Long-Term Embezzlements Can Cripple Small Credit Unions
In July 2008, the NCUA closed and liquidated the $338,000 Meriden Franco-American Federal Credit Union, headquartered in Meriden, Conn. Founded in 1954, the credit union had been chartered to serve the members of the Franco-American Club, a private organization located in Meriden. At the time of its liquidation, the credit union had 206 members.
But NCUA records showed that the credit union, while never large, had been significantly healthier in the past. As of the end of 2003, according to its Call Report, Meriden had been a $1.4 million credit union and made $8,000 for the year.
Further, according to the agency records, the credit union had seen its income increase year over year until, prosecutors said, manager and bookkeeper Melissa Laliberte started stealing the credit union's money.
In a plea agreement filed in federal court early in September Laliberte, then Meriden's only paid employee admitted that in January 2004 she began to systematically embezzle money from the credit union through a number of different schemes.
In addition to drawing her monthly salary multiple times per month over the more than four-year period, Laliberte diverted members' cash deposits for her own use (roughly 161 times); made out checks to herself or to her creditors to pay her bills (approximately 518 times), and, on about 132 occasions, she made teller cash withdrawals from the credit union.
By the time the schemes were detected and she was apprehended, Laliberte had stolen almost $744,000 from Meriden Franco-American members. She had even successfully solicited five other credit unions to place certificates of deposit with Meriden. Their collective $400,000 investment helped cover her embezzlement and kept the whole thing going until she was finally caught.
As a result of her actions, Laliberte faces more than 30 years in federal prison, hundreds of thousands of dollars in fines and a requirement to restore the $744,000 to the NCUA. Neither Laliberte's lawyers nor anyone connected with the now failed credit union could be reached for comment as of press time.
Another recent case involves the $5.4 million First Delta Federal Credit Union, headquartered in Marks, Miss., a community in the chronically low-income Mississippi Delta region. With circumstances similar to Meriden Franco-American's, First Delta is striving to regain its financial health after an embezzling staff member stole more than a $1 million over nine years.
Since its chartering in 1981, First Delta built a reputation on strong community development work in and around its predominantly rural field of membership. One of its founding board members has been recognized for her achievements by the National Federation of Community Development Credit Unions and its past CEO and board member, Robert Jackson, sits on the National Federation's board.
But that legacy of hard work hit a snag after one of the credit union's officers was found to have been embezzling money from the CU over the nine-year period. Now, First Delta is struggling to resume its growth and rebuild it's sense of community, including facing heightened regulatory scrutiny after some of its secondary capital deposits were not allowed to be used as part of the CU's capital ratio, according to Jackson.
"Obviously everyone wishes this had not happened," Jackson said. "The employee involved was a long time co-worker of mine and many other people. We felt we knew her and trusted her. Now her actions have made it that much harder for us to push on and keep going,." he added.
According to court documents filed in the case the First Delta employee, Nikita Brown, started as a loan officer for the credit union and gradually rose in the organization. As she did so, however, she also generated fake loan applications, funded those loans and then used money taken from the vault to make payments on the loans. By the time she was caught, Brown had stolen $1.4 million from the credit union.
Brown received 70 months in federal prison for the theft and has already begun serving her sentence in a federal penitentiary for women in Florida.
In both cases, the fraud continued for multiple years, and it is unclear that there was anything in the NCUA's examination process that could have detected it. The documents were silent about how the Meriden fraud was discovered, and prosecutors in the case declined to comment beyond the court filings. In the case of First Delta, examiners only discovered the fraud when they noticed that the amount of cash the credit union reported having could not possibly be contained in the CU's vault, according to Jackson.
And while these were only two cases, CUNA Mutual Insurance Group reported that claims related to employee or director dishonesty represent about 10% of claim volume but more than 35% of losses in terms of dollars for credit unions of all sizes.
"Generally speaking, the volume of credit union industry's employee or director dishonesty claims fluctuate from year-to-year, but due to the severity of the claims, it is consistently the highest in terms of dollars paid," explained Phil Tschudy, spokesman for the insurer. "For example, the number of employee or director dishonesty claims in 2007 was 11% higher than 2008, and the corresponding losses were 15% higher. While 2009 is not complete, initial indications are that losses will be up."
Executives with organizations that work with small credit unions stressed that cases like Meriden's and First Delta's remain the exception and not the rule. The vast majority of volunteers and paid staff at the almost 2,800 federally charted credit unions with fewer than $20 million in assets are and remain honest, they said. But, nonetheless, executives added that cases like Meriden's highlight some of the difficulty in detecting and stopping fraud and embezzlement before it reaches a point where it could do serious damage or even destroy an institution.
"There were obvious flaws in the credit union's separation of duties, as well as quality and veracity of its supervisory committee audit," said John McKechnie, the NCUA's director of public and regulatory affairs of the Meriden case. "NCUA's regulatory role was reliant on these internal processes."
That, executives say, is one key to the problem. The NCUA has a supervisory role with credit unions not an audit role, and thus does not audit credit unions. Instead, it relies on credit union's for the information that it uses in its examinations.
If a thief has reported false or misleading information to the credit union to cover up a theft, NCUA examiners are likely to use that information as well.
Nevertheless, there does appear to be some discrepancy in how the NCUA conducts examinations of small credit unions, with some credit union examiners appearing to be very thorough and others less so.
Daniel Morrisey, manager of the $1.6 million Queen of Peace Arlington Federal Credit Union recalled his credit union's last examination had been very thorough. The examiner counted the credit union's cash and sought an explanation for one of the credit union's checks that had to be voided and had been misplaced. But not all examination's have been that thorough, Morrisey said. He pointed out that the credit union could not have afforded a full financial audit conducted by a certified public accountant.
Robert Powers, vice president of credit union services for the Connecticut Credit Union Association echoed Morissey's comments, noting that a CPA audit would be beyond the reach of most smaller credit unions and suggested the requiring significantly more expensive auditing procedures from small credit unions would be the equivalent of using a cannon to kill a fly.
"The vast majority of smaller credit unions volunteers and staff are honest and shouldn't have their jobs made effectively more difficult because of what a few bad apples have done," he said.
Clifford Rosenthal, CEO of the National Federation of Community Development Credit Unions, agreed with Powers' point and suggested that embezzlement goes on at larger CUs as well but draws less attention because the overall CU is larger and can sustain the losses more easily.
But, in the case of small credit unions, he suggested the NCUA could help by both working with small credit unions to strengthen their supervisory committees and added that there may be a role for credit union leagues in doing the same thing.
"Strengthening and deepening the supervisory committees in smaller credit unions, particularly those in rural areas, can be a real problem because those areas often lack the sufficiently experienced or professional pool of candidates to draw from," Rosenthal said. He also suggested that as the overall regulatory burdens on small credit unions grow, they can lose sight of the importance of basics like internal controls.
But Morrisey suggested that the most important qualities a supervisor should have are a curiosity about how the credit union operates and a willingness to ask questions. Just the knowledge that there are people in the CU who are curious about how it operates and ask questions about its procedures could deter someone from acting on the temptation to steal, he said.