Introduction to Banking

Operations
 Outline

Session Objectives
Introduction
Conceptual Definition
Banking Services
Banking Regulatory and Law Enforcement Agencies
Revised Banking Model
Categorisation of Nigerian Commercial Banks
Questions & Answers
Conclusion
 Session Objectives
At the end of this session, participants
should be able to:

- Understand the business of banking

- Appreciate the role of banking in national economic
development
- Enumerate the different services provided by banks
- Should have an enhanced understanding of banking
business.
- Should know how and why banking is regulated.

3
 INTRODUCTION
• The financial system is more than just
institutions that facilitate payments and extend
credit. It encompasses all functions that direct real
resources to their ultimate users.

• It is the central nervous system of a market economy and

contains a number of separate, yet co-dependent,
components all of which are essential to its effective and
efficient functioning.

• These components include financial intermediaries such

as banks and insurance companies which act as principal
agents for assuming liabilities and acquiring claims.
 INTRODUCTION
• The second component is the markets in which financial
assets are exchanged, while the third is the
infrastructural component, which is necessary for the
effective interaction of intermediaries and markets

• The three components are inextricably intertwined.

Banks need payments system infrastructure to exchange
claims securely and markets in which to hedge the risks
arising from their intermediation activities

• The banking system therefore functions more efficiently

and effectively when there is a robust and efficient
payments systems infrastructure.
 INTRODUCTION
• The concern to ensure a sound banking system by the Central
Bank is underscored by the critical role of banks in national
economic development.

• Banks for instance, mobilize savings for investment purposes

which further generates growth and employment. The real
sector, which is the productive sector of the economy, relies
heavily on the banking sector for credit.

• Government also raises funds through the banking system to

finance its developmental programmes and strategic objectives.

• It is in view of these strategic roles of the banking system to

national economic development that a sound banking system
becomes imperative.
 Conceptual Definition
What is Banking Business?

• BOFIA*: Banking is the business of receiving deposits

on current accounts, savings accounts or other similar
accounts, paying or collecting cheques, drawn by or paid
in by customers; provision of finance or such other
business as the Governor may, by order published in the
gazette, designate as banking business”
 Conceptual Definition (Contd)
• Banking Business involves the following amongst other
areas:
- Deposit taking
- Extension of Credit
- Payment and Settlement facilitation

• Deposit taking and extension of credit relate to financial

intermediation function of banks

• The third area of operation, when efficient reduces the

use of cash in financial transactions
 Banking Business…
• Banking business is one of the most regulated
world-wide because of the pre-eminent public
interest in the banking industry

• other people’s money

• payment system
• financial intermediation role of banks
• Developmental role of banks( Infrastructure,
Manufacturing, Commerce, Business
Expansion, Agriculture, Oil and Gas)
 Why regulate banking business ?

• The need for control and discipline arise from

the desire to have a safe and sound financial
system:
 Depositor protection
 Monetary stability (Monetary policy)
 Efficient and healthy competition
 Consumer protection (consumers of the
services of banks)
 Systemic stability (role of banks,
implications of abuse)
 Banking Services
• Cash Management
• Credit Management
• Funds Transfer
• Treasury
• Foreign Operations
• Electronic Business
- Cards ( Debit , Credit, prepaid, Master)
- Channels ( ATM, POS, Alerts)
- Mobile Banking and Payments
 Regulations Guiding Banking
Operations in Nigeria

These may be divided into:

• Entry Regulations
• Operational Regulations
Entry Regulation
• Incorporation
• Licensing requirement
• Minimum paid up capital
 Operational Regulations

• Opening and closing of branch

• Capital adequacy and reserves ratios
• Loan Deposit Ratio
• Training and Compliance of staff
• Financial Transparency (disclosure-interest
rate, accounts)
• Monthly return on new customers
• Transactions Reporting [Money laundering
(prohibition) Act]
 …Operational regulations
• Biannual returns to CAC (February and July
each year)
• Know Your Customer (KYC) rules
• Mandatory deposit insurance
• Changes in Board and Management -
(senior management appointment – AGM
and above require CBN approval)
• Employment (fit and proper people)
• Corporate restructuring (merger, take-over,
asset sale)
 Banking Regulatory & Law
Enforcement Agencies

• CAC
• CBN
• NDIC
• NASB
• SEC
• NSE
• EFCC/NFIU
• FIRS and SIRS
 Compliance to Regulations
• There is a myriad of rules sourced from statutes and
directives by regulatory and law enforcement agencies
that apply to banking operations from birth to death.

