1.1 Background to the Study
A well-organized and efficient banking system is an essential pre-requisite for overall economic growth of every country. Banking industry plays an important role in the functioning of organized money markets, and also acts as a conduit for mobilizing funds and channelizing them for productive purposes. But it has been observed during the last 50 years that even the sophisticated markets and long-functioning banking systems have had significant bank failures and bank crisis on account of increasing magnitude of frauds. According to the Association of Certified Fraud Examiners’ (ACFE, 2012) ‘Report to the Nations,"the cost of fraud to the US organizations is extensive—5 percent of annualrevenues, despite increased emphasis on anti-fraud controls and recent legislation to combat fraud." Indeed, bank failures are a direct threat to the economy of any country, and hence, urgent regulatory changes are required to be designed to decrease the probability of future bank failures and lessen the cost of bank failures. Fraud detection in banking industry is a critical activity that can span a series of fraud schemes and fraudulent activity from bank employees and customers alike. Banks, therefore, need to get their customers actively involved in their fraud prevention efforts as customers may be willing to switch to competing banks if they feel left in the dark about those efforts. Thus, banking industry’s risk mitigation and fraud prevention efforts must support a financial institution’s strategic goals of increasing customer satisfaction and contributing additional revenue—all while protecting customers and the organization’s reputation. Since banking industry is a highly-regulated industry, there are also a number of external compliance requirements that banks must adhere to in the combat movement against fraudulent and criminal activity. Fraud is a major economic crime which our banking industries faces today. In discussing frauds in banks, it is pertinent to ask questions; What is fraud?