ALEXANDRIA, Va.-NCUA examiners failed to heed the warnings of independent audits flagging potential fraud at Certified FCU, contributing to the failure of the one-time $52-million Commerce, Calif., credit union at a cost of an estimated $9 million to the National CU Share Insurance Fund, according to a new report issued by NCUA's Office of the Inspector General.
"Following the accounting review, [West Coast Region] officials required Certified management to contract with an independent public accounting firm to conduct a forensic review to investigate the possibility of fraud based on the results of the accounting review," said the new report. "The results of the forensic review determined management had fabricated some of the financial reports provided to examiners. Specifically, the review noted that management input fictitious entries into an information technology test environment, which ran a second general ledger accounting system for the credit union."
The 2010 forensic review also noted the CEO had unauthorized waivers of fees related to nonsufficient funds and late payments on his accounts, modifications to his and one of his family member's loans, check kiting as well as potential kickbacks from vendors and from loan-origination fees and commissions paid to one of the CU's loan officers.
The review reported the CEO had a consulting company, which contracted for a 20% share of commissions paid to the loan officer's mortgage-servicing business. The loan officer generated low-quality loans with high origination fees, which were then approved by the CEO. The loan-origination fees were paid by Certified in the form of commissions to the loan officer's company, which then paid the CEO's consulting business its 20% share.
"We determined Certified's CEO engaged in unethical behavior that breached his fiduciary responsibilities," concluded the NCUA Inspector. "An important contributor to the demise of Certified was the alleged fraud and improprieties committed on the part of the CEO."
Anonymous Calls Made
In 2005, after receiving the anonymous phone calls, NCUA conducted its own fraud investigation that resulted in a finding of suspicious activity related to potential money laundering by the CEO.
The investigation found there was no evidence to substantiate the fraud allegations committed by the CEO but raised serious concerns about the CEO's conduct, including a statement that the CEO "enriched himself personally at the credit union's expense."
"We determined a contributing factor in the failure of Certified was NCUA examiners' and Region V management's failure to take decisive action to address serious safety and soundness concerns surrounding the CEO's business practices and unethical behavior," wrote the IG. "Specifically, examiners could have prevented or reduced the loss to the NCUSIF had they adequately considered external audit findings and reviews when developing their examination procedures, and applied swift and appropriate administrative remedies to resolve the safety and soundness concerns raised in the NCUA's June 2005 Fraud Investigation memorandum. As a result of the examiners and Region V management's failure to take decisive action, it allowed the CEO to breach his fiduciary duty and remain in his position until he resigned in May 2010."
