Minimising Fraud: The Case for Electronic Banking

“Electronic banking can reduce the incidence of corporate fraud, for example by enforcing strict segregation of duties. As a result, it is possible to separate, initiation, authorisation, release of funds and accounting, as well as keeping full clear audit trails of the activities at each stage.”

-- Antony Smyth, Fraud Investigation & Dispute Services Partner, Ernst & Young Financial Services
 
 
The massive fraud perpetrated at India’s Satyam Computer Services has inevitably attracted numerous headlines. Regrettably, this is just the large tip of a broadly based and growing iceberg. Historically, the scale of such fraudulent activity has shown a tendency to increase during recessions and there are signs that this time will be no different.
 
Hard numbers from recent research support the theory that tough economic times beget greater fraud levels. The 2008/2009 annual report produced by the security/fraud specialist Kroll and the Economist Intelligence Unit makes depressing reading. The average company surveyed for the report lost US$8.2 million to fraud over the preceding three years – an increase of 22% on the 2007-2008 report. 85% of companies were affected by at least one fraud in the past three years (up from 80% in 2007-2008), while for larger companies the proportion was an alarming 90%.
 
On top of all their existing concerns, this leaves treasurers and CFOs confronting yet another major challenge. Finding sufficient working capital in the current environment is trial enough, without also having a proportion of it disappearing out of the back door. Finance professionals have to ensure that their financial risk and control systems are leak-proof. But without the luxury a major capital investment, the crucial question is how?
 
Fortunately, there is a highly cost-effective and readily available way of accomplishing this – electronic banking. At a stroke, this has the potential to significantly enhance the transparency, traceability, accuracy and integrity of corporate working capital transactions (i.e., payables, receivables, trade finance, treasury and inter-company transactions, etc.).
 

Whether online or via ERP integration, electronic banking provides a clean and verifiable audit trail for corporate financial transactions; thereby minimising the possibility for manipulation, tampering or record destruction.

 

Visibility and integrity

If a company cannot view balances and activity across all its accounts held by all subsidiaries and business units, it can incur certain risks. Ultimately, if the treasurer or CFO cannot see exactly who is doing what with respect to financial transactions, this invites fraud.
 
One of the most crucial elements in reducing fraud is therefore transparency. On the one hand, this increases the likelihood of early detection of irregularities. On the other, if it is known that processes are highly transparent, then this acts as a significant deterrent to future fraudulent behaviour.
 
In this respect, there is a strong case to be made for liquidity management schemes. Not only do they improve corporate use of internal liquidity. They can also play an important secondary role in reducing fraud through improved visibility.
 
The bank account structure typically associated with such schemes and the associated use of electronic banking introduce additional transparency. Local visibility is obviously improved, with country financial controllers able to see all account activity for any entity in their purview. So is transparency at global and regional office levels, since corporate treasurers and CFOs, as part of their cash flow and working capital management activities, gain additional visibility. By the same token, this transparency can also be extended to others, such as external auditors.
 
In addition to improving visibility, electronic banking also has a critical role to play in maintaining data integrity. Where centrally maintained and redundant copies of electronic records are maintained, the opportunities for destroying or falsifying these are limited. Contrast with a paper based environment, where it is all too easy for an unscrupulous employee to do either of these things.
 
Speed
The immediate accessibility of data via electronic banking provides audit and control functions within a corporation with a speed edge. One of the handicaps to fraud detection and prevention in a paper-based environment is the sheer volume of physical material that has to be collated and summarised before any meaningful conclusion can be reached. In some cases, the costs and inconvenience of doing this systematically or even on a random spot check basis can easily result in such a process being consigned to the ‘to do, but never actually done’ list.
 
Even where such a process is undertaken, the time required to complete the manual checking of paperwork against receivables and payables invoices means that any fraudulent activity is likely to persist for longer and cost the corporation more. It also increases the risk of the culprit(s) absconding before the process is complete and/or becoming aware of it and absconding immediately.
 
None of this applies if a robust electronic banking system is used, as all current and historic transaction data is immediately available. Furthermore, audit/investigation personnel can quickly access all these records on a global basis if required. This makes it considerably easier to detect/deter more sophisticated frauds that may involve personnel across multiple subsidiaries conducting intra-company fraudulent transactions.
 
