Credit Union Fraud Falls in 2020

Credit union insider fraud cases did not take a holiday in 2020, but they substantially declined, presumably because of the coronavirus economic and health crisis.

There were 10 internal fraud cases, and three former credit union employees who were convicted and sentenced for embezzlement/theft crimes, for a total of 13 fraud cases this year prosecuted in federal, state or local courts. That number is quite low compared to 2019, when there were an estimated 15 insider fraud cases and 17 former credit union employees who were convicted and sentenced for embezzlement/theft crimes, for a total of 32 criminal cases. External fraud cases that victimized credit unions were not counted in these totals.

This year, however, there were seven violent and tragic events that occurred at credit union branches (see sidebar).

Henry Wirz, retired president/CEO of the $3.6 billion SAFE Federal Credit Union in Folsom, Calif., who frequently comments on credit union fraud, speculated that this year’s cases may have dropped because COVID-19 shifted more member activity online. What’s more, a lot of credit union fraud involves tellers and vault cash transactions, so the opportunity for each may have been reduced because credit unions had to temporarily shut down or reduce the operational hours of some branches.

This year’s significant decline in fraud cases may just be a temporary lull, however.

David Legge, president of the Manassa, Va.-based Legge Group, which investigates internal fraud cases for credit unions and other businesses, said employees working from home will create problems that may not get discovered until everyone returns to their work sites.

“Some employees, because of the losing of controls and lack of oversight, when also presented with financial difficulties, could have led to the rationalization that they were entitled to the use of business assets,” Legge said. “They also could conclude with no oversight, no one would ever know. Because the computers were being used from home, the physical access controls would be reduced. Management would not have a way of knowing if someone else was using the computer if quick timeout controls were not in place.”

Wirz also pointed out that examiners practicing social distancing and other protective practices will, in his opinion, reduce the effectiveness of exams.

“Exams will also be more difficult given the number of employees working from home,” he said. “This impact may not be seen until later.”

He also noted since COVID-19 has increased the number of employees working from home, it may increase fraud if the credit union does not randomly test transactions and if members do not monitor activity on their accounts.

Another issue is that the number of families with financial problems has increased because of the coronavirus health and economic crisis.

“Credit union employees may be in financial distress and this raises the motive for fraud,” Wirz said. “If credit unions have proactive programs to help employees and members in financial distress, they may minimize fraud caused by financial need.”

This year’s largest insider fraud case involved Janine Keim, former president/CEO of ­Consumers Credit Union, and another former employee, Brenda Jensen, who were accused of embezzling nearly $1.5 million from the $5.2 million credit union that was based in Denison, Iowa.

Jensen pleaded guilty and Keim pleaded not guilty. They allegedly began stealing the credit union’s funds in May 2012, and they continued their theft through March 2018. Federal prosecutors have not yet revealed how or why they embezzled so much money over six years.

Because of its poor financial condition, Consumers was merged into the $1 billion Cobalt Credit Union in Papillion, Neb., during the second quarter of 2018.

“Based upon the amount [of funds] taken, the audit or supervisory exam was flawed for several years,” Legge said. “The review by the state examiner was also flawed for several years. With over 20% of the assets of the credit union taken there should have been red flags all over.”

Wirz noted that when fraud is such a large portion of assets and took place over a long duration, you have to say that every facet of internal control is either weak, non-existent or failed to function as intended.

“This is not an ordinary failure; it is a catastrophic failure. It and so many like it point to big weaknesses,” Wirz said. “The unspoken impact is that when there is such bad internal control there is also very likely poor member service. The same controls that prevent fraud also prevent errors. Poor controls point to a general lack of management and control, and you cannot have good member service without both. The further tragedy is that this credit union’s management and board made their main ­objective survival rather than member service. A merger only happened due to insolvency. I would bet a post-merger analysis would find members got improved service.”

In 2019, the biggest insider fraud case sent shock waves throughout the credit union industry and sent the former CBS Employees Federal Credit Union President/CEO Edward Rostohar to federal prison for 14 years for his $40 million embezzlement. That led to the financial collapse of the Los Angeles-based credit union, nearly $2 million in uninsured losses, lost jobs of long-time employees and a multi-million dollar class action lawsuit against board members.

