The alternative is putting money under our beds, because at least we control it and can assess the risk.

Dr Mohamed Ramady is a former banker and a visiting associate professor in the finance and economics department at King Fahd University of Petroleum and Minerals.

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