Risk Assessment Framework According to "The Fraud Triangle Theory"

The Fraud Triangle theory was introduced by Cressey in 1971. According to Cressey, there are three factors in this triangle, which make people to engage in fraud. These are: ‘Perceived Pressure’, ‘Perceived Opportunity’ and Perceived Rationalization which make up a triangle (Cressey, 1971).

Fraud risk is the intentional action taken to deceive or take advantage over, where a victim will suffer a loss. HSBC has internal control systems to deter fraud, and procedures to prevent fraudulent activities by both employees and customers. Fraud risk is also enhanced in the modern day by technological advancements, where an audit trail will not be found when investigating any changes to data and information in the bank.

Independent studies conducted by KPMG and EY in 2006 indicated that organisations that implement company wide fraud awareness training cut fraud losses by 52%. When discussing fraud risk arising due to interest rate risk, the bank uses sensitivity analysis to to review of the movement in interest rates and prevent any fraudulence in interest rate profiles offered to clients.

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Also group treasury will not let the individual SBUs take the effect of interest rate risk through transfer pricing managed by BSM.

Liquidity risk will be mitigated by the bank where cash resources will be maintained, to deter fraud by unapproved and unhinged lending through a formal credit policy. Key financial metrics are also there in terms of cash flow projections made by Group entity level to make sure that stress-tests are undertaken for individual entities. For operational risks, internal audit function has been established to test the controls in place in the organization.

Also HSBC has a whistle-blowing policy for tip-offs about fraud by its employees.

Operational risk

Financial health of assets to be measured using risk weighted asset model (RWA) Audit function. Cybersecurity reviews and IT risk management by outside professionals. Proposed Fraud Risk assessment framework for HSBCAt HSBC, the most recent example of fraud was HSBC’s entry into a three-year deferred prosecution agreement with the US Department of Justice (DOJ) regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. In January 2018, HSBC Holdings entered into a three-year deferred prosecution agreement with the Department of Justice (DOJ) in the USA regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011.

This concluded the DOJ’s investigation into HSBC’s historical foreign exchange activities. (HSBC Holdings PLC, 2017) HSBC agreed to pay a financial penalty and restitution. This agreement shows the importance and the need of following the very best standards as set by BIS of conduct of business in the banking industry.

In conclusion, a better and effective internal audit plan with review fraud controls designed to deal with the significant fraud risks faced by HSBC will deter fraud. HSBC is exposed to fraud risk in the daily undertakings and management of fraud risk through a policy and framework is essential for its survival.