BANK FRAUD AND INSIDER ABUSE
BANK FRAUD AND INSIDER ABUSESection 9.1INTRODUCTION4. Real Estate LendingThe early detection of apparent fraud and insider abuse isan essential element in limiting the risk to the FDIC'sdeposit insurance funds and uninsured depositors.Although it is not possible to detect all instances ofapparent fraud and insider abuse, potential problems canoften be uncovered when certain warning signs are evident.It is essential for examiners to be alert for irregular orunusual activity and to fully investigate the circumstancessurrounding the activity. Examiners should not restrictconcern to internal crimes, but should also be alert to anyattempts by outsiders to defraud financial institutions.5. Secured Lending6. Third Party Obligations7. Lending to Buy Tax Shelter Investments8. Linked Financing/Brokered Deposits9. Credit Cards and ATM Transactions10. Advance Fee SchemesThis section is organized by separate subject areas witheach providing a summary of potential problems, a listingof warning signs of possible fraud and insider abuse, andsuggested action for investigation. The lists are notall-inclusive but rather cover only those areas in whichfraud and insider abuse occur most frequently. Thissection is designed to help alert examiners to possiblefraudulent activity and insider abuse. It is intended toserve as a reference source during examinations and shouldbe used as a supplement to standard examinationprocedures on an "as-needed" basis.11. Offshore Transactions12. Wire Transfers13. Money Laundering14. Securities Trading Activities15. MiscellaneousAny important situations should be commented on in theReport of Examination. Appropriate comments should beincluded in the Examination Conclusions and Commentsschedule and in any other report pages as applicable.CORPORATE CULTURE/ETHICSPotential ProblemsComplete dominance of an institution's policies andadministration by one or a few directors may lead to ineptmanagement at lower levels. Absence of a written code ofconduct may make it difficult to discipline directors,officers or employees who may be involved in questionableactivities and may cause problems for directors, officers,employees and agents under the Bank Bribery Statute (18U.S.C. 215). The code of conduct should identifyallowable nonbank activities and acceptable gifts orgratuities received in the normal course of business.Note the restrictions on disclosing irregular transactions inexamination reports. This is more fully explained in theReport of Examination Instructions.Any apparent criminal activity should be investigatedthoroughly and reported on the Interagency CriminalReferral Form. The procedures for reporting apparentcriminal violations are included in the Criminal ViolationsSection, Part IV.Warning SignsSUBJECT AREASIncluded under each of the following subject areas is asummary of potential problems, a listing of warning signsof potential fraud and insider abuse and suggested actionfor investigation.1.Absence of a code of ethics.2.Absence of a clear policy restricting or requiringdisclosure of conflicts of interest.3.Absence of a policy restricting gifts and gratuities.4.Lack of oversight by the institution's board ofdirectors, particularly outside directors.1. Corporate Culture/Ethics2. Insider Transactions3. Loan ParticipationsDSC Risk Management Manual of Examination PoliciesFederal Deposit Insurance Corporation9.1-1Bank Fraud and Insider Abuse (4-98)
BANK FRAUD AND INSIDER ABUSE5.Absence of planning,organizational policies.1.6.Absence of clearly defined authorities and lack ofdefinition of the responsibilities that accompany theauthorities.Insider lending personal funds to customers orborrowing from customers.2.Insider involvement in silent trusts or partnershipsand/or shell corporations.Lack of independence of management in acting onrecommended corrections.3.Insider appears to receive special favors frominstitution customers or shows unusual favoritismtoward certain institution customers.4.Insider purchases assets from the institution,directly or indirectly, and there is no evidence ofindependent appraisal of the ements with insiders of other institutions andhis/her institution has correspondent relationshipswith those institutions.6.Insider is involved in a business that arranges itsfinancing through the institution.7.Insider "perks" include use of expensiveinstitution-owned automobiles, boats, airplanes,housing, etc., where the institution's earnings do notappear to support such extravagance.8.Insider heavily indebted and debt service appears torequire most, if not all, of the insider's salary.9.Insider financial statements show large or unusualfluctuations. Net worth cannot be reconciled fromdisclosed sources of income.10.Insider is financing large purchases (home, auto,etc.) through private, nonbanking sources that mayhave a business relationship with the institution.11.Insider financial statement reflects heavyconcentration of high-risk investments andspeculative ventures.12.Insider sells personal assets to third party and theinstitution provides financing without benefit of anindependent appraisal.13.Insiders or their interests frequently appeartransaction suspense item listings orcomputer-generated past due loan lists, but doappear on the "updated" version presented toboard of directors or to examiners.7.training,hiring8.CEO controls internal and outside auditors.9.Lax control and review of expense accounts.andSection 9.1Warning SignsSuggested ActionReview the institution's code of conduct. Determine ifthere is a policy covering conflicts of interest and ifprohibited practices are clearly stated along with theconsequences for failure to refrain from