The National Credit Union Administration decision to take the unusual step of filing administrative charges against the ousted CEO of the conserved Melrose CU is a wakeup call for credit unions to take a hard look at their expense and reimbursement policies.

Alan S. Kaufman, who was fired two years ago as chief executive officer of Melrose Credit Union, shortly before the Briarwood, N.Y.-based institutions was put into conservatorship. The agency is seeking a prohibition order against the former CEO for, among other things, breaching his fiduciary duties and placing his own interests above that of the credit union. NCUA requests that he pay restitution of at least $3.5 million. The NCUA board also assessed Kaufman with a civil monetary penalty of $1 million.

Pamela Perdue, executive vice president and and chief regulatory officer at Continuity, told Credit Union Journal by email that the action by the NCUA “reinforces what we have been telling clients for quite some time: NCUA is keeping its promises to crack down on abuses by insiders in a more vigorous fashion.”

In this regard, Perdue added, NCUA is behaving “more like their banking regulator counterparts” in holding individual officers and directors accountable for misdeeds.

“This raises the urgency not only for closer oversight of expense and disbursement management, but also underscores the need for strong controls around other areas,” Perdue elaborated. “Credit union boards and executives must ensure their compliance management systems can adequately identify and mitigate potential risks. Periodic reviews of policies and procedures, to confirm they're being followed by all levels of staff, are a sound practice. Likewise, strong operational and detective controls should be implemented to detect unusual or unexpected outcomes or activity patterns.”

Perdue, a former senior examiner at the Federal Reserve Bank of Kansas City, added that there should also exist escalation protocols -- written as well as enforced -- to “govern what comes next when these detective measures reveal circumstances that warrant further investigation.”

Credit unions, she added, can no longer “assume the good intentions of their insiders; they must protect their organization and its members from these kinds of internal threats and bad actors with equal vigor they apply to rooting out external fraudsters.”

Moreover, the board must take an active role in oversight or they could also “face possible consequences for the errant behaviors” of credit union executives, Perdue asserted.

Indeed, on his own personal blog, Henry Meier, general counsel at the New York Credit Union Association, wrote in response to the allegations against Kaufman that “if I were at a credit union this morning, one of my top priorities would be to review the credit union’s expense and reimbursement policy, discuss it with the board at the next meeting, and update it if need be. The issue is now on the examiner radar.”

Meier added that having a policy is not enough. “I would also review a sample of credit union reimbursements and make sure that they are consistent with the policy and that they have been approved by the board when necessary,” he concluded.

Kaufman stands accused of soliciting and accepting free luxury trips from the credit union’s vendors; improperly entering into a naming rights agreement that provided no value to the credit union; of living rent-free in a home owned by a vendor; and of illegally using credit union funds to benefit friends and family members.

As reported, in July 2016, Melrose CU fired Kaufman as CEO and later removed him as a board member and secretary for the credit union.

In February 2017, The New York State Department of Financial Services took possession of Melrose CU and appointed NCUA as conservator.

Melrose CU, which once specialized in providing taxi cab medallion business loans, had struggled financially following the massive disruption of the medallion taxi industry by Uber and other ride-sharing and ride-hailing apps.

Keith Leggett, a credit union blogger and former senior economist with the American Bankers Association, told Credit Union Journal that while the action taken by NCUA against Kaufman is “rare,” it has been used before.

Indeed, in December 2012, NCUA sued David Addison, the former CEO of Texans Credit Union of Richardson, Texas, for breach of fiduciary duty and for “grossly negligent” conduct. The credit union went into conservatorship in April 2011.

Addison, who was hired as the credit union’s CEO in 2003, pursued a “high-risk business and investment strategy,” NCUA said, that included acquiring a financial services firm called OBS Holdings Inc. That purchase cost the credit union losses of about $16 million, NCUA alleged.

The now-$1.6-billion-asset Texans Credit Union was released from conservatorship in July 2016.

“NCUA ultimately imposed a lifetime ban on Addison,” Leggett said. “However, there was no information about monetary penalties.” In that action, NCUA issued a cease and desist order to Addison, to which he consented without admitting fault.

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