The Global Banking sector is currently a $134 billion industry. However, it has been one of the most prone sectors to large-scale fraudulent activities. In the recent past, the quantum of frauds has been on the rise. This can be seen especially in the Indian sector:
- ₹9,000 crore (over $1.2B) involving liquor baron Vijay Mallya for defrauding a consortium of lenders in 2017.
- Approximately ₹12,000 crore (over $1.66B) by an Indian gold trader for allegedly siphoning of 1,700 kg of imported duty-free gold.
- In 2018, a diamond trader and his family were accused of defrauding the Punjab National bank in India worth ₹14,000 crore (almost $2B).
Similarly, these frauds have been occurring all over the world. Some of the reasons are:
- Multiple layers of human intervention during the approval and operational purposes.
- Lack of stringent laws or no sufficient clarity available in the banking processes.
- Complex financial products having multiple grey areas.
- Lack of enough supervision at various checkpoints, especially after money has been disbursed.
- Difference of opinion between the Central Government and the Central Bank of the respective countries.
From the above pointers, we can assume that most of the frauds take place either due to excessive human involvement or human negligence. The employees generally do not take accountability and act in the long-term interest of the firm due to:
- Pressures from Superiors or senior management to act in the interest of a particular individual or entity.
- Absence of strong policies to prevent employees if any red flags are raised by them.
- Insufficient training to employees on the identification of potential red flags and how to enact if any possible threat is identified.
- Lack of positive attitude amongst the employees pertaining to such incidents. Most of them are bound by their social responsibilities and on most occasions choose to remain silent or act as per instructions.
Read more: How are banks screwing you over?
IS TECHNOLOGY THE SOLUTION?
The advancement of technology can widely help in neutralizing the above threats and raise the alarm bells at the right time and to the correct audience.
Certain technological solutions which can be implemented are:
- Any activity which involves the disbursement of financial resources should be executed online for all respective authorities to monitor.
- The aspect of Robotics or Blockchain technology should be considered for executing operational processes and raise red flags at appropriate check-points.
- Blockchain technology combined with various smart devices will enable investors to track the condition of investments and know if activities are being executed as per schedule. Individuals will get updates in real time and this will help eradicate all complexities associated with the existing system.
- All documents and financial statements should be vetted and uploaded for appropriate authorities to view and question, prior to disbursing any amount of money.
- The general public can enquire on any suspicious transaction with minimum human intervention. A prompt response should be recorded with justification. Additionally, the complainant should be given the option of keeping their identity private.
- If there is any complex financial product, it should not be cleared till online approvals are received from financial and investigative agencies.
- Terms of repayments have to be clearly defined and requisite collateral should be in place on account of non-payment.
- The collateral taken into custody should be recognized and its financial value should be determined and recorded. These facts have to be available and approved by financial and governmental agencies before processing any financial assistance.
Thus, there should be no limits on the use of technology in preventing banking frauds with the aspect of human intervention to be at a minimum level. Additionally, a strong framework should be in place to award those who raise potential red flags and heavily penalize those encouraging fraudulent activities.
Certain instances of a strong framework can be:
- Empower the auditors to immediately report any suspicious activity while vetting financial statements.
- Accountability has to be imposed on respective authorities and strict actions must be taken irrespective of the hierarchy.
- Government policies should be strengthened to prevent any loopholes. Assistance can also be considered with international counterparts.
- Multiple authorities such as Government agencies, Central Bank and Central Board of Investigations should be well connected if financial assistance is being offered to any influencing individual/entity.
Although banks have been one of the strongest institutions in today’s world, the high number of internal problems are a deep concern. It is quite evident that an upgrade in technology is required.
Found this article interesting? Then, you’ll definitely love our take on how blockchain technology can improve the banking industry.
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Financial Analyst for JP Morgan Chase | Content Writer for eduCBA | Mentor