Branch Manager Ponzi Schemes
The fraud
Clergy, magistrate, bank manager is the order of those with influence and respect in the community as described to us recently when meeting a financial institution. Should a bank manager be so disposed, they can exploit that trust and misappropriate significant sums from the community before their nefarious acts are discovered. At ASL we have adjusted countless losses involving theft by bank employees. Some of the largest involve branch managers misappropriating cash from clients – either from their bank accounts or directly from the individuals. Commonly, the manager will explain to the intended victim that they have been selected to participate in an exclusive offer with an interest rate or foreign exchange facility at preferential rates. The rates will be better than those genuinely available but often only by a fraction – enough to entice the targeted individual but not so high as to warrant concern.
Often such frauds can continue for years. Should a victim wish to withdraw monies from the ‘investment’, the branch manager may deposit funds sourced from another victim. Signatures on withdrawal slips may be genuine, after all in this type of fraud clients want to withdraw and reinvest the funds. Therefore internal audit inspections may fail to reveal the dishonest acts. For long-running thefts, the dishonest employee will likely have had to overcome the usual requirement to take a two-week holiday, but there are numerous methods by which to achieve this.
How the fraud is discovered
It is apparent that unrelated events which dent the respect and trust of bankers, can lead to victims questioning whether the bank manager is acting honestly in connection with their investments. It is this which can often lead to discovery. Thefts by bankers often attract widespread media coverage as is evidenced not least by the international coverage of what is described as the largest ever bank fraud perpetrated in Vietnam (USD 44 billion). Following such publicity, ASL note an uptick in notifications by other banks in those countries involving thefts by their employees.
Policy response and strategy
Regarding the policy response, the crime policy often is the first to be considered. After all, it responds to theft by employees. However, the funds may never have entered the banking system and instead were misappropriated directly from the clients. Accordingly, it may be that the notification falls better to the professional indemnity policy. In both scenarios, the pertinent question is whether the bank is vicariously liable for the acts of their dishonest member of staff. A full and accurate understanding of the factual matrix is critical to reaching a view. If the insurance policy is triggered, Insurers then frequently need to consider whether to support a bank in defending the civil actions brought against them or directing the bank to dispose of the litigation on best possible terms. The latter restricts interest and costs which can be significant but crystalises a loss which may be avoided if the bank is not liable. ASL are familiar with these considerations, and many others, having come across numerous examples.
