White collar crimes refer to the criminal activities by a professional holding a responsible position in the organization. Banking frauds are one of the most pronounced forms of white collar crimes. These frauds impact the reputation of the bank and also effects its financial sustainability. The chapter entails the frauds that happen in banks and identifies reasons for the failure of banks to prevent such frauds. The author pinpoints the best practices in developing fraud prevention frameworks and emphasizes the importance of corporate governance in preventing such frauds. Best practices and future trends are also identified that are important to prevent and detect banking frauds.
TopIntroduction
White Collar Crimes refers to criminal activities involving a professional holding a responsible position in the organization (Strader, 2011). Most of these crimes involve experts who have been given fair autonomy to make decisions, which may impact the reputation risk of the entity whom the professional represents. Essentially these events do not cause physical harm to anyone, however, it may lead to material economic losses to the affected party. In the case of banks, there is also a risk of the economy being impacted by these crimes.
Most of the white-collar crimes take time to be unearthed and proved because they involve professionals who yield enormous power within the organization where they commit the crime. They are also aware of the weakness and loophole in the risk management system and they exploit it to the best of their abilities. This generally creates a fear in the minds of the victims and tarnishes the reputation of the organization. The tarnished image may then materialize into the business loss. White Collar Crimes are committed by people who are involved in otherwise, lawful businesses and covers a wide range of activities. (Sutherland, 1983).
The perpetrators hold respectable positions in the communities unless their crime is discovered. The laws relating to white-collar crimes depends upon the exact nature of the crime committed.
Following are the different category of white-collar crimes:
Fraud by Employees
It refers to the process of circumventing the risk management mechanism in a business organization to profit from it. This is generally tantamount to breach of trust and due to opaqueness in the functioning of banks, it is difficult to detect them before some material harm has already been done.
Blackmail
Blackmail means demand for money by threatening some person to cause physical injury or exposing his secrets. In the banks, there are very few instances of such frauds. Hence, this kind of fraud is outside the scope of the book.
Bribery
It is the process of offering money to influence the judgment of the professional holding discretionary power in the organization. This leads to partisan behaviour and unduly influences the decision- making process and hence is categorized as a crime. Such crimes are typically a function of the culture existing in the organisation. Over the years, an increase in the level of automation has increased transparency and hence reduced instances of bribery.
Digital Fraud
Frauds involving technologically induced malpractices leading to a financial burden for the aggrieved party are known as a digital fraud. Digital frauds incidences are increasing. It can be attributed to the exponential rate of change in the industry and the vulnerability of digital platforms to security. Digital fraud also has the potential to retard the rate at which the fintech industry is growing. Hence, it is important to curb such incidents.
Embezzlement
It refers to the process where a person who has been entrusted with money or power of attorney misappropriates it without the permission of the authorized party. As can be seen in the Karvy scam in the Indian stock markets. In the Karvy Scam which happened in January 2020, a group of employees of the company used Power of Attorney (PoA) given to the company by the investors and transferred the shares from the investors’ account to another account and then pledged Rs. 2,300 crore worth of shares of over 95,000 clients as collateral to get loans from banks and National Banking Financial Corporation (NBFCs) by pretending that the shares belonged to the company.
Extortion
The process of illegally acquiring the property of a person without the permission of the individual. This generally involves an individual who can influence the law enforcement bodies in a country. The banking sector is generally not impacted by the instances of such crime.
Insider-Trading
This refers to the phenomenon where an employee of the entity trades in the market using price sensitive information not available in the public domain. The information asymmetry that exists in case of confidential information and the agency problem are the main factors that lead to this kind of insider trading.