Financial fraud: Were employees complicit?


A credit union faced losing over a million dollars from a scam that involved reclaimed Treasury checks deposited in the account of member who ran a check cashing service. The credit union was filing a claim with their bond company and hired us to find out if any of their employees were complicit in this complex fraud.

The Story:

A member of the credit union ran a business that cashed checks for people in a poor, immigrant community of a major city. This member's business cashed many U.S. Treasury checks that were supposedly income tax refunds. Unbeknownst to the credit union staff at the time, a major scam was going on across the country with con artists stealing identities and then filing fraudulent tax returns with those stolen identities. The Treasury would issue the refund right away based on the fraudulent return, but when the IRS then discovered that the first return was fraudulent - usually after the real person whose identity was stolen filed their own tax return - the Treasury would send a notice to the financial institution to "reclaim" the check and the financial institution that cashed it would be liable for returning the money to the Treasury. (Treasury also reclaims social security checks issued in error after a person dies but before the department has been notified of the death. Those are generally referred to as "death reclamations" and are generally reimbursed by deducting from the account holder's account.)

At this particular large credit union, because con artists identified the member's check cashing business as an easy mark, there were many of these fraudulent Treasury checks that were cashed and then deposited in the member's account, totaling over a million dollars. When a few reclaimed checks came in, the credit union would notify the member that an amount was deducted from his account because of the bad checks and he would just bring in more checks to cover the amount deducted. Finally, however, he closed his account, but many more reclaimed checks from prior months kept coming in. Those checks weren't being covered and the credit union faced a mounting loss.

Needless to say, the credit union management and Board and their attorneys who were filing a bond claim wanted to know 1) Whether any credit union staff members were complicit in this loss? and 2) If staff members were not complicit, why didn't anyone figure out what was going on much earlier? We were brought in to do an investigation and attempt to answer those questions.

We did deep background investigations on all of the staff members who could have been complicit. We also did numerous interviews with the staff, as well as with the former member with the check cashing business.

We did not discover fraud. Instead we found that procedures were not followed correctly and that serious mistakes were made by the credit union accounting staff. In particular, one lower level accounting staff member was responsible for the majority of the losses because she thought the reclamations were all death reclamations that would ultimately be reimbursed. She also did not put alerts on accounts when reclamations came in, a procedure that would have caught the problem earlier, but which was not followed. Our report indicated that both her direct supervisor and the head of the accounting department were also remiss because they did not train and supervise her properly, either of which would have caught this problem earlier and limited the amount of the loss.

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