Banking business has become increasingly complex and banks now take many different type of risks. Included in this profile of risk also includes fraud which relates to physical losses and is generally covered under operational risk. The consultative paper entitled "Core Principles for Effective Banking Supervision" by the Basle Committee in April 1997 has also appropriately recognized risk management which includes operational risk as its core principle # 13.

In this regard, SAMA has recently issued (June 1997) a document entitled "The Management of Operational Risk through Appropriate Insurance Schemes". SAMA expects that all Saudi banks will adopt and implement the key features of this document in their internal management system with the objective that all related risks are systematically identified and controlled through management action.

Potential for fraud is likely to increase with the advent of technology and as banks venture further into new products and services, geographical areas and markets. Further, it is certain that Saudi banks are increasingly affected by the continuing momentum of global automation, inflow and outflow of pilgrims, internationalization of markets and the advent of sophisticated products.

In view of these challenges, the SAMA decided a few years ago to structure various Bank Committees under its auspices, for providing mechanism where all Saudi Banks could assemble, deliberate and discuss common issues and concerns. One of the committees being proposed is the Fraud Committee.

Given the significance and underlying importance of regulating and supervising fraud, the SAMA wishes to give this committee the posture it deserves. Therefore, this committee is going to be an independent Banking Committee, whose chairman and his other senior members would liaise, discuss and deliberate matters of mutual interest related to fraud with senior SAMA officials. The Committee subject to SAMA's approval would be entitled to appoint specific sub committees accountable to it in all respect.

At this committee meetings, representatives of the banks will share their experiences with respect to fraud, provide the bank's point of view for resolving common problems, as well as providing inputs to SAMA for framing supervision policy.

Major types of fraud include:

1. Money laundering
2. Forgery
3. Counterfeit currency
4. Electronic crimes

• ATM
• Payment Cards
• Commercial Services
  • Cash Management Services
  • Electronic Data Interchange
• Retail Electronic Banking

5. Employee fraud

Further, sub committee may be formed in order to afford a sharper focus on specific fraud types such as employee frauds, payment card and Technology fraud, etc., and at the same time to address other constraints such as confidentiality, timing and scheduling, etc.

1. Issues must focus on areas which are in the interest of the long term management and containment all types of fraud occurring in the banking system, as well as enhance control, efficiency and supervision.
2. Committee members are expected to jointly identify, analyze and discuss all bank related fraud cases and issues pertaining to their respective bank's experience. Those internal fraud cases which may be sensitive may not be discussed in detail, however, the lesson learnt from such cases in a general sense should be brought to the forum.
3. Effective policies, process and procedures are implemented to detect, control and report frauds of all types.
4. Discussions must be held in an organized and democratic manner to ensure all viewpoints are aired and objectives of the Committee are achieved.
5. The Committee is expected to keep itself abreast of all international and local development in relation with (i) occurrence of major fraud (local and international) (ii) current responses by the international banking community to response to such fraud including technological developments.

1. SAMA would normally nominal senior officers as its representatives to attend fraud committee meetings. They would act as observers in such forums.
2. SAMA would respond to issues raised and proposals put forward by banks at its own discretion within a reasonable span of time. These proposals should normally reflect the position of all fraud committee members, and in their own rights be comprehensive and of sufficient overall quality with respect to depth and breadth to facilitate SAMA policy makers to recommend appropriate policy responses.
3. SAMA representatives are to ensure that to the extent possible, banks are appraised of SAMA policies, directives and viewpoint on issues. Where possible SAMA representatives will put forward the constraints and concerns of other government ministries. Their effort would be to enable the committees to work in a positive and efficient manner.
4. The meetings are to be conducted with the full knowledge of SAMA and the minutes of Committee meetings to be taken by the secretary of the Committee. These minutes are to be approved by SAMA before being issued.
5. Keep itself abreast of all international regulatory and prudential developments related to operational risks, fraud, etc.

