Fraud Killed Almost All Failed CUs in Q2

This morning's NCUA board meeting was a bit of a snooze, but there was one revelation that continues to be a thorn in the side of the movement.

When presenting the quarterly share insurance fund report, CFO Rendell Jones said of the 11 credit union failures during the second quarter, fraud played a role in 10 cases. In total, credit union failures have cost the fund $9.1 million; of that amount, 77% was the result of fraud.

The difference between the number of credit unions affected by fraud and the percentage of cost to the fund illustrates what everyone already knows: Fraud is more prevalent in small credit unions. Just yesterday, CU Times revealed how a woman stole $60,000 annually from a small credit union over 37 years, for a grand total of $2.4 million. How did she do it? The bookkeeper simply refused to let anyone else access the credit union's financial database system - including the CEO! Good grief, talk about a lack of checks and balances. How in the world did the NCUA miss this for 37 years? This fraud was only revealed when the woman confessed to the credit union's CEO.

Because the impact to the fund is relatively small, the NCUA hasn't devoted a significant amount of resources to it. To its credit, the agency has beefed up examination techniques to detect fraud, and in the past has argued the increase in failures due to fraud is the result of those techniques. That is probably true in part, but as illustrated by the case above, there are plenty of fraud schemes that continue to go undetected by examiners.

Seven million dollars doesn't represent a huge loss, but it's not chump change, either. However, the loss to the fund doesn't quantify the reputation loss to the community and credit union brand. Putting a dollar figure on that loss is very difficult, but it shouldn't be swept under the rug by the industry regulator.

What should the NCUA do? Well, according to this morning's mid-year budget review, it has some money to spend. Due to turnover, the agency has 33 open and unused FTE positions to the tune of $1.9 million.

However, during the meeting, Jones cautioned that the NCUA could not reduce the budget due to "several open obligations from previous years" that require the agency to retain cash.

What open obligations? In the past, Jones explained, the agency estimated its cash needs based on estimated expenses. Now, the NCUA now bases cash needs on current expenditures, and has a policy of holding enough cash to fund one month's worth of expenses. While the NCUA is running under budget, the amount of spare cash it currently holds would pay for about one month of operations.

Shouldn't the budget have already allocated enough cash for the NCUA's cash reserve policy? I'm not sure I buy that explanation.

Jones said the NCUA will reassess the budget at the end of the year and could apply the budget reserve toward operating fee and reduce collection needs in 2007. I'm sure credit unions would appreciate that, but I hope the agency also considers using some of that money, if still available, to beef up its fraud prevention efforts, particularly in small credit unions.

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