internal fraud from the board perspectivemay 03, 2016 · fraud type . amount : alleged perpetrator...
TRANSCRIPT
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© 2016 Fox Rothschild
Internal Fraud from the
Board Perspective Presented By:
Christopher J. Pippett, Esquire
National Association of Federal Credit Unions Webcast May 3, 2016
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Credit Union Organizational Reporting/Supervision Chart
Internal Auditor
Supervisory Committee
Board Committees
Rank and File Employees
Department/Branch Managers
Senior Management
CEO/Manager
Board of Directors
Members
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General Powers & Duties
•DUTY OF CARE •DUTY OF LOYALTY •DUTY OF OBEDIENCE TO THE LAW All of these traditional legal duties apply to non-profit directors and committee members, particularly credit unions.
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General Powers & Duties
• Duty of Care – A director must stay informed and must exercise independent judgment.
– Regular attendance at and participation in board
and committee meetings; – Performance of specific duties and
responsibilities set forth in bylaws, board policies and law;
– Obtaining information so that he/she is reasonably informed with regard to the affairs of the credit union.
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General Powers & Duties
– Information must be obtained/provided in time for meaningful discussion and response.
– The extent of the inquiry depends on the circumstances as well as the information available.
– May rely on information provided by officers, employees, committees, etc., provided reliance is reasonable.
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General Powers & Duties
• Duty of Loyalty – “Best interests of the credit union”.
– Independent Judgment -without regard for alliances
or constituencies; – Conflicts of Interest - must be identified and
discussed, addressed and documented; – Confidentiality - all nonpublic information.
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Polling Question 1
• True or false: You can have term limits for your Board of Directors.
• A) True • B) False
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Credit Union Board Challenges
• The Bad Board
– Rubber Stamp – Micro Managers – Outdated/Stale – Distracted
• All of these can lead to serious problems and threaten the viability of the credit union.
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Credit Union Board Challenges
• Avoiding the Bad Board
– Active Recruiting Program – Updated Nominating Committee and Policies – Thorough Orientation – Continuing Education – Regular Evaluation – Succession Planning/Term Limits
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Building the Good Board
• Specific Board Duties – Policies – are they current and relevant. – Job Description – what do you expect from a board
member.
• Composition of Board – Skills – Financial, accounting, legal, HR, security, etc. – Background – SEG member, business owner,
community volunteer, executive experience, other board experience, diversity, etc.
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Building the Good Board
• Personal Characteristics:
– Integrity – this is key since this is truly a top down element of the credit union’s business approach.
– Fairness – is he/she objective in their approach to matters?
– Work Ethic – being a credit union director is hard work! Is he/she up to it and do you need another person who will do no more than show up?
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Sources/Types of Fraud
• Theft of cash from vault and teller drawers • Manipulation of employee and family member
accounts • Abuse of expense accounts • Loan approvals and disbursements • Theft from inactive accounts (escheat, elderly,
etc.) • Theft of credit union investment accounts
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Tools for Prevention
• The board should make sure there are policies in place for: – Random/surprise verification of cash in vaults and
teller drawers – Audit and verification of elderly, deceased and
escheat accounts – Random/surprise review of employee and family
member accounts – Verification of loans
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Tools for Prevention (cont’d.)
• Policies should be in place for: – Mandatory employee vacation – Assignment of risk factors to employees and for
policies of reviewing and updating same – Random/surprise review of employee and family
member accounts – Verification of loans – Verification of purchasing and vendor relations – Internal controls and separation of duties
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Tools for Prevention (cont’d.)
• Policies should be in place for: – Rotation of tellers branch managers and loan officers – Rotation of auditors – Review of loan losses for patterns (i.e., loan officers,
appraisers, brokers, etc.) – Periodic background and credit checks for certain
employees and executive management • All such policies should be reviewed and
updated annually
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Types of Conduct
• Malfeasance – They’re just doing it wrong. • Misfeasance – They’re doing it wrong and
they don’t care. • Criminal Activity/Fraud – Theft,
embezzlement, diversion of assets.
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Polling Question 2
• Loss Prevention is a role for a very specific part of the Credit Union.
• A) True • B) False
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Red Flags Indicating Potential Bad Conduct
• Changes in behavior • Changes in life style • Changes in performance • Problems at home or outside of workplace • Changes in performance reviews. • Unusual control needs/refusal to let others help
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Red Flags Indicating Potential Bad Conduct (cont’d.)
• No vacation • Repeated failure to provide requested
information • Unusual access in terms of frequency or time
periods to premises, systems, accounts or equipment
• Financial problems – garnishments, loans, etc.
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Duty of Directors Upon Notice of Fraud
• Must investigate claims • Must consider relevant information and
assess the truth of the allegations • Must act promptly to end and/or prevent
wrongdoing • Most D&O coverage will cover costs
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Sources of Notice
• Criminal Inquiries • Regulatory Inquiries • Auditor Questions • Whistle Blower Complaints
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Reporting Process/Chain
• Supervisor • Security Officer • Supervisory Committee
– Then to Board and CEO (unless that’s where the problem is)
• NCUA
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Response to Initial Report
• Depending on severity of claim first call should be to counsel with experience in guiding an organization through such claims. – Protects privilege – Experience in conducting an investigation – Experience in communicating with authorities and
regulators and handling HR issues. • First call should not be to NCUA Examiner!
– But not the last call either!
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Response to Initial Report (cont’d.)
• Involve HR early – perpetrator may need to be removed from the premises and either terminated or put on leave with or without pay
• Involve IT and/or security early in order to preserve information or restrict access to systems or premises
• Review bond coverage
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Preparing for the Investigation
• Determine if an investigation is required – What rules/laws are at issue?
