The penalty for fraud embezzlement and other crimes at credit unions is getting stiffer, to the point that many of those convicted of such crimes may never be able to pay back what they owe in restitution.
Restitution penalties for crimes at credit unions are rising, with at least five penalties in the last two years exceeding $10 million. Among the most recent, in April the regulator handed down a
That was followed in May by a
Longust will pay about $5 million to the credit union and another $9.1 million to CUMIS Mutual, the bonding company for Scott CU.
LaJoice is said to have already returned more than $3.5 million in stateside restitution, and will pay other penalties to Michigan State University, which absorbed the insolvent credit union.
Restitution amounts are set by the courts and not by regulators, and NCUA was unable to confirm if these were the largest in credit union history, but NCUA Communications Specialist Ben Hardaway said “I do know we have had some instances where people have had to pay significant amounts of restitution, some in the million-dollar range.”
Restitution payments, Hardaway added, differ from a fine. Generally speaking, a judge orders a defendant to pay restitution directly to the victim, while a fine is paid to the government.
The overall loss to Scott CU was estimated at about $25.8 million, including both criminal and civil losses. The court determined that the “safety and soundness” of Scott CU was not “adversely affected” by Longust’s criminal conduct.
Let the punishment fit the crime
Few people – let alone parolees – earn $17 million in their entire lifetime, so how can Longust, LaJoice and others slapped with such penalties actually pay them off?
Patrick Keefe, vice president of communications at the National Association of State Credit Union Supervisors, said based on what he has seen with such court orders as this, the judge is likely basing his sentence/order on recommendations from federal prosecutors.
The harsh sentence, said Keefe, “indicates to me that the prosecutors convinced the judge that this was an egregious case and needed to be dealt with appropriately. In any case, hopefully this punishment will serve as a warning or deterrent to anybody else out there who is tempted to steal credit union members’ money.”
Amanda J. Smith, a partner at the Messick Lauer & Smith law firm in Media, Pa., who specializes in credit unions, said while she does not specialize in criminal law, she noted that, generally speaking, restitution is dictated by state sentencing guidelines that take into account factors such as the amount of the loss and the sophistication of the crimes the convict plead guilty to. In this case, she believes the restitution amount was justified.
“While I have yet to see an official total loss, I have seen reported amounts just over $25 million in civil and criminal losses [in the Longust case],” she said. ”If this is accurate, $14.1 million in restitution makes sense.”
While Longust and LaJoice face long and likely insurmountable challenges in paying their enormous fines, the broader issue to be considered is the incidence of fraud at credit unions.
Rarity and severity
According to John Buzzard, account executive and fraud specialist at CO-OP Financial Services, fraud and embezzlement and credit unions are not necessarily increasing, but news reports of such incidents tend to make it to the front pages because of two things: rarity and severity.
“When someone has constructed an embezzlement scheme it can often mean a significant amount of loss for their employer to try to recover,” he elaborated.
Buzzard indicated that embezzlement cases at credit unions always feature a mixture of improper access, “meaning that the individual either has too much unobstructed power that garners their access to funds and systems or there has been some sort of audit breakdown or nonexistent oversight that needs correcting.”
Buzzard commented that “inside jobs” are actually difficult to accomplish -- even “exhausting and tricky” for the perpetrator.
“It’s not all that different from a check-kiting scheme,” he said. “The fraudster cannot take a day off lest they miss an opportunity to compensate for and cover their actions. This could happen from [either] a high-level to lower-level employee.”
Prevention
Some analysts believe the key to preventing such fraud lies with strong audits.
“Pretty much every organization has an audit committee but there’s always room for improvement,” Buzzard said. “I would suggest a randomized auditing process – dual-control for everything that matters.”
From an IT perspective, he added, this also means that no one should be creating login and passwords without justifying who they are for and why they are being created.
“There also shouldn’t be anyone in the organization who has the authorization to initiate a loan from origination to funding without others being involved,” Buzzard said. “It isn’t a question of having your power diluted as an executive in these matters -- but rather making everyone more insulated against complicit and fraudulent activity.”
Following the discovery of such criminal activity, Buzzard pointed out, credit unions tend to react assertively. “Everything tightens, especially around the area where the problem resided,” he said. “The good thing about discovering an issue is that you can fix everything and learn something in the process.”
Buzzard further cautions that criminal activity cannot necessarily be avoided entirely by a rigorous hiring and screening process – since, after all, many people without criminal records might be tempted into improper activities.
“Hiring practices are important, but let’s not forget that where embezzlement is concerned, everyday people who normally behave in an honest fashion find themselves in personal situations that manipulate their better judgment,” he said. “[Romantic] affairs, gambling, extortion and various addictions play a huge role in the fall of someone who started out as a great employee and ended up on the front page of the local paper for something bad.”