• Ignorance of the regulations is no excuse - Education

and training are necessary to know these regulations
and their requirements.

• Use of manuals and guides that identify the regulations

and their demands is necessary.

• Cost of non-compliance such as fines, suspensions,

penalties, adverse press can be avoided.
 Revised Banking Model
In 2010, the CBN discontinued the issuance of
universal banking licences, prohibited banks from
undertaking non-banking activities
New licences were issued to banks to perform the
following types of businesses:
• Commercial banking (regional, national, and
international)
• Merchant banking
• Specialized banking (microfinance, mortgage,
non interest (regional and national) and
development financial institutions)
 Categorization of Nigerian
Commercial Banks

With effect from October 2010, commercial banks in

Nigeria can be categorized as follows:

•International Banks: Minimum Capitalization of 50

Billion Naira.

•National Banks: Minimum Capitalization of 25 Billion

Naira.

•Regional Banks: Minimum Capitalization of 10 Billion

Naira.
 Class Exercise

Give example each of laws/regulatory

pronouncements from each of the
agencies mentioned below:

• CAC, CBN, NDIC, FRC

• SEC, NSE (for publicly quoted banks)
• EFCC/NFIU
• FIRS / SIRS
20
 Conclusion

• Every system has rules to guide the activities

of its members: in banking, “other people’s
money” raises agency problems and the need
to control activities of the “agents”.

• A better informed workforce with respect to the

rules applicable to the operations is a more
productive workforce
ISSUES IN ACCOUNT OPENING,
TRANSFER AND CLOSURE
 OUTLINE

• Bank Accounts – Meaning and Purpose

• Types and features of Accounts
• Account Opening Requirements/KYC
• Current Accounts Operations
• Customer Service Functions
• Issues in Account Opening
• Account Closure - Reasons
 INTRODUCTION

• Bank accounts mirror/represent transactions between bank

and customer.
• It is a contractual relationship that completes the process of
offer and acceptance.
• It signifies the commencement of Bank – customer
relationship.
• The commencement of this relationship confers rights and
duties on the parties.
• Accounts are opened after due completion of the appropriate
documentation and account numbers are generated.
• Nowadays, relationships do commence before eventual
opening of accounts.
 Purpose of having Bank
Account(s)
• To ensure safe keeping of money
• To ensure easy and convenient access to funds
• To meet statutory requirement
• To define the dynamics of the contractual
relationship
• To ensure accurate record keeping of financial
transactions
• To create objective basis for monitoring future
developments
• To protect the interest of parties in the relationship
 Types of Accounts

• Savings Accounts
• Current Accounts (Demand Deposit
accounts)
• Tenured Deposits:
– Call/Short Deposits
– Fixed/Term/Time Deposits

• Domiciliary accounts
• Special Deposit accounts
 Savings Accounts
Types:- Ordinary, Salary, Premium
Features:
– Simple opening process
– Facilitates savings culture
– Allows moderate interest income
– Usually requires account holder to be physically
present for transactions
– On-line real time transactions could be restricted (in
some banks)
– Cannot be overdrawn
– Defined frequency of withdrawals(i.e. for interest
earning)
– May allow cheque lodgement ( if premium mode)
 Current Accounts
Features:
– A chequing account
– Rigorous opening process
– Need for references
– Susceptible to fraud
– Available on demand
– Usually attracts administrative charge
– Can be overdrawn and enjoys all sorts of credit facilities
– Third party payment allowed
– Not subjected to any stipulated frequency of withdrawal
 Call and Term Deposits
Features :
– Suitable for customers desirous of relatively
high return
– Funds usually not required for immediate
use
– Various types differentiated by customer
profile, amounts, tenor and benefits
– Funds placed for a specific tenor/period
cannot be withdrawn before expiration
without penalty.
 Foreign Currency Account
(Domiciliary Accounts)
– Foreign currency denominated
– Funds are held abroad if cash not paid
locally
– Low interest rates in line with global trends
– Motivated by the need to hedge against local
currency or in anticipation of a future foreign
currency payment
– Cumbersome procedure and restricted
usage
 Domiciliary Accounts

