Help Deter, Detect and Report Insider Fraud

It seems like there is a story in the news about fraud at a credit union almost every week.

The worst frauds result in the failure of a credit union and a loss to the National Credit Union Share Insurance Fund. In the past four-and-a-half years, the Share Insurance Fund has suffered fraud-related losses of approximately $146.8 million.

The true cost of fraud is unknown. However, according to the Association of Certified Fraud Examiners’ 2016 Report to the Nations on Occupational Fraud and Abuse, fraud costs companies an estimated 5 percent of revenues each year.

Because of its potential damages not only to individual credit unions, but also to the reputation of the system as a whole, it is imperative credit unions take appropriate measures to safeguard their assets and deter fraud.

How Is Fraud Detected?

Tips are the main way frauds are initially detected and fraud hotlines usually result in higher detection rates, according to the ACFE 2016 Report. Generally, a fraud hotline allows the caller to remain anonymous, as this has shown to increase the number of tips received. Internal audits and management reviews are the next most common ways frauds are detected.

What Should You Do If You Suspect Fraud Has Occurred?

If you suspect fraud, suspicious or inappropriate activity, your action will vary based on your relationship to the credit union and the options the credit union has available. Not all credit unions have an internal audit department or fraud hotline.

However, NCUA has a fraud hotline available to anyone, including members, volunteers and staff of credit unions.

NCUA’s Fraud Hotline number is 800-827-9650. The caller should provide the following information:

  • Details about the situation or activity;
  • The credit union’s name; and
  • Suspected individuals involved.

All information provided is confidential and callers can remain anonymous. More information about NCUA’s Fraud Hotline is available at http://go.usa.gov/xjtQF.

In addition to the NCUA Fraud Hotline, the following avenues may be available for employees of a credit union to report potential fraud or abuse:

  • Notifying the supervisor of the appropriate department;
  • Notifying the supervisory or audit committee;
  • Notifying the internal audit department;
  • Calling the credit union’s fraud hotline; or
  • Discussing it with your credit union’s examiner.

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What Can Credit Unions Do to Deter Fraud?

A credit union can deter the potential for fraud by establishing strong internal controls and ensuring these controls can’t be overridden. Internal controls will vary based on the products and services offered by the credit union and the credit union’s ability to segregate duties so one person does not control a transaction from start to finish.

The member-account verification and the annual audit are two common internal controls. An outside auditor, internal auditor or the supervisory committee may perform periodic internal audits during the year, which function as additional internal controls.

Other common internal controls include:

  • Dual controls;
  • Computer access controls;
  • Reviews of file maintenance reports;
  • Cash counts;
  • Surprise audits; and
  • Measures that prevent employees from accessing family member accounts.

Other actions that a credit union can take to deter fraud include:

  • Performing background checks before hiring employees;
  • Requiring employees to sign a Fraud Policy annually;
  • Conducting basic fraud awareness training;
  • Requiring mandatory vacations and having another employee perform the vacationing employee’s duties; and
  • Monitoring employees, including lifestyle and behavioral changes.

Finally, ongoing training for the board of directors and supervisory committee is important. The more knowledge those charged with oversight have, the more it helps them institute strong internal controls at the credit union.

What Resources Are Available?

Credit unions may find the following resources helpful:

Conclusion

Credit union directors, supervisory committee members and management must continue to assess the potential risk and take action to deter and detect fraud. Implementing strong internal controls and using fraud hotlines are key steps.