Fraud costs the banking industry about R4 billion a year. Much of this can be attributed to cheque fraud. Interventions in two key areas are likely to make a difference: tighter monitoring and controls over those handling cheques and a move towards electronic banking.
According to the International Monetary Fund (IMF), South African banks are well capitalised, well run, organised and efficient. But although they appear profitable, returns on capital in the banking industry are low by world standards (Table 1). Banking council chief executive Bob Tucker believes some of the biggest costs to the sector are robbery and fraud.
By far the most costly of these crimes is fraud. In 1999 an estimated R68 million was stolen in bank robberies and cash in transit heists, and R55 million in Automatic Teller Machine (ATM) crimes. Fraud far outstripped robbery in monetary terms, costing the banking industry around R4 billion. This amounts to 65% of the annual operating profit of R6 billion.
With the help of the police, robberies have been reduced both in number and the amount of cash stolen. But the cost to the banks and indirectly their clients has been high. According to the banking council between R800 million and R1 billion is spent annually to protect banks from robbery using video equipment, security equipment and timing devices.
Compared to robbery, there are, according to sources in the industry, no signs that fraud is decreasing. Police statistics show that 62 086 fraud dockets were opened in South Africa in 1998 with an estimated value of R4.6 billion. With 32 762 dockets opened in the first six months of 1999, projections for 1999 indicate an increase of 5.5% from 1998. This would represent the greatest year-on-year increase since 1994. Between 1994 and 1998 levels of reported fraud have remained largely unchanged (Figure 1).
Police statistics are of course an under representation of the fraud problem, since businesses do not report all incidents. In 1994 a Unisa study estimated that only 45% of employee fraud incidents were reported to the police.
Cheque fraud
The main problem for banks is cheque fraud. Interpol estimates that 46% of banking fraud worldwide is cheque fraud. In South Africa the figure is probably just over 50%. Although not a large majority of cases, in monetary terms cheque fraud is costing the industry dearly. According to the banking council, R151 million was lost to cheque fraud in 1998.
Table 1 Returns on equity aroung the world
Considering the size of the banking industry, the volume of cheques processed daily and the sophisticated approach used by crime syndicates in the country, it is unsurprising that the banking sector — like most other commercial sectors — has been affected by high levels of crime in South Africa.
On a daily basis the industry’s 4 038 branches and agencies process about 2 million ATM transactions, 1.2 million electronic funds transfers (EFT) and 1.1 million cheques. An average cheque passes through about 18 pairs of hands in the cycle from issuing to payment and return. Along with high volumes, the scope for cheque fraud is compounded by the large numbers of people involved in cheque processing.
This creates many opportunities for corrupt employees and crime syndicates. Syndicated crime has grown in South Africa since 1994 and means fraudsters are better organised and more efficient. This in turn increases the scope for their operations and makes detection more difficult. In 1996, 18% of the criminal syndicates known to the police were targeting financial services.
What is being done
Preventing most cases of cheque fraud is possible. The banking industry is actively confronting the problem. Internally banks are raising awareness among their employees and corporate clients about how to prevent cheque fraud.
Incentives are also being offered to employees to report fraudulent activity. For example staff at First National Bank and Rand Merchant Bank who stop potential fraud qualify for a monthly draw with a chance to win R25 000. At the end of the year all qualifying entrants are entered into a draw for the grand prize of R1 million and five additional awards of R50 000.
Two commercial crime courts have also been set up by the justice department and the banking council. This project, which will pilot the use of specialised courts, is costing the council R5 million over the next three years. This initiative is encouraging but according to the council’s CEO, a strategy that will make a real difference to levels of fraud is not yet in place. A national anti-corruption drive will be crucial along with continued cooperation with the justice, safety and security and correctional services departments.
In future, the users of banking services will probably be expected to take more responsibility for prevention. Proposed new legislation will hold clients responsible for the drawing of cheques, the safe custody of cheques and auditing and reconciling their bank statements.
The nature of cheque fraud indicates two key areas for intervention: tighter monitoring and controls over those handling cheques, and a move towards electronic banking.
Figure 2 Number of fraud dockets opened by the SAPS, 1994 - June 1999
Focus areas
Cheque fraud can occur in three ways: forgery (including cloning and forged signatures), stolen originals and fabrication. Increasingly it involves cloning and reproducing entire cheques using sophisticated methods, rather than more rudimentary attempts to alter information on a cheque.
With technology, criminals can defraud a cheque using a few basic chemicals or simply their home computer and colour printer. This makes detecting cheque fraud much more difficult. For the banking industry, one solution is to keep ahead of technology — an expensive option that requires coordination between banks. The most cost effective measure with immediate benefits is to transfer clients from paper based banking towards electronic banking.
Already the electronic banking industry is growing in South Africa by 16% a year in terms of the volume of transactions. The value of transactions has increased by a third. In 1998 the industry volume of inter-bank transactions processed was 280 million with a value in excess of R3 447 billion. By simply reducing the number of cheques and chequebooks in circulation, cheque fraud will decrease.
But sophisticated technology is not the main reason for the escalation in cheque fraud. More important is slack or inadequate controls and monitoring by businesses and banks — where most cheques are issued and received.
The result is that organisations are left vulnerable to theft or human error. Weak controls and procedures open a gateway for employees engaged in routine or repetitive work, who are under pressure or simply greedy, to make mistakes or take part in theft.
In this environment electronic banking reduces the potential for fraud by limiting the numbers of people involved and the volumes of paper moving between organisations. But maintaining effective internal controls will remain a priority to reduce fraud. A significant proportion of cheque fraud is committed in collusion with employees of organisations involved in the cheque processing cycle.
Antoinette Louw
Institute for Security Studies
