Rural banks tackle FRAUD in microfinance operations at RBAP-MABS Conference

Girlie LopezAlways a contentious yet lively discussion, fraud was addressed at the 2010 RBAP-MABS National Roundtable Conference in Manila on June 2-3.  Ms. Girlie Lopez, MABS Regional Coordinator for Visayas, kicked off the panel discussion by describing the many faces of fraud and providing a few helpful tips for bank management.

At the loan solicitation stage, fraud can take the form of bribes, “processing fees”, over-appraised collateral and false identification. At the collection stage, fraudulent activities include non-remittance of collections, altered or fake official receipts, and modification of management information system (MIS) records. Additional forms of fraud can be unauthorized restructuring or extensions of payment schedules, unauthorized withdrawals, writing-off recoverable assets and false benefits claims for insurance.

Account officers and supervisors have the greatest opportunity to carry out these activities. That is why bank executives must be diligent in their management of fraud. Ms. Lopez noted that banks can prevent fraud by institutionalizing a culture of professionalism, honesty and compliance while evaluating the effectiveness of their internal control systems and policies.  Through documentation checks, trend analyses and operational audits, a bank has a greater likelihood of detecting fraudulent activities. Diligent management of the investigation process along with careful coordination of public relations and the dissemination of information will send a clear but firm message that fraud is taken seriously in the organization. Just as important is how the bank executives manage the post-investigation process. Ms. Lopez emphasized that lessons learned must be incorporated into the bank’s control systems.

Vivian LimFrom Mrs. Vivian Lim’s point of view as the Human Resources Director of 1st Valley Bank, the “creativity of people is borderless” when it comes to fraud. That is why banks should always try to be one step ahead. Ms. Lim shared a few HR practices from her experience. The rotation of account specialists, annual leave of bank officers and unannounced visits from supervisors prove to be useful tools in preventing fraud. 1st Valley mobilizes well-trained auditors and supervisors to equip them with the tools to detect fraudulent activity. During the investigation, she suggested suspension or leave of the employee without pay. Once fraud is proven, the bank publicizes it internally to serve as a lesson to others, but carefully manages the information flow externally. At that point, the bank works to “manage out” the employee, from reassignment to a different department or branch up to termination.

Oscar ManinantanNext, we heard from Mr. Oscar Maninantan, Internal Audit Head of FICO Bank about his experiences with fraud prevention, detection and management. To prevent fraud, FICO Bank implemented a stringent loan process where a Branch Credit Committee reviews and deliberates all loan applications before approval. Additionally, the bank conducts monthly post-release documentation audits and semi-annual loan portfolio review audits. He also attributed an efficient MIS as a valuable fraud prevention tool.

As for fraud detection, Mr. Maninantan cited frequent reviews of delinquency reports, validation of loan proposals, and an immediate deployment of a Special Audit if unusual activity occurs. He walked the group through his bank’s audit process: 1) Gather documentation and first-hand accounts through interviews; 2) Prepare a formal report focusing on the facts of the case as well as recommendations to correct weaknesses in the organization’s control systems; and 3) Submit the report to the President and Audit and Inventory Committee of the Board of Directors. Upon acceptance of the recommendations by the Board of Directors, the case is referred to a Special Investigation Committee which will then recommend sanctions back to the Board of Directors upon the completion of the investigation.

Tess GanzonThe final speaker in this panel session, Mrs. Teresa Ganzon, Managing Director of Bangko Kabayan, provided an operational perspective of fraud. She discussed the many opportunities for fraud that she has seen in her position, such as ineffective internal controls, too much trust in employees, management domination subverting internal controls, the lack of a code of ethics, and unreasonable expectations put on account officers. Ms. Ganzon noted one red flag is if employees are living beyond their means. She noted that the bank management must be aware of this change in behavior.

Controlling fraud can be done through internal auditors, validation of transactions, spot auditing, rotation of account officer duties, and a strong, well-trained middle management. As for communications management, Ms. Ganzon advised the rural bankers to be candid about the fraudulent activity to their clients, but it is also important to be controlled with the information.

For more information on fraud prevention, detection, and management, view MABS tools at the below links. Included in these links are important loan processing and documentation procedures and internal control templates that help to prevent fraud.

Fraud Internal Control Presentation

Lending Procedures Presentation

Loan Documentation Procedures Presentation

Internal Controls Checklist 1

Internal Controls Checklist 2

Have you experienced fraud in your bank? What mechanisms do you use to prevent, detect and manage fraudulent activities? Have they been successful? Share your stories and experiences by replying to this post.

Until next time, Mabuhay ang Microfinance!