Fraud Prevention, Detection, and MangementOscar M. Maninantan

FICOBank

2010 RBAP-MABS National Roundtable ConferenceHyatt Hotel and Casino, ManilaJune 2-3, 2010

2010 RBAP-MABS National Roundtable ConferenceHyatt Hotel and Casino, ManilaJune 2-3, 2010

2010 RBAP-MABS National Roundtable Conference

Topic: Fraud Prevention, Detection and Management

Mr. Oscar M. Maninantan

Head, Internal Audit Department

Hyatt Hotel and Casino, Manila

June 2-3, 2010

Presentation for

One of the first 29cooperative banksorganized under aPresidential Decree (PD175 – Strengthening theCooperative Movement)as an accompanyingmeasure of thegovernment’s AgrarianReform Program.

The goal was to develop acooperative bankingsystem owned by farmersto replace the landlord asthe traditional source ofproduction credit.

1976 – The bank was established.

1980 – Upon the issuance of BSP license, the bank opened itsdoors to the general public.

1999 – The bank expand its market by participating in themicrofinance program of PCFC.

2001 – The bank signed up with RBAP to adopt the MABSApproach for individual microentrepreneur borrowers.

Microfinance Performance as of December 31, 2009.

No. of Active Borrowers : 1,328Loan Outstanding : P 37,822,401.48No. of Account Officers : 16No. of Branches ImplementingMF Individual Loan : 8 BranchesArea of Operation : Region 02

1) Implementation of strict/stringent loan process.

Management created a “Branch Credit Committee” where all loans (regular andmicro) are reviewed and deliberated before approval/recommendation. Themembers are: Branch Manager, Assistant Branch Manager, and Teller/Cashier.

2) Conduct of monthly post release documentation Audit.

Department conducts loan documentation audit on a monthly basis. All releasedloans (regular and micro) are reviewed. Any exceptions noted are reported to theCredit Committee that meets every month. The CRECOM is composed of 3members of the BOD, the President, the EVP, Compliance Officer, 2 SVP, Headof the Internal Audit Department and the Branch Managers.

Regular audit that includes review of the loan portfolio of the branch areconducted twice a year. The result of the regular audit is reported to the Auditand Inventory Committee. The AIC is composed of 5 members of the BOD andCompliance Officer which meets every month and reports all major exceptions tothe Board of Director. The BOD meeting is on a monthly basis.

Special Audit is also conducted whenever there are major exceptions noted in theregular audit.

Spot audit is also conducted on a regular basis.

3) Efficient MIS.

4) Introduction of measures as deterrent for committing fraud.

Client visit by supervisors/managers.

Requiring AOs to issue Ors.

Granting incentives to AOs

Strict implementation of Code of Discipline.

AOs not authorized to waive penalties.

Regular rotation of AOs.

1) Regular review of delinquency report.

Supervisor/Managers review delinquency reports and visit/validate accounts withnoted missed payments. Any complaints from clients are acted immediately.

2) Field Validation.

Supervisors/Managers conduct validation on loan proposals. Any materialdiscrepancies in the proposal will cause the denial of the loan.

3) Conduct of immediate Special Audit as a result of:

Major exceptions from Regular Audit.

Complaints from clients.

Information from other parties.

Validated information from supervisor/manager.

Complaints of unremitted/unreconciled deposits/loan balances bysupervisors/managers are verified and any infractions are reported immediatelyto COO and Internal Audit Department for proper investigation.

4) Follows bank’s protocol in fraud cases.

The Internal Audit Department, immediately, upon receipt ofcomplaint/report of fraud, follow the following procedure:

1) Forms audit team for the special audit. Prepares letter to theBranch/Department.

2) Coordinates with HRAD for the issuance of preventive suspension ortransfer order of the personnel concerned.

1) Audit Process:

a) Gathering of documents and other needed information.

Gather documentary evidences.

Get details from interviews with clients, witnesses and if possiblevalidate these information from other sources who may haveknowledge of the fraud.

If possible get signed statements from witnesses and secure originalcopies and/or certified photocopies of documents.

The interview should be done in strict confidentiality to protect thereputation of the client and the bank.

b) Preparation of formal report.

Facts in chronological order.

Amount of accountabilities/persons responsible.

Violation of internal control policies.

Weaknesses in the internal control.

Recommendations:- policy issues- administrative accountabilities

c) Submission of report.

The audit report is submitted to the President and the Audit andInventory Committee of the BOD.

The Audit and Inventory Committee submits recommendations to theBOD.

Under section 7 of the circular no. 410, within thirty (30) calendar daysafter discovery, the case should be reported to BSP:

1) Any material findings involving fraud or dishonesty (includingcases that were resolved during the period of audit); and

2) Any potential losses the aggregate of which amounts to at leastone percent (1%) of the capital.

2) Administrative investigation and imposition of sanctions.

3) As per policy, all fraud cases are strictly confidential. However,Management can always discuss cases to serve as lessons anddeterrent to other personnel.

4) The lessons learned from these cases are the basis forstrengthening the internal control policies of the bank andinstituting new ones if ever there are no existing policies.

BOD approves the recommendations of the Audit and InventoryCommittee and refer the case to a special Investigation Committee sothat the concerned personnel can be given his/her legal rights to a fairinvestigation. The Special Investigation Committee after conducting itsown investigation will decide on the case and will recommend to theBOD the appropriate sanctions.

BOD approves the sanctions.

HRAD will implement the sanction.