• The bank’s authorized officer will check for the completeness

of all documents relating to domiciliary accounts
• He is also to check for the authenticity of all documents
relating to the account
• Bank authorized officer will then sign all checked documents
and forward same to Foreign Operations department in the
Head Office or keep them in the Branch depending on the
approved procedure
• The bank’s authorized officer will authorize amendments on
customer information details as well as mandate instructions
before such amendments are made on account records
• Minimum deposit into a domiciliary account is as established
by the bank
Special Deposits Accounts:
– Enable a bank to tap into desired deposit
profiles
– Structured for a target market
– Bias could be in respect of amount, tenor or
benefits
– Virtually every bank has one of such
product
 3 Tiered KYC
• A financial inclusion initiative of the CBN
• It seeks to implement flexible account opening
for low to medium value account holders subject
to caps and transaction restrictions viz:
• Tier 1 [Low value A/c] – N50k max single dep
and N 300k cumulative cap.SA & Dom Txns only
• Tier 2 [Med value A/C] –N100k max single dep
and N 500k cumulative cap. Basic KYC – ID &
verification. SA & Dom Txns only
• Tier 3 [High value A/C] – Full KYC required. No
limits imposed
 Documentation Requirements:
Savings Accounts
• Duly completed form
• Duly completed specimen signature card
• 2 recent passport photographs
• Copy of evidence of identification:
– International passport
– Driver’s license
– National ID card
– Voters card
– ID card of recognised organisation
 Documentation Requirements:
Current Account – Individual
• Duly completed form
• Duly completed specimen signature
• 2 passport photographs
• 2 independent and satisfactory referees
• Utility Bill [for address verification]
• Employers introductory letter [for salary account]
• Copy of evidence of identification (KYC):
– International Passport - Voters Card
– Driver’s license - National ID card
– ID card of recognised organisation
 Documentation Requirements for
Opening A Domiciliary Account

– Application for Opening Foreign Currency Account

is to be completed by the customer.
– Specimen signature form is to be completed by
applicant/prospective customer
– Two referee forms are to be completed by
customers maintaining account relationship with any
other bank
– Customer is to provide copy of international
passport of the signatories to the prospective
customer account
 Documentation Requirements:
Current Account – Corporate
• Duly completed form
• Duly completed specimen signature signed by
authorised signatories
• Copy of certificate of incorporation
• Copy of Memorandum and Article of Association
(certified as a true copy by the company Registrar)
• Form CO7 – Particulars of Directors
• Form CO2 – Allotment of Shares
• 2 passport size photographs of each signatory to the
account with their signatures on the reverse side
• Address verification document on company,
signatories, Directors and major shareholders
 …Documentation Requirements:
Current Account – Corporate
• Introductory letter with passport size photographs of
contact person(s) or authorised agent(s)
• Two independent and satisfactory company
references
• Copy of the audited financial report and accounts
(where applicable)
• Copy of the resident permit for non-Nigerian
Directors
• Status Report from other Bankers (where
applicable)
• Letter of indemnity
 Partnership Account

• Partnership deed

• Latest audited or management accounts and

projected cash flow statements where applicable

• Proof of the partnership business address and

identity
 Sole Proprietorship
• Copy of business registration certificate
(Original of which must be sighted)
• Letter of undertaking authorizing the bank to
conduct a search on the business name.
• Indemnity for operation of the account pending
search report declaration.
• Inland Revenue receipt or telephone bill.
 Clubs and Societies
• Copy of the clubs constitution.
• Copy of certificate of registration (original to be
sighted).
• Power of attorney.
• Society resolution copy of rules.
• Search report in respect of existence of the society.
• Resident permit for non-Nigeria executive members.
• Letter of indemnity.
• Proof of identity and address of all executive
members and signatories to the account.
 Current Accounts
Operations
• Third party cheque lodgment should not be allowed
except when duly endorsed and authorized by the
Branch Manager.

