FRM in Financial Institutions AntiFraud Forum Kemal zmen

FRM in Financial Institutions Anti-Fraud Forum Kemal Özmen, Forensic Director 16 May 2012

There is a diverse array of risks of fraud that have materialized into real cases in Romania, CEE and Western Europe in the last few years Romanian. Bulgarian cross border motor insurance fraud Theft of cash and other valuables from bank branches Loans granted based on false documents and information Collusion between lessee, supplier and agent Rogue trading Ponzi and other investment schemes Fraudulent bankruptcies Financial statement manipulations re: sub-prime exposures Credit cards fraud © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. 1

Turbulent times definitely contribute to increased fraud. Estimates vary between 510% of worldwide corporate revenues being lost to fraud Increased Opportunity Down sizing / re-engineering risk, process automation, dual control and lack of segregation of duties Increased ease of rationalisation Reduced remuneration, morale, incentives, perceived inequity and personal growth opportunities Increased financial motivation Inflation, personal debt burdens versus negative personal financial growth OPPORTUNITY RATIONALISATION MOTIVATION © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. Note: Source: Fraud Triangle Donald Cressey 1953 2

While the benefits of improving the fraud risk management strategy are clear and demonstrable, you cannot manage the fraud risks that you cannot see • • • See less See more © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. Fraud Risk Management Strategy • Stronger • An organization's fraud risk management (FRM) strategy can present a competitive difference in the financial service market. End game is more efficiently managing costs than your competitors. Losses related to fraud, theft and corruption are taken directly off the organization's bottom line. Depending on the profitability ratio of your organization, every 1 RON lost to fraud means that a further X RONs would have to be generated to replace this lost value/profitability. Add to that the damage to the reputation and brand name of an organization and the loss of the confidence. The cost of disinvestment as the result of a negative public incident can far out weigh the initial direct financial loss. Organisation’s waterline • Weaker Direct and Indirect Losses to Fraud 3

Nevertheless financial services institutions have a responsibility to stakeholders to manage fraud risks …external drivers for fraud §Impersonation and false information on loan applications §Double-pledging of collateral §Forged or valueless collateral §Misappropriation of loan funds by agents/customer §Kickbacks and inducements § Money laundering § Fraudulent instructions § Insider trading …internal fraud risk factors Retail and corporate banking– credit business § Loan to fictitious borrowers § Use of nominee companies § Deposit transformation § Transactions with connected companies § Asset quality manipulation § Kickbacks and inducements § Use of parallel organisations § Selling recovered security below market prices § Bribes to obtain release of security or reduce claimed amount Private banking § Depositor camouflage § Unrecorded deposits § Theft of customer deposits / investments § Off market rings § Related party deals § Broker kickbacks Securities business § False deals / unrecorded deals / delayed deal allocations § Misuse of discretionary accounts § Exploiting weaknesses in matching procedures § Mismarking of valuation rings § Bogus documents § Forged power of attorney Investment banking business § Bogus investments § Selling or lending without authority § Front running and insider trading § Share ramping © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. FRM responsibilities • Develop and maintain • • an effective FRM strategy Properly manage and mitigate fraud risks Safeguard and protect assets Protect stakeholder interests Protect reputation and brand 4

Managing fraud risks means prevention of fraud, detection of incidence of fraud and response in the face of a fraud event Prevent fraudsters as early as possible: • Identify fraudsters before they become customers • Indentify fraud committed by organized groups before significant losses incurred Enhance early detection of fraud in existing portfolio: • Strengthen fraud monitoring • Increase awareness of fraud management • Improve reporting lines Respond to fraud promptly and adequately in order to: • Mitigate potential losses • Prevent future incident through self learning process • Discourage irregular behavior through thorough disciplinary and legal action © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. 5