• Identify the potential objectives/goals of the investigation
• Select the investigative team, if there is going to be a team
• Determine who should contact interviewees
• Establish a timeline/deadline
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Advantages for In-house Counsel
• Less costly • Familiarity with operations and personnel • May be perceived as less threatening • Better where complaint involves lower
level employee
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Problems for In - House Counsel
• Privilege – Are you following business policies or legal
policies • Conflicts
– Legal - separating your duty as to officers and directors from that of the credit union.
– Professional – you could find yourself at odds with a direct report.
• Credibility – Outside counsel is generally viewed (rightly or
wrongly) as being more independent.
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Preparing for the Investigation (cont’d.)
Selecting Witnesses/Potential Interviewees • Person(s) who raised the issue(s) • Person(s) identified in any claim • Supervisors of persons involved • Witness(es) to the alleged action(s) • Others with relevant information • Authors of relevant documents • Co-workers of persons involved
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Preparing for the Investigation (cont’d.)
Order of Interviews • Is there any reason not to interview the
complainant(s) first? (Typically, the answer is NO!)
• Should the alleged wrongdoer(s) be interviewed second, last or in some other order?
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Investigating the Complaint
• Let the investigation lead you don’t lead it • E-mails – Limit them immediately, they’re
discoverable • Develop a preservation program if
appropriate
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Investigating the Complaint (cont’d.)
• Retention of professionals – Must have resources and expertise to get the
job done quickly – Don’t use existing auditor – No time to go cheap – Retention of audit and forensic professions is
preferably done by counsel. • protects privilege and controls chain of reporting
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Investigating the Complaint (cont’d.)
• Interviews – Conduct them in person, on site, with witness – Minimize interference with business operations – Be clear with employees regarding the purpose of
the interview – Employees have right to have counsel present
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Investigating the Complaint (cont’d.)
• Interviews (cont’d.) – Explain the importance of accurate
information and the obligation to provide truthful information
– Caution that disclosure of confidential information can thwart the investigation
– Think twice about recording but get signed statements
– Don’ let a witness lead the interview. – Follow up all leads
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Duty to Report
• Supervisory Committee • Board/ Executive Management • Bond Carrier • NCUA/State Regulator
– Communicate but don’t necessarily report – protect the privilege
• State/Federal Criminal Authorities – File SAR
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Polling Question 3
• Fraud has NEVER caused a Credit Union to fail. • A) True • B) False
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Other Issues
• Bond Claim • Civil Action • Freezing Assets • Other Action (dismissal, etc.)
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Credit Union Fraud Since 2013 Asset Size Credit Union Fraud Type Amount Alleged Perpetrator
$7M Borinquen FCU Loans/Theft of Funds $2.3M CEO
$2M Women’s Southwest FCU
Loans/Theft of Funds $3.4M Manager
$303K United Catholic FCU Aliases/Forged Checks $2.1M Manager
$270K Associated Blind of Oklahoma/Texas
Theft of Funds $200K Manager
$3.1M Border Lodge CU Theft of Funds $300K CEO
$2.5M Lawrence County School EE’s FCU
Theft of Funds $285K Employee
$630K H.B.E. CU Unauthorized Checks $636K Manager
$1.6M Enterprise CU Theft of Funds $800K Manager
$16M GIC FCU Theft of Funds/False CDs
$2M Manger
$24M Taupa Lithuanian Cu Loans/Theft of Funds $15M CEO, Teller, 5 Others
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Credit Union Fraud Since 2013 Asset Size Credit Union Fraud Type Amount Alleged Perpetrator
$60M WesTex FCU Theft of Funds $500K Assistant Accountant
$1.9M Aurora Firefighters CU Theft of Funds $36K CEO
$13.8M Lynrocten FCU Loan Participation Fraud
$1M Manager, 2 Employees
$42M Toledo Metro FCU Corporate Expenses $234K CEO
$186M St. Paul Croatian FCU Loans $70M CEO, 30 Others
$38M Wilkes Barre City EE’s FCU
Loans $16M Mgr, Asset Mgr, Members
$16.3M Shoreline FCU Cash Theft from Vault $1.9M Manager
$10.4M Centra Health CU Theft From Corp. Account
$1.7M CEO, 2 Others
$13B $924M $1.1B
Boeing EE’s CU Twinstar CU Sound CU
Stolen Check $987K Members
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Credit Union Fraud Since 2013 Asset Size Credit Union Fraud Type Amount Alleged Perpetrator
$639M $17B $20M $246M
Great Lakes CU Pentagon FCU Sherwin Williams CU CU 1
Car Loans $853K Members
$24.5M Georgia Power Valdosta FCU
Accounting Fraud $500K Operations Manager
$13.5M Parsons Pittsburg CU Embezzlement/Transfer of Funds
$10M Manager
$1B Scott Credit Union Loan Falsification $12M Business Relationship Manager
$68M Clarkson Brandon Community CU
Accounting Fraud $20M CFO
$603M Houston Police FCU Stale Checks $1.2M VP
$223M Pantex FCU Check Fraud/Theft From Teller Drawer
$826K AVP
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Credit Union Fraud Not – so – fun Facts!
• 192 CU’s failed in the last 10 years. • 78 of the failures were caused by fraud. • 46% of Claim Dollars Paid by CUNA Mutual from
2009 to 2013 involved employee dishonesty. • 94% of losses to NCUSIF were related to
internal fraud. • Moral – Trust but verify!