• However, cheque with restrictive clauses will not be

allowed

• Overdrafts, drawings against unclear effect or excess

over approved amount should be approved in
accordance with the bank’s credit policy

• Accounts should not be allowed to have debit balance

except those that are enjoying credit facility
 Current Accounts
Operations
• Charges for current account management fee (CAMF) and
cheque book issued should be in line with the CBN tariff or
approved rates by the appropriate authorities

• An account will be classified inactive if it is not operated for a

period of six months

• CBN defines a dormant account as one with no customer or

depositor originated transaction for a period of six years

• Any form of transaction on such accounts would require

customers attention and authorization by the Branch Manager
unless it is reactivated.

• Dormant balance on all dormant accounts will be maintained

on the system (computerized branches) or in dormant
balance register (non-computerized branches).
 Current Accounts
Operations
• Interest payment continues on inactive/dormant
accounts
• Such accounts remain insured as part of bank’s total
deposits
• Banks are to share report of dormant accounts and
efforts at locating owner/next of kin with CBN
• The mandate files of inactive/dormant accounts must be
separated from that of active accounts and filed properly

• Deceased accounts will be frozen and account operation

stopped
• The mandate file of such account will be marked”
deceased account”
 Current Account Closure

• An account will be closed on the instruction of the customer in

writing and duly signed and verified by the bank’s authorized
officer or at the instance of the bank

• Bank charges will be deducted from the account balance and

all bank documents retrieved from the customer

• Closed account will be recorded in Account Closed Register

or printout and called over by Branch Manager or his
designate

• Account closed will be moved immediately to archive after

closure.
 Current Account Stop
Payment Order
• Customers stop payment instruction may be accepted:
– In writing,
– by telephone,
– by e-mail or
– by any other electronic means.

Stop payment instruction is accepted when such item/

Instruments have not been paid.

If instruction is by telephone, it would be acceptable

subject to a written confirmation within 24 hours.
 Current Account Stop
Payment Order (cont’d)
Any item/instrument received prior to confirmation
would be referred to the bank authorizing officer for
approval.

The date and time of receipt of stop payment order

should be noted.

• Customer’s signature of stop payment orders should be

verified

• Customers will be informed promptly if an instrument has

been paid prior to the receipt of stop payment
instructions
 Administrative Procedures

• The use of a clearing instrument to open a current

account is acceptable but should be authorized by the
branch manager

• Dormant balances of all dormant accounts should be

maintained and pass worded on the system (for
computerized branches) or in dormant balances register
(for non computerized branches)
• Approval for account closure is to be given by the bank’s
authorized officer or designate and closure will be
carried out on-line or manually
 Customer Service Function

• Accounting Opening
• Account closure
• Status enquiry
• Legal search confirmation
• Standing order
• Stop cheque
• Cheque book requisition
• Savings withdrawal slip issuance and
replacement
 ….Customer Service
Function
--Bankers’ references
--Probate issue
--Accounts’ management:
– Change of name
– Change of address
– Change of mandate
– ATM issue
– Alert issue ( SMS and Internet)
– Technology...Downtime and the effects
 …Customer Service
Function
• Bank cheque/draft issuance
• Funds transfer
• Dormant account reactivation
• Customer enquiry:
– Complaints
– balance on account
– Statement of account
 Issues in Account Opening
• Presentation of false means of identification, especially
drivers’ license and international passport

