1. Each Bank is required to nominate one permanent representative to the Committee. The representative should be of an appropriate level within the bank and should have the appropriate knowledge and skills in reference to fraud and its proper management in order to contribute to the proceedings of the Committee. He should also be in a position to make commitments on behalf of the bank and in contributing to the work and decisions of the Committee. The permanent representative would be accompanied by other bank individuals (Max.2) where specific areas of fraud are on the agenda.
2. Each bank must be represented at each of the Committee meetings. The bank representative(s) is responsible for communication of the proceedings of the meetings, to the relevant personnel within their bank including to the managing directors or the general managers.
3. Fraud Committee must elect a Chairman, Vice Chairman and Secretary (Committee Officials). The term of the Chairman, Vice Chairman and Secretary will normally last for one year but could be longer by a unanimous decision of the Committee.
4. The Chairman of Fraud Committee must ensure that all banks participate fully and meets their responsibility to act as Committee Officials.
5. All banks must be represented in all meetings. Attendance records must be maintained.
6. SAMA will nominate its own staff to attend meetings.
7. In circumstances where the Chairman cannot attend the meeting, the Vice Chairman will act as Chairman.
8. In circumstances where any Fraud Committee official resigns during his term, the Committee must choose a replacement to serve until the end of the term.
9. Minutes must be taken at each meeting of the Fraud Committee. The minutes for each committee meeting must be submitted to SAMA in a draft form for approval before circulation to the full membership of the Committee.
10. Fraud Committee meetings should normally be held at the Institute of Banking Bankers Club or at SAMA Head Office. Sub-committee meetings may be held at other locations.
11. From time to time, Sub-committees may be formed. The Chairman of the main committee may at his discretion delegate the Chair of the sub-committee to another member of the Committee. The sub-committee is fully accountable to the main committee. Proposals to SAMA must be voted upon and made via the main Fraud Committee.
12. Fraud Committee decisions and proposals will normally be governed by consensus. In the case of dissent, a majority vote will apply. Banks are not permitted to vote by proxy.
13. Issues to be discussed in a Committee meeting could originate from the banks, SAMA and other sources. When bank representatives agree by a consensus they shall raise the issue as proposals to SAMA.
14. Proposals made by the Fraud Committee to SAMA must be fully documented and must outline the issues, contain a detailed analysis of the merits and demerits including supporting documentation such as international best practice and the recommendations made by the committee. Proposals requiring major changes in policies or commitment of significant resources must be channeled through the Managing Directors' Committee to ensure their approval.

It, therefore, follows that central banks by managing operational risks, also attempt to manage or prevent fraud. This is achieved by central banks instituting proper interna) control processes and procedures to ensure asset safeguard and prudential banking practices.

Some of practices and policies adopted by central banks exclusive of their joint and combined efforts with other central banks include the following:

1. Policies and procedures prescribing strong internal controls.
2. Rules pertaining to Audit Committees.
3. Engaging external auditors and other consultants to ensure that proper controls are in place to combat fraud.
4. Operational risk manuals.
5. Training.

6. Coordination with other law enforcement agencies.

    

1. Money Laundering

Money is laundered today through banks at substantial amounts involving billions of dollar and spans a large number of banks. It is used to conceal criminal activity related to it. Banks today have become major targets in laundering operations because they provide a variety of instruments such as bank drafts, travelers cheques, wire transfers, etc. that can be used to conceal the source of ill-acquired money.

Because of the on-going sophistication in money laundering and the complexities brought in due to banking automation, many international organizations like the United Nations, Basle Committee on Banking Surevision have issued rules and regulations.

1. The 1988 Un Convention (Vienna Convention), Against Illicit Traffic in Narcotics and psychotropic substances.
2. Financial Action Task Force (FATF). Formed at the economic summit of major industrialized countries in 1989. 40 recommendations were promulgated.
3. European Community (EC). This directive went into effect on 1 january 1993 and each member state has ratified it.
4. Prevention of criminal use of the banking system for the purpose of money laundering by the Basle Committee (1988).

2. Forgery

Forgery is the second largest area of operational exposure according to a 1993 study on fraud done by the international public accounting firm of KPMG. Such types of fraud includes simple forgery of cheques and forgery of the come complex negotiable instruments such as LCs, promissory notes, bonds, etc.

Current document technology such as optical scanners, color laser printers and powerful desktop publishing software now allow creation of forgeries which are virtually undetected except by highly sophisticated means. Here central banks can assist by promoting the institution of tough anti-forgery laws, and rigorous internal control regimes requiring signature authentication and verification and other rule and regulation. Tough anti-forgery laws are already in place in the Kingdom.

3. Counterfeit Currency

There are two major trends developing internationally which expose banks to this type of fraud.

1. . Technology, As with forgery, new technology is also facilitating this type of fraud with new document processing technology.

2. . Organized Crimes. Many international organizations are involved in supporting large scale counterfeiting operations directed against mainly US dollars. This bogus currency is of extremely high quality and is virtually undetectable by even experienced people.

   Central banks respond to the above with technology by redesigning and incorporating various anti-counterfeit features.

4. Electronic Crime

Electronic crime represents the fastest growing form of fraud facing banks. Technology has resulted in increased exposure to financial loss (i.e. by alteration of a state of indebtedness) by gaining illegitimate access to computer records. However, there has been reduced risk of physical loss, i.e. theft of cash and other monetary assets. For example, in an EFT environment, cash holdings are drastically reduced, which serves to reduce physical risk. In general, risk of electronic crime presents 4 major areas:

1. ATMs
2. Credit Cards
3. Point of Sale
4. Commercial Services
   • *Cash management services
   • *Electronic data interchange
5. Retail Electronic Banking
   • Telephone bill payments
   • PC-based home banking

Such types of fraud can be combated by the institution of strong internal controls procedures in an electronic environment. These mainly include high technology security controls at the input, processing, recording and programming levels. Central banks institute such controls to maintain the safety and soundness of the banking system. The most common type being inserting false instructions into the bank's system with the intent to divert funds.

