October 23rd 2017

Top Stories / National

Cooperative Bank hit by rising employee fraud, IT system malfunctions

Just as the ruling was coming up, the bank faced pressure from dozens of farmers from Central Kenya whose property were auctioned over loans they owed the bank, but which the government has paid in full. Some of the farmers said that collateral they placed with the bank cannot be traced.

By Free Press Reporternewsdesk@kenyafreepress.comTuesday, 04 Apr 2017 11:56 EAT

Cooperative Bank House, the bank's main property in the central business district.

The Cooperative Bank has been hit by cases of fraud perpetrated by bank employees who work in cahoots with external persons to obtain money from the bank. The bank’s internal investigations have established a link between employees who know about malfunction in some of the bank’s IT systems and accountholders who take advantage of the system.

While some of the cases have ended up in the court and others remain under police investigation, the bank, keen to protect its image, has hardly reported the full extent of the problem to authorities and has on occasions refrained from pressing charges against accountholders implicated in the fraud.

Last week, an employee at the bank’s Eldoret Branch was accused of stealing Sh40 million from customers who had invested in stocks under accounts he was handling. The bank’s marketing manager Ngumo Kahigo told the Star newspaper, which alone reported the case, that the matter was being handled by the Criminal Investigation Department of the police, and that several employees had recorded statements over the matter.

The bank’s credit card section has been hit by a systemic problem known to staff whereby when a customer conducts a transaction using their card, the credit and debit accounts are not settled in real time. The bank staff then manipulate entries on the Credit Card Debit Suspense Account that has to be reconciled manually. 

Like many banks, Co-op Bank runs bank and card systems, Bank Master and Trans Master, separately. When the bank closes operations at the end of the day, the Bank Master goes to sleep, but the Trans Master that supports ATMs and connects the bank's accountholders to international card system works 24 hours.

Every new work day, the Bank Master should automatically take on board all transactions a customer may have made on Trans Master during the night. However, due to the bank's malfunctioning systems, sometimes transactions from the Trans Master have to be entered manually on the Bank Master, according to information the bank provided to the Milimani Commercial Court in a case lodged against it by a customer the bank later accused of abusing its systems.

Given the malfunction, some bank staff worked in cahoots with accountholders, mostly from the Nairobi Business Centre Branch along Ngong Road, who took advantage of the system to net decent amounts from the bank through gambling activities on the credit card that were performed mostly at night but, as the court established, also during the day.

Under the fraud, the bank was required to make payment to merchants from whom the customer had purchased goods or services (normally in foreign currency for internet-based transactions), in this case betting companies, even where there were no records of the customers having placed bets. The customers accounts were also credited with huge sums of money.

One such customer, Anthony Kimani Chege, who operated Account Number 01109127579300 at the Nairobi Business Centre Branch, went to court in May 2011 to press for Sh14 million the bank had deposited in his account through the fictitious betting wins but which the bank discovered and froze before he could withdraw the money.

The accountholder used his debit card No.4407830011038792 for gambling online. After a series of activity, by 7 May 2011 his account had a credit balance of Sh4,829,965.15. On 9 May 2011, the bank informed him that his account had a debit balance of Sh14,235,121 but refused to provide him with a copy of his Bank Statement.

He went to court seeking orders for Coop Bank to be compelled to un-freeze his account and release him the Sh4,829,969.15 being the credit in his account when it was frozen. While he lost the case, the hearing unearthed massive impropriety on Coop Bank staff members and negligence from senior management that refused to take action for months according to the court.

Investigations by the bank’s security department showed that Mr Chege was one of seven accountholders who all opened their accounts at the same branch, having been introduced by one employee of the bank. The bank found that some its employees were aware of the malfunction in the IT systems and had encouraged accountholders to take advantage of the system of it. While the employees were identified, some were not punished.

