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DOI: https://doi.org/10.34069/AI/2021.45.09.21

How to Cite:

Kyrychenko, O.V., Soldatenko, O.A., Gorokhovska, O.V., Voloshyna, M.O., & Maksymova, L.O. (2021). Fraud in the banking

system of Ukraine: ways to combat taking into account foreign experience. Amazonia Investiga, 10(45), 208-220.

https://doi.org/10.34069/AI/2021.45.09.21

Fraud in the banking system of Ukraine: ways to combat taking into

account foreign experience

ШАХРАЙСТВО В БАНКІВСЬКІЙ СИСТЕМІ УКРАЇНИ: СПОСОБИ БОРОТЬБИ

ІЗ ВРАХУВАННЯМ ЗАРУБІЖНОГО ДОСВІДУ

Received: July 12, 2021 Accepted: September 9, 2021

Written by:

Oleh V. Kyrychenko

https://orcid.org/0000-0002-2046-9522

Olena A. Soldatenko

https://orcid.org/0000-0002-6587-0280

Olena V. Gorokhovska

https://orcid.org/0000-0002-6163-4344

Maryna O. Voloshyna

https://orcid.org/0000-0001-9416-6885

Larysa O. Maksymova

https://orcid.org/0000-0001-7660-6779

Abstract

The article aims to identify effective ways to

combat bank fraud in Ukraine. Using the method

of systematic analysis of theoretical experience,

practical measures and international legislation

in the field of combating banking fraud, the main

factors influencing the bank fraud level are

identified: financial instability of the banking

institution, lack of information about the client's

credit history, poor internal control, low level of

corporate governance, lack of a standard

procedure for customers verification, lack of a

unified register of bank employees, imperfect

legal regulators and a banking control system.

The study allowed to identify the characteristics

of an effective banking fraud combating system:

a clear definition of the legal framework,

regulation subjects and objects, strict and

guaranteed liability for violations of laws,

cooperation of structural units and regulatory

authorities at the domestic and international

level, state control of financial monitoring. As a

result of the study, it was concluded that the

Анотація

Статистичні дані про рівень банківського

шахрайства в розвинених та країнах, що

розвиваються, свідчать про доцільність

створення ефективної системи боротьби з

цими видами злочинів. Стаття покликана

визначити ефективні шляхи боротьби з

банківськими шахрайствами в Україні. За

допомогою методу системного аналізу

теоретичного досвіду, практичних заходів та

міжнародного законодавства у сфері протидії

банківським шахрайствам визначено основні

фактори, що впливають на рівень

банківського шахрайства. Такими факторами

є: фінансова нестабільність банківської

установи, відсутність інформації про

кредитну історію клієнта, поганий

внутрішній контроль, низький рівень

корпоративного управління, відсутність

стандартної процедури перевірки клієнтів,

відсутність єдиного реєстру працівників

банку, недосконалі правові регулятори та

система банківського контролю. Дослідження

Doctor of Law Sciences, Associate Professor, Rector Private institution of higher education "Dnipro humanitarian university",

Dnipro city, Ukraine.

Candidate of Juridical Sciences, Associate Professor, Dnipropetrovsk State University of Internal Affairs, Dnipro city, Ukraine.

Associate Professor, PhD in Law, Head of the Department of Theory, History of State and Law and International Law, Classical

Private University, Zaporizhzhia city, Ukraine.

Ph.D, Associate Professor of the Department of Operative – Investigative Activity Dnipropetrovsk State University of Internal

Affairs, Dnipro city, Ukraine.

Candidat of legal sciences, Associate Professor, Kyiv University of Tourism, Economics and Law, Kyiv, Ukraine.

Kyrychenko, O.V., Soldatenko, O.A., Gorokhovska, O.V., Voloshyna, M.O., Maksymova, L.O. / Volume 10 - Issue 45: 208-220

/ September, 2021

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successful experience of developed countries,

comprehensive implementation of measures to

combat bank fraud (at the legislative, bank

management and technological level) will not

only reduce the level of bank fraud, but also

corruption, money laundering and terrorist

financing rate.

Key words: financial institution, crime, control,

security, information, legal regulation, Ukraine.