• Visitation and confirmation of customers’ address

• Variation in addresses stated on Utility bill and address

written by customer

• Most times, references are not complete and when they

are, delay in receiving response from other banks

• Incomplete mandate, usually for accounts sourced by the

Sales Teams
 Account Closure
• Banker customer relationship may be determined by
both the customer, the bank or the operation of the
Law – Death, Insanity or Bankruptcy.
Reasons for Account Closure
At Instance of customer
• Poor quality service and customer dissatisfaction
• Relocation of customer from present environment
• Having multiple A/Cs bearing same name
• Fraud by bank officials on customer’s account
• Money laundering issues
• One-off transaction
 Reasons for Account Closure

At Instance of Bank
• Fraud
• Bankruptcy or winding up of the customer
• Death
• Handicap or insanity of the customer
• Dissolution of partnership
• Failure to meet statutory requirements –
Unperfected state for too long
 Conclusion

• Knowledge of banking operations is inevitable for

effective service delivery.

An improperly opened account with active

operation is a DISASTER WAITING TO HAPPEN
Thank you
CHEQUE & CLEARING
PROCESSING
 Outline
• Cheque : Meaning and Terms in its process
• Clearing: Meaning and Instruments
• Clearing process and Fund Transfer desk
• Automated clearing systems
• Introduction to Fund Transfer Transactions
• Uses of Funds Transfer
 Terms in Cheque Process

Cheques:
• Promissory notes issued by a person or a bank
to another for a specified amount of money, to
be paid at a given date

• A Cheque is a written order from one party (the

drawer) to another (the drawee bank) requiring
the drawee to pay a specified sum on demand
to the drawer or to a third party specified by the
drawer
 Types of cheques

• Open
• Crossed
• A cheque is either Open or Crossed
• A cheque is said to be Crossed when 2 parallel
lines are drawn across it
• A crossed cheque given to a 3rd party cannot be
cashed over the counter. It must be paid through
the clearing process, unless where the drawer
signs in between the lines (to uncross the
cheque)
 Terms in cheque process
• Cheques are generally Non Negotiable, meaning that
the payee whose name is specified on the cheque is
the sole beneficiary of the cheque.
• Cheque clearing: This is the movement of a cheque
from the bank in which it was deposited to the bank on
which it was drawn, and the movement of the face
value/amount in the opposite direction.
• The cheque process normally results in a credit to the
account at the bank of deposit and equivalent debit to
the account at the bank in which it was drawn. This is
also called CLEARING.
 ….Terms in cheque process

Payee:
– The person that is being paid with the cheque.
– He is the bearer of the cheque
– He is the benefactor or beneficiary of the
money
Drawer:
– The issuer of the cheque
– The owner of the account from which the
money is being paid
 ….Terms in cheque process

Drawee:

• It is the bank

• Although, the drawee can sometimes be

the drawer when the bank issues bank
draft and bankers payment
 ….Terms in cheque process
The Collecting Bank:
– It is the banker of the payee, where the payee
lodges the cheque or instrument
– The bank where payee operates his account

The Paying Bank:

– The bank of the drawer of the cheque
– The bank that has the account from which the
cheque is to be paid
 What Clearing means

• It means the exchange of payment instructions

between system participants with a view to
reconciling and confirming payment instructions.

• Basically, it refers to the settlement of claims of

financial institutions against other financial
institutions.
• The Nigerian Clearing system is currently
organized by the CBN/NIBSS (Nigeria Interbank
Settlement System) and the banks participating in
the operation are known as Settlement banks.
 Clearing Services
• Clearing is one of the most important aspects of
banking operations. It is a major means of
transferring funds between banks, as
instruments drawn on one gets value at the
other without physical movement of cash.

• The high risk and sensitive nature of clearing

demands that it be handled with great caution
and diligence.

