Fraudsters find holes in new bank system

Banning of cheque payments valued at above Sh1 million has failed to curb banking fraud. Photo/FREDRICK ONYANGO
Banning of cheque payments valued at above Sh1 million has failed to curb banking fraud. Photo/FREDRICK ONYANGO 

Banning of cheque payments valued at above Sh1 million has failed to curb banking fraud and instead opened a new loophole for swindlers to steal money, financial consulting firm Deloitte has said.

Banking fraud is estimated to have tripled to Sh3 billion last year with majority of fraud occurring on the Real Time Gross Settlement System (RTGS) through which all payments above Sh1 million are processed, Deloitte’s forensic services department said on Tuesday.

The amount that banks were defrauded amounted to an average of Sh246 million a month, with almost half (Sh1.2 billion) of the total amount lost during the year not being recovered at all.

“Systems expected to improve competitiveness have instead created loopholes for fraud,” said Faith Basiye-Omolo, the chairperson of bankers’ lobby organisation the Kenya Bankers Association (KBA) fraud and security committee during release of the Deloitte report.

In the second quarter of 2010, Sh270 million was stolen through the RTGS, about 69 per cent of the total amount lost during the period.


Banks are also reported to have lost Sh21 million through Safaricom’s M-Pesa money transfer system.

“In March 2010, technology-savvy fraudsters were reported to have stolen an estimated Sh21 million from the mobile money transfer system M-Pesa,” the Deloitte report said.

Safaricom had not responded to a request for comment on the matter by the time of going to press.

Ms Basiye-Omolo said that while new systems are improving the cost efficiency as well as customer services, serious threats had emerged including hacking, malicious insiders, card skimming, manipulation of electronic files, circumvention of IT controls, unauthorised penetration and careless employees.

Total sum

The total sum lost was about four per cent of the pre-tax profitability of the industry for the whole of 2010 which amounted to about Sh72.4 billion.

The majority of fraud cases may not have been reported due to many banks wanting to protect their reputation, indicating that the percentage could be higher.

The RTGS, an instantaneous electronic payment system, and the electronic funds transfer (ETF) system where payments are held and settled in batches in were said to be the most common systems where money was lost.

Deloitte said Sh1.7 billion was lost in the third quarter alone, with a single bank losing Sh500 million in a transaction.

A summary report by KBA for 2009 revealed that Sh900 million was stolen through fraud, indicating that the 2010 figures were Sh2.46 billion higher.

It emerged that technologically-savvy employees are able to manipulate the electronic systems and move cash into designated accounts and withdraw it as their own.

Robert Nyamu, forensic and litigation services director at Deloitte East Africa, said: “It is alarming to note that the rate of convictions for bank fraud is very low. In the second quarter of 2010, 108 suspects involved in 102 reported fraud cases were arrested and charged in court. But only eight cases were finalised with five convictions and two cases withdrawn.”

He was making a presentation at a Deloitte-sponsored workshop at Nairobi Serena Hotel.

“While a robust fraud risk management framework may not eliminate the occurrence of fraud in its entirety, it goes a long way in reducing the risk,” Mr Nyamu said.