A BRIEF ON HOW TO DETECT FRAUD IN BANKING AND FINANCIAL SECTORS - Nik Zafri

Please also read my other articles about money laundering and anti-corruption.

Detecting fraud is usually linked money laundering, and corruption in the banking and financial sectors is crucial for maintaining the integrity of the financial system. there are strategies and technologies need to be taken into account.

1. Fraud Detection

a. Transaction Monitoring Systems (TMS)

These systems analyze transaction patterns in real-time or near real-time to detect suspicious activities. They use predefined rules, statistical models, and machine learning algorithms to flag anomalies. This will enable banks to proactively detect and investigate suspicious activities, helping to prevent them from escalating into more significant financial crimes. By identifying and halting illegal transactions early, banks can avoid potential losses and reduce the risk of regulatory scrutiny.

b. Anomaly Detection (AI)

Machine learning techniques (AI), such as supervised and unsupervised learning, are employed to detect deviations from typical behavior. These methods can identify unusual patterns that may indicate fraud. Machine learning models has proven effective in detecting anomalies by identifying unusual patterns in vast datasets. These AI models continuously learn from transaction data, adapting to emerging fraudulent schemes in real-time.

c. Behavioural Analytics

Sometimes, a user behaviour can also indicate fraudulent activity. These include frequent login times, transaction types, and sometimes at different locations and mixture of transactions (frequent use of cash deposit machine with significantly large amounts at different locations and online transfers/interbank transfer) 

d. Multi-factor Authentication (MFA)

Implementing MFA helps in preventing unauthorized access to banking systems, which is a common precursor to fraud. It can pose problems to the customers with too many authentications and verifications but it will protect both customers and bank from fraud and scamming. MFA adds an extra layer of security beyond just a password. Customers must provide two or more verification factors—such as something they know (a password), something they have (a smartphone or security token), or something they are (a fingerprint or facial recognition). This makes it much more difficult for unauthorized users to gain access, as even if they manage to obtain one factor, they would still need the additional factor(s) to successfully log in.

2. Money Laundering Detection (Anti-Money Laundering or AML)

a. Know Your Customer (KYC) and Customer Due Diligence (CDD)

KYC involves verifying the identity of customers, while CDD involves ongoing monitoring of their transactions to help identify potentially suspicious behavior linked to money laundering.

b. Suspicious Activity Reporting (SAR)

Banks are required to file SARs for any transactions that they suspect may involve money laundering. These reports are then reviewed by financial regulatory authorities such as Bank Negara.

c. Risk-Based Approach

Financial institutions categorize customers and transactions based on their risk level. Higher-risk transactions are monitored more closely to detect potential money laundering.

d. Transaction Structuring Detection

Money launderers often structure transactions in small amounts to avoid detection. Advanced algorithms can detect patterns of structuring across multiple accounts or over time.

e. Beneficial Ownership Identification

It's essential to determine the true owners behind complex corporate structures, as money launderers often hide behind layers of corporate entities.

3. Corruption Detection

a. Conflict of Interest Checks

Regular audits and checks can help identify situations where employees or executives of the bank might have conflicts of interest, potentially leading to corrupt activities via specific client favoritisms.

b. Vendor and Third-Party Risk Management

Financial institutions should monitor and evaluate the integrity of vendors and third-party relationships to detect corrupt practices, such as bribery or kickbacks.

c. Whistleblower Programs

Encouraging employees to report corrupt activities internally through protected channels can lead to the early detection of corruption.

d. Internal Audits and Controls

Regular internal audits can identify weaknesses in financial controls that could be exploited for corrupt purposes.

4. Technology and Data Analytics

a. Artificial Intelligence and Machine Learning:

AI and ML are increasingly used to detect complex fraud, money laundering, and corruption schemes. These technologies can analyze large datasets and identify patterns that humans might miss.

b. Blockchain Technology

Blockchain’s transparency and immutability make it a powerful tool in preventing fraud and money laundering, especially in tracking the provenance of funds.

c. Big Data Analytics

Analyzing vast amounts of structured and unstructured data helps in identifying suspicious activities across different systems and jurisdictions.

d. Network Analysis

Analyzing relationships between different entities (e.g., customers, accounts, transactions) can reveal hidden connections that may indicate fraudulent or corrupt activity.

