internal routine & controls (irc) & fraud€¦ · intended to result in financial or...

Internal Routine & Controls (IRC)

& Fraud

2015 New York Region Directors College

FEDERAL DEPOSIT INSURANCE CORPORATION

Discussion Topics

Fraud: What It Is and Why People Commit It

Fundamentals of IRC and Fraud Prevention

Insider Fraud

Fraud Trends in the New York Region

IRC/Fraud Resources

Case Studies

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Fraud: What Is It?

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• The unlawful and intentional

making of a misrepresentation

with the intent to deceive and to

defraud by causing actual and

potential prejudice

• Wrongful or criminal deception

intended to result in financial or

personal gain

FEDERAL DEPOSIT INSURANCE CORPORATION 4

Fraud Triangle


Fundamentals of IRC and

Fraud Prevention

Board and Management’s Role

Prevention

Detection

Reporting

Duty of Loyalty

Duty of Care

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Fraud Prevention

Potential Director Liability

Failure to satisfy the duties of loyalty and care:

Director/officer engaged in dishonest conduct or

condoned abusive transactions with insiders;

Director/officer was responsible for the failure of the

bank to adhere to applicable laws, regulations, or bank

policies;

Directors failed to establish proper underwriting

policies and to monitor adherence thereto, or

approved loans that they knew or should have known

were improperly underwritten.

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Fraud Prevention

Basic Elements of an Internal Control System

Organizational Structure

Protection of Physical Assets

Accounting Procedures

Audit

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Fraud Prevention

Organizational Structure

An internal control system, at a minimum, should

provide for:

Directors’ Approvals

Segregation of Duties

Rotation of Personnel

Sound Personnel Policies

Vacation Policies

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Fraud Prevention

Protection of Physical Assets

Protection of assets can be accomplished by various

procedures including:

Cash Control

Joint Custody or Dual Control

Employee Hiring Procedures

Reporting Shortages

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Insider Fraud

Insider abuses include:

Failure to disclose their interests that borrow from the

bank or otherwise have business dealings with the bank

Diverting assets and income for their own use

Misuse of position by approving questionable

transactions for relatives, friends, or business associates

Abuse of expense accounts

Acceptance of bribes and gratuities

Other questionable dealings related to their positions at

the institution

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Insider Fraud

Insider Fraud Prevention

Strong code of conduct and ethics policy

Policy restricting or requiring disclosure of conflicts

of interest

Policy restricting gifts and gratuities

Full auditor access to the board

Control and review of expense accounts

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Insider Fraud

Insider fraud red flags include:

Living beyond their apparent means

Dramatic change in lifestyle/personality

Protective of certain customers

Disregard for established internal controls

Rarely takes vacations (or vacations are short)

Comes into work during vacation

First one to work/last one to leave

Overtime without additional pay

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FEDERAL DEPOSIT INSURANCE CORPORATION 13

Insider Fraud

Common Target Areas for Insider Fraud

Correspondent Bank Accounts

General Ledger Suspense Accounts

Payroll Accounts

Travel/Expense Reimbursement Accounts

Cashier’s Check/Official Check Accounts

Dormant Deposit Accounts

Bank Owned Deposit Accounts (Clearing Accounts)


Fraud Trends in the New York Region

Common Insider and Non-Insider Frauds

Embezzlement

Identity Theft/Account Takeover

Loan Fraud

Wire Fraud

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IRC/Fraud Resources

Statement Concerning the Responsibilities of Bank Directors and Officers • http://www.fdic.gov/regulations/laws/rules/5000-

3300.html#fdic5000statementct

Financial Crimes Enforcement Network • http://www.fincen.gov

FDIC: Risk Management Manual of Examination Policies – Internal Routine and Controls (Section 4.2) • https://www.fdic.gov/regulations/safety/manual/section4-

2.html

FDIC: Risk Management Manual of Examination Policies – Bank Fraud & Insider Abuse (Section 9.1) • www.fdic.gov/regulations/safety/manual/section9-1.html

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http://www.fdic.gov/regulations/laws/rules/5000-3300.html






http://www.fincen.gov/

https://www.fdic.gov/regulations/safety/manual/section4-2.html



http://www.fdic.gov/regulations/safety/manual/section9-1.html




Case Study

Accommodating Officer

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Case Study

Accommodating Officer

What are the red flags?

What are the improper practices?

What actions should the bank take to prevent this

situation?

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Questions?

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