Fraud at a Customer's Business Could Mean Litigation for the Bank. (Finding Fraud)

By Butler, Steven I. | The RMA Journal, February 2003 | Go to article overview

Fraud at a Customer's Business Could Mean Litigation for the Bank. (Finding Fraud)


Butler, Steven I., The RMA Journal


Trust no one. Had the lender to a small printing company shared this "X-Files" advice, the bank would not have found itself accused of "oversight failure." Although the bank finally beat the rap, it was not without considerable time and expense as well as the loss of a good customer. With their higher level of experience, banks can and should help customers thwart fraud.

When a trusted employee at a bank's business customer goes bad," the consequences can be devastating not just for the employer but all too often for the bank as well. Because the employee has been so trusted, the fraud can go on for many years before detection, and the resulting losses can be huge. In addition, the employer may look upon the bank as partly responsible for the losses and allege a lack of internal audit controls and general vigilance. When this point has been reached, the customer may decide to seek compensation from the bank through litigation. A longstanding relationship between customer and bank has now collapsed, the bank's energies are redirected to defending itself, and a source of future business has been lost.

Not all fraud can be prevented but there are many ways the bank can help its customers reduce the risks. Bankers are often unaware how much customers look to them for assistance with their business beyond the merely financial relationship but are either too shy or too overconfident to ask. Unfortunately, bankers may not realize that customers really want them to understand their business. By failing to pick up on this often poorly expressed desire, bankers miss an opportunity to prevent fraud before it strikes. Bankers should take the time to visit their customers' places of business more often, ask questions, look for vulnerabiliries, and, most important of all, get to know the employees handling matters that affect the bank.

One of the most important things banks can do for their business customers is to urge them to check the backgrounds of all short-listed job applicants as well as those of people scheduled for internal promotion to positions of authority. This is particularly important when those positions involve responsibility for relations with the bank. Unfortunately, there is no profile of the potential employee-fraudster since so many frauds are crimes of opportunity perpetrated by people who appeared to be trustworthy up to the moment they committed the crime. Nevertheless, a check of credit records and educational documentation and a call to former employers are always worthwhile. It is not unknown for periods of "self-employment" to turn out to be periods in state prison!

There is always the risk that a trusted long-term employee may be having financial or other difficulties that could be driving him or her to consider fraud as a solution. Many people also have a dark side that can be aroused by greed and by envy of the lifestyles of the wealthy. They convince themselves their position of trust is a safeguard against any suspicion of dishonesty and therefore a cover for their thefts.

The trusted employee turned fraudster is a particularly difficult problem and, at the personal level, a heart-rending tragedy. People who are trusted by their employers are probably people also respected by their families and communities. A fall from this height caused by the discovery of a fraud will destroy a lifetime's reputation that can never be recovered.

How the Worm Got into the Apple

The following cautionary tale shows how a bank became entangled in litigation from a fraud committed by a customers trusted employee who had conflicting responsibilities, too little supervision, and a taste for luxury.

A husband and wife started a small printing business in the suburb of a large eastern city. The couple was very experienced in the printing business, understood the market, grew the business cautiously, and had an excellent relationship with their local bank. …

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Fraud at a Customer's Business Could Mean Litigation for the Bank. (Finding Fraud)
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