Definite Guide to Banking Fraud and Bank Scams

Bank fraud is a crime that has been around as long as banks themselves. Anytime there is a large amount of money floating around, there are going to be people trying to figure out ways to get to it. In developed countries, bank fraud is a serious problem that causes billions of dollars in damages every year, and is considered a federal offense.

In certain undemocratic countries bank fraud is even punishable by death. Bank fraud is defined as attempting to wrongfully take money or property from a Federally insured financial institution. However, that doesn’t mean that banks are the only victims here though. Millions of people every year fall victim to monetary damages that are caused by bank fraud.

The Enron scheme. The Maddoff pyramid. The Wells Fargo scandal.

Sound familiar? These are some of the biggest financial scandals of our time. They are so big that they can put the whole global economy at risk.

That doesn’t mean banks have evil intentions programmed in their core. But they base their decisions on economic incentives. And, because they are so powerful, even the smallest mistake can cause large-scale changes.

For clients, it’s almost second nature to want to inspect these organizations. 

What’s the bank history? What changes will they make this year? Where does my money go? Is it safe?

Your bank isn’t a safebox. Make sure to know the risks of having your finances in such a financial institution so that you can anticipate and protect your financial future.

Bank Fraud In a Nutshell

Bank Fraud In A Nutshell

Banks lend and borrow money. If you trust money to your bank, you can earn more with interest. What they may not tell you is how they use your funds to make dozens of times more than what they give you.

Whichever way the funds are used, it can be financially profitable when done right, but ruinous when not.

Sometimes, it may be your bank misusing your funds. In another case it may be someone stealing your bank account. Bank fraud has many variations, from accounting scandals to identity theft.

Needless to say, the risk is high. If you fail to recognize the scam and prevent it, you could potentially lose all the finances you had in such an institution. Although you may be protected and your bank can refund you (some of) these losses, it doesn’t always have to be that way.

The Causes Of Banking Fraud

The Causes Of Banking Fraud

Look at a bank as if it was a company. In business, you can either take an approach that creates value for everyone involved in the process or you might choose a take and run approach.

How can we protect our credibility?
What is good for the customer?

Long-term thinkers look to create lasting wealth while mantaining integrity, regardless of the present challenges.

How can we make as much money as possible?
How can we impress our shareholders, so they invest more in us?

Short-term thinkers focus on incentives. Sadly, the best financial opportunities often go against what’s legal or good for everyone involved. People and businesses decide on such options regardless, because there’s a chance to make profits.


A bank could be down in the red. But it could lend a lot of money and show it to the public as revenue. That would make people invest more in the bank, creating real wealth. Investors respond based on data the bank has manipulated.

You never know where your money goes unless you verify it yourself. If news seems suspiciously good, the bank may be compromising tomorrow’s financial stability.

Remember you can always close your bank account if you don’t have any payments remaining.

What should we do?

Not using banks isn’t the solution. If we ever transition to cryptocurrencies in the future, it is wise to keep banks involved as well.

Usually there’s a risk whenever there’s a reward. Bank clients have multiple payment methods, earn interest, and can borrow money. As long as you beware of the potential problems and prevent them, you can enjoy the rewards and minimize risk.

Common Types Of Bank Fraud

Common Types Of Bank Fraud

There are some main categories when it comes to bank fraud, but there are countless ways that this crime can occur. Here are the common bank fraud cases you may find and how to recognize them.

Rogue Trading

Rogue trading is an ironic concept. If a trader loses, it ruins their own and company’s credibility. But if the trader profits, people will admire this person, even after revealing the scheme.

Rogue trading is a negotiation of risk and reward (learn more about the Fraud Triangle). But why should we consider it fraud?

Imagine a thief steals $100 from you. For some reason, he is a nice thief and comes back later to you and says: “Look, I’ve invested them in X and tripled the money. I’ll give you back your $100 plus some interest.” Even if you personally score a profit, the initial theft behind enabled this return.

Rogue trading works in a similar fashion, it is just that the financial input is much bigger. Such a trader can use your money anytime without your consent. And, because he’s moving your money, he’s unattached from it and will likely take more risks. Emotional detachment however, is considered a very good rule of trading. Ironically such a trader may thus in fact be better positioned to make good trades.

In finance, control matters more than profits, hence it is wise not to let lose the control of your finances.

Identity Theft

Thieves use many tricks to steal your bank information, from ATM scams to phishing. Once they get into your account, they may be able to do whatever they want with your money.

“But wait, there’s more!” The scammer who controls your account can worsen your credit rating, sell your information, or modify it.

Unfortunately, it’s too easy to fall on it due to the identity theft variations. You never know where the next mouse-trap will be, but you can always report as soon as possible, hoping the bank recovers the losses.

Identity theft.

Fake Bank Inspector

This trick uses misdirection impersonating the bank. A scammer will contact you either by phone or email, asking to withdraw money from your account.