Each bank should nominate, select and appoint its representatives with proper fraud background related to the Committee's mandate. These individuals are responsible for the following;

1. Keep themselves abreast and aware of all the fraud related rules and regulations issued by SAMA.
2. To bring to the attention of the Committee the relevant issues and concerns of their bank which require support from other banks as an agenda item for discussion.
3. To bring to the attention of their bank's relevant management, the deliberation at such meetings of the various matters identified in the agenda and bring any responses thereto from their management to the Committee which may be of interest to the Committee as a whole.
4. To discuss and deliberate in an open, positive and democratic manner under the guidance of the Chairman.
5. Keep themselves abreast of major development in fraud management both locally and internationally.
6. Report all fraud to SAMA and discuss at the Fraud Committee.
7. Should a particular fraud case, of an internal nature represent a potential embarrassment to a member bank, the bank should discuss the case at the committee level in general terms by not disclosing any particular identities and focusing on the lessons learnt.

Fraud Committee would have the following official with a term of 1 year each. However, it could be made longer by a unanimous decision of the Committee with SAMA's approval.

Chairman

It is the responsibility of the Committee's Chairman who will determine its effectiveness and success because he would normally set its tone, agenda and style. His responsibilities include but not restricted to the following:

1. Over-all planning of meetings including timings, venues, agenda items, etc.
2. Obtain approval from SAMA on minutes.
3. Liaising with SAMA officials, internal and external to the Committee, to do follow-ups on outstanding agenda items, improving the functionality, mandate and objectives of the Committee.
4. Maintain a professional and effective style and attitude amongst the members of the Committee.
5. Determine strategies and priorities for the Committee and in implementing new proposal amongst the banks most efficiently.
6. Solicit and develop new ideas in order to activate and improve on the mandate of the Committee.
7. Improve and develop the terms of reference document of the Committee in making it more effective and efficient.
8. At the beginning of each term (every September), the chairman of the committee will submit an update term of reference document to SAMA, outlining its objectives and mandate, significant and key agenda items and priorities for the coming year.
9. Decide at the Committee level if external consultants are necessary in providing input to a proposal. Final approval for such appointments to be given by SAMA.

Vice Chairman

The Vice Chairman shall assist in any way the Chairman in discharging his role and responsibilities as described above. 

He will be there to officiate instead of the Chairman during his absence or early termination.

The Secretary

The secretary's main responsibility would be to take and maintain minutes and obtain SAMA's approval in a reasonable span of time. The minutes must normally be prepared and submitted to SAMA for its approval within one week after the meeting. SAMA is expected to approve the minutes under normal circumstances within one week after their receipt.

It is fully recognized in the interest of internal and external confidentiality, that it would not be easy for banks to air the incidence of all frauds occurring within their bank specifically if it is involving senior officials. In such cases, the banks should discuss the lessons learnt, without detailing any particular personalities or embarrassing details. Consequently, the Agenda, as is the case amongst other banking committees, would be driven by the banks followed by SAMA's approval. Therefore, the banks should plan to bring all fraud cases to the forum keeping in view the overall objective being of exchanging relevant and mutually beneficial information with a view to educate each other and to deliberate on and discuss fraudulent cases.

The natural benefit for all banks would be to contain fraud. Consequently, the overall success, measured in terms of what the banks get out of this forum in managing fraud, would be totally contingent on the nature and level of commitment by the banks in exchanging and deliberating with each other their expertise, wisdom and experiences.

In general, what has to be recognized is that this forum is not a reporting mechanism for banks but a mechanism to gain from each other, in the quest to manage fraud, via discussions and deliberation of common, relevant and significant experience

The proposals before being presented to SAMA need to be seriously thought through and documented by the Committees. Formal proposals outlining the nature of the fraud issue, existing and international practice to combat fraud, an analysis of the merits and demerits of the status quo and of the proposed changes should be submitted to SAMA by the Chairman of the Committee.

It would be the explicit and direct responsibility of the Chairman of the Committee to submit proposals of sufficient quality in terms of definition, scope, research, etc. to SAMA. What should be clearly understood that it is with the banks and not SAMA where the responsibility of the following lies with respect to proposals being submitted for SAMA's deliberation and approval.

