BOSTON-NCUA said it is amending its exam process to better protect against fraud-particularly at small credit unions.
"A small credit union going out of business is a relatively small loss, unless fraud is involved-you can have a $2 million credit union that actually causes the agency a $5 million loss," said Bill Myers, director of NCUA's Office of Small CU Initiatives. Myers addressed a group here during NAFCU's Annual Conference.
Myers, the former CEO of Alternatives FCU in Ithaca, N.Y., noted that small CUs lead the industry in fraud losses, in part because smaller organizations have fewer backstops in place to prevent fraud. This new step in the exam process-which is being reviewed internally this year but won't be put in place until 2015-seeks to identify red flags that are indicators of fraud.
Part of the reasoning behind that, he said, is that in most cases fraud is discovered by accident. He recalled an instance when examiners were on site and saw some ledger paper in a trash can. That paper, as it turned out, was "essentially a second set of books." Myers emphasized that the changes to the exam process won't be implemented at individual CUs unless examiners see specific red flags.
Myers offered as an example transaction level testing, which he said is a time-consuming activity and takes too long for most examinations. "The red flag way to do it would be to review corporate reconcilements and then you don't have to do transaction level testing," he said. "If corporate reconcilements aren't in good shape, that's a red flag for going more deeply."
Myers added other tests-some more formal than others-such as looking into remittance activity. "If they see a pile of remittance activity but don't see BSA training at the board level, that's a red flag." Another red flag: "Does the manager of a $3 million credit union drive up in a new Mercedes?"
NCUA, he said, is "building a model of how they can identify potential risk" rather than routinely scouring every detail for possible fraud.
"We're trying to pay attention to what your real risk are, and where we're standing in the way of you doing your job," he said. "If you're doing things in an unusual way, as long as that doesn't create risk for us, go ahead and do it. We're trying to train examiners not to focus so closely on peer records." Instead, he said, the focus is on identifying risk to the Share Insurance Fund while also leaving latitude for the variety of business models that crop up at small CUs.
"Simply put, the agency understands that small credit unions are important both for itself and for the field," said Myers. "There's a certain value in having a diversified field of credit unions."
He noted the "peculiar products" that small, nimble CUs can design for members can be innovations, and "when they're successful, [can] spread out to the rest of the movement."