Internal Bank Fraud Schemes & Scams in an Economic Downturn. Fictitious Loans. Bank Fraud Investigations. Tracking spreadsheet Affidavit 1 Affidavit 2

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1 acumen Internal Bank Fraud Schemes & Scams in an Economic Downturn Presented by Angela Morelock, CPA, CFE, CFF, ABV, Certified Forensic Accountant insight ideas attention reach expertise depth agility talent Fictitious Loans Tracking spreadsheet Affidavit 1 Affidavit 2 Bank Fraud Investigations Kickbacks on loans Data center manager online entries to move money to personal accounts CFO walking transactions to proof moving money to personal account Fictitious loans recorded by bank presidents & chief lending officers Fictitious financial statements submitted by business customers SBA loan fraud Lapping schemes involving CD s

2 Bank Fraud Investigations Undisclosed ownership interests in loan customers & conflicts of interest Host of schemes to manipulate past due loans &/or payment dates or roll loans over & over Variety of purchasing schemes generally amounting to paying personal expenses Schemes by bank customers to abscond with various types of loan collateral (often in bankruptcies) Trust officers misusing customer funds Straw Loans & Reg O Violations 2010 by the Association of Certified Fraud Examiners, Inc. Cost of Fraud & Abuse $2.9 trillion worldwide 5% of revenues 42% recover nothing after fraud is discovered (2008 study) 2010 by the Association of Certified Fraud Examiners, Inc.

3 2010 by the Association of Certified Fraud Examiners, Inc by the Association of Certified Fraud Examiners, Inc by the Association of Certified Fraud Examiners, Inc.

4 2010 by the Association of Certified Fraud Examiners, Inc. The Fraud Triangle Perceived pressure facing individual Exacerbated in economic downturn Perceived opportunity to commit fraud Person s rationalization or integrity Economic Impact on Fraud Increase discovery with softening economy Increase in employee financial pressures Increased pressure to show good financial results (pressure for unachievable?) Maintain earnings, meet debt covenants, just keep the doors open

5 Economic Impact on Fraud Increased financial pressure distract from risk management activities Less effective internal controls during downsizing (or less emphasis on them) Diminished morale Greater pressure = easier rationalization Other Items to Note Marked increase in SEC enforcement actions during economic downturn Have seen government gearing up...

6 Required Reading! Managing the Business Risk of Fraud: A Practical Guide (IIA, AICPA & ACFE) Key Red Flags Lifestyle clues Unusual results or items Unusual relationships Employees suddenly guarded, secretive, working unusual hours or taking work home Out of balance conditions Key Red Flags Employees with significant increases in debt &/or credit problems Behavioral changes (drugs, alcohol, gambling, fear of losing job) Refusal to take vacations or sick leave Unreasonable reaction to reasonable questioning

7 Key Red Flags Missing supporting documentation Increase in customer complaints Increased write-offs or shortages Manipulated documents (i.e., white out) Budget to actual differences Profile of Typical Fraud Perpetrator The Typical Perpetrator White male College educated Intelligent Married Most loyal employee

8 Profile of Fraud Perpetrator Male or female No prior criminal history (<8%) Well liked by co-workers Likes to give gifts/compulsive shopper Gambling problems not unusual Long-term employee Rationalizes: Starts small or borrows Lifestyle clues Characteristics to Watch Bank Specific Credit problems NSF in personal accounts Unusual transactions in personal accounts Management override of internal controls Less experienced employees unknowingly aid Second person signs off on transaction based on trust 2010 by the Association of Certified Fraud Examiners, Inc.

9 2010 by the Association of Certified Fraud Examiners, Inc. CD Lapping Schemes Steal customer money at CD opening or after open When need that money, replace from another CD Requires aid of tellers Can be focused on most unwary, but not always Loans Receivable Schemes Lapping Fictitious loans Manipulation of loan master file Bogus write-offs Kickbacks Straw loans Undisclosed interests

10 Accounts Payable & Purchasing Personal bills Fictitious suppliers Kickbacks Ordering personal items Petty cash funds Employee expense accounts Corporate credit cards Fictitious Loans Investigation Examiners call for forensic audit Suspicions regarding loans originated President/CEO

11 Fictitious Loans Example Known that President/CEO living high lifestyle & has significant debt Owns $2 mil. yacht in Florida Unusual transactions in personal account of President/CEO Additional Electronic Analysis & Loan Review Sort for all family member addresses Reviewed loan files of all family loans Several nominee loans in violation of Reg. O Review of President/CEO Personal Accounts Fictitious loans prevented overdrafts in personal accounts when debt payments were due Numerous large deposits that would have been an evident problem if account review was being conducted

12 Loan Maintenance File Interest Rate Manipulations Past Due Manipulations Maintenance by User Things To Be Alert To PO Boxes Unusual items being passed at teller line Suspense accounts don t reconcile Trust activity w/o proper authorization TIN used on accounts with different names No phone Business account w/no business phone Things To Be Alert To Transactions brought directly to proof Loans to employees not meeting requirements Insiders loaning personal funds to customers or borrowing from customers Insiders appear to give or receive favors to (from) customers Insiders involved in business that borrows from the bank

13 Things To Be Alert To Insider with heavy debt that appears to require most or all of salary Financing of insider sale of personal assets to a third party Insider relationship with shady characters or high rollers Insider keeps unusual number of customer files at their desk Things To Be Alert To Insider making payments on another borrower s loans Insider frequently takes documents outside bank for customer signature Insider processes transactions in absence of customer as special favors Changes to loan master file due dates Protect Your Organization Fraud risk assessment Internal controls Proper environment External review Reporting mechanism Hire right Fidelity bonding Establish Perception of Detection Perform data mining

14 2010 by the Association of Certified Fraud Examiners, Inc. Double Down on These Heightened awareness of unusual Monitor, monitor & monitor some more Improve fraud risk assessment practices Carefully watch for lifestyle clues Increase oversight where head count is decreased Be proactive, not reactive & implement electronic analysis of some kind Re-emphasize fraud hotlines Five Things to Remember 1. Review personal accounts of employees & officers 2. Perform data mining of loan master & maintenance files 3. Train tellers not to accept unusual transactions from insiders 4. Encourage questioning & reporting unusual transactions have a confidential hotline 5. Be aware of relationships between insiders & loan customers

15 Contact Information Angela Morelock, CPA, CFE, CFF, ABV, Certified Forensic Accountant BKD, LLP 910 E. St. Louis Street Springfield, MO Phone: Fax: acumen insight ideas Questions? attention reach expertise depth agility talent