Frauds in the Banking Sector


Large amounts of resources, energy and time are utilized in development of organization policies, implementing of control systems, risk managing strategies and training of employees to ensure that they follow these measures. However, it is unfortunate that banks and organizations still fall prey to fraud. This is due to the factor that organizations do not take time to fathom the risks involved, the causative factors and how to hinder fraud activities. Therefore, in order to ensure that banks and organizations impede fraud occurrences, it is of great significance comprehending the major causes of fraud and the most effective ways of preventing and controlling fraud in banks. By understanding this, banks will be in a position to prevent revenue loss, improve business quality and maintain a good reputation.

Causes of bank frauds

There are various factors that lead employees to indulge in fraud activities. They include:

Financial Issues

Employees are trusted individuals who can turn to trusted violators in case they perceive themselves as having financial problems which can’t be shared but can be solved through violation of the financial trust they have. An employee could be under great pressure due to various issues that he/she considered non sharable. Examples of such issues include: violating obligations, business reversals, personal failures, and demands of gaining status, isolation from associates and friends and issues in employee-employer relationship. Notably, issues that are non-sharable to one individual may be different to the other hence this may not be only issue an individual is facing. Eventually, as an individual undergoes through much pressure, it is more likely that the individual will indulge in fraud once an opportunity arises.


It is undeniable that an employee has to perceive a particular opportunity in order to indulge in fraud with less chances of being caught. Opportunities could present themselves in various ways. To start with, the banking system could have internal controls that are poor hence, could be easily manipulated. Apart from that, a bank could have discipline policies that are weak. Therefore, an employee will feel less at risk and less threatened by his actions thus comfortably indulging in a fraud activity. An employee under pressure due to a non sharable problem is more likely to indulge in fraud once an opportunity opens up.

Differential Associations

With respect to paulo freire banking concept of education essay, crime is a learned behavior just like other subjects. He explains that criminal behavior is occurs through other people through communication. Therefore, criminal activities cannot exist without aid of other individuals. Therefore, when an employee is exposed to more definitions to violation of the law than definitions not related to law violation; it is likely that the employees will acquire a criminal behavior. Therefore, organizations with dishonest and criminal minded employees will gradually pass the dishonest trait to a number of honest employees. Therefore, through this employees will; feel more confident and supported in indulging in criminal activities like fraud.

Job Dissatisfaction

With respect to research, employees who are often dissatisfied with their jobs are more likely to indulge in fraud activities. Job dissatisfactions could be caused by low rewards, poor pay, high stressing working environment or bad employee employer relationship. Employees who perceive their working conditions as unfair or worse are more likely to commit and justify fraud. However, different researchers have contradicted on this theory with the reason that there is no enough evidence relating job dissatisfaction to indulging in Fraud activities.

Offender’s capability

With respect to various studies, offenders need the capability and ability to commit a fraud. This capability could entail technical knowledge, executing the crime or planning on how to get away with the offence. With respect to Cressey, cognitive abilities are also major causes of fraud. An employee could persuasive and manipulative hence using other workers to execute the fraud activities for him. To support this, researchers have used cognitive abilities in fathoming the reason managers could commit a fraud while others don’t and showed that the major reason behind this is an individual’s cognitive conditions and bias.

Misfit between norms and values

In the modern society, there have been great misfits between norms and values. To illustrate this, there is a major dilemma between goals and dreams and how to achieve them. Individuals may input effort to achieve their goals and could adopt solution types. They include: innovation, conformity, retreatism, rebellion or ritualism. These forms of adaptations emerge as a result of pressure s from the society related to economic success and achieving ones dreams. As a result, individuals are more likely to commit a fraud as a simple means of achieving their goals and being financially successful as they are expected by the community or peers.


Rationalization is the major reason that leads an individual in committing a fraud. Therefore, this can also be described as the motivation to undertake a fraud. With respect to Biegelman, an individual could use his verbal tone learnt from initial experience from friends or workmates in a particular culture. As a result, the offender develops a rationalization that excuses him or her to violate. However, these rationalizations do not escape legal prosecution since the main action is a crime. To illustrate this, an employee who takes a share of an organization’s money and claims to borrow but not steal realizes he/she is a criminal once the rationalization is eradicated.

Likewise, another cause of fraud is having an organization with a complicated organizational structure. This can be explained as an organizational structure designed to interfere with revenue streams hence hiding the real financial flow from other parties. Through these structures, employees could be highly encouraged to commit a fraud since it is more likely that they will be unnoticed. Likewise, accounting controls that are poor are more likely to lead to more fraud cases. This is due to the factor that the accountants will not indicate any money fraud. Additionally, poor information management is also another major factor that leads to fraud. Employees from organizations where results are not accurate, timely, and relevant or well detailed due to poor information management systems are more likely to commit a fraud.

Measures of combating and preventing Bank Fraud

The banking environment experiences two major forms of fraud: external and internal fraud. Detection of fraud is very complicated, notably; most fraud cases are often detected externally or through accidents. However, lifecycle verification and monitoring is major approach that can be used to combat fraud. This lifecycle entails eight stages. The first stage is deterrence which involves encouraging activities that discourage fraud via fear of the repercussions. The second stage is prevention and involves activities that keep away and hinders fraudsters from indulging in fraudulent activities. The third stage is detection which involves uncovering fraud attempts. On the other hand, mitigation entails activities that hinder the continuation or success of the fraud like blocking a bank account. The analysis stage aims at determining the major cause of fraud activities and factors that enabled the occurrence of fraud. The policy stage entails creating, evaluating and communicating policies objected at minimizing fraud.


Auditing is major preventative measure for fraud. It is undeniable that, a firm internal control system is the major defense strategy that organizations can put in place to detect and prevent fraud. Poor internal controls often leave a wide gap that could facilitate fraud. Such controls are exhibited through improper cash payment support and documentation, inventory controls that are poor, absence of segregation duties and obsolete or ineffective accounting software. Therefore, organizations should ensure that they conduct risk assessments periodically. The focus of these assessments should be on high risk sectors like marketable securities, cash, inventory and payroll.

Regulatory requirements and whistle blowers

Initially, whistle blowing was a voluntary act of raising concern whenever an employee notices incorrect information on accounting or auditing. However, in recent years, whistle blowers are often compensated after blowing a whistle. Despite the factors that whistle blowing could lead to other social pressures, organizations are obliged to offer protection and compensation to whistle blowers in order to minimize activities like fraud in organizations. Whistle blowing is an effective way of preventing fraud in banks and organizations.


Occurrence of fraud in banks is often facilitated be inadequate supervision. This is often experienced in international banks due to the factor that supervision levels vary from one country to another. However, by ensuring there is enough supervision through emphasizing on the consequences of fraud and clearly showing put an individual in charge, bank supervisors will be more strict in their supervision hence hindering and discouraging fraud activities.

Improving human resource management

A recruitment and employee selection strategy is a major way of preventing fraud. This is due to the factor that it enables organizations to stay away from employees with an initial bad reputation, dishonest or untrustworthy. Through this, an organization ensures that the company’s workmates do not influence each other which could lead to learning or criminal behavior.


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