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Fraud Prevention & Risk Management

March 25, 2017


In Financial markets, it has become very common now days that we often hear about financial irregularities that often pop up due to intentional/unintentional human error or for not abiding by the rules and regulations. But fraud, which happens in all types of business to gain dishonest advantage with the intent to misappropriate fund has lengthen in size.

Financial crime is caused due to unmanaged risk. Proactive approach is the key to strong risk management, which should be timely implemented/executed rather than responding to it after it has happened.

Estimates suggest criminals annually launder proceeds worth USD 1.6 Trillion and thieves defrauds size is of nearly USD 50 Billion. According to fraud facts 40 pct fraud is detected through complains, 24% by internal auditors, 21% by accident and 15% through internal set-ups causing 5 to 7 pct revenue losses. On an average, it takes nearly 2-years to discover fraud.

Some of the recent accounting scandal involves BCCI in 1991 owing Pound Sterling 10 Billion to creditors and is blamed for money laundering. In 2001, Enron got bankrupt as its shareholders lost USD 74 Billion. Scandal of USD 1.7 Billion was detected at Camera maker’s Olympus in 2011 and lately Toshiba joined the list of corporate financial scandal/casualty and is estimated to suffer write off of nearly USD 2.5.


In July 2012, LIBOR issue popped up after one of the former trader highlighted manipulation of Libor that according to him was going on since 1991. During investigation it was found that banks were incorrectly deflating or inflating rates to profit from trades.

Basically Libor is the benchmark average interest rate, which banks lend unsecured funds to each other on London inter-bank market after it is calculated by major member banks from across the globe after reaching a consensus.

Libor relevance is the pricing of USD 544 Trillion in Notional Amounts (BIS Report), Over the Counter (OTC) Derivative Market as of end June 2016. Then the estimated size of derivative/loan was USD 350 Billion.

Investigation of 16-Financial Institutions from 5-Countries reveled that the unfair practiced was taking placing since 2003. Some of the notable names were Royal Bank of Scotland, Rabobank, Deutsche Bank, UBS and Barclays. Riggers were fined more than USD 9 Billion in USA, UK and in EU and charged Brokers and Individual Traders. Libor is controlled by UK law through its Parliament.

In 2007-09 US financial crises were a white color crime and the fraud was committed in mortgage securitization industry by issuance of MBS and Securities that created housing bubble.

Money laundering

Dirty money or money laundering, which is huge in size estimated to be well above USD 2 Trillion is the real global problem, which is the cause of corruption and crime that leads to all sorts of wrong doings.

Imagine the total available count of notes and coins (M0) is USD 1.3 Trillion around the world, then how difficult it is to have a constant check on cash money. Latest FED data suggest Currency in Circulation is USD 1.5 Trillion.

And according to 2010 survey of Economic Blog DollarDaze out of 137 currencies traded in 167 countries the total size of notes and coins (M0) is equivalent of USD 5.2 Trillion. Total asset size of Central Banks in 2010 was nearly 11 Trillion against today’s size of USD 22 Trillion.


In latest development it is reported that Global Banks have recently handled in processing Billions of US Dollar worth of Russian cash that involves Major US and European Banks.

Organized Crime and Corruption Reporting Project (OCCRP) estimates suggest that nearly 70.000 transactions have taken place between 2011 to 2014 that paved way to shift Billions of US Dollars from Russia into the account of large  number of companies around the world.

In last couple of years large penalties were imposed on German, French and British Banks for violating money laundering laws. It is said that Moldova is involved in sizable laundering scheme of nearly USD 22 Billion helping to shift money to Eastern Europe.


The past failure was/is surely caused by bad governance of regulatory authorities due to culture of greed and unethical practices. The calculated liquidity risk was surely misjudged, as the market was totally illiquid when it mattered.

The decade old past events had clearly exposed the vulnerability of financial market, as its model had completely failed because the truth is that the market was at excessively high leverage levels.

Similarly, Euro-zone debt crisis was caused by high structural deficit, high interest rate environment causing expensive temporary bailout. Yes, of course the real culprit was large outflow causing imbalance. ECB’s QE policy is forcefully keeping it afloat, but the big hole still needs to be fixed.

But again I would like to warn that keep a close watch on global interest rate trend, which needs to tame down, or else confidence can once again shaken and systemic cracks could reappear.

Unfortunately, rating agencies clearly lagged behind to provide timely signal and hence, is the biggest culprits that failed to identity the problem causing sovereign debt crisis.

Surprisingly during crisis period (USA & Europe), despite wide Bond spread, rating agencies lagged behind Credit Default Swap (CDS), but CDS moves were/are too choppy to provide guidance, which cannot be taken as guideline for future market direction.

However, despite questionable debate about the timing, method and procedures adopted by the credit rating agencies, it still plays vital role in providing guideline to determine cost of funding for a sovereign borrower or a private enterprise.

Therefore,  after going through various analysis and reports, I have am of view that operating in a Domestic/Global environment, it requires different type of challenges that involves country’s social behavior, its political environment, and its trade and taxation policy, which guides future line of action.

Hence, emphasis should be on Financial Risk Management that should support and cover both the dimensions, Domestic and International, which should help in reducing overall risk substantially.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

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