bank employee fraud
DESCRIPTION
Guide to avoiding fraud in banks.TRANSCRIPT
1
B
Bank Employee Fraud
A Presentation of
McNair, McLemore, Middlebrooks & Co., LLC
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Why Rob a Bank?
That’s where the money is.
3
Why Use a Gun?
A Keystroke is Easier
4
Loan Fraud
U.S. Attorney’s Office Press Release – May 12, 2011
Justice Department Prosecuted: Georgia Bank Vice-President (Chief Loan
Officer) Three individual bank customers
Names changed in the following story
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Loan Fraud
Henry Potter – Bank VP
Terry Starr - Borrow
er
Stan Johnson
- Borrowe
r
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Loan Fraud
June 2005 Potter approved loan of $500,000 to Stan Johnson Johnson bought 54 acres of land
July 2005 Johnson sold the land to Terry Starr for $1.6
million Potter approved the loan to Starr Johnson paid Potter a Kickback of $400,000 Johnson paid Starr a Kickback of $270,000
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Loan Fraud
August 2005 Potter approved loan of $672,000 to Johnson Johnson bought 98 acres of land
Eight days later Johnson sold the land to Starr for $1.6 million Potter approved the loan to Starr Johnson paid Kickback to Potter for $371,000 Johnson paid Kickback to Starr of $200,000
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Loan Fraud
What’s the Incentive?
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Loan Fraud
Henry Potter – Bank VP
Zane Crawford - Borrower
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Loan Fraud
Crawford, a real estate developer and home builder, owed millions to the bank which he could not pay
Potter desired to hide the bad loans from regulators
Potter made new loans to Crawford to enable him to pay interest on prior loans Loans made to Crawford’s mother, wife and daughter ;
also to fictitious entity called “XYZ Models” The mother, wife and daughter had no knowledge of
the loans Loans totaled $2.8 million
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Loan Fraud
What’s the Incentive?
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Loan Fraud
Henry Potter – Bank VP
Henry Potter –
Borrower
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Loan Fraud
Potter loaned himself $800,000 through fraudulent loans that he set up in the names of members of his own family (without their knowledge)
Potter forged the signaturesLoans proceeds used for “personal purposes”
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Loan Fraud
What’s the Incentive?
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Results of Fraud
Henry Potter – Sentenced to 10 years
in federal prison
Stan Johnson – Sentenced to 2 years
in federal prison
Terry Starr – Sentenced to 3 years
in federal prison
Zane Crawford – Sentenced to 2 years, 6 months in federal
prison
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Results of Fraud
Potter Forfeited:• Franchise rights to six Zaxby’s
restaurants• Eleven real properties• Two CDs• Three investment accounts• $150,000 in Jewelry
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Results of Fraud
Bank Closed
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Results of Fraud
120 Employees “Let Go”
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Results of Fraud
Free PublicityCover of Time
Magazine
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Results of Fraud
Former Bank President
Slightly Riled…
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Is Fraud Important?
Well, Yeah…
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Post Mortem
Control Weaknesses
Changes Needed
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Post Mortem
Did the bank have an anonymous fraud hotline?
Did anyone notice a change in lifestyle?
How were loans reported to the bank board?
Did bank have loan reviews performed?
Did the bank have a fraud policy?
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Main Points
Did One Person Control?
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Main Points
Transparency is Healthy
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Main Points
As everyone who has ever worked in an office knows, there is a far different standard for scrutiny of the CEO’s expense report from that of a file clerk.
In too many organizations, one of the privileges of rank is a tendency to get automatic approval of behavior that would be questioned in the less exalted.
Transparency – Warren Bennis (Author)
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Fraudster Profile
What Does a Fraudster Look Like?
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Fraudster Profile
50% with organization
for more than 5 years
85% with no criminal record
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Fraud Triangle
Rationalization
Incentive
Opportunity
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Certified Fraud Examiner Survey
One of the most victimized industries
Banking
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Certified Fraud Examiner Survey
16% of All Fraud Cases
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Certified Fraud Examiner Survey
Median Loss
$175,000
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Certified Fraud Examiner Survey
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Dollar Damages
Expense
Reimbursement
•Small dollar exposure
Corruption
•High dollar exposure
Financial
Statement Fraud
•High dollar exposure
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Focus
High Dollar Exposure
Higher Probability of Occurrence
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Certified Fraud Examiner Survey
Corruption
34% of Cases
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Certified Fraud Examiner Survey
Corruption schemes involve the employee’s use of his or her influence in business transactions in a way that violates his or her duty to the employer for the purpose of obtaining a benefit for himself or someone else.
Examples of corruption schemes include bribery and a conflict of interest.
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Certified Fraud Examiner Survey
Cash22% of Cases
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Detection of Fraud Schemes
The ability to report fraud anonymously is key
because employees often fear making reports due to the threat of retaliation from superiors
or negative reactions from their peers.
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Detection of Fraud Schemes
Procedure Rank Percent
Tip First 47%
Management review
Second 17%
Internal Audit Third 16%
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Detection of Fraud Schemes
Impact of Hotlines (per ACFE)
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What Can I Do?
Install Anonymous HotlineEducate Bank’s Employees about FraudIdentify Fraud Risks in Your Bank
Identify Highest Risk Areas – Based on Potential Dollar Damage Based on Internal Control Weaknesses
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What Can I Do?
Annual Fraud Report to BoardAdopt a Fraud PolicyPerform “Surprise” Unannounced Audit
Procedures e.g. Teller Counts
Map Your Transaction Cycles Step-by-step map brings clarity to process
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Be Alert For
If one person can do any two of the following, pay attention:
Segregation of Duties1. Authorize a transaction2. Record a transaction3. Reconcile the related account4. Possess the related asset
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Be Alert For
Loans Financing of insider sale of personal
assets to a third party Insider relationship with “shady”
characters or “high rollers” Loans to employees not meeting
requirements Insiders loaning personal funds to
customers or borrowing from customers
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Be Alert For
Loans Changes to loan master file due dates Incomplete loan lists provided to loan
committee Insiders appear to give or receive favors to
(from) customers Insiders involved in business that borrows
from the bank
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Be Alert For
Reconciliations Suspense accounts not reconciled
e.g. Loans in process Due to/Due from accounts not reconciled
properly All reconciling items must be fully
accounted for Official checks
Check clears but loan not recorded
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Be Alert For
Wire Transactions Ability to bypass dual controls
Does wire system track parameter changes such as disabling dual controls?
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Be Alert For
Accounts Payable Purchasing of goods/services that don’t
exist Fictitious vendors
A/P clerk changes vendor mailing address to his/her own address, then – after check is processed – correct the vendor address Check is mailed to A/P clerk who then converts
the check to cash
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Be Alert For
Investments Contract with investment company with
no bid process Kickback to decision maker
Investment in low grade instrument (with higher interest rates), reflecting investment as high grade Employee steals the difference in the
spreads
52McNair, McLemore, Middlebrooks & Co., LLC
ContactCharles Hall
Linkedin.com/in/charlesbhall