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Raising Fraudsters with Your Own Hands

In the first part we discussed the staff fraud challenges. Today we will highlight situations when the financial institution managers create conditions favorable for fraudsters.

In Ukraine the practice of loan arrangements within sales networks by network managers, without direct participation of representatives of crediting organizations, is getting widespread. The idea is not fresh: similar situations have been observed in Russia for several years. On the one hand, the company issuing loans may save on establishment and keeping its own sales network. On the other hand, here is the risk of decreasing quality of issued credits at least and creation of favorable conditions for the line personnel frauds as the highest risk.

However, the following scenarios of fraudulent actions are most probable in this case:

1. Sales outlet managers arrange credits based on ID card copies of customers who did not actually receive any loan. This is the most widespread fraud scheme. As a result, the financial company is extending its list of invariably loss loans. And the following question is becoming acute: how should business process, i.e. the operations risk control, be established if, from the legal standpoint, there is nobody you can hold a demand against?

2. Conversion into cash occurs when a shop or business entity makes out a de facto fancy account which is used not for selling a product, but to have credit money received from the financial company converted into cash. It’s important to stress that cash credit rates are substantially different from consumer credits, and many banks don’t provide cash credits. This is how the sales outlet functions as the center to convert consumer credits into general cash credits. As a result, the financial institution generates a higher risk credit portfolio than the bank risk managers have planned.

3. Accommodation of credits for wrong goods different from the ones which were actually bought. It is important that when buying on credit, the categories of goods differ by their risk rates. For instance, buying a cell phone on credit is much more risky than buying a washing machine. As a result, there are some cases when the loan bill is formally issued for a washing machine or refrigerator, but in fact, the expensive mobile phone is bought. This is the way how a shop decreases loan servicing expenses for a cell phone buyer. In this case, the shop faces no risks. But for the credit organization they are huge: it credits an obviously riskier product than it expected (and, as a result, this risk was included in the credit cost). Moreover, a cell phone or other highly marketable electronics bought on credit can be purchased not for personal use, but for resale (it often happens that a pawnshop becomes the next chain link) and converting it into cash.

During the first six months, the scheme of crediting by the sales network staff will be pleasing its founders. After a certain time, interests of the trade and financial parties will strongly diverge. The first one will chose the least prudent and the most "ambitious" partners from the crediting institutions, while these institutions will be covering the scheme disbursements at the expense of their shareholders and investors.