Employee Fraud Leads to a Financial Institution Bond Claim … Now What?

No other policy helps credit unions navigate direct financial losses better than financial institution bonds (FI Bonds). Offering protection from losses incurred as a result of an employee or officer’s dishonest and fraudulent acts, FI Bonds are a critical coverage for all financial institutions in today’s world.

It is very disconcerting when a financial institution first uncovers an employee fraud. Let the following checklist guide your credit union from fraud discovery to FI Bond claim submittal.

Remember, do not settle a claim without the carrier’s consent. Also, do not credit your member or any party and reserve the right to investigate.

When You Discover Fraud, What Should You Do?

First, don’t panic! Staying levelheaded is key to gathering facts in an efficient manner and can help protect the credit union against additional losses.

• Alert law enforcement, as well as your FI insurance broker, correspondent credit union, and if applicable, IT forensic specialist and attorney of the fraud.
• Act quickly. Start by gathering facts. Preserving evidence and potential avenues of recovery will help mitigate further losses.
• Gather documents. This includes policies and procedures, relevant transaction details, notes from employee interviews, IT forensic specialist reports, a list of names of persons/companies involved, applicable member agreements, disclosures, and relevant call logs and email/correspondences.

How Can You Best Mitigate Losses?

Have an employee who understands your FI insurance lead post-discovery efforts. This will ensure that no action is taken that could jeopardize your coverage. This includes waiting to settle and/or credit member accounts until you have FI insurance carrier consent.

• Stop all transfers still in progress and any overseas withdrawals.
• Determine if the cause of the loss was due to hacking, employee dishonesty or carelessness.
• Report any/all claims suspected or actual to your broker. Reserve the right to investigate all matters thoroughly. In difficult and complex situations, obtaining counsel may be necessary to protect your credit union, regardless of who the carrier is.

What Should the Credit Union Say to the Affected Member(s)?

You want your member to cooperate and it would be beneficial to know whether the member’s email, computer and/or phone systems were compromised. Commercial members may have their own cyber/computer crime-type insurance, but often times they do not and want to place blame on the institution.

Because the credit union shouldn’t settle or credit consumer accounts until the FI carrier has consented, there will be a period of time in which the member account lacks funds and the credit union is unable to replenish them.

• First, sympathize with the member. Apologize that this happened and tell them that you know the situation is upsetting.
• Explain what steps the credit union is taking. Tell the member that the credit union is currently assessing the cause of the loss, and promise to keep them updated in a timely manner.
• Urge the member to cooperate with the investigation. This could include working with an IT forensic specialist and other carrier agents, and may include participating in interviews and providing access to their personal records.
• Don’t admit culpability or pay members outright. Explain that doing so would invalidate your ability to collect damages from the credit union’s insurance carrier.
• Determine your member’s short-term cash needs. Along with your insurance carrier’s consent, consider making a temporary interest-free loan to the member, pending the conclusion of the investigation.

Determine Who Is Responsible for the Loss

Consult the credit union’s agreement(s) with the member as well as policies and procedures and applicable provisions of the Uniform Commercial Code in determining responsibility for the fraud. Then, file a claim with the credit union’s FI insurance carrier. Remember to consider all relevant insurance policies. Work with your broker to understand which policies apply. This may also include your credit union’s cyber, D&O, E&O, FI Bond, crime and business services bond insurance policies.

Does it matter that some funds came from a line of credit? The insurer may assert that there is no coverage for the advances under the “loan loss” exclusion, while the credit union will be at risk of non-payment. If the member is liable, the credit union will have to make collection efforts.

Now is the time – ahead of a potential fraud situation – to ensure your credit union secures the right financial institution bond, as well as appropriate limits. This will vary based on credit union size, member funds and more.

Debra McManigle is SVP for Hub Financial Services. She can be reached at 269-441-5058.