Segregation and granularity
Electronic banking allows organisations to deploy far more sophisticated and robust payment authorisation models. A good electronic banking solution should be able to offer customisable multi-level authorisation matrices. These mean that the payment process can be easily split into discrete granular tasks (such as preparation, authorisation and initiation) that can be conducted by personnel across multiple widely dispersed locations.
 
This has several significant benefits:
 
  • The use of segregation of duties into discrete sub-tasks means that it becomes easy to ensure that no one individual has control of the entire payment process – an obvious weak control point.
  • The ability to split payment processes into sub-tasks also assists in complying with regulatory requirements, such as Sarbanes-Oxley.
  • The fact that sub-tasks can be distributed among geographically dispersed personnel reduces the possibility of localised collusion in a fraud.
 
Furthermore, if changes prove necessary, the inherent flexibility of multi-level authorisation matrices means that altering the breakdown and distribution of payment related tasks is relatively simple.
 
By contrast, in a paper-based payment environment, it is extremely difficult to establish or change this same separation of roles. For example, paper documentation would need to be moved among locations to the relevant personnel, thereby increasing costs and introducing delays and errors.
 
Scope
A full-featured electronic banking system does much more than just list bank account entries. As corporate transaction chains have increasingly globalised, trade finance has become an increasingly vital part of the equation. Trade finance fraud has become increasingly commonplace and sophisticated in recent years and the sums involved are typically large (in the past few years there have been several cases that have cost the companies involved literally hundreds of millions of dollars apiece).
 
Therefore, an electronic banking system that provides immediate access to scanned or digital copies of trade related documentation and flows is of value in preventing trade finance fraud. In addition, if fraudulent trade transactions are linked with other payment activities, this relationship between transaction types becomes easier to detect where all categories of transaction are visible via one electronic banking platform.
 
Alerts, ERP and STP
More sophisticated electronic banking systems provide more than passive reporting and data; they can also be configured to alert the treasurer, CFO or internal audit personnel in the event certain transactions or patterns of transactions are detected.   
 
For example, an attempt to initiate a payment of value above the initiator’s approved value level may be simply a keying error – or it can be something else. Multiple payments to the same payee may be perfectly legitimate, or they could be part of a ‘double invoicing’ scam being perpetrated in collusion with a dishonest supplier. Whatever the case, the ability to set and log alerts on such transactions represent a valuable tool in combating fraud.
 
Electronic banking becomes even more potent as a fraud prevention/detection tool when it is tightly integrated with ERP or accounting systems. In the case of an ERP system, maintaining a granular backup by associating electronic banking transactions with matching ERP records hugely enhances visibility and ease of audit. This becomes even more effective if document imaging is also used, so all paper invoice documentation is scanned and then indexed on the ERP system as an image, which is then directly linked to authorisation to pay and actual payment.  
 
Electronic banking also facilitates straight-through processing, which provides an instantaneous and electronic audit trail that, in turn, improves control. By removing manual paper-based methods and/or those requiring voice communications from the equation, the opportunities for fraud are substantially reduced.
 
Conclusion
The benefits of electronic banking as a tool for fraud prevention and detection are apparent; treasurers and CFO can use it to maintain full control and visibility of their business enterprise at all times. External parties, such as auditors and regulators, are also more likely to have faith in the effectiveness of the internal treasury and financial control frameworks if they are supported by electronic banking rather than paper processes.
 
It is important to note that the whole question of electronic banking as a tool to combat fraud does not just apply to public companies, which are subject to regulatory requirements for management to attest to the effectiveness of controls as part of the financial reporting process. Privately-held firms are also finding themselves facing scrutiny from shareholders, banks, and counterparties upon whom they depend for financial support.
 
In summary, electronic banking has truly come of age. Not only does it provide treasurers and CFOs with line-of-sight over their most precious commodity (liquidity), but it can materially improve the control framework to reduce the incidence of fraud, misappropriation of funds and related risks.
 
About the Author
Neal Livingston is managing director and global head of client access, transaction banking, at Standard Chartered Bank. He was previously the bank’s COO for transaction banking. Livingston joined Standard Chartered in 2006 from Arthur Andersen, where he served as global treasurer and as an Andersen worldwide partner. Prior to that, he held positions in credit risk management and cross-border leveraged finance with Norwest and Bank of America. Livingston holds an MBA in finance from the University of North Carolina at Charlotte. 

 

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