Bank Internal Fraud Risk Management Analysis

Operational risk, one of the risks in banking industry, emerged and developed along with the banks. After 1990s, a lot of cases caused by the operational risk in banking industry, which not only brought heavy losses to the banks, but also indirectly affected the financial and economic stability of our country. But the importance and urgency of the operational risk wasn’t widely concerned until the Basel Committee classified the operational risk as one of the three major risks in banking industry.Since most of our commercial banks are still in the process of transforming into marketized commercial banks, and there are some limits in laws and various rules and regulations which are incompatible with the modern market economy, a variety of irregularities and frauds still occur; for state-owned commercial banks, internal control mechanism of risk management is not perfect, with a lack of management experience and relatively low ability to discover and respond to crises; unreasonable organizational structure, inappropriate incentive constraints, ineffective design and implementation of management system, and the internal audit and other issues, to varying degrees, have exacerbated the operational risks in state-owned commercial banks. In recent years, major cases caused by operational risks in our banking industry are successively reported, because there is serious moral hazard, and most of the cases are internal frauds. Internal fraud operational risk has become one of the main types of operational risks in our commercial banks, and its proportion in the risks of our commercial banks is much larger than that in international counterparts.Therefore, paying attention to the internal fraud risk’s management and research, and building a scientific and effective internal fraud risk management system, have great theoretical and practical significance for improving the whole banking industry’s level of preventing risk, enhancing their safety and profitability and improving competitiveness and so on. Based on the present research, this paper analyzes the present situation of the internal fraud risk management by our commercial banks, and then made policy and recommendations for strengthening the internal fraud risk management by our commercial banks by drawing on international theory and advanced experience of internal fraud risk management.This article discussed many problems closely related to internal fraud risk management by our commercial banks from seven aspects.The first section is introduction, in which the author, from the perspective of bank’s transformation, briefly analyzed and discussed the background, main contents, purpose and meaning of the research topics of the paper.The second section is a review of the operational risks in domestic and foreign commercial banks. Taking "the New Basel Capital Accord" as the starting point, the author briefly discussed their present research of operational risks and internal fraud risks. This paper firstly introduced the researches made by foreign scholars. Because of earlier starting, their researches have formed several major research perspectives, which have a certain contribution to enriching the theory of fraud risk management and guiding the practice of fraud operational risk management. Then the author made a review of the domestic research. There are lots of researches on internal fraud operational risks in commercial banks in recent years, but researches on how to prevent and control the risk of internal fraud are not deep enough.The third section firstly analyzes the relationship between operational risk and internal fraud, which leads to the current situation of internal fraud risk management in China’s commercial banks, then points out the frequent occurrences of the operational risk crime cases in China’s commercial banks that have caused tremendous economic losses and social impacts on the country, which leads to the necessity to enforce the management and monitoring of internal fraud risk, in terms of its impact and destructive force on the banks’current situation. Meanwhile, internal fraud makes serious damage to China’s commercial banks. This problem is not only a serious threat to the stability and security of China’s financial system, but also will take up huge financial capital and further restrict the competitiveness of China’s banks, thus it is urgent to focus on the management and monitoring of internal fraud risk.The fourth section is an analysis of the causes which lead to internal fraud risk in China’s commercial banks. Combined with a few typical cases of bank C, this section discusses and analyzes the causes of the internal fraud cases, such as lack of systematic, effective and standardized internal monitoring system, lack and decentralization of controlling, the asynchronies between the business exploring and the constructing of internal monitoring system, imperfect management framework, separated responsibility and lack of effective warning mechanism and technical method. It also stresses that the imperfect internal precaution is a key point to form internal fraud risk.The fifth section brings forward some precaution countermeasures and recommendations against the management and monitoring of internal fraud risk according to the internal fraud cases of bank C. The countermeasures include six aspects such as personnel management, the implement of monitoring and inspecting fraud risk, setting up key risk index and the implement of effective incentive and restrictive mechanisms, etc.The sixth section exploringly put forward the management methods of constructing the internal fraud risk’s management and monitoring mechanism in China’s commercial banks, which is comprehensively based on the previous discussion and analysis. The management methods include improving the bank’s internal monitoring system of internal fraud risk, strengthening the real-time surveillance and control management of business operation through computer, adapting the core software of JPMorgan’s Horizon operational risk management system to set up our own internal fraud risk management system and operational risk losses database and key index to improve the electric level of bank’s internal monitoring of internal fraud risk, enhancing the constructing of internal fraud risk culture, and designing bank’s organizational framework and business process reengineering of internal fraud risk management.The seventh section points out that China’s commercial banks should learn the theoretical fruit and practical experience of international banks’operational risk management and actually improve the ability and level of operational risk management. Besides, the section exploringly put forward the basic framework of internal fraud risk management in China’s commercial banks.