User:Jasonchen149/sandbox

= External fraud of operational risk = External fraud is the risk of accidental financial, material or reputational damage caused by fraudulent practices outside the company. It is a recognized risk category in the global regulatory framework (Basel II standard). The precise definition of external fraud by Basel II is: losses caused by third parties’ intention to defraud, misappropriate property or evade the law.

External fraud includes 2 categories that are theft and fraud, and systems security. Theft and fraud includes theft/robbery, forgery, and check kiting. Systems security includes hacking damage and theft of information.

Further Categorization

External fraud events vary by the number of people involved and the "vector" or mechanism of attack. An important distinction concerns the identity of individuals involved in the External Fraud event. We can distinguish：

·      First Party Fraud (fraud committed by an individual or group on their own account)

·      Third Party Fraud (fraud committed by means of use of a third person's identity)

Examples of External Fraud by Business Line

·      Corporate Finance: Loan Fraud, Client Misrepresentation of Information, Theft

·      Trading and Sales: Cybercrime, Forgery

·      Retail Banking: Cybercrime, Check Fraud, Theft of Information, Theft of Assets

·      Commercial Banking: Fraudulent Transfer of Funds, Credit Product Fraud (loans, letters of credit, guarantees)

·      Payment & Settlement: Payment Fraud

Mitigation of external fraud

External fraud is mitigated by strong internal controls, including systems and processes, and is supported by a corporate risk culture embedded in employees. The sound management principles of operational risk also apply to external fraud.

Fraud by suppliers

External fraud by suppliers includes:

Insufficient supply of goods or insufficient supply.

Payment for undelivered services and goods.

A rebate for a biased supplier.

Pay false claims to false suppliers.

Checks are only paid in cash, not authorized checks.

Purchase items for private use.

The ways to avoid fraud by suppliers

Ensure that employees are properly trained in accounts payable and storage functions.

Ensure that supervision takes place in dealing with income and payment expenses.

Ensure purchase, receipt and the payment function is isolated so that no one performs all three duties.

Ensure that the relationship between your business members and suppliers has guidelines to avoid prejudice and incentives from suppliers (gifts).

= Ensure audits for all areas of procurement, including petty cash, unreceived items and all invoices. =