A nationwide spree of particularly egregious crimes has brought down a number of credit unions in recent years. And while the crimes were all different, a common theme is obvious: All were small federal credit unions, undone by their own executives.
Perhaps more troubling, however, is that independent investigators are laying some blame at the feet of the very authorities in charge of credit union oversight: Examiners from the industry’s regulator, the National Credit Union Administration (NCUA).
In February, a West Virginia credit union CEO was convicted of “misappropriating” millions from her $8.4 million institution. This month, nine people – including a CEO – were indicted in the failure of an Ohio credit union that cost $170 million. In December, a Texas credit union CEO was arrested for allegedly making off with $1.2 million.
Each fraud was massive enough to sink the institution, resulting in multi-million dollar payouts from the credit union deposit insurance fund.
In its detailed reports, the NCUA’s independent investigator, the Office of the Inspector General (OIG), said that NCUA examiners ignored or didn’t follow up on major red flags prior to two of the failures.
Close To Home
While these cases may seem remote, the impact reverberates throughout the industry. Credit unions pay fees on deposit insurance, so they’re paying for these failures, too.
And New England has its own fraud stories.
In 2008, Carol Aranjo, former CEO of Springfield-based D. Edward Wells FCU, was convicted of siphoning $1.5 million from the institution. It was shuttered in 2003 and cost the NCUA’s deposit insurance fund $3.5 million, according to Todd Harper, NCUA director of public policy and Congressional affairs.
In Connecticut, a group of former New London Security FCU members is suing the NCUA for lax oversight, using the OIG’s report to bolster their case.
Almost all the assets belonging to a $12.7 million credit union were nonexistent. Edwin Rachleff, the man in charge of investing roughly $12 million on behalf of members, spent years tweaking the books and funneling money elsewhere before an alert NCUA examiner finally noticed major discrepancies. Rachleff committed suicide in 2008, before he could be arrested.
Robert Reardon of The Reardon Law Firm in New London, Conn., told Banker & Tradesman it’s unclear where the money went. In addition to filing suit against the NCUA, which Reardon said clearly failed to oversee the institution properly, his clients filed suit against Rachleff’s estate and the law and accounting firms that worked with the credit union.
“We know the NCUA failed because the inspector, in its … report, noted in one section that the [NCUA] failed to carry out its duties,” he said.
Other frauds, after their unraveling, appear similarly egregious.
Size Matters
The CEO of St. Paul Croatian FCU in Ohio apparently went so far as to make fictitious loans, according to the OIG. When NCUA examiners requested loan files, employees later confessed, he would gather the entire staff and direct them to fabricate documentation. According to reports, the CEO is currently hiding in a witness protection program because of threats from a Macedonian crime ring, the alleged beneficiaries of the fraud.
Still, the NCUA started investigating the Ohio case only after the FBI notified it of suspicious activity, according to the report.
The regulator was also tipped off to another fraud, at Center Valley FCU in West Virginia, by a third party. CEO Bernie Metz had a habit of running into computer glitches when examiners asked her to download financial documents. As it turned out, Metz had been using the credit union to create side businesses, funded by withdrawals from members’ accounts and fictitious deposits into her own accounts.
Oftentimes, the size of the institution matters. The OIG doesn’t launch an investigation for losses of less than $10 million, according to Harper. Smaller institutions are also more vulnerable to fraud in general, said Shirley Inscoe, of Burlington-based fraud protection group Memento. A small number of employees means fewer people checking up on each other, she said.
That is an “inherent problem” with smaller institutions, according to the OIG’s report on the St. Paul case – but the NCUA’s examiners didn’t take that into consideration. In both Ohio and West Virginia, the NCUA apparently noticed discrepancies during annual examinations, but didn’t investigate further. They also advised credit unions to take corrective actions, but didn’t follow up to ensure compliance.
Batting A Thousand
Harper couldn’t comment on the OIG’s findings regarding the NCUA, but emphasized the organization was “continually adjusting its procedures and off-site monitoring” to improve fraud detection. The NCUA has increased its field staff by more than 30 percent since 2008, to 737 full-time staffers.
John Kutchey, NCUA’s deputy director for the Office of Insurance and Exams, said examiners monitor credit unions once every 12 months with an on-site inspection, and also comb through the credit unions’ submitted call reports for what he called “red flags.”
Each credit union also has a volunteer supervisory board tasked with its own oversight functions, including hiring third-party auditors to check the institution’s books. It serves as a helpful check on smaller institutions, in particular, because it puts more sets of eyes on the books.
Still, in its two most recent reports, the OIG criticized these boards’ failure to properly check up on their credit unions.
Rob Kimmett, spokesman for the Massachusetts Credit Union League, said these cases were troubling, but rare. While unfamiliar with the cases, he said the NCUA’s possible missteps were forgivable.
“The criminal mind shows a great deal of ingenuity on occasion,” he said, noting that individual credit union losses were dwarfed by recent Wall Street fraud and mismanagement.
“In every situation, society, or collective group, there are going to be people who color outside the lines, and there are enforcement bodies charged with seeing that doesn’t happen – [but] it does happen,” he added. “The enforcement authorities don’t bat a thousand.”