The person collected basic information to contact you and will disguise as a bank manager. They’ll make up an excuse to make you transfer money, and why you shouldn’t tell anyone.


We have found several fraud cases and suspect a bank employee is behind them. We need you to transfer X amount to this specific bank employee for our investigation.

This is a simplified example, however the main reason why this may be fruitful for the scammer is because they present themselves as the authority, and people usually obey those in command. They may mention the gravity of the situation, why it’s urgent, and why you should not tell anyone. If you resist, they could incentivize you in hopes that you change your mind.

“Since our employees may be behind the bank fraud, it’s very important that you keep this message private and don’t tell anyone. The transaction must appear as normal as possible and from a random client such as yourself. Once we complete the research, we will send your funds back plus 15% for your assistance.”

After the victim sends the money, they will be told to wait several days until they get their phone call. The client loses the amount and never hears from them again.

They could ask for your credentials instead of money. Fraudsters may manipulate the documents to “verify” their identity and appear as your bank. We call this “forgery.”


Banks use legal documents to monitor how clients use their services. Unfortunately, some scammers can replicate this structure and falsify information. They use manipulated documents and make others think they’re official.

Scammers use similar strategies for money laundering, by the way.

Like fake bank inspectors, forgery is about impersonating the bank. But it requires caution, legal knowledge, and skill. When done right, it can be rather difficult to recognize, and the effects are terrible.

The next you get a questionable bank notice out of the blue, ask your bank to double-check it. If you send the document to the bank directly, they may spot the forgery marks. Remember that the best scammers may even fool your bank.

Unlawful Loans

Banks make most of their profits from their services and from lending money. Whether you lend, borrow, or save, you’re paying a service fee. Some of these fees are required to be paid by you, like taxes, while others may be inflated or made up.

Try to understand where your money goes. Are the numbers outrageously high? If you find a term and a fee charge you don’t understand, ask the lender what it means. Sometimes, they may remove it for you.

Dishonest lenders can exploit this blindspot and inflate your interest rates. You should always do what you can to reduce expenses, especially when numbers don’t make sense. Who knows if the lender is trying to scam you?

Think twice and you’ll avoid falling for personal loan scams.

Check Fraud

Cheque fraud occurs when someone steals or reproduces your actual cheques and then is able to cash those cheques and withdraw money directly from your bank account.

There are many ways to steal checks. Someone can intercept mail sent to your mortgage company, the IRS, or a local vendor and cash it themselves using an account opened in the fraudulent name of the person to whom the check is made out. For example, someone could open an account in the name of Ian Richard Smith and use his initials (IRS), or turn the I into an M to create MRS initials.

Cheque fraud is a common form of identity theft that can happen in a variety of ways – including forgery, illegal check printing, and even thieves using chemicals to modify checks.

Fraudulent Accounting

Fraudulent accounting refers to an employee or organization changing, destroying or defacing an account; or presenting an individual or organization’s accounts in a way that does not reflect their true value or the financial activities of the company.

Documents can be falsified to inflate the perceived value of a company. This is used to attract large investments from the banks, when in reality the company may be worthless and never intended to give the bank a return on its investment.

Credit Card Fraud

Credit card fraud occurs when a third party makes a purchase using credit card information without the authorization of the account holder. Fraudsters can also commit new account fraud by using your personal account information to obtain a new credit card or create a fake credit card number.

Credit card fraud is still one of the most common forms of bank theft, and if a fraudster makes a purchase from a company, the impact and consequences for the company can be significant.

Money Laundering

Money laundering is a leading source of fines for compliance with the rules for financial institutions. Banks can use intelligent transaction segmentation to detect money laundering attempts immediately and avoid fines. By reducing the number of false positive and false negative alerts, banks will spend fewer resources on catching bad actors in the act.

For this reason, banks are turning to artificial computer intelligence, which promises to transform segmentation into a powerful anti-money laundering process that delivers significant improvements with full transparency. Banks can use AI solutions to monitor activity from a comprehensive, global perspective and link bad actors to reduce false positives without compromising regulatory compliance.

Another promising solution is blockchain. Many world companies teamed up to solve the money laundering problem using Blockchain technology.

Exemplary Bank Fraud Cases In US History

Exemplary Bank Fraud Cases In US History
  • Nordea Bank Fraud: In 2007, Nordea clients get a phishing attack. A group of fraudsters impersonated the bank to make users install a Trojan program. Although it looked like an official bank app, it was a phishing software that cost over $170 million in losses.
  • Enron: For many years, Enron was one of the biggest corps in America. At least, until the late nineties. Executives chose to hide the Enron losses to keep stock prices high. They accumulated debt for years until investors discovered the accounting fraud in 2001.
  • Evil Corp: This Russian group stole more than $100 million using malicious software. They sent thousands of emails to get people’s credentials. This executable could ignore all antivirus defenses and fly under the radar until 2011.
  • Madoff Pyramid: Investors lost over $60 billion in assets, which makes it the biggest Ponzi scheme in history. Bernie Madoff promised investors high returns for no risk. In this model, members focus on bringing new members to put money, benefitting the early birds. Once you get to the “bottom of the pyramid,” the scheme unravels, as happened in 2008.
  • Nicholas Leeson: It’s a well-known case of rogue trading. Leeson would trade with other client’s capital to earn massive profits. It worked for him in the late nineties until he lost over $200 million in bad trades. He would take money from the bank to cover these losses, so clients didn’t notice. Eventually, in 1995, Leeson owes over a billion dollars, revealing the scam.

