Unfortunately, Recession Has Had One Growth Industry

It's hard not to have seen the reports in Credit Union Journal and at cujournal.com:

• In Texas, a 56-year-old CU exec is charged with 14 counts of embezzlement for allegedly stealing $1.1-million over four years.

• In Maryland, a woman once honored as an outstanding CU employee is alleged to have stolen more than $500,000 over a six-year period-an amount expected to grow even larger.

• In Washington, a CU accountant was arrested after allegedly stealing $200,000.

The recession, it seems, has created at least one growth industry — People Helping Themselves. Those reports of embezzlements and employee theft are just three of most recent in what seem like almost weekly arrests.

Brad Mundine, senior manager of risk management with CUNA Mutual, which insures most credit unions in the event of such losses, said that such thievery is the "most significant portion" of the claims the company pays. He noted that from 2004 to 2008, employee dishonesty claims made up 10% of claim cases, but was responsible for 36% of the dollars paid out.

Let Us Count The Ways

In general, losses from an employee are seen most often at smaller CUs, those below $100 million in assets. That is likely not a surprise, given the multiple roles many people play in smaller operations. "Not that it isn't a risk at larger credit unions, but larger credit unions tend to have more oversight and controls," Mundine explained.

How are employees stealing money? Let us — and them — count the ways. In the Texas case, the employee wrote small checks from $5,000 to $9,000 to herself from the CU's own account. In Maryland, the 23-year CU employee allegedly took money from friends' and relatives' accounts.

But neither of those is MO Numero Uno. The leader remains bogus loans, whether to fictitious members or made as unauthorized loans to real members. Other common embezzlement strategies, Mundine said: overpayment of salary, fictitious expenses, personal expenses charged to CU credit cards, double-payment of authorized expenses, embezzlements using the general ledger, and one that remains common and which can at times go on for extended periods-vault and teller cash shortages.

How most of these embezzlements eventually come to light is not usually pulled from the riveting plot of a CSI episode, unless that's Cash Shortage Inspection. Often, said Mundine, embezzlements are discovered following a tip from someone who has grown "suspicious." Such tips usually go to a manager or, in cases where the manager is suspected, to a regulator or board member. CUNA Mutual gets involved when it appears an employee dishonesty claim is likely.

"There are a number of reasons embezzlements" are able to occur, according to Mundine. "In most cases it's just a general lack of oversight and internal controls at the management, board and supervisory committee levels."

In nearly every case where management and/or the board are confronted with an embezzlement, they are "caught off guard," said Mundine. "They are shocked. They say 'We never thought it could happen to us.' They will say, 'This was a long-term employee,' or 'We thought we could trust our employees.' Many are under the impression their controls cannot be circumvented, but you must constantly monitor. Many smaller credit unions in smaller communities think they are immune."

Mundine has, during his career, met with a number of employees guilty of embezzling from their credit union. Certainly some are mortified to have been discovered, and some must be relieved in a way, but not all.

"One of the things that is very intriguing and difficult to understand is what was this person thinking," observed Mundine. "To paint a picture psychologically, the recipe for embezzlement requires three things: One, there has to be a need; an addiction, or they're in debt, or there's been a lifestyle change. Two, there has to be opportunity; poor internal controls, a lack of an active supervisory committee and ineffective audits and background checks. And three, there has to be rationalization. They feel they are not stealing, that they will pay it back, that they deserve a raise or are overworked."

Covering one's tracks isn't easy, said Mundine, but it can be made much easier in situations where one person is controlling a particular function.

Some Solid Advice

Mundine said CUNA Mutual has seen enough of such losses that it has developed some "solid advice" for CUs that may not prevent losses, but which can reduce exposure. That advice includes: Ensuring dual controls; controlling access to data; maintaining an active supervisory committee that understands risk; having surprise audits and cash counts, with the latter including coins, money orders and other negotiables; having controls on expense accounts, and mandating time off for employees every year, with a minimum of one consecutive week off.

Guarding against such theft must start at the top of the CU, reminded Mundine, and every credit union should have a fraud policy (CUNA Mutual has sample policies available) in place. Such a policy must be stressed to employees, he said, and must make clear that theft is about more than just taking money.

Frank J. Diekmann can be reached at fdiekmann@cujournal.com.