these practices.Determine whether all insider interests are accuratelyreported to the institution's board of directors. Closelyreview the minutes of the board of directors' meetings andnote the reporting of insider interests and the dominance ofany director(s) in discussion of policy matters andadministration.Also note the discussion of insidertransactions and see if there are any directors whofrequently or consistently vote against insider transactionsin general or against those of one or more insiders inparticular. Attempt to determine the reason for the dissent.If directors, officers and employees are required to reportgifts and gratuities from present or potential customers,review the report to see if the gifts or gratuities conform tothe institution's guidelines.INSIDER TRANSACTIONSPotential ProblemsInsider fraud has accounted for over one-half of all bankfraud and embezzlement cases closed by the FBI during thepast several years. Insiders are in a position of trust andcan abuse that trust for their own personal benefit. Insiderabuses include failure to disclose their interests that borrowfrom the institution or otherwise have business dealingswith the institution; diverting assets and income for theirown use; misuse of position by approving questionabletransactions for relatives, friends and/or businessassociates; abuse of expense accounts; acceptance of bribesand gratuities; and other questionable dealings related totheir positions at the institution. Insider abuse underminesconfidence in institutions and often leads to failure.Bank Fraud & Insider Abuse (4-98)9.1-2ononnottheDSC Risk Management Manual of Examination PoliciesFederal Deposit Insurance Corporation
BANK FRAUD AND INSIDER ABUSE14.Insider "unofficially" guarantees loans and/or loanparticipations.15.Insider is responsible for clearing up auditexceptions on loan balance confirmations.16.Insider "forgets" to process credit entry for officialbank checks causing the account to beout-of-balance because checks are sometimes paid(debited) before the credit is posted, sometimesseveral days later.17.18.19.Section 9.1not commensurate with the level of servicesprovided.Insider conducts a cash transaction over 10,000but "forgets" to have the institution file a CurrencyTransaction Report or asks an employee to"structure" the transaction to avoid filing a CurrencyTransaction Report with the Internal RevenueService.Insider's stock in the institution is pledged to secureloans obtained from sources other than financialinstitutions. If true, what is the purpose of the loanand are payments current?Insider conducts personal business from theinstitution using equipment, supplies, employees,etc., and/or spends most of their time out of theinstitution on business unrelated to the institution.28.Insider agrees to buy fixed assets from theinstitution with the understanding that the institutionwill repurchase the fixed assets at some future date.29.Insider receives incentive pay or "bonuses" basedon volume of loans generated.30.Insider buys a home from a builder whosedevelopment project is financed by the institution.31.Insider is involved in "churning" of the institution'ssecurities portfolio.32.Insider arranges sale of EDP equipment at bookvalue in connection with the conversion to a newdata processing servicer. Also check "side" deals.33.Insider authorizes ORE related expenses such aslandscaping, remodeling, etc., when such expensesdo not appear justified.(May be makingimprovements or repairs to personal residence.)34.Insider makes frequent trips at the institution'sexpense to areas where the institution has nobusiness relationships.20.Insider has substance abuse problems or is known toassociate with people who have these problems.35.Insider will not allow employees to talk toexaminers.21.Insider is known to associate with "high rollers".36.Insider keeps an unusual number of customer filesin his/her office.22.Insider suggests that institution change servicers orvendors even though there appears to be no problemwith the current servicers or vendors.37.Insider is making payments on other borrowers'loans.38.Insider's loan is being paid by someone else.39.Insider receives commissions on credit lifeinsurance premiums and those commissions are notproperly adjusted in cases where the insurancecompany gives rebates for the borrower'sprepayment of the loan or gives refunds toborrowers for premium overcharges.40.Insider sells some of his/her personal stock of theinstitution to borrowers (as a condition forapproving loan) and buys more stock from theinstitution at about the same time that the institutionis under pressure to increase capital.41.Insider purchases investment securities for hispersonal portfolio through the institution but23.Insider abruptly suggests changes in outsideauditors or legal counsel.24.Insider loans increase dramatically at about thesame time as the institution is recapitalized.25.Insider's major assets are parcels of real estate thatappear to increase in value at a rate that is notconsistent with market conditions.26.Insider sells his stock to an Employee Stock OptionPlan (ESOP), sometimes arranging for the ESOP toobtain a loan to purchase the stock.27.Insider's interests have a direct business relationshipwith the institution and compensation for services isDSC Risk Management Manual of Examination PoliciesFederal Deposit Insurance Corporation9.1-3Bank Fraud and Insider Abuse (4-98)
