Justice Dept. Investigating Fraud At CUs

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ALEXANDRIA, Va.-NCUA is working with the U.S. Justice Department on fraud investigations surrounding as many as a dozen credit union failures since the start of 2009, as the costs of failures continues to take a growing toll on the National CU Share Insurance Fund.

A new report issued by the NCUA's Office of the Inspector General identifies at least nine failures since October 2009 that may be attributed to management fraud.

'An Awful Lot Of Fraud'

"There's been an awful lot of fraud," said Inspector General William DeSarno, who suggested that the financial crisis and declining finances at many credit unions have unearthed some of the malfeasance.

"It seems when times are good these kinds of things get covered over, but when times get bad sometimes they get uncovered," he said. "When we started doing these material loss reviews we didn't see so much fraud show up out there. Now it seems to be more prevalent."

The new report identifies potential fraud at several small CU failures including: Norbel CU, Lawrence County School Employees FCU; Fairfield County Federal Employees FCU, Orange County Employees' CU; Alabama Bratcher FCU; Allied Tube Employees FCU; Certified FCU; Second Baptist Church CU and Mutual Diversified Employees FCU.

The new report does not include major fraud investigation being conducted on recent failures of St. Paul Croatian FCU, a Cleveland CU estimated to cost $170 million in losses; Center Valley FCU, projected to cost $8 million; New London Security FCU $12 million or Huron River Area FCU, some $45 million in NCUSIF losses.

In investigating fraud NCUA works with attorneys at the Justice Department to determine whether to launch a civil lawsuit to recover costs, or to file criminal charges. More than 75 credit unions have failed since the start of the financial crisis but only a few have resulted in criminal charges. In lesser cases, NCUA may choose to just bring civil administrative charges resulting in an individual being barred from CUs and banks

The new report also shows NCUA projections for some of the failures, even absent of fraud. First American CU in Wisconsin is projected to cost $10 million; Certified FCU, $9.2 million; California's Kern Central CU, $5.6 million; Norbel CU, $3.5 million; First Service CU, $3.7 million; tiny Kappa Alpha Psi FCU, $134,000.

Under previous rules, NCUA was required to conduct a material loss review on every credit union failure costing the NCUSIF more than $10 million. The first loss review was conducted on Norlarco CU, the Colorado credit union that was sunk two years ago by its involvement in a massive Florida real estate speculation. The recently passed Dodd-Frank Financial Reform Act will increase the threshold for a material loss review to $25 million.

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