Capital Markets

Identity theft tops stock market fraud


Nairobi Securities Exchange trading board. Fraudsters are using fake IDs to steal from investors. File

Identity theft is emerging as the most common form of fraud in the capital markets, the regulator has said.

The Capital Markets Authority (CMA) analysis shows identity theft, in which fraudsters use fake identity cards and supporting documents, is common especially in rural areas where swindlers take advantage of inexperienced staff to dupe sales agents.

The Capital Markets Fraud Investigation Unit has been busy this year as the number of fraud cases reported has jumped in just six months.

“So far, in this year alone, the authority is handling 190 reported cases, which are nearly 40 per cent of the total reported in 2011,” said Stella Kilonzo, CMA chief executive.

In the year to June 2011, the anti-fraud unit handled 460 cases, putting the number of reported cases this year at about 184. One way the CMA is trying to make it more difficult for ID fraudsters is by installing a real-time surveillance system, expected to be operational by June this year. The new software will cost Sh48 million and is being installed by InfoTech, a Pakistani-based company. Mrs Kilonzo was speaking yesterday at a fraud detection and prevention workshop in Nairobi.

The industry regulator said it had found that fraudsters were taking advantage of market developments that allow for the quick transfer of funds and execution of deals.

Last year, the fraud unit recovered Sh25.4 million of investor funds, up from Sh7.5 million in 2010 when it investigated 390 cases. Since the unit was formed in May 2009 it has recovered Sh96 million.

(Read: CMA anti-fraud unit recovers Sh25 million investor funds)

The Central Depository and Settlement Corporation (CDSC) is planning to register all account users in its system, which will allow holders to get a SMS notification whenever any transaction happens on their accounts.

“We hope that in the next three months we would have registered everyone,” said CDSC chief executive, Rose Mambo. Ms Mambo, said that from the company’s experience the propensity for fraud is higher in Kenya than in neighbouring countries. The CDSC has adjusted its system to put safeguards against internal fraud, which had not been envisioned by the Sri Lankan developers who claimed such malpractices are “unheard of” in the south East Asian country.

Kenya is earning a reputation as an economic crime hotspot after it ranked first in a survey on economic crimes by consultancy firm PWC.

PWC’s Global Economic Crime Survey gave Kenya a score of 68 per cent, more than 10 times Japan which had a six per cent score. The CMA’s legal officers will also be trained on prosecution to help, jointly with the Judiciary and the Director of Public Prosecutions, to expedite fraud cases. A backlog of fraud cases and sophistication of economic crimes are a setback to prosecution efforts.

The CID director, Ndegwa Muhoro, said that even when the law prescribes heavy punishments for offenders, if criminals know that cases were likely not to proceed beyond the prosecution stage due to an inefficient system, then fraud continues to thrive. A proposed step to further deter fraud is blacklisting employees who have been found guilty of engaging in fraud.

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