Bank embezzlements increase 733 percent

Bank embezzlements increased 733 percent during the first six months of 2000 compared to the first six months of 1999, according to the Kansas Bankers Surety Company.

This alarming statistic deserves the attention of every banker.

Who commits bank fraud?

Bank embezzlers run the demographic gamut, coming from all age groups, education levels and backgrounds. Line-level employees are the most likely to commit fraud. For example, dishonest tellers may steal cash. However, the losses from these types of occurrences are generally smaller than those perpetrated by mid-level employees or management.

Significant losses can result from unethical loan officers making fraudulent loans and keeping the proceeds. Executive officers or directors may illegally use bank assets for personal benefit. Generally, the whiter the collar, the bigger the dollar.

What are most common methods?

Like all industries, banks are at risk for accounts payable, kickback and employee expense account schemes, and these areas should have good internal controls and be monitored carefully.

The most common types of fraud for banks include deposit account fraud; unauthorized transfers from customer accounts; theft from dormant accounts; misappropriation through teller transactions; wire transfer fraud; unauthorized wire transfers; credit card fraud; obtaining credit impersonating a customer; activating voided or unissued cards; using customers' account numbers to make unauthorized credit charges; securities fraud; personal trading with bank funds; diverting investment income; converting securities belonging to the bank or its customers; use of bank securities as collateral for personal loans; misappropriation of loan payments; charging off loans and diverting payments to a personal account; and loan fraud.

How can you protect your bank?

Internal control weaknesses are the No. 1 cause of fraud. Therefore, carefully examine your internal policies and procedures to ensure sufficient control exists, established procedures are being followed and controls have not fallen by the wayside over time.

Good internal controls are the most important factor in preventing fraud and embezzlement of all types.

Frequently, bank employees will use their personal accounts with the bank in the perpetration of embezzlement. Review of employee statements each month is essential in detecting fraud and can be a significant deterrent.

Every bank should establish codes of conduct and ethics policies that address fraud and other illegal acts, and make clear that the bank will not tolerate unethical behavior at any level in the organization. In addition, employees should be encouraged to watch for and report unusual activity and procedural violations.

Establishing a confidential hotline system often is successful in getting employees to report problems. The Association of Certified Fraud Examiners provides a cost-effective hotline service, staffed with experienced operators 24 hours a day.

Strict bank policy should be established that forbids loan officers from ever handling cash. Ideally, loan proceeds should be deposited directly in a customer account. But if the customer wants the proceeds in cash, the customer should take the check to the teller window. Loan officers also should not be able to produce a check for loan proceeds. A loan processor or loan teller should handle this duty.

Complaints from customers about improper balances should be given careful consideration and investigated thoroughly. In addition, maintain a log of customer complaints. Such a log often establishes a pattern over time that will lead you to a problem.

What to do when fraud occurs

After gathering documentation of the embezzlement, the employee in question should be interviewed in a professional manner. A written confession, written and signed by the employee, should be obtained if possible.

This interview is critical, because soon thereafter the employee will likely retain the services of an attorney who will not allow you to talk to the client. Therefore, consider using an outside consultant with interrogation training to conduct the interview.

Once the employee confesses, terminate him/her immediately. Although employers frequently hesitate in firing dishonest employees, the banking industry usually lacks this option because any future loss caused by the employee in question will not be covered under the bank's bond. Coverage for that employee automatically cancels when the bank becomes aware of a dishonest act committed by the employee.

Notify law enforcement, regulatory authorities and your insurance company immediately of the situation. Because of potential damage to public trust, banks are often hesitant to prosecute.

Prosecution is essential in preventing the employee from obtaining a job in another bank, which often happens, particularly with tellers.

Prosecution also is important in deterring other employees within the bank and the industry from similar activities. Your bank does not want to develop a reputation of being soft on embezzlers and should publicize its intent to fully pursue anyone found to have defrauded the institution.

(Angela R. Morelock, CPA, CFE, ABV, is a managing consultant with Baird, Kurtz & Dobson's southern Missouri practice. This article originally appeared in BKD's December 2000 Financial Alert newsletter.)