• CBN has 37 Clearing zones in Nigeria (i.e each

of the 36 states plus the FCT) and still regulates
and supervises the interbank clearing and
settlement processes
 Clearing Process
• The funds transfer desk officer receives and captures all
instruments meant for clearing in the system
• Clearing Period – Under the Cheque Truncation regime,
cheques shall clear on a T+1 basis such that customers
receive value in the morning of T+2.
• The cheque clearing process is relatively simple.
- When Customer X deposits a cheque in UBN written on the
account of Customer Y at GTB,
- GTB sends reserves to UBN equal to the amount of the
cheque.
- UBN then adds a credit to Customer X's account and GTB
subtracts a debit from Customer Y's account
 Rules and Regulations Governing
Clearing System of a Cheque
TRANSACTION DAY CHEQUE CLEARING CYCLE

MONDAY (T) • Fresh cheques are deposited at bank branch

TUESDATY (T +1) • Cheques are presented at the clearing house

• Paying Bank to return unpaid instruments

same day

• Beneficiary Bank gets value

• Beneficiary gets value

I- Teller [introduced Dec Same day clearing

2017]
 Funds Transfer: Introduction
Fund transfer refer to payments processed through
a payment system by a direct participant on
behalf of its customers, the third party.
The modes of fund transfers are:
• Cash Payment Systems: - ATM , OTC
• Non cash Payment Systems: -Clearing of
cheques, drafts and local transfers
• Electronic Payment Systems: - Internet, Mobile,
POS, ATM, Web Pay, NEFT/CIFT.
 FT OPERATIONS/TECHNOLOGY

Available FT Service delivery channels:

1. Bank Branches (physical presence)

2. Manual facilities: Drafts/MC etc

3. E-Banking facilities
a. Internet Banking
b. Mobile Banking
c. POS/ATM etc
71
 Types/Coverage of Funds Transfer

Funds transfer (FT) covers transfer of funds:

1.between accounts of the same customer in one
branch; or
2.between accounts of different customers in one
branch; or
3.between accounts in different branches; or even
to or from a third party.
 Importance of FT Services in Banking

a) Reduces operational costs

b) Enriches the products basket
c) Generates fee income
d) Factor for customer assessment and selection of
banker( competitive advantage)
e) A veritable niche tool, in this age where banking/
banking products have been commoditized
f) A major determinant of account turnover
g) A secure FT system deters fraud to a very large
extent
h) A major measure of customer service delivery
efficiency
 Uses of Funds Transfer
FT is used to effect 3rd-Party payments as follows:

a) Payment for goods and services

b) Payment of salaries and pensions
c) Payment of sundry benefits to several individuals
e.g. shareholders dividends, interests, bonuses
etc
d) Payment of Inter-Bank Standing Orders, by banks
e) Contractor/Supplier payments
f) Bill payments (DSTV, tuition payment, etc.)
g) P2P, P2B, B2P, B2B, P2G, G2P payments
 E-Payments

• They are either debit or credit payments that are

processed entirely electronically, with the value
passing from one bank account to another bank
account.
• Credit payments EFT,
– a customer instructs their bank to make a
payment to another bank account electronically.
• Debit payments, (direct debits)
– a customer instructs their bank to allow the
payment to be charged to their bank account.
 Major Funds Transfer Products
1. INTRA-BANK FT
a. Account-to-Account
b. Account-to-Walk-In customer (e.g I Cash)
2. INTER-BANK FT
a. NIBSS ELECTRONIC FUNDS TRANSFER (NEFT
Credit Transfer)
b. CBN Inter-Bank Funds Transfer System (CIFTS Third-
Party)
c. Standing Orders
d. POS, Internet, Mobile payments
e. International Remittance service(Western Union,
Moneygram, Virgo, etc.)
76
 FT transactions: Basic Information
Requirements
a. Name of Payer
b. Payer Account Number
c. Name of Payee
d. Payee Account Number
e. Bank and Bank Branch of Payee’s account
(sort code)
f. Payment Reference
g. Transaction Date
h. Value
i. Transaction Narration
77
 Processing FT
Transactions (cont’d)
• ATM, POS machines – Card based. Customer
requests for and completes appropriate form to
get a debit card which is linked to the customer’s
account (funding account). After PIN change
operation , customer is free to transfer funds.
• Internet Banking (Web-based) – customer
completes appropriate form and gets created on
the system i.e. issued an identification code
which acts as password.
• To use, customer logs unto the bank’s website
and follows the instructions as he/she is
directed.
 Processing FT
Transactions (cont’d)
• Mobile Banking (Software-based) – Upon
completing appropriate forms, customer submits
registered Mobile Phone to Bank officer for
downloading of franchised software or customer
downloads same from bank website after having
been created/enabled on the system.
• To effect transaction, customer must enter a
registered and recognized password followed by
other details as enumerated on the basic
information list.
• Any available Network can be used to effect the
transaction
 Processing FT Transactions
(cont’d)
• Other P2P, P2B, B2P, B2B, P2G, G2P
payments:
• For Individuals - customer must fill appropriate
form for every new transaction with all the
required basic information and submit in person
to the bank for processing.
• Large Corporate customers request for and are
given access to capture and upload their FT
details in prescribed format on-line and send to
the bank for onward processing.
 Marketing of FT Services

