Bank Employee Fraud

A Presentation of
McNair, McLemore, Middlebrooks & Co., LLC

Why Rob a Bank?

2

Thats where the money is.

Why Use a Gun?

3

A Keystroke is Easier

Loan Fraud
4

U.S. Attorneys Office

Release May 12, 2011 Justice Department Prosecuted: Georgia Bank Vice-President (Chief Loan Officer) Three individual bank customers Names changed in the following story

Press

Loan Fraud
5

Henry Potter Bank VP

Stan Johnson Borrower Terry Starr Borrower

Loan Fraud
6

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

Loan Fraud
7

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

Loan Fraud
8

Whats the Incentive?

Loan Fraud
9

Henry Potter Bank VP Zane Crawford Borrower

Loan Fraud
10

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 Crawfords 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

Loan Fraud
11

Whats the Incentive?

Loan Fraud
12

Henry Potter Bank VP Henry Potter Borrower

Loan Fraud
13

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 signatures Loans proceeds used for personal purposes

Loan Fraud
14

Whats the Incentive?

Results of Fraud
15

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

Results of Fraud
16

Potter Forfeited:
Franchise rights to six Zaxbys restaurants Eleven real properties Two CDs Three investment accounts $150,000 in Jewelry

Results of Fraud
17

Bank Closed

Results of Fraud
18

120 Employees Let Go

Results of Fraud
19

Free Publicity Cover of Time Magazine

Results of Fraud
20

Former Bank President Slightly Riled

Is Fraud Important?
21

Well, Yeah

Post Mortem
22

Control Weaknesses

Changes Needed

Post Mortem
23

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?

Main Points
24

Did One Person Control?

Main Points
25

Transparency is Healthy

Main Points
26

As everyone who has ever worked in an office knows, there is a far different standard for scrutiny of the CEOs 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)

Fraudster Profile
27

What Does a Fraudster Look Like?

Fraudster Profile
28

50%
with organization for more than 5 years

85%
with no criminal record

Fraud Triangle
29

Rationalization

Incentive Opportunity

Certified Fraud Examiner Survey

31

One of the most victimized industries

Banking

Certified Fraud Examiner Survey

32

Certified Fraud Examiner Survey

33

Median Loss $175,000

Certified Fraud Examiner Survey

34

Dollar Damages
35

Expense Reimbursement

Small dollar exposure High dollar exposure

Corruption

High dollar exposure

Financial Statement Fraud

Focus
36

High Dollar Exposure Higher Probability of Occurrence

Certified Fraud Examiner Survey

37

Corruption

34% of Cases

Certified Fraud Examiner Survey

38

Corruption schemes involve the employees 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.

Certified Fraud Examiner Survey

39

Cash 22% of Cases

Detection of Fraud Schemes

40

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.

Detection of Fraud Schemes

41

Procedure Tip

Rank First

Percent 47%

Management review

Second

17%

Internal Audit

Third

16%

Detection of Fraud Schemes

42 Impact of Hotlines (per ACFE)

What Can I Do?

43

Install Anonymous Hotline

Educate Banks Employees about Fraud

Identify Fraud Risks in Your Bank
Identify
Based

Highest Risk Areas

on Potential Dollar Damage Based on Internal Control Weaknesses

What Can I Do?

44

Annual Fraud Report to Board

Adopt a Fraud Policy

Perform Surprise Unannounced Audit Procedures

Teller Counts Map Your Transaction Cycles Step-by-step map brings clarity to process

e.g.

Be Alert For
45

If one person can do any two of the following, pay attention: Segregation of Duties
Authorize a transaction 2. Record a transaction 3. Reconcile the related account 4. Possess the related asset
1.

Be Alert For
46

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

Be Alert For
47

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

Be Alert For
48

Reconciliations
Suspense
e.g. Due

accounts not reconciled

Loans in process

to/Due from accounts not reconciled properly

All

reconciling items must be fully accounted for

Official

checks

Check clears but loan not recorded

Be Alert For
49

Wire Transactions
Ability

to bypass dual controls Does wire system track parameter changes such as disabling dual controls?

Be Alert For
50

Accounts Payable
Purchasing
Fictitious

of goods/services that dont exist

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

Be Alert For
51

Investments
Contract

with investment company with no bid

decision maker

process
Kickback to Investment

in low grade instrument (with higher interest rates), reflecting investment as high grade
Employee

steals the difference in the spreads

McNair, McLemore, Middlebrooks & Co., LLC 52

Contact Charles Hall 478-330-5248 chall@mmmcpa.com Linkedin.com/in/charlesbhall