BANK FRAUD AND INSIDER ABUSE"forgets" to reimburse the institution until a fewdays or weeks later, and then only if the investmenthas increased in value. In spite of the increase invalue, the insider only pays the original purchaseprice to the institution.42.Insider's accounts at the institution are frequentlyoverdrawn. Deposits to cover overdrafts come fromloans or some undisclosed source.43.Insider maintains total control over the institutionand does not allow other officers and employees tomake independent decisions.44.Insider has past due loans at other financialinstitutions.Section 9.1Loan participations can lead to substantial losses if notdocumented properly and if not subjected to the samecredit standards and reviews as direct loans. Participationspurchased as an accommodation to affiliated institutionsoften do not receive the same scrutiny as those purchasedfrom non-affiliated institutions.Informal repurchaseagreements between participating institutions may be usedto circumvent legal lending limitations and could subjectinstitutions to substantial undisclosed contingent liabilities.Participations may also be used to disguise delinquenciesand avoid adverse classifications.Warning Signs1.Excessive participation of loans between closelyrelated institutions, correspondent institutions andbranches or departments of the lending institution.2.Absence of any formal participation agreement.3.Poor or incomplete loan documentation.4.Investing in out-of-territory participations.5.Reliance on third party guaranties.6.Large paydown or payoff of previously classifiedloans.7.Some indication that there may be informalrepurchase agreements on some participations.8.Lack of independent credit analysis.9.Volume of loan participations is high in relation tothe size of the institution's own loan portfolio.10.Evidence of lapping of loan participations. Forexample, the sale of a loan participation equal orgreater than, and at or about the same time as, aparticipation that has matured or is about to mature.Review all insider transactions to see if they comply withpolicy and applicable state and federal regulations. Followup on any exceptions. Any nonconforming transactionsshould be discussed with the institution's board ofdirectors. Apparent fraudulent activities should be referredto the proper authorities.11.Disputes between participating institutions overdocumentation, payments, or any other aspect of theloan participation transaction.12.Formal participation agreements are missing;therefore, responsibilities and rights of allparticipating institutions may be unclear.LOAN PARTICIPATIONS13.Participations between affiliated institutions may be"placed" without the purchasing institution havingthe benefit of reviewing normal credit information,45.Insider maintains signed, blank notes in personal orcustomer loan files.46.Insider is rumored to have financial problems due todivorce, business failure, gambling losses, etc.47.Insider maintains several personal accounts outsideof his/her own institution.48.Insider frequently takes loan papers out of theinstitution for customer signatures; personallyhandles the disbursement of the loan proceeds;routinely cashes checks for customer loan proceeds;and insists on personally handling certain past dueaccounts as a "special favor" to certain customers.49.50.Insider insists that different audit firms auditdifferent divisions or departments. (Hopes therewill be no comparison of findings between firms.)Insider insists that different departments be auditedat different times.(Makes it easier to hidefraudulent inter-departmental transactions.)Suggested ActionPotential ProblemsBank Fraud & Insider Abuse (4-98)9.1-4DSC Risk Management Manual of Examination PoliciesFederal Deposit Insurance Corporation
BANK FRAUD AND INSIDER ABUSEparticularly where there is dominant ownership anda "rubber stamp" board of directors.Section 9.1REAL ESTATE LENDINGPotential Problems14.Payments that are not distributed to each participantaccording to the participation agreement mayindicate preferential treatment; or where theparticipants are affiliated, it may indicate an attemptto disguise the delinquent status of the loans in theweaker institutions.15.Informal guaranties by insiders may be one methodof disguising insider transactions.16.There is some indication that the credit informationcontained in the selling institution's files is not thesame as the credit information in the purchasinginstitution's files.17.Be aware of reciprocal arrangements in thesale/purchase of participations.For example,Institution A sells a 100% participation in a loan toan insider of the selling institution to Institution Bwhich, in turn sells a 100% participation in a loan toone of their insiders to Institution A.18.19.Real estate lending abuses have been given a lot ofpublicity due to the problems encountered by financialinstitutions that have suffered substantial losses fromproblem real estate loans. These problems have not beenconfined to any particular area of the country. Many of theproblems revolve around inflated appraisals, land flips(interparty transactions), fraudulent sales contracts, forgedtitle documents, misapplication of loan proceeds, financingof nonexistent properties, loans in the name of trustees,holding companies and offshore companies to disguise thetrue identity of the actual borrowers and fraudulent loanapplications from purchasers, including false incomestatements, false employment verifications, false creditreports and false financial statements. In many cases,important documentation is missing or is intentionallydeficient in an attempt to conceal material facts.Warning SignsThere are a number of outstanding items incorrespondent accounts just prior to or during anexamination or audit which relate to participationspurchased or sold.1.An unusually large number of loans in the samedevelopment are exactly equal to the institution'smaximum loan-to-value (LTV) ratio