дозволило виявити характеристики

ефективної системи боротьби з банківськими

шахрайствами: чітке визначення

законодавчої бази, суб’єктів та об’єктів

регулювання, сувору та гарантовану

відповідальність за порушення законів,

співпрацю структурних підрозділів та

контролюючих органів на внутрішньому та

міжнародному рівнях, державний контроль

фінансового моніторингу. В результаті

дослідження було зроблено висновок, що

успішний досвід розвинутих країн, всебічне

впровадження заходів щодо боротьби з

банківськими шахрайствами (на

законодавчому рівні, на рівні управління

банками та на технологічному рівні) не тільки

знизять рівень банківського шахрайства, але

також корупції, відмивання грошей та

фінансування тероризму, що сприятиме

зростанню довіри населення до банків та

фінансової стабільності.

Ключові слова: фінансова установа,

злочинність, контроль, безпека, інформація,

правове регулювання, Україна.

Introduction

Inter-temporal changes in modern reality and

current trends in society increase the need to

obtain only the most necessary information in a

few seconds, without being overloaded with

related information; the main principle is access

to information with just "one click". Such

information development, publicity and

simplification of access to information gives new

opportunities for the society development. The

other side of this process is offering new

opportunities for financial crimes and fraud in all

spheres of life. Banking system is one of the most

vulnerable areas for fraud. Despite audits by

financial institutions and financial transactions

control, verification of customer bases and

continuous improvement of the security system,

fraud related to financial transactions is

becoming more common.

The rapid pace of banking sector modernization,

the emergence of new payment systems and

methods of mutual settlements has become the

basis for the emergence of various forms of fraud

requiring legal regulation and identification of

possible ways to combat such crimes. The

common forms of fraud involve the use of digital

signatures, online transactions, plastic cards.

This situation becomes the basis for changing the

form of fraud, its globalization and

internationalization.

In 2019 the KPMG international company

undertook a global study in 43 retail banks in

regard to the commitment and combating bank

fraud. The study found that more than half of

respondents worldwide experienced an increase

in the total cost and volume of external fraud, in

2018 61% of respondents reported of an increase

in the total number of external fraud cases, and

59% of respondents reported of an increase of

fraudulent transaction amounts. Banks around

the world experience a tendency of fraud level

increase. Fraudsters manipulate and force

customers to make payments to them, bypassing

banking control (KPMG, 2019). Fraudsters are

becoming more sophisticated and can change and

adapt their approaches very quickly. Banks need

to be shifty to be able to respond to new threats

and apply new approaches and technologies to

predict and prevent fraud.

The share of products and services sold by banks

through digital channels is growing. According

to the World Payments Report (BNP Paribas,

2018), the share of non-cash transactions will

increase by a total of 12.7% by 2021. According

to a global study of economic crime and fraud

conducted by PwC (2020), relatively low

percentages of financial institutions investigate

fraud cases and regularly monitor financial

performance. 26% of Ukrainian companies have

suffered losses caused by fraud ranging from $

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50,000 to $ 1 million during the last two years,

and 3% of Ukrainian respondents have reported

fraud losses of more than $ 5 million (PwC,

2020).

Statistics of developed countries concerning

fraud rate show that this issue is topical for many

countries. 81% of US organizations were

attacked by payment fraud in 2019, which is the

second highest percentage since 2009. However,

only 60% of them have implemented anti-fraud

policies. The level of missing card fraud (CNP)

continues to grow from year to year in Europe.

Within the Single Euro Payments Area (SEPA)

in 2018, CNP fraud amounted to € 1.43 billion of

fraud losses, which is 17.7% more compared to

2017. In contrast, ATM fraud decreased by

14.7% from 2017 to 2018, which is largely due

to the increasing use of chip-and-pin transactions

cards in ATMs (Merchant Savvy, 2020).

This situation can adversely affect not only the

profitability of banking institutions, but also

macroeconomic variables (Bhasin, 2016). The

growing level of financial fraud, the

consequences it leads to and the low

effectiveness of combating against such crimes

indicates the expediency of determining an

effective system for detecting and combating

financial fraud in the banking sector

The article aims to identify effective ways to

combat banking fraud in Ukraine on the basis of

a systematic analysis of theoretical experience

and practical measures to combat fraud in the

banking system.

Methodology

Banking fraud is the subject of interdisciplinary

research. The object of study refers to research

areas of law, economics and psychology.