There are many different elements to consider when implementing an FRM strategy, most important of all is alignment with the organization Governance Prevention Detection Response • FRM framework and policies • Roles and responsibilities • Objectives and reporting • Empowerment and monitoring • Integration with other functions • Fraud risk assessment • Fraud risk register • Anti-fraud controls • Awareness programs • Employee screening • Ethical assessments • Proactive monitoring of transactions with clients • System detective controls • Whistleblower hotline • Reactive reviews and data analysis • Fraud response and investigations framework and protocols • Evidence to legal counsel, regulators, and to legal and disciplinary proceedings • Protocols for disclosure and other remedial actions © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. 6

The fraud prevention and detection framework and support technology must be integrated to the overall Fraud Risk Management process A Fraud prevention and detection system implementation is not a one-off exercise. Calibration It must be established as a continuous process and requires ongoing improvement. FS institution specs Product specs Historical patterns FRM framework Data gathering, analysis, testing and evaluation General fraud detection and follow-up rules & principles high cost high % of fraud identification Follow up © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. 7

This is how the framework, methodology and the support technology would come together Business events Transactions in core applications Management response to fraud Capture, analyze, corroborate Red flags Access to records and data Fraud scenarios DB Fraud risk register © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. Investigation and Response methodology 8

The FRM framework and any support technology has to support the following processes Primary and secondary processes, e. g. analysis process prior to approval / underwriting Automated fraud detection mechanisms, e. g. for transactions based on red flags Use of all known fraud indicators, red flags and scenarios Maximum utilization of all available data Regular and Ad hoc portfolio screening Facilitation of investigation phase and decision making Control over the investigation process, ensuring adherence to professional standards Continuous gathering of relevant information and its further utilization Monitoring of employee actions Flexible reporting tools facilitating effective monitoring © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. On-line, real-time, ex-post 9

A wide range of aspects need to be considered during implementation Awareness has to be built up in top management and all levels below FRM processes have to be aligned with existing processes and systems Changes to existing process (e. g. enhanced data gathering) Any changes resulting from the IT tool implementation have to be reflected in policies and procedures Roles and responsibilities have to be defined (segregation of duties) Reporting (ex post, ex ante, online) and escalation lines have to be established Fraud indicators/scoring model must be accessible only to a limited user group only Employees should be trained adequately to be able to utilize features of the system Utilization of synergies – e. g. AML, credit risk, claims risk, asset / collateral risk Data sharing with other systems (DWH, Risk Management, Core System, Collections) Data Quality & Data protection against theft or corruption Automated update of blacklists and other indicative statistics © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. 10

This is how a typical Fraud Risk Management framework and support system implementation project would look like People Business processes Technology Infrastructure Design of FRM framework, processes and systems GAP analysis of current FRM structures and processes Phase II Design of FRM framework, processes and systems Phase I GAP analysis of current FRM structures and processes § Understanding of banking processes and products under consideration § Understanding of current FRM framework, systems, processes and controls § Comparison of existing processes and controls against FRM model and identification of key gaps § Review of functionality of the considered tools and assessment of their flexibility and usefulness from the fraud scoring system perspective § Analysis of potential use of the selected IT tool in respect of fraud scoring system § Development of the road map and business case for enhanced FRM § Design of FRM framework: § § § Roles and responsibilities, Governance model, Fraud unit, Strategy, policies and procedures, Motivation schemes § Design of processes related to ongoing monitoring of the risk of fraud and performance of the initial fraud risk assessment § Design of the processes and controls in respect of fraud: § Prevention § Detection § Response Support in implementation Phase III Support in implementation § Assistance in the implementation of FRM framework, processes and controls by assisting in: § Creation of anti-fraud unit § Development of fraud strategy § Drafting policies and procedures § Development of awareness programs § Implementation of controls § Trainings § Fraud detection system testing and Proposed calibration recommendations § Work flow testing § Design of the automated fraud detection / scoring tool © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. 11

Questions & Answers Kemal Özmen Forensic Director KPMG in Romania Head of Forensic Services in Romania, Serbia and Montenegro, Bulgaria and the Balkans kozmen@kpmg. com T: +40. 372. 377. 839 F: +40. 372. 377. 700 M: +40. 748. 234. 635 © 2012 KPMG Romania SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative("KPMG International"), a Swiss entity. All rights reserved. PDC no. 8229. 12

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