5. Regulatory Compliance and Reporting

a. Regulatory Technology 

Regulatory Technology help financial institutions comply with regulatory requirements by automating the monitoring, reporting, and auditing processes.

b. Continuous Training and Awareness

Financial institutions must regularly train their employees on the latest fraud, AML, and anti-corruption techniques and regulations to ensure vigilance and compliance.

c. Collaboration with Law Enforcement

Financial institutions often work closely with law enforcement agencies such as Bank Negara Malaysia, Security Commission, the Police (PDRM), Company Commission etc. to share information and intelligence, helping to detect and prevent illicit activities.

6. Challenges and Emerging Threats

a. Cyber Fraud

As banking becomes increasingly digital, cyber fraud (e.g., phishing, hacking) poses a significant threat. Institutions must continuously update their cybersecurity measures.

b. Cross-Border Transactions

Detecting fraud and money laundering in cross-border transactions is challenging due to differing regulations and the complexity of tracking funds across multiple jurisdictions.

c. Cryptocurrency Risks

The rise of cryptocurrencies presents new challenges for detecting money laundering, as these digital assets offer a degree of anonymity and are harder to trace.

Conclusion

Detecting fraud, money laundering, and corruption requires a multi-faceted approach that combines advanced technology, strict regulatory compliance, and robust internal controls. As threats evolve, financial institutions must stay ahead by adopting innovative detection methods and continuously improving their risk management strategies.

Kursus Pencegahan Risiko Penggubahan Wang Haram serta Pembiayaan Keganasan dan Pengurusan Dana Awam

Kursus Pencegahan Risiko Penggubahan Wang Haram serta Pembiayaan Keganasan dan Pengurusan Dana Awam

Jaringan Kerjasama Jabatan Pendaftaran Pertubuhan Malaysia, Bank Negara Malaysia dan Suruhanjaya Pencegahan Rasuah Malaysia

Ianya dihadiri oleh lebih 300 orang peserta dari NPO/NGO, Koperasi, Yayasan, kakitangan-kakitangan SPRM dan BNM dll.

Penghargaan saya kepada Presiden dan Pengasas Pertubuhan Wanita dalam Urustadbir dan Teknologi Malaysia (WIGTA), Puan Tetty Henney binti Zulkifli

PREVENTING BRIBERY AND ILLEGAL BOOKMAKERS IN MALAYSIAN FOOTBALL (by NIK ZAFRI)

 

Remember the bribery cases involving FIFA? the international governing body for football (soccer). One of the most notable cases is the FIFA corruption scandal that came to light in 2015.

The FIFA corruption scandal involved allegations of widespread corruption, bribery, and racketeering among FIFA officials and other football administrators. The investigation, led primarily by the United States Department of Justice, uncovered a range of corrupt practices, including bribery related to the selection of host countries for the FIFA World Cup, the awarding of broadcasting rights, and other commercial deals.

Numerous FIFA officials and executives were indicted and arrested on charges of corruption, including bribery, money laundering, and fraud. Several high-ranking officials were banned from involvement in football-related activities due to their involvement in the scandal.

The FIFA corruption scandal prompted widespread condemnation and led to calls for reform within the organization. FIFA implemented various measures to improve transparency, governance, and integrity, including the establishment of independent oversight bodies and the adoption of stricter ethical standards.

The FIFA corruption scandal serves as a stark reminder of the challenges facing international sports organizations in combating corruption and preserving the integrity of the sport. It underscores the importance of robust governance mechanisms, transparency, and accountability in preventing bribery and corruption within football and other sports.

Bribery and Illegal Bookmakers

When discussing corruption in football, it's essential to consider bribery and the involvement of illegal bookmakers simultaneously.

To spot, address and prevent bribery in soccer requires vigilance, transparency, and strong ethical standards. Knowing the common signs of bribery is very important. Issues like sudden outcomes or players/managers behaving suspiciously.

Despite there have been great effort to educate everyone involved on the consequences of bribery and corruption, understanding the importance of maintaining integrity is another matter. Sometimes, the problem in raising awareness in football is the need to include more and more legislations.

It is also important to understand the MO of illegal bookmakers. They often offer large sums of money to players, coaches, referees, or other individuals involved in football matches to influence the outcome of games. This financial incentive can tempt individuals to engage in bribery and corruption. Illegal bookmakers seek to manipulate betting markets by bribing players or officials to fix the results of matches. By controlling the outcome of games, they can profit from betting on predetermined results, undermining the integrity of the sport. These illegal operations will undermine fair competition.

