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7 Common Types of RCA Corruption Schemes Plaguing the Banking Industry

The banking sector has long been suffering at the hands of corruption.  It not only hurts financial stability but also jeopardizes people’s trust in the system.  Transparency International—a nonprofit working to fight corruption—estimates that more than 5 percent of global GDP is lost annually to corruption, involving a significant outlay from the financial sectors of many countries.

Influence peddling by relatives and close associate corruption of senior bankers and political leaders is one of the significant sources of corruption within banks.  Many a time, the RCAs misuse their connections to engage in a variety of illegal activities for personal gains with impunity.  

A 2021 survey conducted by Global Fraud Survey found that nepotism and cronyism due to RCA influence featured among the top 5 anti-corruption challenges reported by bank compliance officers worldwide gimkit.  

This article explores 7 common types of corruption schemes used by RCAs that are hugely damaging to banks.

  1. Embezzlement and Misappropriation of Funds

Embezzlement is the illegal withdrawal of funds from a bank by employees or RCAs of senior management who are expected to enjoy its trust. It is often done by simple acts like transferring money to personal accounts or taking cash and not recording the transactions.  

According to the U.S. Chamber of Commerce, embezzlement is expected to make up a significant portion of outflows from the financial sector this year, running at approximately $50 billion.  Proper screening of PEPs and their RCA networks serves as an essential step in discovering the source and extent of such robbery and misappropriation of money.  

  1. Bid Rigging and Procurement Fraud

During large technology purchases or when banks embark on construction, corruption usually targets the bidding and procurement processes. The powerful RCAs, in collaboration with complicit bank insiders, may influence bid assessment committees to favor particular vendors.  

Common frauds include overbilling, kickbacks on contracts, and the sale of goods and services at inflated prices, among others.  Lack of transparency and accountability in the procurement system provides the much-needed fertile ground for RCA corruption to flourish in such tendering and purchasing activities.  

Bonus: At amlwatcher.com, we are committed to bringing you the latest news and analyses on critical issues impacting the financial industry, including corruption.

  1. Bribery for Influencing Loans

According to the Financial Stability Board, practices contributed to about 30% of nonperforming loans in 2022 across several significant banks.  

This type of corruption seriously compromises the bank’s credit risk framework and financial health.  It is essential to have effective vetting mechanisms for PEPs and politically exposed persons who are close associates of PEPs, as it would identify and prevent hidden undocumented influences in loan decisions.

  1. Abuse of Functions for Unauthorized Personal Gain

Some staff and managers working in banks abuse their official functions for unauthorized personal gain. The powerful RCAs pressure them to pursue some other personal financial benefits rather than the bank’s.   

According to a 2023 report by the Basel Institute on Governance, Compliance breaches at banks have cost more than $10 billion in fines globally in just the past year.  Monitoring and PEP checks over employee networks and financial dealings give indications of discrepancies and abuse of decision-making powers for private gains rather than institutional objectives.  

  1. Money Laundering

Ill-gotten wealth from various criminal offenses, like tax evasion, has to be cleaned through financial systems. The Banking RCAs exploit the weaknesses in the KYC/AML protocols to launder such dirty money.  The FATF openly declared that in 2024, if banks do not have efficient PEP screening, information on the origin or control of illicit funds is not maintained for sufficiently high-risk clientele, extending to relatives.  

The compliance teams adopt a cavalier approach to the screening of PEPs among high-risk clientele, extending even to relatives, failing to identify the origin or ultimate controlling owners who park illicit funds.  This paves the way for banks to facilitate financial crimes inadvertently.  Only with stringent RCA and PEP checks, along with robust transaction detection and monitoring of RCAs, can money laundering abuse be contained.  

  1. Tax Evasion

The other means through which the RCAs avoid losing their undisclosed wealth is by evading due payment of taxes. Since they hold control of bank accounts and transactions, it is possible that the financial details of the beneficially owned entities do not get disclosed to the concerned tax authorities.  

According to the IMF, financial institutions have cost governments worldwide an estimated $500-$600 billion due to tax avoidance.  Suitable enforcement of the CFT provisions respecting the identification of ultimate human controllers can prevent such schemes of transferring unaccounted money abroad with the intent to avoid legitimate taxes.  The banking regulators should see that appropriate PEP corruption is conducted during all phases of customer onboarding and transactions. 

Favoring Relatives in Promotions

Powerful RCAs quite often put undue pressure and influence on the bank’s management to adopt unfair recruiting policies and staff promotion to ensure that as many relatives as possible get recruited or promoted against better candidates.  

Banks should have put in place robust controls to prevent any corruption monitoring of their HR processes.  They need to conduct detailed screening of the background of candidates, including political and RCA linkages, which may lead to impaired objective decision-making. 

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