Internal Routine & Controls (IRC) & Fraud New York Region Directors College

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1 Internal Routine & Controls (IRC) & Fraud 2015 New York Region Directors College

2 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 2

3 Fraud: What Is It? 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 3

4 Fraud Triangle 4

5 Fundamentals of IRC and Fraud Prevention Prevention Detection Reporting Duty of Loyalty Duty of Care Board and Management s Role 5

6 Fundamentals of IRC and 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. 6

7 Fundamentals of IRC and Fraud Prevention Basic Elements of an Internal Control System Organizational Structure Protection of Physical Assets Accounting Procedures Audit 7

8 Fundamentals of IRC and 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 8

9 Fundamentals of IRC and 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 9

10 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 10

11 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 11

12 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 12

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) 13

14 Fraud Trends in the New York Region Common Insider and Non-Insider Frauds Embezzlement Identity Theft/Account Takeover Loan Fraud Wire Fraud 14

15 IRC/Fraud Resources Statement Concerning the Responsibilities of Bank Directors and Officers Financial Crimes Enforcement Network FDIC: Risk Management Manual of Examination Policies Internal Routine and Controls (Section 4.2) FDIC: Risk Management Manual of Examination Policies Bank Fraud & Insider Abuse (Section 9.1) 15

16 Case Study Accommodating Officer 16

17 Case Study What are the red flags? Accommodating Officer What are the improper practices? What actions should the bank take to prevent this situation? 17

18 Questions? 18