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V Finance Focus Brendan Hawthorne Ian Felice
Managing Director and Head of Kroll’s Dubai office. Email: bhawthorne@kroll.com
Partner- Hassans & CEO- Line Management Services Limited 57/63 Line Wall Road, Gibraltar
Tel - +(350) 200 79000 Fax - +(350) 200 71966 Email - ian.felice@hassans.gi Website - www.gibraltarlaw.com
Bank collapses amidst mismanagement & fraud
Bank collapses have been both a cause and a symptom of today’s economic malaise, with government and depositor losses running into trillions of dollars. Where is this money now and why did the banks crash? Owners, management, compliance departments, regulators, and even governments are all in the frame. Investigators charged with looking into bank failures must keep uppermost in their minds the suspicion that the institution has been the victim of fraud, possibly perpetrated by the highest levels of its management.
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ndeed, new findings from Kroll’s Global Fraud Report reveal that two thirds of financial services businesses were affected by fraud in the past 12 months, and the sector has the highest level of internal
financial fraud and regulatory or compliance breach of any industry.
When a bank collapses, the inquest should start with an examination of the loan book. Its construction, the lending decisions, and the approach to loan management it reveals may answer why the institution was left exposed to unsustainable losses. From here, mismanagement can be differentiated from fraud and abuse.
This part of the investigation may uncover malpractice by bank owners and managers. For many, the temptation to misuse funds is too great. They may think that no one will know if they help themselves or friends to depositors’ money through loans made on
a cosy basis, sometimes even bearing no interest; they may even believe that the funds will eventually be repaid. The truth, though, can quickly become clear when a bank is in financial difficulty and people want their money out immediately. The chances that those who borrowed the cash will then have it to return are remote.
“Insider lending” is more frequent in emerging markets where bank owners have lent to groups of relatives or to members of the country’s elite. This practice may result from lack of control, or even naiveté, in handling and building the loan book. By lending to a cluster of inside parties, the bank may simply have wanted to cement its position at the hub of the country’s economy. When the global economy went into reverse, however, it exposed just how risky the practice was.
A loan book investigation may also unearth
abuse by borrowers. Some will use the bonds of friendship to deceive bankers into giving a loan, or claim to be better placed to repay the money than they actually are. Many fraudsters also piggyback one loan on another, giving a false impression of their net worth. When struggling banks sought repayment, these individuals were shown to have acted fraudulently. By then, however, the money was lost.
Analysis of the loan book is most challenging when both the owner or manager and external borrowers engage in fraud. They may pillage the bank by colluding in the arrangement of loans, using disguised or fabricated documentation to circumvent credit allocation committees and internal controls. Some banks became little more than Ponzi schemes, with growth in depositors’ money used to keep the institution afloat after fraudulent borrowers had ceased to service their loans. In such