Illegal bookmakers tend to find vulnerable individuals to participate in bribery schemes. The vulnerable individuals are more susceptible to bribery offers due to their personal circumstances. Thus, the management need to be vigilant on the staff that they have hired. Screen them if necessary.

Football associations and clubs in Malaysia must support integrity initiatives dedicated to combating match-fixing, corruption, and illegal betting in sports. Contribute resources and expertise to their efforts to protect the integrity of soccer and other sports. Be open to collaborate with law enforcement agencies to investigate and prosecute illegal bookmakers and their associates. The management also need to share intelligence and coordinate efforts to disrupt the illegal operation.

We need to establish clear and strict rules against bribery and corruption. Make sure everyone involved, from players to officials, understands these rules and the penalties for breaking them. This must include the risks associated with illegal betting and the importance of reporting any suspicious approaches or activities.

The management of football associations and clubs need to ensure strong governance structures within the sport to prevent opportunities for bribery, matchfixing and illegal bookmakers. This includes having transparent decision-making processes and accountability mechanisms. Transparency as part of important core elements of good governance helps build trust and deter individuals from engaging in unethical behavior.

However, lack of transparency may support further growth of the clandestine nature of bribery and illegal bookmaking operations which will make them difficult to detect and investigate. Transactions often take place under the radar, away from public scrutiny, making it challenging for authorities to uncover evidence of wrongdoing.

There is also the need to establish strict anti-corruption policies and protocols within soccer organizations in Malaysia, including codes of conduct, reporting mechanisms, and disciplinary measures for those involved in illegal betting.

Whistleblowers (officials or even fans from fanclub) in football matches witnessing elements or signs of bribery is important. There is a need to create a safe environment for individuals to report suspicious behavior without fear of retaliation. There is also a need to implement anonymous reporting systems in football associations to encourage transparency. The management of associations need to take any allegations of bribery seriously and conduct thorough investigations.

It's a good move to alert the authorities or better involve them as well. Collaboration with law enforcement agencies (such as SPRM) and relevant authorities to tackle bribery and corruption effectively. If bribery is discovered, take swift and decisive action against the offenders. This may include banning them from the sport or pursuing legal action.

Preventing bribery in soccer requires a collective effort from everyone involved, including players, officials, administrators, and fans. By promoting integrity, transparency, and accountability, the sport can maintain its credibility and uphold its values.

Matchfixing and bribery can be detected by working closely with the management, managers, players, ex-players and whistleblowers. Malaysia has regulated that all forms of sports betting (at bookmakers) and online gambling as illegal. Illegal bookmakers in football involves several measures aimed at identifying their activities, disrupting their operations, and implementing preventive strategies.

The whistle blower or undercover officials need to monitor betting patterns especially involving large sums of money and match the sudden shifts in odds. Analyzing data carefully can potentially identify suspicious activities. This can also be a high risk job as bribery and illegal bookmaking operations often involve complex networks of individuals and organized crime syndicates (possibly money laundering activities as well) These networks can be difficult to detect and dismantle, requiring extensive resources and expertise.

Security measures need to be beefed up at stadiums, training facilities, and other venues to prevent unauthorized access by individuals associated with illegal bookmaking operations.

So far, the existing laws and regulations against illegal gambling activities are adequate, including prosecuting bookmakers operating outside the law and confiscating their assets. But there is also a need to continually promote awareness to the general public about illegal bookmakers and the harsh punishment that comes with it.

Nowadays we need to leverage technology, such as data analytics and surveillance systems, to identify and track illegal bookmakers and their networks. I suggest a collaboration with technology companies to develop tools for detecting and preventing illegal betting activities.

By implementing these measures and fostering collaboration among stakeholders, soccer organizations can effectively spot, take action against, and prevent illegal bookmaking activities, safeguarding the integrity and credibility of the sport.

Addressing these challenges requires a concerted effort from football organizations, government authorities, law enforcement agencies, and other stakeholders to implement comprehensive strategies aimed at preventing bribery and illegal betting, strengthening governance and integrity measures, and fostering a culture of transparency and accountability within the sport.

Public perception towards bribery and illegal bookmaking in football in Malaysia is typically negative. These activities are seen as undermining the integrity of the sport and compromising its fairness. Bribery involving acceptance of money or other incentives to influence the outcome of matches, is widely condemned as it distorts the natural competition and erodes trust in the game.

Similarly, illegal bookmaking, which involves unauthorized gambling on football matches often with ties to organized crime, is viewed as harmful. It can lead to match-fixing, manipulation of odds, and other illicit activities that tarnish the reputation of football and threaten its legitimacy as a sport.

