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Articles on fraud prevention have been on my mind for a while. Every time a mention of another credit union fraud is published or a national study on fraud is released, it raises the issue again. Over the past few years, the expansion of the philosophy of the need for risk assessments as an analytical tool continues to increase, especially for financial institutions. Annual risk assessments are now required for Bank Secrecy Act and Automated Clearing House procedures. The NCUA’s examination procedures require time for analyzing and assessing transaction risk, credit risk, interest rate risk, compliance risk and reputation risk. Then within smaller breakout areas, such as investments and lending, you have diversification, pricing, default, liquidity and Asset Liability Management matching risks, and risk-based lending and concentration risk to name a few. With all the risk analysis being performed, why not a strong analysis of fraud risk?
In discussions with directors of the Office of Small Credit Union Initiatives at the NCUA, it has been stated that one of the leading causes of liquidation of small credit unions is fraud. Current NCUA Board Member Mark McWatters earlier this year has stated that agency data showed approximately 58% of share insurance fraud losses over the past five years were attributable to fraud. NCUA CFO Mary Ann Woodson indicated that for 2014, this figure was 94%. Michael E. Fryzel, former NCUA chairman, has questioned why more is not being done in this area. The NCUA has added procedures for fraud into the examination scope for small credit unions, which may help if the red flags identified are properly investigated and or addressed.
In the most recent 2014 Association of Certified Fraud Examiners annual “Report to the Nation on Occupational Fraud and Abuse,” losses due to fraud for all businesses were estimated to be 5% of gross revenue. Carried to the bottom line, this would cause most credit unions to operate at a loss. Financial institutions once again lead the way with the highest number of cases. This could be somewhat skewed because of the regulatory requirements to file Suspicious Activity Reports that other industries do not have regulations for. The number of SARs filed on employees of credit unions continues to increase at alarming rates.
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