What CUs Said About Stopping Embezzlements

By Frank J. Diekmann

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A few weeks back I asked a simple question in this space, “How would you stop the embezzlers?” It’s definitely a question that provokes a response, as I heard from plenty of you, both via email and in person at recent conferences in Austin and Las Vegas and San Diego. 

Yet while there were opinions shared, in what was perhaps a collaborative effort among CUs, so was something else: a collective shrug. 

What had led to the question was CUToday.info’s extensive reporting around an alleged $40-million fraud by Edward Rostohar, the former CEO at C B S Employees FCU in Studio City, Calif. As if allegedly stealing $40 million weren’t enough, the crime is all the more astounding since the credit union had assets of about $21 million and the embezzling had allegedly been going on for about two decades.

As is the case every time such an inside-job occurs, the immediate response is where was the regulator (again and again)?  The supervisory committee? Hello, anyone at the credit union? Many believe they would have spotted the warning signs, or made sure to have had this procedure or that practice in place.

Really? So I asked, what can be done about a problem unfortunately common at many small CUs?

“Sadly, this is never going to completely go away,” responded Terry Shoemaker, manager of State College FCU in State College, Penn., who echoed a sentiment I heard frequently from people. “There will always be a few bad eggs that think they can beat the system, which they obviously can, at least for a while.  It will also continue to be more prevalent at smaller CUs, where there are fewer eyes to see possible wrongdoings.

Level of Comfort Needed

Shoemaker said he believes “one thing that examiners and/or a volunteer could do is communicate with other CU staffers and ask them if they are aware of anything unusual happening.  I know that this may be difficult in smaller shops with a fear of retribution, but there ought to be simple and creative ways that an examiner could extract information from employees without blatantly exposing them as a rat.  Before I got here, we had a bad situation with two ex-employees who were in the number-one and number-two positions.  If someone had felt comfortable speaking to a board member or examiner, we might not have had as big of a hole to climb out of as we did.”

As stated above, I heard from multiple people who almost seemed to accept the fraud taking place as the cost of doing business, even if everyone is taking a hit when the losses are recorded by the share insurance fund. It was almost as if many people were all on the same email distribution list and reading it back to me when they expressed a universally-felt insistence that the last thing they need are more examiners spending more time inside their offices. 

The irony of that, of course, is it’s smaller credit unions that most need someone to regularly pull up the shades, but it’s also those same CUs that can least afford to surrender time to the shade-pullers when resources are already strained and a VP (or even CEO) title doesn’t mean you’re above staffing the teller line when needed. 

Striking a Balance

That was a point made by NAFCU’s EVP and general counsel, Carrie Hunt, who acknowledged widespread media coverage of alleged shenanigans such as those at C B S Employees don’t help the credit union image. But…

“Certainly, we see the headlines. Fraud isn’t new,” said Hunt, who added NAFCU has been doing some work internally to compare fraud at credit unions with that seen inside banks. “We want to see if any improvements can be made. Of course, fraud is notoriously hard to find, but we are working with NCUA. What we don’t want is credit unions to be examined to the Nth degree. There needs to be a balance, and zero fraud isn’t possible.”

Geoff Bacino, the former NCUA board member who now heads up the Association of Credit Union Internal Auditors (ACUIA), reminded regulations do not require an outside party to verify the books are on the up and up at smaller CUs. Bacino said there is a need for an independent internal audit professional and/or department to “ferret out” fraud in credit unions.  

Some Other Suggestions

CEO Carole Wright shared that when she first saw the headline on the earlier column asking what can be done, she shook her head and thought, stopping fraud will never happen.   

“Fraud makes me angry. It casts a bad light on the movement and costs every credit union,” said Wright. 

After thinking about it some more, Wright said she concluded that while it may be impossible to stop fraud, reducing it is another matter. The key, she believes, is education.

Wright suggests mandatory staff education with an annual training component that essentially includes: 

  • Teaching that people won’t get away with the fraud and ultimately will be caught
  • Testimonials on the high daily cost of covering up fraud from people who have had to do it
  • First-person accounts on the cost of being caught by incarcerated ex-employees
  • Alternatives for handling the problems that cause fraud. Wright noted her own internal auditor has observed that beyond just greed, fraud often involves an addition of some kind

Wright, by the way, leads Holy Rosary Credit Union in Kansas City. And while it certainly can’t hurt to ask for a little divine assistance as the prayerful are running their fingers over the beads, credit unions could also use some more effective strategies down here on earth. 

I continue to welcome your thoughts and feedback.

Frank J. Diekmann is Cooperator in Chief at CUToday.info and can be reached at Frank@CUToday.infoor @FrankCUToday.

Section: Standard
Word Count: 1168
Copyright Holder: CUToday.info
Copyright Year: 2019
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URL: http://www.cutoday.info/THE-tude/What-CUs-Said-About-Stopping-Embezzlements