ALEXANDRIA, Va. – NCUA examiners missed numerous signs that a tiny New York credit union that moved to Florida, then Arizona, was being used almost solely for the purpose of processing billions of dollars in Internet poker bets, which was exposed when the processor was caught up in a massive sweep by federal officials that shut down the world’s biggest online gambling sites, according to a new report issued this morning by NCUA’s Office of Inspector General.
The losses related to last year’s failure of Vensure FCU so far are minimal, an estimated $39,000, but could escalate to as much as $2 million if the Department of Justice decides to go after the funds tied to the processor, Trinity Global Commerce Corp., says the new report.
Examiners explained they did not identify the nature and scope of Vensure’s fee activity because their primary focus was getting the credit union, then under a supervisory agreement, “back on track” through the identification of issues such as appropriate record-keeping, written policies, a business plan, and appropriate operating procedures. As a result, “We believe (NCUA) examiners not only missed uncovering what turned out to be an elaborate money laundering scheme tied to illegal Internet gambling involving several Vensure members, but also could have prevented or mitigated the current and potential loss to the NCUSIF,” concludes the IG.
A subsequent legal challenge to the NCUA takeover of Vensure showed that $2 million on deposit at the credit union belonged to Trinity Global, while the credit union had just one loan outstanding. The tiny credit union was processing tens of millions in bets daily, according to court documents. Virtually all of the credit union’s income was earned from processing poker bets.
The Justice Department said Vensure and the other two dozen financial institutions that processed bets for the online sites were chosen because most of them were floundering, badly in need of capital. Court records show the poker operations, which were supposed to be banned in the U.S. under the Unlawful Internet Gambling Enforcement Act, scouted out small, troubled financial institutions to process the poker bets through access to the Federal Reserve’s payments system using phony originations, such as flower shops or office supplies.
The IG says NCUA examiners missed the huge transformation of the tiny credit union, which relocated from New York City to Florida, then to Mesa, Ariz., in 2008 to a major processor of bets for the two biggest online poker sites, Full Tilt Poker and Pokerstars. The transformation caused a huge increase in the credit union’s assets and its earnings almost overnight, with 90% of its income earned by ACH transactions processing poker bets. NCUA examiners discovered the connection in early 2010, a year after the move to Arizona.
The gambling ties were made public on April 15, 2011, when the Justice Department indicted dozens of the leading online gambling figures and froze $3 billion of their assets in accounts all over the world, including those owned by Trinity Capital at the Arizona credit union. Trinity was Vensure’s largest single depositor at the time and because Vensure derived nearly all of its income from fees for processing Trinity’s internet gambling transactions, NCUA seized the credit union later that day because Vensure no longer had adequate capital to absorb its Automated Clearing House returns.
The new report says that an NCUA examination in the third quarter of 2009 focused on a review of the controls over ACH and wire transactions, but the review did not identify the underlying source of the funds or nature of the activity that was creating the large amount of fee income for the tiny credit union. “We believe these increases and the recommendations by the (examiners’) reviews should have prompted a more detailed exploration by examiners into the volume and nature of the activities that were creating the increased fee income,” says the report.
“We believe had examiners looked behind the numbers into the source of the significant fee income activity, the credit union’s involvement in processing illegal internet gambling proceeds may have been uncovered sooner,” the IG states.
The IG concluded that Vensure’s management and board were not forthcoming to examiners regarding its ACH FedWire transactions being for internet gambling activities. In an October 2009 strategic plan approved by the board, the plan made no mention that the credit union’s ACH FedWire activities were related to Internet gambling processing; despite the fact management had already entered contracts related to this activity from which it derived a significant portion of its revenue.
“We believe the significant and rapid increase in Vensure’s fee-related income, as well as the size of the individual and cumulative ACH wire transactions given the small size of the credit union, the significant change in the make-up of its management and board, and its few traditional sources of income, should have triggered (NCUA) examiners to expand the scope of their on-site examinations and supervision contacts to thoroughly evaluate the credit union’s income to determine the nature of its source and why it increased so rapidly,” says the IG.