Therefore, a comprehensive analysis of banking

fraud, which includes general theoretical and

special methods of cognition, is appropriate. The

methodological basis of the study includes such

general scientific methods as the dialectical

method of scientific knowledge, which

determines the development of banking fraud, as

well as the relationship between banking fraud

and other crimes (corruption, cybercrime, money

laundering). Using the classification method, the

main types and forms of bank fraud are

identified. System analysis allowed to determine

the causes of fraud in the banking sector. The

grouping method and the system-structural

approach allowed to classify modern frauds in

the banking sector. The logical-legal method

allowed to determine the main measures to

combat banking fraud in Ukraine. The method of

comparative law, which is used to compare the

legislation of countries with low levels of

banking fraud, has identified effective measures

to combat and reduce fraud in the banking

system. Due to the method of generalization,

conclusions and proposals for research are

formulated.

Literature review

As reported in ACFE (2014), banking institutions

are becoming more susceptible to fraud, although

various control measures have been

implemented. A global survey concerning bank

fraud was conducted by KPMG company (2013)

reports that 85% of respondents believe that

fraud is increasingly occurring in the industries

inclined to fraud risk. The banking industry is

mainly an industry of risk, and one of the

industries that is classified as an area of high

fraud risk (Kingsley, 2012). The propensity of

the banking sector to fraud risk also affects the

level of money laundering. “Increasing the level

of money laundering is influenced by incomplete

identification of users when using Internet

banking and online transactions; evasion of

financial institutions from conducting audits for

fear of losing their customers' trust” (Vitvitskiy

et al, 2021a).

V.V. Pivovarov (2013) notes that latent crime in

the banking sector is a vivid and visible

manifestation of corporate crime committed in

the banking sector. "The most common crimes in

the banking sector is fraud using payment cards

and their details, unauthorized debiting of bank

accounts, interference with Internet banking, the

spread of computer viruses, DDoS-attacks on

Internet resources, fraud in information

networks." (Vitvitskiy et al, 2021b).

Among the scientific approaches to

understanding the concept of "financial fraud"

the similar approaches can be distinguished,

which, in turn, can be divided into two groups:

scientific-theoretical approach and practical

functional approach (Rodchenko & Zhivko,

2020).

According to the scientific-theoretical approach,

financial fraud is understood as a set of

interconnected and common in terms of forensic

technology selfish encroachments on the

financial resources of the state, business entities

and citizens, committed by deception and abuse

of office (Cherniavskyi, 2010). Financial fraud is

a criminological phenomenon that constitutes a

criminal activity and is expressed in a system of

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criminal and legal actions committed by

deception or abuse of trust in the process of

formation, distribution and use of funds for

material gain (Chernyshov, 2014).

Wells (2008) puts emphasis on the use of one's

probably official position for personal

enrichment. Fraud is one of the most serious,

expensive, stigmatizing and punitive forms of

liability imposed on today's corporations and

financial markets (Buell, 2011; Green, 2007).

According to Agwu (2013), fraud is considered

as any illegal act characterized by deception,

concealment or breach of trust. These actions do

not depend on the threat of violence or physical

force. Entities and organizations commit fraud to

obtain money, property or services; to avoid

payment or loss of services; or to provide

personal or business advantage. Research on

fraud detection and prevention has been

highlighted in audit procedures and appeal to

"Red Flags". As explained by Gullkvist & Jokipii

(2013), "Red Flags" is a warning sign or

symptom that indicates the likelihood of fraud for

professionals in the field of financial

criminology.

In terms of financial market activities - banking,

securities and insurance - fraud is given more

specific meaning and is best understood as illegal

falsification or manipulation of financial

information (Neil & Roehrkasse, 2013).

Financial information is considered as a support

for financial market operations (Lomnicka,

2008).

There are two types of fraud in criminal

proceeding related to banking activities; in

particular external and internal fraud (Sanusia et

al, 2015). Fraudsters are divided into three main

groups: "household" (individuals) fraudsters,

professional fraudsters and borrowers who use

the services of professional fraudsters

(Kuznetsova, 2016a; Siddiqi, 2006). It is also

important to identify friendly fraud, also known

as "civil fraud" or "family fraud." This applies to

fraud committed using information, which

belongs to an intimate friend or a family member

(Bhasin 2007).

The strongest protection against this type of fraud

is to emphasize to clients the importance of

maintaining the complete confidentiality of their

passwords (Haugen and Selin, 1999; Agwu,

2012).

