SAN DIEGO — Volunteer directors have many duties at their credit unions, but according to NCUA Vice Chairman Rick Metsger one of the most important is being a watchdog for the CU.
Metsger told a gathering at the National Directors Roundtable Conference here internal fraud is an issue volunteers can sniff out.
"You are the first line of defense," he said. "Your job is to know what is going on, to be engaged and to ask questions. That is how you lead your credit union, that is how you protect it, protect your members, protect the system and protect the Share Insurance Fund."
According to Metsger, who served on the board of directors of Teachers CU in Portland, Ore., from 1993 to 2001, Share Insurance Fund losses have been declining overall, but internal fraud is a continuing problem, particularly at smaller credit unions.
"Internal fraud is a major contributor in more than half of the losses to the Share Insurance Fund," he reported, "and it poses a significant reputation risk for credit unions. However, it can be difficult to find, often because credit union boards and supervisory committees are not as strong and active as they should be. In one recent case in Hawaii, three credit union employees, none of them aware of what the others were doing, bilked a credit union out of $500,000. Now, that is a lack of internal controls."
Metsger said in 2009 and 2013, estimated losses actually exceeded the assets of the credit unions driven into liquidation by internal fraud. He added when fraud is detected, it is nearly always the result of work by an examiner, auditor or outside party.
In the last 12 years, Metsger said not one case of internal fraud leading to the failure of a credit union has ever been detected by a single board member or supervisory committee member. With more supervisory focus on larger credit unions, he emphasized it is more important for directors of small institutions, which are more likely to be targets of fraud, to be vigilant.
Red Flags
Metsger pointed to several "red flags" that he said should alert directors to possible internal fraud, including:
- Missing records and signature cards, which has occurred in every case of fraud uncovered since 2002,
- Recordkeeping problems and items off the balance sheet,
- A manager has outside business interests,
- Management delays in providing information,
- Backdated transactions, and
- Large deposits flowing through an account.
"Credit unions offer great value to their members and are important to offering an affordable, non-profit alternative in financial services," Metsger said. "It is also important that we keep the public's faith in their safety and soundness."
Metsger touched on a number of other subjects, including NCUA's efforts to provide regulatory relief, the agency's proposed risk-based capital rule and credit unions' advantages for consumers.
