Fraud Protection

The Uganda financial system is currently composed of both regulated and non-regulated institutions. The regulated segment is composed of fifteen commercial banks, seven credit institutions, three Micro-Finance deposit ta king institutions. Insurance Companies and the Stock exchange.

Apart from the set back suffered following the closure of banks in 1998 and 1999, the sector has witnessed tremendous improvement in performance indicators over the past fifteen years with an accelerated improvement over the past five years. In particular confidence in the financial sector has been restored. The challenge for the Central Bank is to sustain and enhance confidence in the sector especially in the systems and products provided therein.

The central bank is mandated to regulate, supervise and discipline financial institutions in order to maintain their safety and soundness. The financial system supports the economy since it is the vehicle through which savings are mobilized and then channeled to investment. This inter-mediation role can only be successful if the general public has trust in financial institutions, especially confidence in ensuring safety of the deposits.

Another important role played by the financial system in the economy is the operation of the payments system. The national payment system supports all settlements for goods and services and other payments to cover the numerous transactions taking place between parties. It also facilitates international trade by enabling payments to be effected across nations. Money transfer for other purposes from one party to another is also enabled by the payment system.

The most commonly used instrument in settlement and otherwise is the cheque. There has however been an introduction of other instruments to effect payments including the use of debit and credit cards, electronic funds transfer (EFT), point of sale EFT and real time gross settlement system (RTGS) among others.

Albeit the good performance of the financial system in supporting the economy through inter-mediation and operation of the payment system, the financial sector faces the problem of bank fraud which unfortunately is on the increase. Bank frauds take various forms ranging from alteration of cheques and / or counterfeit to skimming or cloning of cards.

1. Cheque Frauds

Cheques transactions constitute the largest form of settlement in the banking sector and the recent past reveals that cheque fraud is the fastest growing financial crime. Whilst cheque fraud statistics are scanty, the loss of funds as a result of well-organized fraud through the financial sector has been enormous. Global technological advancements has made it increasingly possible and easy for criminals to skim or clone realistic counterfeit and fictitious cheques, plastic cards as well as identification that can be used to defraud banks and bank customers.

Common types of cheque frauds world wide take the from of;

• Counterfeit
• Forged
• Altered
• Drawn on closed account Counterfeit.

2. Counterfeit

Cheque not written or authorized by legitimate account holder. Normally this occurs when a false cheque is drawn on a valid account or presented based on fraudulent identification. A criminal may open a current account and cash the false cheque using the fraudulent identification documents. Criminals use information from personal and / or corporate trash to produce the identification with computer technology.

In other instances a valid cheque drawn on a busy account may be stolen, counterfeited and the counterfeit is then cashed using a fictitious account. To protect against such frauds, customers should ensure that their personal information, including account records is highly secured at all times.

3. Forged Instruments

These are usually stolen cheques not signed by the account holder. The fraudster, upon getting hold of a blank cheque, which is either stolen or lost, will fill in the details and forge the account holder’s signature. Another way is to forge an endorsement. Customers should ensure that their cheques are securely kept and should promptly report any stolen or lost cheques to their bankers.

4. Alterations on Instruments

Information on the legitimate cheque such as payee, account number, amount is changed to benefit the fraudster (Bichupuli). This occurs after a bonafide drawer creates a valid cheque to settle an obligation; a criminal then intercepts this good cheque and uses chemicals or other means to erase the amount or the payee so that new information can be entered. New information is then introduced on the cheque.

The valid cheque then becomes a fraudulent cheque, which the criminal cashes using false identification. To protect against such frauds, customers are encouraged to exercise care and safety precautions in keeping their cheque books and in issuing cheques. Due care must be taken in transmission of cheques from drawer to payee by use of reliable and secure couriers. The recipients of cheques must also exercise adequate security for cheques received before being banked to avoid these cheques falling into the hands of fraudsters who may later cause the alterations. If lost, the drawer should be requested to issue a ‘stop payment’ order to the bank and the loss reported immediately to the appropriate authorities.

5. Drawn on closed accounts

Closed accounts frauds are based on cheques being written against closed accounts. Such frauds occur when a fraudster banks a cheque drawn on a closed account. The cheque is then deposited into a new account in another bank. The criminal can withdraw funds from the new account if the cheque is intercepted or lost during the clearing process. Closed account fraud can be successful when customers do not return unused leaves after closing accounts or do not inform their bankers the proper status of their accounts. To mitigate such frauds, customers should keep their ankers informed of the status and return unused cheque leaves to the banks whenever an account is closed or destroy unused cheque leaves.

Sources of cheque frauds

There are many sources of cheque frauds but the following are the most common in our sector.