Fans, authorities, and stakeholders in football generally advocate for strict measures to combat bribery and illegal bookmaking, including robust regulations, investigations, and penalties for those involved. There's a growing recognition that maintaining the integrity of the game is crucial for its long-term sustainability and credibility.

TATAKELOLA YANG SALAH - RENUNGAN HARI INI

Bila berbicara mengenai tatakelola, ketelusan adalah salah satu asas yang penting. Tidak guna berbicara mengenai tatakelola dengan niat yang tidak jujur.

Ada pihak-pihak tertentu apabila diminta laporan, mereka menyediakan 2 laporan yang berbeza. Satu laporan sebenar yang disimpan untuk dilihat oleh orang-orang tertentu, satu lagi laporan "berhias" untuk diserahkan kepada pihak atasan.

Laporan "cantik" hanyalah untuk "feel good factor" dan tidak menggambarkan suasana yang sebenar.

Ini menyebabkan ketidaktepatan maklumat mungkin juga membuka peluang kepada unsur korupsi berlaku.

Kisah sebenar hanyalah diketahui apabila melihat hasil/keputusan akhir atau berlaku sesuatu peristiwa yang kurang menyenangkan atau apabila pihak atasan turun sendiri untuk memeriksa ketepatan laporan berkenaan atau apabila pihak ketiga yang dilantik pihak atasan untuk memeriksa rekod/dokumentasi.

Perkara ini; pada saya; tidak patut berlaku dan sepatutnya dibendung oleh pihak pengurusan kerana ketidaktepatan maklumat laporan adalah juga unsur korupsi.

Jika mana-mana ahli pengurusan merasakan adanya unsur negatif seperti ini, tidak perlu takut untuk melaporkan hal yang sebenar kepada pihak atasan dengan bukti-bukti yang jelas supaya tindakan susulan boleh dilaksanakan.

Hal ini menjadi satu kesalahan dari segi agama dan perundangan terhadap mereka yang tidak melaporkannya atau memberikan laporan yang tidak benar dan juga ke atas mereka yang tahu akan kebenaran tetapi memilih untuk menyembunyikannya kerana ketakutan hilangnya sesuatu kepentingan.

A CASE STUDY OF CORRUPTION IN PROCUREMENT (CONSTRUCTION) THAT WAS OVERLOOKED BY ABMS AUDITORS - BY NIK ZAFRI

True case. That's why ABMS Auditors and the Authorities should also be equipped with some "forensic audit skills" especially when it comes to construction industry.

SOME OF THE SHADY TACTICS OF MONEY LAUNDERING - NIK ZAFRI

1) Professional services firms for example accounting, legal and even consultancy firms may unwittingly or knowingly become entangled in money laundering schemes.

Criminals might exploit them by using complex transactions- creating intricate financial transactions or structures, using services to obfuscate the origin of funds or make illicit gains appear legitimate. On the other hand, some professionals might be complicit in facilitating money laundering by either turning a blind eye to suspicious activities or actively aiding in the creation of complex financial setups that conceal the illegal source of funds.

Oversight and due diligence by these firms may also result in inadvertently processing transactions that involve illicit funds without recognizing the red flags.

A conflict of professional secrecy vs a crime will always be an issue. Professionals might be exploited by criminals to shield their activities from scrutiny, using these professionals to shield their transactions or communication from legal investigations.

I hope regulatory bodies should monitor some of these firms and ensure they too implement anti-money laundering measures and know-your-customer protocols. I know many professional firms are dedicated to comply with anti-money laundering and anti-corruption laws but the authorities should find more effective ways to prevent such misuse.

The reality now is that, I notice gaps in compliance or deliberate evasion may enable criminals to exploit and manipulate these services for money laundering purposes.

2)  The process of money laundering in the realm of cryptocurrency involves criminals using diverse methods and services to route funds through numerous addresses or enterprises, obscuring their initial source. Following this, these funds are moved from a seemingly lawful origin to a specific address or platform for conversion into cash.

This approach involves employing cryptocurrency tumblers and mixing services. These services fragment unlawful funds into smaller sums, dispersing them among various addresses before reuniting them, effectively disconnecting the connection between the initial fund source and where it eventually ends up.

CORRUPTION AND MONEY LAUNDERING TODAY

 I'd sincerely advise those involved in money laundering or corruption: attempting to outwit authorities is not a viable strategy. Eventually, regardless of your cunning, the risk of being caught is high, leading to severe penalties and imprisonment.