Neither did the bank improve its systems, which according to insiders remain among the weakest in the industry even in 2017. The Judiciary also continued to receive cases of employee fraud originating from the bank, including a number from the same Nairobi Business Centre where the gambling racket was discovered, long after Coop Bank said it had corrected the system. In December 2012, bank staffer Magdaline Wanjiku Makara was arrested and charged with stealing more than Sh49.6 million from the bank between March 26 and October 27 of that year.

In the ruling on Mr Chege's Civil Suit No 373 of 2011 delivered on February 20, Commercial Division Judge Fred Ochieng censured Coop Bank for not only not taking remedial measures after the scandal became known, but also for smoothing questions of employee fraud. “I find absolutely no evidence that either the plaintiff knew that the banking system had malfunction, or that he worked in cahoots with any employee of the bank….In any event, the bank made it clear that it was not making any allegation against the plaintiff….that he was guilty of conspiracy (jointly with some employees of the bank) to defeat the systems of the bank”.

The bank’s defence in the case showed how the fraud was perpetrated. It said that as at 28 February 2011, Mr Chege’s account had a credit of Sh19,745, and that thereafter, “the deposits into the account increased dramatically, without any correlation to its previous conduct or to the plaintiff’s disclosure of his income”.

Upon the accountholder’s demand for the money, the bank conducted internal investigation and found, among other things, that between October 2010 and 6 May 2011, some seven customers had run up debits totaling Sh115,869,566, which had not been debited into their respective. The bank said Mr Chege was one of the seven customers, and that the debits attributable to him totalled Sh19,065,090. All those debits were described as being in relation to internet transactions, connected to gambling.

According to our sources within the bank, the accounholder's decision to sue was made in confidence that Coop Bank, while pressing to recover its own money, would not place a countersuit for fraud as criminal lawyers would have advise. “The bank was aware of its own weaknesses and the best they could do was defend their decision,” said a source at Coop Bank who revealed that the weaknesses persist to this day.

Among the cause of the weaknesses in IT systems, the source told us, was the quality of systems used by the bank, some of which were supplied by a vendor connected to a senior director. "In the bank, you have the software which is the backbone, but this has to run on the hardware which the bank procures differently," said the source, who shared internal reviews by the bank indicating, for instance, that queues at its ATM booths are usually the longest of any bank due to slow speeds.

The first witnesses who testified in support of the bank was IT expert John Murrey, who provided the court with a detailed summary of all the debits and credits, totaling of Sh5,800,529/15, and that debits of Sh20,036,120.50 respectively. Edwin Karuri, the investigation manager, testified that his investigations revealed that between October 2010 and 6 May 2011, debits totaling Sh115,869,566 transacted by the suspicious seven customers had not been debited to their respective accounts.

But Mr Karuri’s testimony that all the transactions under the case were carried out after 6.00pm contradicted that of Mr Murrey and the bank’s own documents under review that showed that some of the transactions were carried out during the regular working hours. This slight variation, said our bank source, was to minimise the extent of malfunction in the bank's system.

But weaknesses aside, Justice Ochieng expressed concern that the bank did not review its systems or stop the fraudulent transactions four months after the investigations department had raised the red flag. “Considering that the plaintiff had opened his account in January 2011, the bank could have stopped the bleeding of the account if it had taken appropriate action in a timely manner.

"By failing to act appropriately and in a timely fashion, the bank negligently contributed to continued debiting of an account which did not have requisite funds to meet such debits,” the judge held, in declining the bank's demand for Sh14 million from the plaintiff. “As the bank was contributorily negligent, to such a degree that it allowed the transactions to continue for a whole four months, I find that the losses should lie where they have fallen,” the judge ruled.

Just as the ruling was coming up late February, the bank was coming under pressure from dozens of farmers from Central Kenya whose property were auctioned over loans they owed the bank, but which the government has paid in full. Some of the farmers said that collateral they placed with the bank cannot be traced even though President Uhuru Kenyatta has said the farmers' loans should be offset from Sh2 billion government grant for the purpose.

The bank did not respond to email questions for this article.

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