• Fraudulently opened bank accounts.
• Thieves/robbers who break into homes/offices or cars;
• Waste cheques from bank archives by bank insiders;
• Intercepted Government / Parastatals or company cheques payable to genuine suppliers/service providers
• Intercepted cheques written using acronyms e.g. URA, CAA, URC, KCC etc.
• Counterfeit cheques – with advancement in color copying and desktop publishing, this is a growing source of fraudulent cheques.
• Dollar cheques / Travelers cheques – “Bichupuli” – these are mainly
• obtained from outside the country but may also be intercepted from In
• ternational Mail locally.

6. Credit and Debit Cards (plastic) Frauds

The most common plastic cards in Uganda today is the Debit card e .g. ATM and point of sale cards. ATM and credit fraud occurs when a stolen or cloned card is used by criminals to withdraw cash from a customers’ account. The fraud takes various forms. A bonafide customer may be accompanied by a close friend or even a relative to an ATM point to withdraw cash. In the process the relative or friend may learn the PIN number of the card and subsequently steals the card and withdraws the money from the bank without the knowledge of the customer.

In more sophisticated cases, fraudsters mount cameras and other gadgets on ATMs and steal or capture the details of the card plus the PIN as it is entered, make a copy of the card and withdraw funds using the obtained details. These gadgets are cleverly disguised to look like normal ATM equipment or leaflet/brochure holders.

In other instances criminal gangs or employees obtain the particulars of a credit card through imaging techniques when being used to pay for goods and services and use the information to clone a fraudulent card which is then used to defraud the holder of the card. To protect against such frauds, customers are advised to memorise their PINs and never to write it down or share it with any other person. They should desist from the habit of giving cards and PINs to other people to withdraw money on their behalf.

Cardholders should never use a card in an ATM where they see suspicious equipment or people. Always insist that cashiers swipe customer’s cards in a machine that should be well located at the counters in the site of the cardholder and not under the counters or back offices.

7. Deposit Slip Scam

This refers to a situation where the amount shown on the deposit slip defers from the actual amount of cash deposited by customer’s agent to the bank. This usually occurs when the customer’s agent suppresses the whole amount or part of cash entrusted to him and forges a bank deposit slip to show as evidence of cash deposited. Customers are advised to vet their agents before entrusting them with large sums of money to deposit with banks. It is advisable that customers should fill in deposit slips themselves while using agents to deposit money in the bank.

The Way Forward

There is no single known remedy of eradicating bank frauds. However;

• Customers and banks must exercise due care whenever handling cheques. While the customers must exhibit due diligence,the banks too ought to have robust systems / procedures, policies and guidelines in place to mitigate frauds.

• Bank of Uganda Initiatives In its resolve to maintain a safe and sound financial sector, the Bank of Uganda has strengthened the regulatory framework and strengthened the supervision of financial institutions. New laws have been enacted to strengthen the legal framework. The Micro Finance Deposit-Taking Institutions Act, 2003 (MDI), The Financial Institutions Act, 2004 (FIA) and the Foreign Exchange Act, 2004 (FEA) have all been enacted recently to ensure that financial institutions are managed within an appropriate and up to date legal environment. The MDI regulates micro finance institutions which take deposits from the public and Bank of Uganda has so far licenced three micro finance deposit-taking institutions.

• The implementation of the law is expected to increase outreach of financial services especially in the rural areas. The FIA reflects best practices, standards and principles in supervision of financial institutions. It addresses among others aspects of licencing, corporate governance and prompt corrective actions against problems in licenced institutions. There are currently fifteen commercial banks and seven credit institutions licenced and supervised under this act. Implementing regulations have been gazetted under these acts and supervision of the institutions has been strengthened through capacity building, and more frequent examination of institutions through on-site and off-site methodologies including risk-based supervision.

• The FEA consolidates the law relating to foreign exchange in Uganda; to provide for the exchange of foreign currencies in Uganda and the making of international payments and transfer of foreign exchange. Foreign Exchange Bureaux are licenced under this act. The Anti-Money Laundering Bill has been drafted and is due for debate by the legislature. The enactment of this law will curtail the misuse of Uganda’s financial system for money laundering activities, hence protecting the financial sector against the effect of money laundering.

• Bank of Uganda regularly meets with the Uganda Bankers’ Association to discuss the frauds and forgeries taking place in the financial sector. An Economic Intelligence Unit (EIU) has been established in the Bank of Uganda to handle the problems of fraud and forgeries taking place in financial institutions. The payments system has been extensively modernized by the Central Bank in collaboration with the financial institutions. Improvements have introduced initiatives, which will reduce on incidences of especially cheque fraud.

• Implementation of a national cheque standard has ensured high quality cheques with reasonable security features. The use of risk-prone cheques will be reduced further with the introduction of electronic funds transfer systems (EFT), real time gross settlement system (RTGS), credit cards and electronic funds transfer at point of sale (EFTPOS). The use of these settlement methodologies to effect both large volume payments (RTGS) and low value payments (EFTS) eliminate the use of cheques, and hence the incidence of cheque fraud.

Source: BOU