Corruption and money laundering constantly evolve as people find new ways to exploit systems.

Cryptocurrency is one of them. Its decentralized and pseudo-anonymous nature makes it attractive for illicit activities. Criminals are hiding behind cryptocurrencies to launder money by converting it into various cryptocurrencies and moving it through multiple accounts.

The good old trick still lives -  - establishing shell companies and trusts in countries with lax regulations allows individuals to obscure their identities and the origins of funds.

Trade-Based Money Laundering is done by manipulating trade invoices or falsify goods and services to move money across borders without detection.

Another old trick is via real estate where launderers invest illicit funds in high-value real estate, which can be sold later, legitimizing the money.

What is on the rise now are online gaming and gambling. These too are using platforms or sites to launder money by placing bets and cashing out with "clean" money.

The authorities should also look into those providing "the so-called" "professional services" hiding behind legal or accounting firms to legitimize illegal funds through transactions or complex financial structures.

Other which has posed so much risk is what I know as Cyber-Enabled Financial Crimes. Techniques like phishing, ransomware, and hacking can generate illicit funds that are then laundered through various means, including cryptocurrency.

Authorities and financial institutions should continuously adapting their strategies to combat these evolving methods. Technologies like AI and machine learning must be employed to detect patterns and anomalies in financial transactions, aiding in the fight against money laundering and corruption.

TYPICAL CORRUPTION PRACTICES IN PROCUREMENT (ANTI-BRIBERY MANAGEMENT SYSTEM SERIES)

Photo source : Dreamtime

Based on my experience in assessment, one of the most critical department that I would focus on would be Procurement (or Purchasing) This is because the department are involved in various transactions with Supplier/Sub-Contractor/Materials where if not properly controlled or without proper procedure, potential and risk of corruption practices may occur.

Disclaimer - Without naming such organization (s) due to Oath of Confidentiality and the author may change some details/sequence of events - corruption in the Procurement Department can occur through various means and practices. Here are some common ways in which corruption can happen in procurement:

(1) Bribery

Suppliers/Subcontractors may offer bribes to procurement officials in exchange for favorable treatment, such as winning a contract or receiving preferential pricing. This can involve cash payments, gifts, vacations, or other forms of illicit benefits.

(2) Collusion

Procurement officials may collude with specific suppliers/subcontractors to manipulate the bidding process. They might provide confidential information about competitors' bids, set biased selection criteria, or create artificial barriers to exclude certain suppliers, all with the aim of awarding contracts to predetermined vendors.

(3) Kickbacks

Procurement officials may receive kickbacks from suppliers/subcontractors after awarding them contracts. In this scenario, the suppliers/subcontractors inflate their prices and then kick back a portion of the excess payment to the corrupt officials.

(4) Fraudulent Invoicing

Suppliers/Subcontractors can submit fraudulent invoices to procurement departments for goods or services that were never delivered or were delivered at inflated prices (even I've seen cases of wrong (intentional) delivery to a further location "blaming" the location given by Procurement (intentional) - in order for the subcontractor/supplier to claim additional cost) Corrupt officials may approve these invoices in exchange for kickbacks or other personal benefits.

(5) Conflict of Interest

Procurement officials with undisclosed personal interests or relationships may manipulate the bidding process to favour companies they are associated with, such as family members or close friends (cronyism) . This undermines fair competition and can result in biased contract awards. (anti-trust)

(depending of the case where "impartiality" can be proven)

(6) Nontransparent Procurement Processes

Lack of transparency in procurement procedures can create opportunities for corruption. For instance, if the Procurement Department operates without clear guidelines or proper oversight, officials can exploit loopholes to engage in corrupt practices.

(7) Weak internal controls

Inadequate internal controls and poor governance structures within the procurement department can facilitate corruption. Lack of segregation of duties, limited oversight, and ineffective auditing mechanisms create an environment conducive to fraudulent activities.

(8) Influence peddling

Powerful individuals or organizations may exert undue influence on the procurement process to benefit certain suppliers/subcontractors. This could involve political pressure, nepotism, or other forms of manipulation, thereby compromising the integrity of procurement decisions.

Preventing corruption in the procurement department requires robust anti-corruption measures, such as :

a) implementing transparent processes,

b) promoting accountability and ethics,

c) conducting regular audits, and

d) providing training on anti-corruption practices.

It's crucial to establish a strong ethical culture and foster an environment where reporting corruption is encouraged and protected.