FT services have to be properly packaged to gain

customer appeal. Specific areas to focus on:
1. Delivery channel
2. Convenience
3. Transaction fee – simple, affordable
4. Customer segmentation
5. Identify Customer needs through appropriate
surveys, and develop products that suites
customers
81
 Marketing of FT Services
Marketing tools
1. Billboards
2. Posters
3. Flyers
4. Electronic media
5. Print media
6. Message in Bank Account Statements
7. Target SMS, e-mails
8. Stickers
9. Road shows, exhibitions
 Examples of Clearing
Instruments
__________________________________
a)_________________________________
b)_________________________________
c)_________________________________
d)_________________________________
e)_________________________________
f)_________________________________
 Learning Activity
Funds transfer cover transfer of funds
between the following:
1.__________________________________
2.__________________________________
3.__________________________________

84
 Group Learning Activity
Mention some uses of Funds transfer
a) __________________________________
b) __________________________________
c) __________________________________
d) __________________________________
e) __________________________________
f) __________________________________
g) __________________________________
85
 Thank you for
your attention.

86
Fraud
Detection,
Prevention &
Control
 Presentation Outline
• Overview of Fraud
• Types and Causes of Frauds
• Fraud Typologies
• Fraud Detection, Prevention &
Control
• Conclusion
 Overview of Fraud
• Fraud is a generic term which embraces all the multifarious means
which human ingenuity can devise. Fraud is committed by one
individual to get undue advantage over another by false
representations.

• No definite and invariable rule can be laid down as a general

proposition in defining fraud, as it includes surprise, trickery, cunning
and unfair ways by which another is cheated.

• Fraud is an intentional pervasion of the truth for the purposes of

inducing another, in reliance upon it, to part with some valuable
belongings or surrender a legal right.

• A false representation of a matter of fact, by words or conduct, by false

or misleading allegations, or by concealment of what should have
been disclosed, which deceives or is intended to deceive another so
that he shall act upon it to his legal injury.
Profile of a Potential Fraudster

• Under stress (suffering from personal

crisis, such as a financial problem, bad
marriage, etc.)
• Greedy or has genuine financial need
(illness, drugs, gambling, etc.)
• A rule breaker (takes short cuts, self-
justifies infractions of law, rules, etc.)
• Disgruntled at work or a complainer (may
try to "get even", or take what he/she
"really deserves")
• A big spender (expensive hobbies, living
beyond means)
The Fraud Process
 The Fraud Equation

Motivation
(Perceived Pressure ) + Opportunity
(To Commit Fraud & Conceal it) = Fraud

Opportunity
 Fraud Types/Schemes
• Spy ware installation  Cheques suppression
• ATM Fraud / substitution
• E – Payments Fraud
 Fictitious expense
• Electronic Card Fraud
payment
• Electronic Funds
Transfer Fraud  Falsification of asset
• Suppression and theft quality
of customer deposits  LCY/FCY funds transfer
•


Theft of bank cash  Data Manipulation

• Cheque cloning  Program Manipulation
 Identity Theft
• Opening of fraudulent
accounts
• Unauthorized lending
• Posting fictitious
credits
 Fraud Types/Schemes