The ways of committing fraud in the banking

sector are classified by L.I. Kriushenko (2015).

The ways to commit fraud in the banking sector

are distinguished as follows, depending on:

intent; typical traces; the stage of entering

knowingly false information; type of credit and

banking transaction; the nature of the mechanism

for obtaining a credit and banking transaction;

the nature of the employment relationship of the

entity with the banking institution; existence of

certain agreements; the method of entering

knowingly false information in the documents;

the actions for preparation and concealment.

О.V. Krishevich (2012) classifies bank fraud in

criminal proceedings according to three grounds:

1) the type of banking operations by means of

which the crime is committed;

2) the nature of the relationship of the subject

of the crime with the bank;

3) separate mechanisms of criminal activity.

A. Mordvinkin (2014) offers several

classifications relating to financial fraud in a

commercial bank:

 classification of the type of events which

have led to losses;

 classification of bank fraud;

 classification of credit fraud types of legal

entities.

The key contributing factor facilitating fraud is

poor internal control (KMPG, 2019) and poor

corporate governance practices (Beasley, 1996;

ACFE, 2014). As banking institutions carry out a

wide range of activities, fraud can potentially be

committed by various parties, including

shareholders, depositors, borrowers, staff, and

the bank itself.

The main causes of fraud in the banking sector

are: the lack of standard customer verification

procedures and the unavailability of reliable

information about the customer's credit history;

lack of a unified register of employees of credit

and financial institutions, imperfection of public

relations legal regulators; inefficiency of the

bank activities control system, low level of

material security of the population and

unemployment (Klochko, 2015).

Fraud is committed for the following reasons:

perceived pressure, anticipated opportunity and

rationalization. These three elements or basic

concepts were taken from the "Fraudulent

Triangle Theory" founded by Donald R. Cressey

(Omar et al., 2010).

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Analyzing the threats to banking security,

O.I. Baranovskyi (2014) has noted that the

significance of classifying financial security

threats lies in the need to assess soberly the

current situation, assess the negative aspects and

trends of their development, group negative and

positive actions of factors and on this basis to

develop sound recommendations for making

specific decisions to ensure the appropriate

security level.

Ukraine is one of the leading countries in the

world regarding bank fraud and is among the top

five countries where bank payment transactions

are unsecured. 19% of transactions suspected of

fraud turned out to be really fraudulent. This

index exceeds the fraud extent in other countries.

Thus, in 2017 with the help of cyber fraud, 8900

dollars were withdrawn from the cards of

Ukrainian citizens (Fraud Digest, 2017).

The largest share of fraudulent bank transactions

carried out applying social engineering methods

(41%) was implemented using fitting and

pretexting. The essence of such fraudulent

actions is to defraud payment card data from

customers and gain access to accounts and stolen

funds. The victims of social engineering are

usually people of retirement age (aged 55 and

older) - 15% and middle-aged people (aged 35-

44) - 13%. The popular method of money

stealing from bank customers is through ATMs

(32%) and via the Internet (16%). Taking into

consideration the popularity of these types of

bank fraud, banks need to develop ways to

protect their transactions. In fairness, it should be

noted that bank fraud implemented using social

engineering is not only a problem of Ukraine, but

a global problem (Rodchenko & Zhivko, 2020).

Often the victims of ATM fraud (in particular, by

"trapping" and "phantom" method) are people

who do not live permanently in the relevant area,

namely tourists. Insufficient awareness,

combined with the stressful situation created by

a fraudster, contributes to the victimization of

such persons and attracts the increased attention

of criminals (Afanasenko, 2014).

In the field of bank card fraud, the victim's

behavior plays a decisive role. According to

scientists, the main reasons for the crime

commitment are the inattention of the victim,

lack of sufficient critical thinking, his or her own

carelessness and propensity to risk-taking. K.L.

Popov (2015) notes that risk often becomes the

last argument for a person in favor of

participation in situations of doubtfulness or

uncertainty, which involve obtaining significant

benefits, achieving significant advantages, but at

the same time are potentially dangerous given the

possibility of unpleasant consequences.

