How Would You Stop the Embezzlers?

By Frank J. Diekmann

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We now know NCUA’s examiners missed an alleged $40-million embezzlement that lasted nearly two decades, as detailed here last week. So, here’s this week’s question: what would you do if you were NCUA or a state regulator to catch the bad guys?

Hindsight may be 20/20, but in they shoulda/I woulda cases–-especially when the government is involved in any way–it’s always 20/10. They should have spotted the warning signs. I would have had this procedure or that practice in place, you always hear people saying afterward.

And maybe they’re/you’re right? But what exactly are the warning signs you might have noticed? What policies and procedures or practices would you have had in place that might have exposed a pink hand before it ever turned red? The biggest challenge with the latter, of course, is that in most of these cases of internal fraud at credit unions the person responsible for putting the policies and procedures in place and then enforcing them is the very same person doing the embezzling. 

Mr. Fox, you’re in charge of writing the Henhouse Security Manual and then implementing it.

No Easy Fix

So, what would you do? As I outlined last week, the list of long-running, multi-million frauds at CUs is a long one. Each and every time there is astonishment that state and federal regulators and independent auditors and supervisory committees all missed the bogus deposits, fake loans, and even missing vault cash. 

In the case of Edward Rostohar, the CEO at C B S Employees FCU who allegedly stole an amount double the credit union’s assets, he reportedly told police his prior experience as an NCUA examiner taught him how to avoid detection. At the smaller credit unions where so much of this type of fraud takes place, insiders take advantage of inexperienced examiners and auditors who are auditing documents and records provided by the bad guy/gal.

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Mr. Fox, we’re reviewed the Henhouse records you’ve provided and everything seems to be in order.

Compiling Suggestions

So, as I’ve asked, how would you change things at the regulatory/examination level? You can’t complain about the job being done by the regulators unless you’ve got some ideas for making it better. After all, CUs and their trade groups have been pushing hard for less regulatory “burden,” including fewer exams. When credit unions say they want more virtual exams, for instance, what they really are saying is they would prefer virtually none. 

I’d soliciting input from throughout the credit union community for what might be done, and I’ll compile responses as they are received. If you wish to remain anonymous, I’ll honor the request as long as I know who is submitting the suggestion. 

So, give it some thought. I look forward to hearing from you.

A New Ratio for CUs?

Speaking of the alleged (and giant) embezzlement at C B S Employees FCU, some have turned to gallows humor. While at PSCU’s annual Member Forum in Austin last week, one CEO told me he believes NCUA should develop an embezzlement-to-assets ratio to really rate the embezzlers. And while there have been some pretty astonishing cases of embezzlement at credit unions, this CEO said the 200% ratio at C B S Employees FCU may be difficult to ever top.

Some 2020 Visions

As you continue to plan for 2020 and the decade to follow, here are a couple of views on how artificial intelligence (AI) and other technologies may play out as shared during a couple of recent CU conferences.

AI as a Board Member?

From Mark van Rijmenam, founder of Datafloq and author of “Think Bigger–Developing a Successful Big Data Strategy for Your Business”:“The organization of tomorrow revolves around data. Every organization is a data organization. If you want to use all the data, you have to rethink all your processes and customer touchpoints, as well as what kinds of products you offer. Once you are a data organization, it’s important to put smartness into your organization. You must create a culture of collaboration among humans and machines.”

van Rijmenam said deep learning is getting smarter and bringing the world closer to artificial general intelligence (AGI). AGI is when AI is as intelligent as human beings (followed in the next step by Super Intelligence, which is infinitely smarter than humans and has the ability to control the world, he said).

van Rijmenam said one company, Deep Knowledge Ventures, has given AI and an algorithm a seat on its board of directors. “It has a vote on whether to invest in a company,” said van Rijmenam.

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Separately, van Rijmenam noted most consumers prefer to talk to a chatbot when canceling a service, as there isn’t a human there to talk back to them. van Rijmenam recommends credit unions use chatbots to assist human staff who work in member service.

Good Or Bad? We Don’t Know

Rich Karlgaard, a forecaster, futurist and publisher of Forbes:  “AI is going to change the world, but it’s not really certain if that is for the good or for the bad. Algorithm accountancy firms will control and validate the algorithms of firms. Two algorithms at Facebook that needed to talk to each other created a new encryption that humans could not understand and the plug had to be pulled. Increasingly, we will have to watch algorithms to see if they are doing what they were created to do.”

Karlgaard said “machine ethics” is the most complicated question of all. “What is ethics. What is ethical today may not be ethical tomorrow? What happens when a machine becomes more ethical than humans?”

Are You Ready?

Several analysts and futurist have urged credit unions to get ready now for augmented reality and virtual reality, as it’s going to be everyday reality in the delivery of all products and services. For example, a credit union could demonstrate the products/services it offers to a member or prospect, and either add or subtract to what the member/prospect is seeing as various criteria are identified. 

Think all of that is far off? It’s here. Doctors are already giving kids artificial reality headsets to distract them when giving them shots. And there’s nothing artificial about how expectations are changing.

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

Section: Standard
Word Count: 1462
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Copyright Year: 2019
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