5. Insiders Infidelity

One of the most common type of frauds bing committed involving substantial amounts are insiders (employees, officers, directors, shareholders, etc.) who can in concert with outsiders (members of national and international networks) act individually or collectively to defraud bank. A prime examples of insider fraud has been the savings and loans (S&L) crisis. One of the greatest factors contributing to this crisis was insider fraud where via false indebtedness or funds were diverted for the benefit of the owners. Other such examples include BCCI. DAIWA, Baring Brothers, etc.

Saudi Arabia already has some of the toughest laws to combat frauds related to drug trafficking and an international reputation that it is a hostile environment for such activities.

Notwithstanding, SAMA as the central bank and as a regulator of the Saudi banking system has also instituted a number of policy measures to combat fraud in the Saudi banking system. More to the point, these measures provide specific guidance to the banks in their aim to combat bank-related frauds.

Improved Internal Controls in The Banking System

The Agency has taken various steps to enhance and strengthen the internal control systems at the banks. Such controls are in place to ensure asset safeguard, prudential running of the banks, integrity of financial information and Bonafide authorization of transactions. These controls ensure smooth operations of the banks and provide for safeguard against fraud.

These measures include the following:

1. The management of operation risk though appropriate insurance schemes.

2. Issuance of Internal Control Guidelines by the Agency.

   These guidelines provide for the enhancement and standardization of control systems to ensure that assets specifically liquid assets such as cash and other negotiable instruments are safeguarded.

   It is well known fact that there is overwhelming pre-dominance of fraud related to cash, travelers cheques, ATM cash. etc. Committed by employees and non-employees. Further, recovery of assets lost due to internal or external fraud is remarkably low. Consequently, the institution of sound internal controls is indispensable to prevent fraud.

3. Issuance of Accounting Standards for Commercial Banks.

   The Agency has also issued accounting standards to ensure Bonafide accounting measurement, recording, treatment and reflection of transactions as a measure to prevent fraud.

   Efficient accounting records are again essential to manage and prevent frauds of various types. These controls relate to asset safeguard, authorization of transactions and to ensure general safety and soundness of banks.

4. Issuance of a Manual entitled "Rules for Minimum Physical Security Procedures for Saudi Banks"

   The Agency has issued "Rules for Minimum Physical Security Procedures for Saudi Banks." These have been issued to improve the physical security controls of banks.

   The manual contains minimum requirements and standards for security as described below:

1. Minimum requirements for security systems.
2. Standards for corporate security manual.
3. Minimum requirements for physical security.
4. Cash in transit procedures.
5. Security guards work instructions.

5. Other Support Manuals And Documents

1. Guidelines for the prevention of fraud. This guideline provides a coverage on the steps to be taken in the event of a fraud including collaboration with law enforcement agencies.
2. Guidelines for the prevention of money laundering. This guideline is a state-of-the-art document and has been composed after consulting various internationally known standards and documents. The Agency has very rigorously pursued this type of fraud in the Kingdom.

6. Rules And Regulation Pertaining to Audit Committees.

7. On-site Inspections

        The Agency's inspection department performs periodic on-site inspection of banks, as circumstances warrant it, to ensure the detection of fraud and also to ensure that the following attributes which are again related to fraud are in place.

1. Assets are safeguarded.
2. Proper internal controls and accounting and other records exist and are functioning to detect fraud.
3. The banks are running in a prudent manner consistent with the objective of safety and soundness.

4. Transactions are authorized, recorded and re-valued.

   Further, such on-site inspections also reveal if improvements can be made in meeting the above subjects.

8. Manuals under Study

   The following manuals and guidance documents are in the final stages of their completion.

1. Requirements to have compliance officers to guard against operational risks.

9. Cooperative Procedures with Various Constituencies

1. With Bank's management. The Agency has defined procedures related to coordination and cooperation with the bank's management in the event of an incidence of fraud to provide for an effective deterrent. This entails proper recording of facts, analysis and appropriate steps to be taken.
2. With law enforcement agencies. The Agency also cooperates with different law enforcement agencies in investigation frauds, forgeries and counterfeit currencies.

11. Training Programs for Law Enforcement Agencies

    The Agency also conducts training programs for law enforcement agencies in relation with economic and financial crimes. For example, SAMA has conducted a six-week training program for the security forces.

12. Fraud Reporting System

    *  SAMA has developed a central fraud data base wherein each bank every six months report their various fraud cases. A central fraud database covering all of the significant facts and analyses has been developed to provide support in framing policies and in investigating cases. Various reports can be extracted from this data base which are planned to be distributed to all the bank.

*SAMA is reviewing various options to develop a fraud management and investigation system which is planned to provide for a data base to aid in supervising and managing fraud.

13. Electronic Fund Transfer Project

SAMA has instituted the EFT system in the Kingdom. This again serves to reduce exposure to physical loss of assets, i.e. cash as there would be a reduced need to hold large amounts of cash at the branches and the need to physically transport it.

14. Embezzlement, Fraud, And Money Laundering Section

This is a special unit in the banking inspection department which has been established to conduct studies and research on all aspects of fraud, i.e. current developments, impact of technology, new types of fraud, etc.

This special unit also assists in conducting investigations and analysis on all types of fraud cases under investigation by SAMA.

15. Reporting of Fraud by The Banks to SAMA

• Banks are expected to report all fraud cases to SAMA at the time it is detected.
• Banks are expected to provide summarized updates on all fraud cases.