The Management of Operational Risk Through Appropriate Insurance Schemes

Forgery During the period 1988-1993, in the Kingdom, forgery (including check fraud) was the second largest area of operational loss, accounting for approximately 12% of total reported losses. This is entirely consistent with the results of the KPMG study in which losses in this area averaged between 10% and 18% for the six countries surveyed. Within the Kingdom the majority of crimes in this area appear to represent either simple check forgery or the forgery of negotiable instruments such as letters of credit and generally involved the failure of bank employees to adequately verify the authenticity of the documents before negotiation. From a cash-based system, the Kingdom is rapidly moving into electronic-banking thus minimizing the intermediate state represented by the paper check. These actions have the long term potential of reducing the incidence of the relatively simple forgeries currently being encountered. However, document technology such as optical scanners, color laser printers, and powerful desktop publishing software now allows the creation of forgeries which are virtually undetectable except by highly sophisticated technical means. Therefore, while the number of simple document forgeries will probably decrease in the future, the level of technical sophistication and monetary value of forgeries may be expected to increase significantly. With the increasing use of electronic imaging used in verification of signatures in many banking transactions, transfers etc. banks' risk management policies and procedures should include preventation of forgery through electronic means. This will become even more important with further advances in payment cards and payment systems technologies. 2.1.3 Counterfeit Currency Counterfeit currency does not currently appear to be a major area of potential loss to Saudi banks. However, two current trends should be noted: 1- Technology - As with forgers, the counterfeiters of both currency and negotiable securities are also the beneficiary of new document processing technology. A recent incident involving the counterfeiting of a major international currency using color laser printers was of such a magnitude as to cause the Central Bank to redesign the currency to incorporate various anticounterfeiting measures into the new currency. However, it is expected that despite advances in design and manufacture of currencies, counterfeiting activities will continue to increase. Consequently banks must remain vigilant to these trends. 2- State Supported Counterfeiting - State supported counterfeiting is assuming importance specifically for the US Dollars. US Government estimates the amount of this currency-$20, $50, and $100 notes at approximately US$ 1 billion. This bogus currency is of extremely high quality, virtually undetectable by even experienced personnel, and is primarily circulated outside the United States. 2.1.4 Robbery and Burglary Although a highly "cash rich" society, robbery and burglary do not currently represent a significant source of operational risk in Saudi Arabia. This can be attributed to the deterrent effect of physical security measures taken by banks and law enforcement agencies, the severity of judicial punishment, and cultural factors within Saudi society, and the lack of significant illegal drug problem within the Kingdom. Studies in other countries have shown that the majority of robberies and burglaries directed against bank branches and ATMs are drug related. Therefore, barring significant social or political changes within the Kingdom, it seems unlikely that robbery or burglary will present a major operational exposure to Saudi banks within the foreseeable future. In recognition of these trends the Agency has issued detailed rules in 1995 entitled "Minimum Physical Security Standards".