The difficulty of legal regulation of bank fraud in

criminal proceedings is that fraud must involve

both dishonesty and intent to either gain benefit

or cause damage (which must be a profit or loss

in terms of money or other property). Such traits

are subjective classifications and therefore they

are difficult to be justified objectively (Sharma,

2004; Agwu, 2013). Fraudsters are becoming

more sophisticated, which means that fraud

precautions should be constantly evolving to

ensure that they are able to counter the threat

(Agwu, 2014).

For example, most types of fraud in the UK fall

under one of the laws. The Law on Fraud

establishes certain types of fraud that cannot

easily fit into the categories of this law. These

include possession of documents (including

electronic data and programs) for fraudulent use,

drafting such documents to obtain services

dishonestly (Okpara, 2009).

French statistics on the level of bank fraud show

the effectiveness of the system for combating

these types of crimes. According to the French

Observatory for Payment Security (OSMP), the

figures for 2017 show that losses decreased by

9.8% (467.0 million euros) compared to 2016. In

the UK, there is an increase in banking fraud. In

2016, bank card fraud in the UK caused losses of

8.8% more than in 2015. However, in 2017 there

was a decline of 8.4% since 2016. In May 2019,

the UK developed a new payment security

system in which the CoP is an important tool to

prevent payment fraud (Nets Fraud & Dispute

services, 2019).

Rodchenko & Zhivko (2020) states that banking

payment systems that have poor protection may

lose customers because they may be subject to

fraud. Involving large sections of the population

in non-cash transactions and the possibility of

sustaining losses among them turns bank fraud

not only into a problem of banks, but into a social

problem. This problem needs to be solved

comprehensively with the involvement of the

state, population, banks, and investors.

Results and discussion

The main ways to commit banking crimes can be

divided into 4 main groups:

1. Information interception: direct interception

and electromagnetic interception.

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2. Unauthorized access to information:

"computer boarding", "hoax", "disguise",

"inconstant choice", "by the tail",

"emergency", "by a fool", "break", "hatch",

" warehouse without walls", "system looky-

loos".

3. Manipulation of information: "Trojan horse

in chains", "Trojan nest-doll", data

substitution, code substitution, computer

viruses, "salami", "logic bomb",

"asynchronous attack", simulation, "kite",

"bait trap".

4. Obtaining and using information for

criminal purposes: software theft, theft of

equipment through computer operations,

money theft by obtaining secret codes,

money theft by computer transfer, money

theft by means of computer manipulation,

introducing changes in the program

(Dzhuzha, Golosnichenko, & Chernyavsky,

2000).

The use of special information technologies that

would detect fraudulent plans of attackers at the

stage of loan applications consideration is

currently topical for the banking sector. In this

respect, the important task of risk management is

to distinguish between fraud credit risks and

defaults (impossibility of further fulfillment of

their credit obligations) (Buchko, 2013).

In world practice, different types of scoring are

used at different stages of crediting, but not only

at the stage of loan application consideration,

continuing to assess the significance of the loan

application throughout the life of the loan, as well

as at the stage of debt collection and transfer to

collectors. At any stage of credit history with the

help of scoring, it is possible to solve various

tasks, such as:

1. Scoring according to current data during the

application process - assessment of the

potential borrowers' credit capacity based on

the information provided during the credit

transaction.

2. Scoring during the credit period, when

assessing the dynamics of the borrower's

credit account allows you to mathematically

estimate the probability of the credit

reimbursement.

3. Assessing the probability of full or partial

reimbursement of the credit offers to

determine the priority areas of work

regarding borrowers, when their credit

account is classified as "unsatisfactory".

4. Assessment of fraud possibility determines

the likelihood of potential wrongful acts of

the borrower (Narain, 1992).

The main way to combat fraud is to update

constantly scoring models to detect fraud, change

their parameters, increase the speed of operations

monitoring, increase IT tools and maintain strong

collaborative relationship with cyber police. It is

offered to use scoring models and special scoring

technologies to detect fraudulent actions at the

stage of a loan application consideration or at

attempt to obtain unauthorized money from

bankcards. (Kuznetsova, 2016b).

The main reasons of bank fraud are:

 imperfection of financial institutions internal

control;

 low level of banks corporate governance

practices;

 lack of standardized customer verification

systems;

 information unavailability about the

previous credit history of clients;

 lack of a unified register of banking

institutions employees;

 imperfection of legal regulators of public

relations in the banking system of Ukraine;

 low efficiency of the control system over the

activities of banks.

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Figure 1. Fraud in the banking system.

