The primary cause of the failure of Center Valley FCU was the embezzlement of millions of dollars by the former CEO to fund her family's restaurant and the purchase of luxury vehicles. However, NCUA examiners failed to adequately evaluate the risks to the credit union's operations and failed to notice that there were reportable conditions and material weaknesses.
Those are the main conclusions of the NCUA Inspector General's report on the failure of the Wheeling, W.Va., credit union in February 2009. The loss to the NCUSIF was approximately $16.4 million. Center Valley FCU, which was designated a low-income credit union, had $8 million in assets, six employees and approximately 3,000 members.
Before the embezzlement was discovered, NCUA examiners knew of some of the problems with the credit union's internal controls, which the report concluded were
"nonexistent." These problems included not following written policies and control procedures and a $252,000 reconciliation error that was not resolved. The credit union's board of directors and supervisory committee failed to ensure that account verifications were conducted properly and ensure effective monitoring of internal controls.
Those practices allowed Center Valley President/CEO Bernie D. Metz to be "able to conduct the embezzlement for approximately three or more years," according to the report.
Because the NCUA didn't discover additional problems until after the embezzlement, it "missed opportunities to expand examination procedures that may have detected the fraud sooner and mitigated the lost to NCUSIF caused by Center Valley's failure.
The report said there was "no evidence," that NCUA examiners verified the procedures of the supervisory committee and outside auditors. A January 2004 report by an auditor said that internal policies weren't being followed. Also, NCUA examiners failed to adequately question the CEO when she blamed computer problems as a reason for some of the credit union's financial reporting irregularities.
NCUA Executive Director David Marquis said, in a written response, that the agency's examination procedures are "not designed or intended to detect fraud." However, the agency acknowledges that "inadequate assessment of the level of transaction risk" to the credit union's operations may have resulted in missed opportunities to detect problems at an earlier date. He said that the agency now requires its examiners to complete a Red Flag questionnaire on all credit unions with less than $20 million in assets, and the agency requires new examiners to complete a class in fraud detection.
In January, Metz pleaded guilty to embezzlement and money laundering after federal prosecutors traced $5 million of $9 million that was missing from the credit union to her. She and her family used the funds to finance the construction of a restaurant and tavern that her family ran and the purchase of several vehicles, including a Mercedes, two tractors and a four-wheel drive utility vehicle.
She has not yet been sentenced and faces seven years and three months in prison and a fine of $8.9 million. She has also agreed to forfeit all the items she obtained from the embezzled funds. As part of the plea agreement, federal authorities won't prosecute her husband, who was her business partner in the restaurant. But he must help federal officials identify and locate forfeitable property and assets.
Metz's main methods for embezzling funds were unauthorized withdrawals from accounts by using official credit union checks, unrecorded checks to pay family creditors, fictitious deposits into accounts and disbursement of checks funded with fictitious deposits.
To see the full report, go to: ncua.gov/Resources/OIG/Files/Reports/2010/OIG-10-02_MLR_Center_Valley_FCU_4-14-2010.pdf