Preventing Bank Fraud

Prevent Bank Fraud

Who can you really trust?

In the 21st century alone, we’ve experienced dozens of cases like these. Today, it’s easier to understand what caused them. The question is, could we have avoided them?

If so, we would also be able to prevent future bank fraud. Thankfully, we have many alternatives as investors to minimize risk as individuals and stay informed.


It may sound obvious, but the best way to avoid bank fraud is to limit the finances you have in a single bank.

Think like an investor, and remember to look at banks like businesses. You could buy shares from one company alone, but in doing so you are increasing your risk factor, no matter their history.

Even the most trusted banks can make catastrophic mistakes. You could split your funds among different banks.

You could use multiple at once. It will increase your exposure to potential scams, but it will limit the losses you may have. This may however increase your fees. Thus it is advisable to invest your money in an asset.

Know Your Bank

Do some research periodically to know about your bank updates. It will help you decide whether you should stay or find a better solution.

Also, try to understand how your bank works and how they make their profits and if you want your money to be associated with that. While this is in many cases easier said than done, some banks will be more transparent in this than the others.

Use Multi-Factor Authentication in Online Banking

The best approach is to choose and enable a multi-layered authentication process. If your bank does not support this vital module, this alone might be a good reason to change your bank. The multi-layered approach will block an attempt for a questionable transaction or login attempt and as well cut the institution’s headaches and losses.

Regularly Check Your Account Activity

An effective strategy you can use to safeguard your finances. At the very least, you should log in and check your account movements several times a week to ensure that there are no unexpected transactions. Report any discrepancies to your financial institution immediately.

Here’s what you can do to protect against bank phishing.

Use Strong Authentication and Keep It Secret

Guard your PINs and passwords with vigilance. Do not give them to anyone else and never write them down on paper, in an email or in a text message. They could be intercepted.

Use secure passwords whenever there is an option. Do not use your or family members birthdays, names, addresses, social security numbers, or anything so painfully obvious. If you do use them, use them in conjunction with one another and combined with some speical characters like !-?&*.

Do Not Give Out Account Information Over the Phone or Email

Your bank will not call or email you to ask for your account numbers, PINs or passwords. They already have this information. You should automatically become suspicious of unexpected calls and emails. If you have any doubts about the caller, hang up and call your bank directly.

It’s easy for fraudsters to fake compelling emails. This is a very common threat in the online world and is called phishing. If you receive an email from your bank, do not click on any of the links as precaution. They could lead you anywhere if they are not truly from your bank. Instead, type the bank’s web address into your browser and navigate from there.

Use Protective Apps

Use firewalls, antivirus software and spyware blockers. By having these basic computer protection tools, you can significantly reduce your vulnerability to cyber attacks and fraud. Operating systems these days usually have many of these already included, but you need to check to which extent. Also make sure you have the latest security patches on your computer.

Do Not Use Public Computers for Online Banking

This is never a good idea. Even if you make sure no one can see your screen and you remember to log off completely, an experienced fraudster can find ways to record your activities. You should also avoid making transactions over public Wi-Fi (be specially aware of DNS poisoning too). Someone might be secretly recording your keystrokes or otherwise intercepting whatever you type in the computer.

Report Lost Credit Cards Immediately

Act quickly and prevent fraud before it happens. Do not hesitate. As soon as you notice that your card is missing, call the bank to close your current credit card and have a new card sent to you.

Check Your Surroundings at ATMs

First take a look at the ATM itself and make sure it’s not been altered in any way. A skimmer could be placed over the ATM card slots to steal your account information. If the ATM card slot looks strange, do not use it.

In the event that all is fine, proceed and keep an eye on the people around you. Make sure that no one is standing too close. Use the domed mirror to watch what is happening behind the ATM. Be sure to keep your PIN secret and complete your transaction before you leave the machine. If there is anything suspicious, finish your transaction and leave immediately.

If you want to go into the detail on the multiple ATM scam variations, you can check this article.

Destroy Old Documents and Cheques

Anything containing account information should be destroyed beyond recognition. You do not want sensitive documents to end up in the wrong dumpster. Minimize the writing of checks as well. Checks may expose a lot of personal information.

But wait: how do you know which ones to shred and which ones to keep? This guide shows how long to keep documents (by type).

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