Kenya’s commercial banks lose $9.4m to fraud in just six months

Fraudsters stole at least $9.4 million from commercial banks in the first half of the year in schemes that exploited gaps in online banking solutions and involved collusion with bank staff.

Data from the Banking Fraud Investigations Department (BFID), a division of the Central Bank, shows that 525 cases of fraud were leading to a loss of $8.5 million by various financial institutions in the first quarter of 2014.

In the second quarter of the year, $907,797 was stolen, a decline that can be attributed to technical mitigation efforts such as the move from stripe to chip ATM cards and increased consumer education.

In the first quarter, investigators only managed to recover $6.7 million while in the second quarter only $248,554 was recovered.

The investigation report cites identity theft, electronic funds transfer, cheques and credit card fraud, forgery of documents and online fraud as among the ways through which financial institutions lost cash.

The data indicates that between January and June, $6.2 million was lost through cheque fraud, $2.6 million through electronic transfer crimes and $13,403 via Internet scams.

Counterfeiting was the least recorded fraud at $93. Card fraud was at $112,773, computer fraud at $138,683 while mobile banking fraud was at $42,175.

The amounts could actually be higher as most banks disclose modest fraud figures for fear of reputational risk, a senior investigator with the police fraud unit said.

“We have always seen a trend where banks would rather resort to internal mechanisms to handle fraud, which sometimes involves staff collusion. They look at the reputational risks involved when making these decisions,” he said.

Kenya’s top five banks by profitability — Equity, Co-operative bank, Standard Chartered, KCB and Barclays — were the worst hit.

Recently, KCB, while releasing its sustainability report, said that it had dismissed some 94 employees in the past year over fraud and professional negligence. It said 22 per cent of its 431 former staff were sacked because of fraud.

“Cases of fraud within our bank are investigated thoroughly and dealt with decisively. We pride ourselves on doing business based on integrity and trust. We are, therefore, unapologetic for parting ways with members of staff who betray the ethical standards of behaviour that KCB Group abides by,” chief executive Joshua Oigara said.

Safaricom, Kenya’s largest telecommunication company, also announced the dismissal of 56 employees over fraud, corruption and ethical malpractice.

“We do not condone fraud within our organisation. Whether you have stolen a hundred shillings or a hundred thousand shillings, or if you have disclosed a customer’s data, fraud is fraud. If we have evidence of fraud, we take you to court. We take ethics and corruption very seriously,” said Safaricom chief executive Bob Collymore.

Early this year, a survey by PricewaterhouseCoopers ranked Kenya seventh in the world among countries with the highest levels of economic crime.

The survey found that economic crime continues to be a major concern for most firms in Kenya, with 52 per cent of surveyed respondents having experienced some form of it.

“At the regional level, African respondents continue to report the highest percentage of economic crime, though the gap has narrowed significantly since 2011,” says of the PwC 2014 global economic crime survey.

The East African Community is in the process of adopting uniform laws to fight cyber-crime, electronic fraud, data protection and privacy. The initiative has already been approved by the EAC Council of Ministers.

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Recently, the Kenya Bankers Association launched the ATM Safety campaign to curb card fraud.

Ms Nuru Mugambi, director of communications and public Affairs at the Kenya Bankers Association, said that banks are increasingly deploying safety enhancements such as skimming detection devices known as “jitters.”

“Skimming is a type of electronic identity theft and is an area banks are addressing very seriously in conjunction with the Banking Fraud Investigation Department at the Central Bank,” Ms Mugambi said.

A report released early this year by Deloitte East Africa, titled “Financial Crime Survey 2013,” says financial institutions in East Africa lost $30 million last year, though the figure could be as high as $89.41 million since most institutions opt not to report cases of fraud.

From the report, half of the cases happened in Kenya, with the rest happening in Rwanda, Uganda and Tanzania. Till mid last year, Uganda did not have a money laundering law, which saw the country record a high incidence of cheque fraud in 2013. Kenya, on the other hand has enacted the Proceeds of Crime and Ant-Money Laundering Act 2009.

READ: Gone in 12 months: How fraudsters stole $17m from Kenya’s banks

According to Deloitte, cash theft, cheque fraud and asset misappropriation remain the three main avenues of fraud affecting the region. Nearly 70 per cent of all financial crimes committed in East Africa were through cash theft.

Kenya had the highest levels of cash theft at 72 per cent, Tanzania was at 71 per cent and Uganda at 61 per cent. Cheque fraud was highest in Uganda, where it accounted for half of the financial crimes. Kenya was second while Tanzania was third.

However, cheque fraud in Kenya has reduced drastically since transactions involving more than KSh1 million ($11,110) were required to be concluded through Real Time Gross Settlement (RTGS), an online transfer.

Previously, cheques involving large sums were targeted by fraudsters who deployed forgery experts to substitute the names of beneficiaries. Physical movement of cheques before they are encashed was also stopped with the introduction of cheque truncation, where cheques are presented to the clearing house in electronic form.

Execution of financial crimes in East Africa commonly involves collusion between internal and external parties, as a way of compromising internal controls.
However, the report said that most organisations in the region also conduct risk based transaction monitoring on an ongoing basis.