for real estatemortgages.2.The institution has an unusually high percentage of"No Doc" loans. (A "No Doc" loan is one in whichextensive documentation of income, credit history,deposits, etc., is not required because of the size ofthe downpayment, usually 25% or more.Theoretically, the value of the collateral will protectthe lender.)3.Borrower has never owned a home before and doesnot appear to have the financial ability to supportthe size of the downpayment made.4.Property securing loan has changed ownershipfrequently in a short period of time. Related entitiesmay be involved.5.Insured value of improvements is considerably lessthan appraised value.6.Appraiser is a heavy borrower at the institution.7.Appraisal fee is based on a percentage of appraisedvalue.There is some indication that payments onparticipations purchased are being made by theselling institution without reimbursement from theborrower.Suggested ActionWhere possible, determine the current status ofparticipations at each participating institution. Makespecial note of any disputes between participatinginstitutions and follow up. Review any debits or creditsrelated to participations posted to the correspondentinstitution accounts just prior to or during the examination.Follow up on any exceptions. Attempt to determine if theparticipation has been adversely classified by examiners atany participating institution. Look for any indication ofany informal repurchase agreements.DSC Risk Management Manual of Examination PoliciesFederal Deposit Insurance Corporation9.1-5Bank Fraud and Insider Abuse (4-98)
BANK FRAUD AND INSIDER ABUSE8.Borrower furnishes his/her own appraisal which is aphotocopy of an appraisal signed by a reputableappraiser.9.Use of "comparables" which are not comparable.10.Appraisal is based on an estimated future value.11.All comparables are new houses in the samedevelopment that were built by the same builder andappraised by the same appraiser.12.An unusual number of "purchasers" are from out ofthe area or out of state.13.Credit history, employment, etc.,independently verified by the lender.14.Large number of applicants have income fromsources that cannot be verified, such asself-employment.15.are24.There seems to be an unusual number offoreclosures on 90% to 95% loans with PrivateMortgage Insurance on homes in the samedevelopment built by the same builder. (Sometimesit is cheaper for the builder to arrange for a strawbuyer to get the 95% loan and default than it is tomarket the home if the market is sluggish.)25.Applications received through the same broker havenumerous similarities.26.Sales contracts have numerous crossed out andchanged figures for sales price and downpayment.27.Appraiser for the project owns property in theproject.28.Lending officer buys a home in a project financedby the institution.29.Assessed valu
of warning signs of possible fraud and insider abuse, and suggested action for investigation. The lists are not all-inclusive but rather cover only those areas in which fraud and insider abuse occur most frequently. This section is designed to help alert examiners to possible fraudulent activity and insider abuse. It is intended to
Types of economic crime/fraud experienced Customer fraud was introduced as a category for the first time in our 2018 survey. It refers to fraud committed by the end-user and comprises economic crimes such as mortgage fraud, credit card fraud, claims fraud, cheque fraud, ID fraud and similar fraud types. Source: PwC analysis 2
Types of economic crime/fraud experienced Customer fraud was introduced as a category for the first time in our 2018 survey. It refers to fraud committed by the end-user and comprises economic crimes such as mortgage fraud, credit card fraud, claims fraud, cheque fraud, ID fraud and similar fraud types. Source: PwC analysis 2
Northern Bank & Trust Co. Patriot Community Bank People's United Bank Pilgrim Bank Radius Bank RTN Federal Credit Union Santander StonehamBank TD Bank The Cooperative Bank The Savings Bank The Village Bank Walpole Cooperative Bank Wellesley Bank Winchester Co-operative Bank Abington Bank Bank of Canton Blue Hills Bank Boston Private Bank & Trust
Good Practices Guide -Fraud Prevention Prevent fraud through effective internal controls Prevent staff (insider) fraud by proper vetting and . (COSO) Framework, Principal 8 - Fraud Risk Assessment, Fowler & Company, LTD. . FRAUD RISK MANAGEMENT ACTIVITIES OCS, April /May 2019 53. OCS, April/May 2019 54 .
Card Fraud 11 Unauthorised debit, credit and other payment card fraud 12 Remote purchase (Card-not-present) fraud 15 Counterfeit Card Fraud 17 Lost and Stolen Card Fraud 18 Card ID theft 20 Card not-received fraud 22 Internet/e-commerce card fraud los
the CERT Division's National Insider Threat Center (NITC) at Carnegie Mellon University's Software Engineering Institute. Serves as the Chair of the Open Source Insider Threat (OSIT) information sharing group for industry insider threat practitioners. Develops detection and mitigation strategies for insider threat programs.
Fraud by any other name is still fraud “Relatively few occupational fraud and abuse offenses are discovered through routine audits. Most Fraud is uncovered as a result of tips and complaints from other employees.” Association of Fraud
Academic writing is a formal style of writing and is generally written in a more objective way, focussing on facts and not unduly influenced by personal opinions. It is used to meet the assessment requirements for a qualification; the publ ication requirements for academic literature such as books and journals; and documents prepared for conference presentations. Academic writing is structured .