Systematization of the main forms, types,

methods and causes of bank fraud commission

allows to assess the shortcomings and gaps that

may affect the increasing level of bank fraud and

identify possible ways to combat these types of

crimes.

Factors affecting the level of fraud in the banking

system can be divided into three main groups:

banking system shortcomings, the shortcomings

of legal and regulatory framework and the

actions of bank customers. To increase the

effectiveness of combatting and counteraction to

banking fraud, it is advisable to implement

measures aimed at overcoming each group of

factors.

Table 1.

Factors increasing the level of bank fraud and possible ways to overcome it.

Factor

Ways to overcome

Banking systems shortcomings

Low efficiency of banking activities

monitoring

Establishing uniform standards for auditing and

verification of banking activities in accordance with

international standards

Insufficient verification of bank

customers

Creating a single customer base of financial

institutions, with preserving data concerning their

credit history

Opportunities for bank employees to

commit fraud

1) creation of a single database of banking

institutions employees;

2) establishing liability for bank employees for

violating the standards of the banking institution

activities.

Shortcomings of

legal and

regulatory

framework

Difficulties in detecting bank fraud

Involvement of IT specialists, financiers and

financial auditors in the process of detecting and

investigating bank fraud

Lack of interaction of banking

institutions with law enforcement

agencies

Introduction of state standards of interaction

between law enforcement agencies and banking

institutions

Activities of bank

customers

Disclosure of personal financial

information to relatives and friends

Informative activities with the bank customers in

regard to the need to maintain the confidentiality of

personal banking data

Providing access to banking information

to the third parties (fraudsters)

Educational activities with the population on

possible ways of committing banking fraud and the

need to maintain the confidentiality of personal

banking data

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That is, improving the effectiveness of banking

fraud combating can be achieved through

comprehensive implementation of changes in the

security system and monitoring of banking

activities, amendments to regulations and

optimization of banking fraud investigations, as

well as educational and informational activities

for the population.

According to a study carried out by Sanusia et al,

(2015), bank affiliates are more vulnerable to

fraud. According to the results of the study, the

level of fraud can be reduced by the following

actions:

1) comprehensive verification of the

documents submitted, for example, cross-

checking of the information provided in the

certificates of salary, clarification of the

employer's information about the position

and status of the employee; verification of

financial declarations and verification in

other relevant authorities;

2) checking the applicant's credit history and

the ability to repay the bank loan;

3) involvement of professional appraisers in

the bank affiliates, who will carry out

property appraisal.

Positive trends in reducing the level of bank

fraud in developed countries indicate the

effectiveness of combating these types of crimes.

Therefore, it is advisable to compare the anti-

fraud system in the banking sector of developed

countries and Ukraine.

Table 2. Anti-bank fraud system

Country

Legal regulation

Financial monitoring

Great

Britain

.20)The Fraud Act. (CPS, 20

Cooperation within FIRST, the International

Telecommunication Union,

Groups of European Computer Emergency

Response Centers

(EGC group), TF-CSIRT, NATO, OSCE,

Is carried out by the Inland Revenue Service NCIS / ECU,

which is subordinated to the UK Treasury and interacts

with the National Criminal Intelligence Service, Customs

and Excise, the Anti-Fraud Office and the National

Investigation Service.

France

. Digital Economy Law (Lexology, 2004)

Cooperation with the Federal Office for

Information Security of Germany (BSI).

Administrative model of financial monitoring.

Activities of TRACFIN - a body, which is provided with

information on setting up bank accounts of individuals and

legal entities.

Italy

Italian legislation requires banks and other

intermediaries to keep detailed records

concerning residents' foreign exchange

transactions in order to prevent fraud and

money laundering attempts. (Di Vizio,

2017). The legislation provides for banks and

other financial institutions to keep detailed

documentation on all foreign exchange

transactions of resident clients.

The state is obliged to monitor the detection and cessation

of money laundering attempts. The monitoring is carried

out by the Ufficio Italiano Combi UIC (SAR), which

reports to the National Bank of Italy.

Identification of legal entities and individuals upon receipt

or payment of cash (or its equivalent), bearer securities, the

amount of which exceeds 12.5 thousand euros, is

mandatory.

