financial industry employee crime

The Risk of Employee Theft and Crime in Financial Institutions

Financial institutions around the world face significant risks in their operations – both externally and from within. Employee theft and crime, including fraudulent activities, are believed to be the largest risks banks and other financial services firms face. Despite numerous safeguards, financial institutions are vulnerable to criminal activity of employees, who often have access to customer accounts as well as transaction and personal data that can be used for illicit means. U.S. Risk Underwriters, a specialty provider of a number of insurance programs for the financial industry, knows that financial managers and business owners need to understand the risks posed by employee theft and crime.

The Threat from Within: Employee Crimes in Banking and Finance

In 2018, the Association of Certified Fraud Examiners (ACFE) published Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse. This study covered employee fraud across 24 industries, but the financial services sector was especially hard-hit by fraud committed by those working within organizations. Employees committing theft or fraud in banking ranged from bank tellers to executives and board officers.

The average loss to financial institutions was about $110,000 per employee fraud case in a period from January 2016 to October 2017; a total of 366 cases was tallied in this period by the ACFE. Millions or even billions of dollars in losses are at stake. Common crimes committed by employees in the financial services field include:

  • Skimming funds from inactive accounts.
  • Monitoring activity of customer accounts, then skimming funds from those perceived as unmonitored (typically those owned by elderly customers).
  • Creating fraudulent accounts using stolen personal information from customers, then using these accounts as repositories for skimming operations.
  • Artificially inflating or adjusting sales figures to collect sales rewards.
  • Reversing the fees from non-sufficient funds charges, then redirecting those refunds to personally-created fraudulent accounts for access by the employee.
  • Selling personally-identifying information, including bank account, Social Security, and credit card numbers to criminals for profit.
  • Counterfeiting documents for the purposes of creating or accessing accounts.

Employee theft and crime does not only result in financial losses. The reputational damage to financial institutions can be staggering, resulting in loss of business continuity and potentially billions of dollars in regulatory penalties and lost sales, not to mention a severe loss of confidence among customers.

Controlling Employee-Related Crime in Financial Institutions

Faced with threats from employee criminal activity, financial institutions have turned to technology solutions to combat fraud. Employee monitoring can take several forms in banking institutions, including surveillance cameras as well as automated fraud monitoring programs. Automated transaction and account monitoring typically looks for activities like:

  • Unusual account access, particularly those accounts that have been dormant for months or years as well as access outside of normal business hours or from locations outside the institution.
  • Unusual account activity, including frequent transfers of funds away from accounts or transactions occurring at strange times of the day or night.
  • Ledger transfers to employees’ personal accounts.
  • Any transfers from customer accounts to employee personal accounts.
  • Excessive cash deposits or transactions occurring in employees’ personal accounts.

Automated account monitoring systems are very sophisticated, and can identify many fraudulent activities. They are not foolproof, however, and financial institutions need to take additional precautions to thwart criminal activity.

Know Your Employee Programs: Stopping Criminal Activity in Financial Institutions

In recent years, financial institutions the world over have implemented so-called “Know Your Employee” (KYE) programs to combat fraudulent activity. The goal of these programs is to identify certain risk factors centered on employees, including:

  • Employee working backgrounds
  • Susceptibility to embezzlement or money laundering schemes
  • Conflicts of interest
  • Credit and financial histories, including significant debt or personal business losses
  • Criminal histories

It can be argued that the best way to prevent employee theft is to carefully evaluate employees before they are hired. In the financial services field, extensive criminal and financial background checks are an integral part of the risk management process. U.S. Risk Underwriters and many other insurance industry experts agree that by weeding out employment candidates with criminal histories, fraud can be reduced.

KYE programs are not only for prospective employees, however. Smart financial institutions will also use these programs to continually evaluate and monitor current employees, including those in leadership and management roles. These practices go hand in hand with automated account monitoring, and together can reduce the financial and reputational impacts financial institutions face as a result of employee-related crime.

U.S. Risk Underwriters

Breaking Down Financial Institution Bonds

Financial institutions face many risks in their business operations, including risks that come from both external and internal sources. One of the primary emerging internal risks plaguing the financial services industry is that of employee dishonesty, which can take several forms. While many safeguards are in place, risk management experts like U.S. Risk Underwriters know that certain types of insurance policies can protect against the illegal acts employees commit in financial institutions. These policies are referred to as financial institution bonds. Here is a look at financial institution bonds, how they work, and what they mean for business continuity in the financial industry. 

What is a Financial Institution Bond?

Before delving into financial institution bonds and how they work, it can be valuable to understand a broader category of business insurance known as fidelity bonds. In simple terms, fidelity bonds protect against the monetary or physical losses resulting from employees’ fraudulent activity. Fidelity bonds provide coverage for a range of losses, including:

  • Employee theft
  • Employee forgery
  • Embezzlement
  • Fraudulent trading practices

Financial institution bonds are a form of fidelity bond, or a type of business insurance designed to protect companies in the financial services field. In addition to providing coverage for the risks illustrated above, financial institution bonds also provide loss coverage for fraudulent account activity, such as employees creating false customer accounts or skimming from inactive existing accounts. There are four main types of financial institution bonds, each designed for specific financial entities. The four main financial institution bonds are:

Form 14 – for investment banks and companies, stock exchanges, stock brokerages, and mutual funds, among others.

Form 15 – for loan and small-business finance companies as well as mortgage and real estate investment trusts.

Form 24 – for commercial banking on the national level as well as for U.S. subsidiaries of foreign banks, trust companies, title insurance companies, and similar large-scale financial operations.

Form 25 – for insurance companies and reinsurance firms. 

According to the Association of Certified Fraud Examiners (ACFE) in their groundbreaking study entitled Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse, the financial services sector is especially susceptible to fraud, facing billions of dollars in losses each year due to illegal employee activity. Financial institution bonds, then, offer a counterpunch to rising levels of employee fraud. 

Banker’s Blanket Bonds: Unique Fidelity Bond Coverage

In addition to financial institution bonds as a means of insurance protection for companies in the financial services industry, there is another fidelity bond option. This is called the Banker’s Blanket Bond, or BBB. These bonds are obtained from insurance brokers like U.S. Risk Underwriters and many others. Just like other fidelity bonds, they provide coverage against losses resulting from dishonest or illegal employee activity.

Banker’s blanket bonds typically provide coverage against:

  • Financial losses from employee forgery
  • Cyber fraud
  • Damage or loss of physical property
  • Extortion
  • Dishonest employee acts

The key difference with banker’s blanket bonds is that coverage is only provided if employees have committed dishonest acts for personal gain. In other words, dishonest or fraudulent acts committed to make the financial institution appear more financially stable are not covered. Banker’s blanket bonds are also considered first-party insurance, as they cover the institution and its assets itself, not the assets of account holders or shareholders. In many states, these bonds and other forms of fidelity bond protection are required by law. In other states, while not required, financial institution bonds offer valuable protection for business interests and the assets held by financial firms. 

It is important to understand that fidelity bonds, particularly financial institution bonds, are not credit insurance. These insurance protections do not offer credit to the financial firm, nor do they assume the credit risks of borrowers affected by fraudulent employee activity. Many financial institutions will also opt for specialized credit insurance to fill the coverage gaps inherent in financial institution bonds and other fidelity bonding solutions. 

About U.S. Risk

U.S. Risk Insurance Group, Inc. is a wholesale broker and specialty lines underwriting manager providing a wide range of specialty insurance products and services. Headquartered in Dallas, Texas and operating 16 domestic and international branches, U.S. Risk and its affiliates would like to help you access a world of new markets and products. For more information, contact us today at (800) 232-5830.

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