Building Culture of Fairness and Restoring Trust

A scam that reflects systemic challenges for corporate India

Recent revelations of fraudulent activities at ICICI Bank's Dhariyawad branch in Rajasthan have once again brought to the forefront the systemic challenges plaguing India's banking sector. The incident, where a branch manager and his aides allegedly siphoned off funds from unsuspecting account holders to meet business targets, underscores the urgent need for stricter oversight and robust internal controls within financial institutions.

The Moral of the Story

Instances of fraud or misconduct can happen in any large organization.

According to reports, the branch manager and his accomplices exploited loopholes in the system by creating overdrafts against fixed deposits and using the money to open new accounts, only to close them later and return the funds to the original accounts. This 'Entry and Reverse Entry' technique, as termed in banking, went undetected for years, highlighting a glaring lack of scrutiny and accountability.

What is particularly concerning is the apparent ease with which such scams can be orchestrated, despite the banking sector being highly regulated and monitored by the Reserve Bank of India (RBI). The fact that this fraud went unnoticed for so long raises questions about the effectiveness of the regulatory framework and the diligence of auditors in ensuring compliance. The fact that a branch manager could use depositors' money to meet business targets for years without detection raises questions about the bank's oversight and compliance mechanisms.

The scam reflects poorly on the bank's internal controls and risk management practices. This incident could potentially erode consumer trust in the bank, as customers may be concerned about the safety and security of their deposits.

What the investigations revealed

• The branch manager of the bank and aides met business targets by withdrawing funds from unsuspecting account holders, creating an illusion of opening new accounts.

• This misappropriation was driven by pressure to meet targets, with officials creating overdrafts against FDs and using the funds for new accounts, then closing them and returning the money to the original accounts.

What can we infer?

The branch manager and his aides succumbed to the pressure of meeting targets and resorted to fraudulent activities, leading to severe consequences for both the bank and its customers. This highlights the need for stringent internal controls, oversight, and a zero-tolerance policy towards fraud in all organizations.

• The operation ran for years without detection, as branch employees were unaware of the scam. To cover up, more money was taken from customer accounts to pay hush money to a blackmailer.

• The fraud was exposed when an employee noticed missing funds from a friend's account, leading to further investigation.

• ICICI Bank has a zero-tolerance policy towards fraud and has therefore suspended the involved employee pending investigation, filing a complaint and cooperating with the police.

• The total embezzled amount is estimated to be Rs 2.5 crore.

Why do you think this reputed bank struggled to maintain strongethical standards and Fair Business Practice?

Several factors may have contributed to the lapse in ethical standards and lack of Fair Practice at the bank. The intense pressure to meet business targets, driven by the competitive banking industry, may have led the branch manager and aides to resort to fraud.

Inadequate internal controls and oversight within the bank could have allowed these activities to go undetected. Additionally, the organizational culture and leadership's emphasis on integrity and transparency play crucial roles. The leaders need to balance between growth & what is “right”. They need to walk the talk & set high standards for others to follow. They need to “ring fence” themselves & their team from any undue pressures to do something abnormal & which is not in line with Values of the organizations.

Why do you think any organization fails to implement safeguards to prevent such incident? A flaw in the system?

Several potential flaws in the system could have contributed to the fraudulent activities going undetected for an extended period. Here are some areas where the bank might have slipped in implementing safeguarding mechanisms:

1. Leaders setting the tone & leading by example.

2. Weak internal controls: There may have been inadequate internal controls in place to prevent and detect fraudulent activities.

3. Lack of monitoring: There may have been a failure to effectively monitor transactions and account activities for suspicious patterns or anomalies. This could include inadequate use of technology for monitoring or a lack of regular audits.

4. Culture of pressure: The bank's culture may have placed undue pressure on employees to meet business performance targets, creating an environment where unethical behavior was more likely to occur.

5. Inadequate training: Employees may not have been adequately trained to recognize and report fraudulent activities.

6. Poor oversight: There may have been a lack of oversight and supervision from senior management, allowing the fraudulent activities to go undetected.

7. Inadequate compliance practices: There may have been gaps such as inadequate adherence to regulatory requirements or failure to conduct regular reviews of policies and procedures.

8. An ineffective whistleblower mechanism.

What should companies, especially banks, do to prevent such issues from happening again?

To proactively address and prevent fraud or misconduct, particularly in banks and other large organizations, the following strategies and steps can be implemented:

1. Promote a culture of trust, ethics and integrity from the top down.

2. Implement robust internal controls to prevent and detect fraud.

3. Conduct regular training programs for employees to raise awareness about ethical standards, fair practices, fraud risks, and the importance of compliance.

4. Establish a mechanism for employees to report suspected fraud or misconduct anonymously and without fear of retaliation.

5. Regularly audit financial records, processes, and controls to identify and address any weaknesses or vulnerabilities that could be exploited for fraudulent activities.

6. Utilize technology such as data analytics and artificial intelligence to monitor transactions in real-time and identify suspicious patterns or anomalies.

7. Clearly define and enforce consequences for employees who engage in fraud or misconduct.

8. Regularly review and update policies and procedures related to fraud prevention and detection.

9. Collaborate with regulatory authorities and industry peers to share best practices and stay informed about emerging threats and regulatory requirements.

How can organizations protect their reputation and maintain the trust of their customers?

By hyper-focusing on fairness and stakeholder experiences, banks can strengthen their risk management practices and maintain the trust of their customers and stakeholders. Deploying a diagnostic platform can help banks and other businesses proactively address and prevent fraud or misconduct by focusing on the fair treatment of stakeholders.

Here's how a diagnostic platform can help:

1. Identifying Vulnerabilities: A diagnostic platform can help banks identify potential vulnerabilities in their practices that could lead to fraud or misconduct. By assessing fairness across six dimensions, the platform can pinpoint areas where improvements are needed to mitigate risks.

2. Enhancing Internal Controls: The platform can provide insights into how well internal controls are functioning to prevent fraud. By highlighting areas of weakness, banks can strengthen their controls and reduce the likelihood of fraudulent activities going undetected.

3. Cultural Assessment: Using the diagnostic capabilities of the platform, banks and other businesses can assess the organization's culture to determine if there are any factors contributing to unethical behavior. By identifying cultural issues, they can take steps to promote a culture of integrity and ethical behavior.

4. Training and Awareness: The platform can help banks identify training needs to ensure that employees are aware of fraud risks and know how to report suspicious activities. This can help create a more vigilant workforce that is better equipped to prevent fraud.

5. Monitoring and Reporting: A platform that can provide tools for monitoring and reporting on fairness practices, including fraud prevention measures, can help banks track their progress in addressing fraud risks and demonstrate their commitment to stakeholders.

In conclusion

Overall, the incident highlights the importance of having robust internal controls, a strong ethical culture, focus on fair business practices and effective monitoring mechanisms in place to prevent and detect fraudulent activities. It also underscores the need for continuous improvement and vigilance in addressing potential weaknesses in the system.