• Loan application Competition with

through fronts employer
• Forex profiteering
Property rental or
• Business purchase fraud
development/Public
relation payments Invoice inflation
• Loan recovery fraud
• Sharing interest Falsification of
earned or cost saved asset quality
with customers
• Misuse of bank’s
assets
 Detection: Before Processing

• Careful review of documents

• Observe body language
• Use tact, ask leading questions
• Profile your staff properly
• Profile the customer properly
 Detection: During Processing
• Ink and handwriting scrutiny
• Verify Signatures (SV) and Counter SV
• Authenticate alterations
• Phone (verbal) confirmations
• Refer for others opinion when in doubt.
• Higher levels of authorizations
• Use of technical equipments/instruments
• Effective use of access rights
 Detection: After Processing

• Batch review and Call over

• Proof review
• Reconciliation of ledgers
• Audit
 Purpose of Investigation

• To recover the amount of money lost,

• To identify, punish and dismiss offender,
• To prevent future recurrence, and
• To clear innocent people and remove
suspicions.
• Fraud investigations must provide for proof
of loss, dishonesty, and personal gain to
prepare for possible litigation.
 Preventive Measures

 Training
• Senior Management
• Operations/Control staff
• Marketing/Relationship Mgrs.
• Credit Officers
 Sharing experience with/of other F.I.s
 Spreading knowledge of critical systems
to relevant individuals.
 Physical and Administrative

• Stressing segregation of duties

• Dual controls for sensitive tasks
• Job rotation
• Authorization procedures.
• Implement a whistle blowing program
• Strong physical/access control
 Accounting Controls
• Balancing cash and accountable items
frequently.
• Timely ledger proofing
• Proper Nostro Account reconciliations
• Unscheduled counter-party confirmation
• Supporting an active internal audit
program.
 IT Administration
• Use a firewall to filter certain messages (such as ones
that contain viruses) from entering or leaving your
network

• Have up-to-date anti-virus and security software

installed on all computers

• Don't store any customer data on a server connected

to the Internet.

• Encrypt sensitive data

• Give data file access only to authorized staff

• Use intrusion detection systems

 Access Controls
• Sufficient password length to counter
exhaustive search attempts.
• Assignment of randomly generated passwords
to reduce predictability.
• Limit guessing attempts and disconnect after
given number of failed attempts
• Facility to change the passwords.
• Non-input of passwords in clear text to avoid
shoulder surfing or scavenging
 Others
• Install CCTV cameras at strategic places
• All PCs on the WAN must have authentication
protocol
• Regular job rotation of sensitive job functions
• Review all relevant audit logs daily
• Do not publish confidential information on websites
or in discussion forums
• Be wary of “social engineering” practices meant to
divulge confidential information
 Other Preventive Techniques -The Don’ts (about
fraud)

• Don’t take anything for granted.

• Don’t volunteer confidential information over the telephone/telex/fax

unless you know and trust those who are inquiring.

• Don’t allow customers to pressurize you into making impulsive decisions.

• Don’t transfer funds without first obtaining proper authorizations.

• Don’t discuss internal operations or systems with outsiders.

• Resist promises of inordinately high returns and guarantees of endless

supplies of funding.

• Don’t write to suspicious individuals on company stationery.

• KNOW YOUR CUSTOMER (KYC) & KNOW YOUR CUSTOMERS’ BUSINESS

(KYCB)
 Conclusion – Building Synergy to Prevent Fraud
• Fraud should be seen a business problem threatening the
survival of the business and all stakeholders should seek to
eliminate it through a well thought-out and efficiently executed
strategy.

• Creation of a collaborative & effective forum for tackling of

fraud.
– Establishment of a committee to tackle fraud

• Collaboration with law enforcement, legal and regulatory

agencies
– Establishment of a joint task force
– Evolution of a Risk & Compliance initiative to drive adoption
of industry best standards that enhance system security,
implementation of an enterprise wide operational risk
management system that improve service delivery.
Thank You
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