Bank Fraud in Asia

as “unmanaged risks.” The term “unmanaged” connotes the practical difficulties associated with managing fraud risk effectively and dynamically. In recent years, while the number of publicized frauds—unauthorized usage of credit and ATM cards, checking account fraud, Nigerian scams, etc.—increased, these cases merely constituted the tip of the iceberg. Estimates are that just 20% of frauds are exposed and made public. The remaining frauds are either undetected or discovered but not made public because of reputation risk. Past causes of Asian bank crises include lack of depositor confidence due to perceived deterioration in loan quality, unsound lending practices and lax credit controls, uncontrolled diversification into new business segments, overtrading, and liability mismanagement. The framework and technology for bank risk management have improved over time, mitigating these risks. The risk of fraud—another crisis that can bring down a bank—remains more difficult to predict and manage. The inherent vulnerabilities of the banking and finance system provide a conduit for fraudulent activities. Coupled with an accelerated pace of financial development and an emphasis on realizing short-term returns, bank frauds are likely to increase in Asia, as they may in the rest of the world. The greater concern, however, is the growing sophistication and complexity of frauds. Banks should contemplate two interrelated issues. 1. Is the risk architecture capable of protecting the institution against fraud attacks? That is, are there preventive controls designed to identify potential fraudulent activities either prior to or at the time of executing a transaction or contract? These controls are the foundation of the bank’s overall business processes. 2. In 2003, Asia witnessed a spectrum of frauds. What happened and what are Asia’s banks doing to combat frauds? And what should bank and risk practitioners look for in managing fraud risk?