Credit Union Boards Are the First Line of Defense Against Fraud

Sometimes, credit unions fail. When they do, NCUA’s Asset Management and Assistance Center is there to manage the liquidation by winding down the affairs of the failed credit union and minimizing losses to the Share Insurance Fund. Our office also ensures that all verified shares are returned to members, typically within five days of a credit union’s closure.

A board of directors discusses their organization’s financial performance and business plans.Over the last ten years, NCUA has liquidated 135 natural person credit unions, ranging in size from just under $15,000 in assets to more than $320 million in assets. A little less than half of these liquidations were caused by fraudulent activity. In recent years, fraud has played a role in several failures. In 2016, fraud was a contributing factor at 10 of the 14 credit unions that failed during the year, costing the Share Insurance Fund $6.5 million. In 2015, fraud was a contributing factor at 11 of the 16 failed credit unions for that year, costing $12.3 million. Of the two credit unions that failed in 2017 so far, fraud was a contributing factor in one of them.

Smaller credit unions in particular face significant fraud risk because they have limited staff to ensure adequate controls are in place and they lack sufficient reserves to absorb any losses from fraud. However, an engaged board of directors can be a critical first line of defense against the potential for fraud and employee dishonesty.

Our analysis of failed credit unions shows that credit union boards can mitigate the potential for fraud through increased oversight and engagement in the credit union’s operations and financial management. For example, credit union boards should:

  • Ensure fidelity insurance applications are signed by an audit committee or a board member and not by a credit union employee to maintain independence;
  • Require third parties not involved in daily operations to perform bank reconciliations;
  • Verify all dormant or inactive accounts are closed and funds are submitted to the state’s unclaimed property department, as appropriate under state law;
  • Ensure loans are approved and disbursed by different employees or board members;
  • Document all loans in writing and require them to be signed by the member or members;
  • Confirm that investment account balances are accurate, independent of staff ’s own verification;
  • Document and monitor accounts that have invalid addresses;
  • Require additional reviews or audits when the credit union has very low delinquencies, but high asset yields;
  • Use an independent third party to investigate member complaints;
  • Question unusual balances and activity in cash or suspense accounts that appear on your financial reports;
  • Ensure members receive regular statements through the mail or electronically. Statements should not be hand delivered by staff;
  • Follow up on any unusual activities or changes in the lifestyles of staff, such as large personal expenditures or frequent trips to casinos; and
  • Inform your auditor, insurer and regulator if you notice anything suspicious or if your credit union has processes and procedures that aren’t commensurate with how a credit union should conduct business.

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