Fraud at Bank of Baroda: Manage Risk or Manage Crisis – Case Solution

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Fraud at Bank of Baroda: Manage Risk or Manage Crisis Case Answers

Executive Summary – Fraud at Bank of Baroda: Manage Risk or Manage Crisis

In our analysis of this case, “Fraud at Bank of Baroda: Manage Risk or Manage Crisis,” we will examine methodically and in detail the fraudulent events that led to the crisis and compromised the risk management framework at the bank.

We will identify the indicators of money laundering that were ignored and the interrelationships between the various risks faced by the bank. We will also speculate about possible reasons why the fraud happened. Furthermore, we will analyze and present the consequences of BoB’s poor risk management and its key components that failed.

We will then evaluate the risk culture at the Bank of Baroda. More specifically, our analysis will attempt to offer insight and recommendations for the new managing director and CEO, P.S Jayakumar, on a management action plan to follow.

We will use and reference various outside sources for this analysis aside from this case but will not conduct any investigations of our own to arrive at form theories, opinions, and suggestions.

Introduction and Overview

Bank of Baroda (BoB) was first established in 1908 in Vadodara (earlier known as Baroda) in Gujarat, India. It currently services 25 countries with a network of 5,250 branches and 49,378 employees, hence adopting the title of “India’s International Bank.” (Dhamija, S., 2016).

BoB offers personal, business, corporate, and international banking services worldwide, holding the record as India’s second-largest bank. This giant financial services company developed historically by first expanding domestically before World War II and serving Indians overseas afterward by establishing branches in Kenya, Uganda, and Tanzania.

BoB’s biggest achievement was opening a branch in London in 1957 and making its first acquisition of Hindi Bank one year later. Throughout the decades following the 1960s, BoB merged, acquired, and opened new branches in Fiji, Guyana, Dubai, Abu Dhabi, Brussels, New York, The Bahamas, Sydney, Hong Kong, Delhi, and many more.

1. Describe the key components of the risk management system at the Bank of Baroda.

Recently, BoB had been in the headlines for the wrong reasons: a bill discounting fraud of ₹3.5 billion in Ahmedabad and an alleged money-laundering scam of ₹60 billion in New Delhi. The bank had identified irregularities in bill discounting transactions. A few days later, internal investigations revealed irregularities in foreign exchange remittances at one of its branches in New Delhi (Dhamija, S., 2016).

State agencies such as the Central Bureau of Investigation (CBI) were pursuing the matter and had arrested six people in connection with the foreign exchange scam, including two senior officials. As a result, the stocks of Bank of Baroda plummeted over 3% and were downgraded by the FDIC from “outperformer” to “neutral.”

Some changes must be made to the bank’s risk management structure and the compliance of policies and guidelines from the board of directors and audit committee set forth by the Reserve Bank of India (RBI).

2. Given the comprehensive policies and procedures at the bank, how was it possible for the fraud to take place?

Bank of Baroda’s board of directors was responsible for upholding the bank’s risk management framework. Their responsibilities included defining the bank’s risk limits and establishing the policies and procedures for effective monitoring.

BoB failed to adhere to the risk management framework and became susceptible to money laundering within its branch banking business. During the bank’s day-to-day operations, the bank staff ignored key controls to prevent and identify money laundering that were already in place.

Due to the interconnected characteristics of money laundering and the risks posed to all banks. The Reserve Bank of India (RBI) established a set of detailed guidelines, which included a customer acceptance policy, a customer identification procedure, and transaction monitoring. The bank failed to identify key indicators of money laundering, such as placement, layering, and integration.

Placement involves placing, through deposits or other means, unlawful proceeds into the financial system (OCC, 2002). Layering involves the separation of proceeds of criminal activity from their origin through the use of layers of complex financial transactions (OCC, 2002). At the same time, integration is the act of using additional transactions to create the appearance of legality through the purchase of assets (OCC, 2002).

Bank of Baroda identified irregularities…