In addition to CEOs, other credit union staffers such as vice presidents, loan officers, supervisors, branch managers, loan officers, operations managers, member service representatives and tellers also have been convicted for embezzlement, theft or fraud.

Of the total 13 fraud cases in 2020, two involved branch managers, one involved an operations manager and four involved tellers.

Johnnie Earl Harrell, a former branch manager at the $92 million Welcome Federal Credit Union, admitted he embezzled at least $645,000 from the Morrisville, N.C.-based credit union.

While working at the branch in Zebulon from 2008 to 2019, he convinced members to roll over their retirement accounts into annuities, but he never purchased the annuities and stole the funds for his own personal use. Harrell managed to conceal his fraud for 11 years by preparing fake annuity account statements that were periodically presented to members, prosecutors said.

The Zebulon branch had been purchased by Welcome from another credit union in October 2016. Not long after that acquisition, Welcome’s internal controls detected Harrell’s fraud.

After learning his credit union hired a new compliance officer who was planning to implement new internal controls, including conducting complete cash counts at all the vaults, Henry Martin Hill decided it was time to turn himself in to police and confess that he stole more than $430,000 from the vault of the branch that he managed.

Hill, a former branch manager for the $604 million Greater Iowa Credit Union in Ames, began stealing cash from the vault starting in 2012. His theft continued through September 2019, according to court documents.

He admitted he took $20, $50 and $100 bills from banded cash stacks in the vault and replaced the stolen bills with $1 and $5 bills to make the stacks appear untampered. In violation of the credit union’s policy, Hill audited the vault alone and falsely reported that the vault cash had been audited in compliance with the credit union’s policy.

When Angela Domingo, a former credit union operations manager at the $306 million CU Hawaii Federal Credit Union in Hilo, was questioned about stealing cash from the vault, she laughed.

When she stopped laughing, she said, “‘I know it’s not funny. I’m sorry, it’s like stupid funny,’” a federal investigator quoted her as saying in a criminal complaint that was filed in Hawaii federal court.

In November 2017, a senior internal auditor for the credit union contacted the U.S. Secret Service to report a large cash discrepancy at the Hilo branch following a surprise cash audit. The last surprise cash audit conducted at the branch was in March 2014 when Domingo was assistant operations manager, investigators said.

The credit union determined $637,000 in cash was missing from the branch. Although Domingo denied she stole that much money, she admitted to taking small amounts of $4,000 to $8,000 from the vault and teller drawers and depositing the cash into the accounts of her husband, daughter, a niece and a nephew. She lost track of how many times she did this.

According to the interview with investigators, Domingo said she did not feel appreciated at the credit union and was not paid enough for work she was expected to do. Even though she knew her theft was wrong, Domingo said stealing cash became an addiction, and that it was so easy and no one knew about it.

“She stated that after working at the branch for several years, she realized they were going to let her take control and she knew she could get away with it,” an investigator wrote in the criminal complaint.

6 Violent Acts at Credit Union Branches in 2020

Heritage Credit Union, Rockford, Ill., Jan. 3

An armed robber held a female employee hostage and allegedly sexually assaulted her. Suspect surrendered after more than six hours.

Truliant Credit Union, Burlington, N.C., Jan. 11

Armed suspect entered the branch holding a rifle. She fired a shot into the ceiling. A member tackled the suspect and she was arrested.

Navy Federal Credit Union, Las Vegas, Jan. 15

Armed suspect entered the branch holding his mother hostage. He allegedly shot her three times. Police arrested the suspect.

Family Security Credit Union, Boaz, Ala., Feb. 18

A domestic dispute concerning a joint account led to a suspect fatally shooting a man in the parking lot. Suspect was arrested.

Mountain America Credit Union, Ammon, Idaho, July 2

During a robbery, a branch manager collapsed and later died. No weapons were seen. Police arrested the suspect.

Navy Federal Credit Union, Orlando, Fla., Sept. 8

A suspect allegedly fatally shot his wife, Barbara Tommey, the assistant manager, outside the branch. The suspect was arrested.