Spain

The Law on the Participation of Financial

Institutions in Anti-Money Laundering and

Anti- Drug Trafficking (1990), The Law on

the Certain Measures against Money

Laundering (Law 10/2010, 2010) and the

Monetary and Financial Code (European

Banking Federation, 2002).

The monitoring is carried out by TRACFIN, which is an

agency of the French Ministry of Finance.

Among the subjects of financial monitoring, it is

appropriate to mention auditors, accountants, tax advisors,

organizations selling antiques and pieces of art. Financial

monitoring entities are obliged to provide information to

the financial intelligence unit on transactions if they

involve the transfer of cash, checks or other documents to

the bearer, as well as on transactions with residents of

offshore jurisdictions in the amount exceeding 30 thousand

euros.

USA

Legal Act - PATRIOT Act 2001 (Uniting

and Strengthening America by Providing

Appropriate Tools Required to Intercept and

Obstruct Terrorism)

Controlling bodies: The U.S. Department of

the Treasury, Office of the Comptroller of

the Currency, The Board of Governors of the

Federal Reserve System), FinCEN (Financial

Crimes Enforcement Network).

In 2020, the Anti-Money Laundering Law

was approved.

The financial monitoring system is based on extending

authorities of government bodies; strengthening and

improving the procedure for financial institutions to

implement measures to prevent fraud in the banking

system.

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So, the international system of banking fraud

combating is characterized by the following

features:

 clear definition of the legal framework,

subjects and objects of regulation;

 establishing strict liability for non-

compliance with the law;

 interaction of structural subdivisions and

controlling bodies within the country;

 international cooperation on the basis of

international agreements and acts in regard

to banking fraud combating;

 state control over financial monitoring of

risk-oriented approach.

Based on the analysis of international experience,

effective measures to combat banking fraud are

as follows:

 investment in monitoring the

implementation of the requirements of

international financial institutions to combat

financial crime (anti-money laundering and

terrorist financing (AML CTF), bribery and

corruption (ABC);

 introduction of integrated reporting,

integrated management structures,

integrated systems and staff responsibilities

with fraud risk management and financial

crime combating compliance (KPMG,

2019);

 changes in legislation with clearly defined

subjects, objects of regulation and liability

for breach of the law;

 increase of the country's cybersecurity,

interaction with cyber police;

 combating money laundering and financing

of terrorism, corruption and other

interrelated crimes;

 involvement of external experts for risk

assessment and financial monitoring.

At the same time, banking fraud is not a separate

problem of modern society, which can be solved

independently. Fraud in the banking sector is

interrelated with the following social problems:

 increasing the money laundering and

terrorist financing level;

 the presence of corruption schemes in the

country, both in the financial, political and

legal system;

 low material standard of living of the

Ukrainian population;

 socio-economic and political instability.

Therefore, combatting against banking fraud can

not be considered separately from these social

problems. Therefore, improving the

effectiveness of combatting against banking

fraud can have a positive impact on solving these

problems, reduce money laundering level,

eradicate corruption in the banking system and

promote socio-economic and political stability in

the country.

Fraud in the banking sector can cause huge losses

in terms of the financial market, banking and

financial institutions and payment systems

operation. From the point of view of customers'

psychology, bank fraud can lead to customer

distrust, which in the future may adversely affect

the integrity and stability of the economy. Such

influence can destroy the banking system and

cause public discontent and political turmoil.

Another obstacle to combat fraud in the banking

sector may be the inexperience and low level of

awareness of employees in regard to fraud

prevention. In this respect, it is important to train

employees to combat fraud, which will positively

affect the level of employees’ compliance and

improve the attitude to banking procedures. The

interaction of relevant committees, special public

and interbank associations can have a positive

effect on reducing the bank fraud level, due to the

creation of common models for fraud detection

and exchanging current information on existing

ways of committing fraud, its detection and

counteraction.

Maintaining the level of customer confidence in

banking institutions can be reached through

informational and educational activities that can

protect the bank's customers from the

confidential information disclosure and from the

loss of money due to fraudulent actions.

In terms of banking institutions activity, work

can be done to increase the efficiency of

monitoring and tracking of suspicious banking

transactions. Tracking the territorial position of

financial transactions by the client will help to

prevent fraud. If the transaction is carried out

elsewhere in the country or in the world, by

increasing control of the transaction - requesting

additional information or confirmation of the

customer, it is possible to avoid bank fraud

commitment.