1. The key issue of the proposal must be clearly defined.
2. The issue must have the backing of all banks i.e. a complete consensus.
3. The key problems or risks which have actually happened or are likely to manifest.
4. Alternatives available to respond to item 3.
5. Industry practices on the subject issues in major jurisdiction such as UK, US, France, Germany, GCC, etc.
6. Recommended course of action and a coverage on its efficiency, economy and effectiveness aspects.

Discussions and deliberations by the Committee often serve as inputs for SAMA in combating fraud in the Kingdom. These discussions are concerned with either existing rules, regulations or practices or for contributing towards new ones.

It is expected by SAMA that not only is there a consensus on the proposals being submitted, but also there has been sufficient research and analysis carried out by the Committee members to ensure the smooth and practical application of the proposal to combat fraud in the Saudi banking system.

Committee decisions and proposals would normally be by consensus. However, in the case of dissent a majority vote would apply. No voting by proxy is permitted.

These proposals would be further studied by SAMA internally or SAMA may at its own discretion solicit external advice and help if necessary on the account of the banks. SAMA may after studying reject any proposal.

Each committee must elect its own set of officials composed of the following offices:

1. Chairman
2. Vice Chairman
3. Secretary

The selection of each of these officials should take place every September and would be on the basis of majority vote with the following constraints:

1. Each bank will have one vote.
2. N proxy vote to be accepted.
3. no individual can have the same specific within a span of three years.
4. All official appointments will be approved by SAMA should there be an unexpected departure for any reason of any of the officials to the Committee, before their regular tenure of 1 year, the Committee as a whole via a voting mechanism choose a replacement to serve until the end of the term.

Any official can be terminated under any of the following circumstances:

1. Unanimous decision by the Committee and SAMA's approval.
2. SAMA's sole discretion.

The size of the committee will be restricted to maximum of 3 members from each bank. Each bank will have one central permanent representative who is i) expected to come to all meetings in order to maintain continuity ii) coordinate with the other individuals (Max.2) who are to accompany him from the bank representing fraud case or issues to be discussed at a specific meeting as determined by the agenda. The individuals chosen to be a permanent representative will be the one who is an closest to managing fraud at any bank and may be the internal auditor, compliance officer, fraud manager, etc.

Discussion of fraud, its implications and other ramifications in front of a forum is never easy. Consequently, all deliberations, agenda items, decisions, notifications, etc. are to be strictly confidential. However, all banks must realize that all fraud to the fullest extent possible must be reported and discussed (if material). This is because fraud is not a competitive situation, in that a joint effort in deliberating on lesson learnt to manage fraud is the underlying objective.

Under certain circumstances, banks may communicate with each other outside the committee on an individual basis and not via a formal committee, if it is deemed in their professional judgment that it would be in the best interest of the banking system.

Fraud related to employees and particularly senior management would require discretion. However, under such event, it is expected that banks may consult with SAMA, and may just discuss the key lessons learnt without disclosing any embarrassing details.

For all major items deemed to be significant by the Chairman, the Chairman in conjunction with SAMA, will appoint two individuals from the Committee to maintain a follow-up on items pending resolution over an unreasonable time span. Such delays may emanate from any of the following situations:

1. The quality of the proposal in terms of its formatting, documentation, research, clarity, description, reasonableness, etc.
2. Absence of relevant SAMA executives to give a decision.
3. Protracted process at SAMA involving opinions, approvals from other relevant government bodies, etc.

It is expected that these individuals will maintain a follow-up contact with the relevant SAMA officials and provide up update on these issues to the Committee.

In order to ensure that issues and proposals are thoroughly deliberated upon, the Chairman of a committee, may at his discretion, but with SAMA's approval appoint a Sub-committee. These Sub-committees would be headed by a Chairman who would have an accountability and responsibility relationship with the Chairman of the main Committee for the terms of reference, reporting, agendas and timing.

A summarized "Guidelines for Banking Fraud Committees" is attached for easy reference and implementation.