A Common & Detectable Fraud Red Flag
There are still too many opportunities for bank employees to commit fraud with little or no likelihood of detection. Focus Technology Group has identified so many bank frauds over the last 30 years of creating fraud detection programs that our CEO has written a book to be published titled “An Expose on How to Commit Employee Fraud in a Financial Institution Without Getting Caught.” One such opportunity is called a “lapping” scheme. It has even been uncovered during our training sessions on live data files. It is generally executed against loan accounts, although it can also be applied to deposit accounts.
The general concept of a lapping scheme is to steal loan payments and convert them into funds used by the fraudster. That includes making payments on fictitious loans. The fraudster then applies other borrowers’ loan payments, from a later date, to make payments to the loans from which the payments were stolen. The fraudster needs to move the money for a month or two and generally does this with quite a number of accounts. Like check kiting, the amounts and accounts being manipulated will grow.
Reversing payments is another variation of the lapping scheme. The fraudster does not need to be in position to steal loan payments because reversing payments accomplishes the same thing. In one training session we noted this being done on many accounts. In that instance the fraudster would reverse the reversal within a day to hide the ones he was manipulating. The fraudster hid the scheme by making many reversals of reversals that were not associated with his fraud. Because there were so many transactions of this type, the auditors did not consider these to be suspicious. The fraudster covered (e.g. replaced) the reversed payment associated with his fraud a number of weeks later and simply backdated the payment to the original transaction date. Is anybody at your financial institution looking at backdated transactions? Are they also in the position of being able to backdate transactions themselves?
Although the concept of lapping is relatively easy to understand, it is hard to detect because there are many ways to conceal it. It’s the red flags related to these concealment strategies that will give the scheme away. Let’s take a closer look at some additional concealment strategies and red flags:
The fraudster does not want the borrowers with stolen payments to receive delinquent notices. So, the fraudster either makes a simple change to the “Late Days Notice’ field in the account record from 15 days to 90 days, or enters data to suppress the generation of late notices. Now the borrower will not receive a late notice for at least 90 days after the loan has been overdue. How many of your staff has access to these important fields, and do these changes require supervisory intervention? How would you prevent or detect a supervisor doing this?
The fraudster does not want borrowers with the stolen payments to show on the 30 day delinquency report that is reviewed by management, or allow the borrower to see the missing payment on their next loan bill. So, the fraudster makes sure to cover the stolen, or reversed, payments within 30 days. Is your staff reviewing payment reversals and do they require supervisory intervention? How would you prevent a supervisor from doing this?
The fraudster could establish a new loan class in the loan system that contains a parameter to not issue late notices prior to 30 days. Then the fraudster would change the loans with stolen payments over to this loan class. Are your staff looking at new product types and changes to global parameters?
The fraudster can make a partial payment on the loan account by using the transaction code which updates the last payment due date. Are you watching partial payments and the use of transaction codes that allows this?
In future Newsletters we will be discussing more opportunities on how employee fraud can be committed without detection. But, in the meantime, if you are curious about how our products can detect the ones discussed above and many more, we are offering free 30 day trials of BancAudit Pro. We will help you build the analytical scripts.