Effective counteraction of fraud in the banking

sector and combatting it can be reached by

introducing reliable information technology

equipment of the bank's security service;

introduction of a unified clients' database of

relevant institutions, training of employees of

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/ September 2021

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credit (deposit) banking units concerning fraud

prevention, organization of enhanced

cooperation between representatives of the

financial sector and law enforcement agencies.

Figure 2. Anti-fraud system in the banking sector

Factors affecting the level of banking fraud also

include:

1) financial stability of the banking institution,

the increase of which may help reduce the

level of fraud;

2) complex bank transactions, poor financial

performance, low capacity of the bank to pay

debts may increase the level of fraud;

3) poor internal control over the activities of

managers and employees of the bank may

increase the level of banking fraud;

4) failure of bank managers to comply with the

standards of the institution plays the greatest

role as a factor in increasing the level of

fraud (Nafchi & Dastgir, 2019).

These factors can be solved through the

establishment of an independent board of

directors, which will monitor compliance with

the standards of the banking institution, the

revival of a culture of honesty and trust among

bank employees and conduct seminars and

trainings for the staff.

Anti-fraud system in the banking sector should

be comprehensive and systematic, including the

interaction of the state, banking institutions and

organizations conducting audit and control of

bank activities. Coordinated actions in the

following areas can be effective ways to combat

fraud in the banking sector: banking institution

management, legal regulatory support and

technological area.

Development of organization strategy and

definition of control tools aimed at analyzing

potential threats as a result of internal and

external abuses; periodical training and

education for bank employees, aimed at

improving knowledge on detecting and

combating fraud in the banking system;

establishing an effective communication model

between the banking units, the bank's security

service and law enforcement agencies; reporting

on the results of suspicious transactions

monitoring and transferring relevant information

to the security service and higher authorities;

Regular assessment of the bank's operating

procedures for compliance with statutory

standards will be able to reduce the level of

banking fraud and increase the security level of

banking institutions.

The anti-fraud strategy in the banking sector

should be focused not only on improving the

security level, but also on creating conditions

under which fraudsters will know that they will

be punished for sure for the committed crime. In

this respect, it may be effective to create

conditions in which a fraudster will not be

willing to commit a crime and will believe in a

guaranteed punishment, which will turn worse

than the reward for fraud, which will represent a

warning factor.

It is important for the bank to be able to protect

itself against fraudulent activities by

strengthening the mechanism for detecting,

mitigating and controlling fraud through prompt

detection, investigation and information

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exchange. This can have a positive impact not

only on banks security, but also ensure the

resistance and stability of the financial system as

a whole and maintain public confidence in

financial institutions.

Conclusion

This study was aimed at identifying the main

trends in the causes and consequences of bank

fraud, features and methods of committing such

crimes. In order to determine effective ways to

combat bank fraud, international legislation and

the system of financial monitoring of developed

countries, which are characterized by a low level

of bank fraud, were analyzed.

The increase in the banking fraud level can be

influenced by: corporate crime, imperfection of

banks safe operation ensuring system, rapid

development of technology, information

availability, financial transactions poor control,

simplification of the bank customers

identification system, shortcomings of legal and

regulatory framework of banking institutions.

The analysis of the international bank fraud

combating system revealed the features peculiar

to the countries with high effectiveness in

combating bank fraud: clear definition of the

legal framework, subjects and objects of

regulation, strict and guaranteed liability for

breach of laws, interaction of structural units and

controlling authorities at the domestic and

international level, state control of financial

monitoring of the risk-oriented approach.

It is possible to increase the effectiveness of bank

fraud combating in Ukraine as a result of the

implementation of the following measures: the

application of countermeasures at the bank

management level (creation of a standard

customer verification system, training of bank

employees to combat bank fraud, maintaining

information confidentiality, enhancing customer

identification control); at the state level

(development of effective legal regulations,

creation and interaction with cyber police,

introduction of communication models between

banks, the state and organizations conducting

banking institutions audits); at the technological

level (scoring models updating, creation of a

unified register of banking institutions

employees, involvement of IT specialists to

increase the bank security system efficiency).

As a result of the study, it was concluded that

bank fraud combating cannot be considered

separately from combating against corruption,

money laundering and terrorist financing.

Reducing the level of bank fraud in the country

will help increase confidence in banking

institutions, economic development and financial

stability of the state.

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