The most unsettling story imaginable for a bank customer is to find a mysterious transaction and all money gone from the account. The recent incident in which a Kampala businessman, Justus Kashoma, attempted to withdraw Shs 500m and $500,000 from Stanbic Bank, Garden City branch, is a clear indication of how porous the bank security system in Uganda can be. It also shows how dirty transactions have been carried out in banks with ease and full co-operation of the bank employees.

This is just a tip of an iceberg, those familiar with the issues say. Many banks have suffered huge losses as a result of  illicit transactions and theft by employees. Out of fear to damage their reputation, some banks prefer to handle the matters internally and don't inform the Police. Consequently, the Police Department of Economic Crimes does not have records of how much is stolen or lost in illicit transactions. But it is estimated that about Shs 1 billion is lost every month.

Kashoma claims that the money was wired from abroad by his Congolese business partners as commission for the gems deal they had struck sometime back. The total amount that was wired on his account in Stanbic is $3.8 million (Shs 6.3bn), One million British Pounds, and Shs 985,957,000.

Kashoma’s story highlights growing concern over the way banks (financial institutions) verify who is moving money around the systems. The banking sector and its attendant services are growing at an unprecedented pace, but the financial institutions regulators and the banks themselves have not put in place security measures-where they exist they are very weak- to cushion the customers from fraud and abuse by bank employees. The financial system is fraught with leaks and risks.

Prominent among these is systematic siphoning of money from customers’ accounts by bank employees to either fictitious or personal accounts. Other dubious ways of skimming off customers’ money are the abuse of the suspense account and the bank reserves by the unscrupulous employees.

How it is done

The Suspense account is used to temporarily keep doubtful receipts and disbursements or discrepancies pending their analysis and permanent classification. The account holds cash receipts, and cash disbursement entered with invalid account numbers. The account specified may not exist or it may be deleted or frozen. If one of these conditions exists, the transaction should be directed to a suspense account. The money held in the suspense account is constantly reviewed with the intention of transferring it to the appropriate account as soon as possible.

The suspense account is a victim of the fraudulent tactics by the employees because it carries huge amounts of money of certain and uncertain deposits to the banks’ accounts associated with unclear accounts, uncertain area of origin (electronic money transfers), posting errors by banking staff, or even system failure.

Because the bank must endeavour to transfer this money to the right accounts and clear it to zero, the unscrupulous employees have taken advantage of this by creating fictitious accounts where some of this money is later transferred. The employee may also write a report about the suspense account claiming that the uncertain balances were reconciled with the appropriate accounts. All it takes for this money to be diverted to dubious accounts is a concerted effort of employees to prepare verifiable papers indicating the origin of the money and the validation of accounts. Once the paper work is ‘authenticated,’  the money would be moved to different accounts and the suspense account will remain at zero.

Many of these fictitious accounts either belong to the employees’ spouses, children and friends. This fraud may not be discovered until external auditors are brought in. Little wonder then that most of the frauds have been discovered by chance.

Bank reserves

Bank reserves are another area where fraud is practised. Every bank or credit institution incorporated in Uganda maintains a reserve fund to meet the liabilities to the public, according to the Financial Institutions Act, 2004. Out of the net profits of each year and before dividends are declared, 20% of the profits are transferred to the reserve accounts until the fund is equal to the paid up capital. Some crooked employees have taken advantage of this reserve to create phony accounts and make book entries without moving physical cash between the suspense account and reserve. Again this can only be discovered by external auditors or internal whistleblowers. A majority of them do it after the deal has gone sour. Sometimes the bank authorities cannot explain such fraud and prefer to bundle the losses into operational expenses.

In recent months, some banks have suffered outright robbery. Some employees have been conniving with thieves, giving them details of the movement of money and passwords to vaults. Indeed, some of them organise these robberies to cover for the money that had been diverted to their personal pockets. Others decide to skim little amounts from certain accounts, where owners may take long to notice. Some bank employees would deliberately not enter the money in the general ledger accounts. When this is done, the employee directs an outsider to report to the bank and disguise as someone who comes to withdraw the money. This money, which is not registered, is then passed on to this outsider and the sharing is done later.

Recently, one city bank foiled an attempt to deposit Shs 100 million of counterfeit money into the bank. It was again discovered that there was a high level of staff involvement in this sleazy deal. In fact, some people have often wondered how counterfeit money ends up in the Automated Teller Machines (ATM). Some ATMs of a certain bank are notorious for dispensing counterfeit notes. Unfortunately, the customers have not been able to recover their money even if they prove that the money was withdrawn from their machines.

In another dirtier scheme, the employees pass on customers’ personal information to thieves. This information includes names of customers, addresses, signatures, personal identification numbers (PIN), and bank account numbers. The thieves then use this information to withdraw money from the customers’ accounts. Usually these identifications are ‘authenticated’ by the conniving bank staff.

Refund

While consumers who do suffer account losses are often refunded the money, there’s rigorous paperwork to deal with. Not everyone does recover everything they’ve lost. In most cases, especially those involving ATM thefts, they find trouble getting their money back. The banks usually claim that the customers draw the money themselves or pass on the cards to other people who steal the money. Indeed, some banks have blamed this theft on the carelessness of the customers. But on the whole, the banks prefer to sort out these queries amicably and internally without involving Police or courts of law.

Incapable Police

Whereas Police are often kept in the dark about the bank frauds, it is also undermined by its lack of skills to tackle fraud, especially where it involves electronic transactions. According to a source within Police, the success of the prosecution of the fraud cases would entirely depend on the co-operation of the bank. The source added that the Police have no skills to detect sophisticated electronic fraud.

“Of the 36,000 Police officers Uganda has, hardly 500 have e-mail addresses. Few of them have punched a word on a computer keyboard. Besides, these guys earn less than $70 and you expect them to investigate a Shs 1billion theft! Are you banking on their patriotism or what?” the source said. “You can’t imagine, recently there was case in Entebbe involving computer crimes, and these Police officers carried a monitor other than the CPU to investigate the case!,” he said.

In neigbouring Kenya, the bankers association has reinforced their security. The Kenya bank fraud squad is financed by the bankers association. It is a specialised unit of the Police which is skilled in detecting fraud of any kind. The banks pay their salaries and sponsor their logistics. This squad is also involved in doing background vetting on future bank employees.

What bankers say

The management of the banks in the country is not comfortable commenting on the bank fraud in the country on record. But the Executive Director of Uganda Bankers Association, Emmanuel Kikoni, blamed the increasing fraud on the general breakdown of morals among Ugandans. “We deplore any level of fraud in the banks in Uganda whether small or big. I don’t agree with those who say that all the bank staff are fraudulent,” Kikoni told The Weekly Observer.

He said that the good elements within the banks have been able to alert the authorities about these red flags and the robberies and fraud have been foiled. Kikoni added that customers should help the bankers to detect fraud.

“The banking community must reconcile their monthly statement with the bank management. It’s only through the customers’ co-operation that this fraud can be eliminated,” he added. He said fraud cannot entirely be blamed on the recruitment methods because before banks recruit staff, the association is asked to do a background check on the candidates.

“Some of the candidates have acquired this fraud from contact with their colleagues who were not detected in the beginning,” he said. So for now, as some customers are finding out the hard way, only a username and password stands between criminals and their hard-earned money.

By Pius Muteekani Katunzi  < [email protected]>

First published in The Weekly Obsever