The closing of a small, single-sponsor federal credit union in Arizona has raised serious questions about some of the ways NCUA supervised or failed to supervise a federally chartered CU.
When it was first announced, the decision to close the $2.7 million Vensure Federal Credit Union, headquartered in Mesa, Ariz., did not appear justified. While there was no data available from the March Call Report, the agency's announcement set the CU's assets at $4.7 million and membership at 144, but the agency's data site reported its assets as of Dec. 31, 2010 to be $2.7 million and 94 members.
But while small, there was nothing on the first glance that might suggest that the CU needed to be closed. The agency data also reported that the credit union had a net worth ratio of 33.52% as of Dec. 31, 2010 and had net income of almost $592,000 for the year.
But it also came to light fairly quickly that Vensure might have been either the dupe or a participant in what federal prosecutors have described as an extensive and sophisticated fraud and money laundering scheme around Internet gambling payments.
Those possibilities came to light after Vensure was the only credit union on a list of 16 domestic U.S. financial institutions to have an account or accounts seized by federal officials after the U.S District Court for the Southern District of New York unsealed indictments against the principal owners and officers behind some of the largest Internet poker websites. The dual indictments, one criminal and the other civil, charged the owners and officers of PokerStars, Full Tilt Poker and Absolute Poker/Ultimate Bet and the companies themselves of conspiring to defraud banks to get them to process credit, debit and prepaid card transactions from their gambling sites.
Gambling on the Internet has long been illegal in the U.S., but it was a ban without many teeth until 2006 when Congress passed the Unlawful Internet Gambling Enforcement Act, which made it illegal for companies to accept payments for gambling over the Internet. The passage of the UIGEA led most of the existing Internet banking firms to leave the U.S. market, but the three under indictment, among others, remained, according to the government's indictment. The companies were charged with using fraud to try to circumvent UIGEA.
Federal officials declined to comment on the indictment or Vensure's role in the scheme, citing ongoing investigations, but the credit union only had one account, in the name of the Trinity Global Commerce Corp., seized by the government. But the fact that the NCUA conserved the CU after the seizure argued that it was an account of significant size and that the agency might have closed Vensure because the CU could not remain liquid after the account was seized, one attorney who did not want to speak for attribution observed.
The indictment also described the approach that could have been used to facilitate Vensure's involvement.
"Because it was illegal to process their Internet gambling transactions, the poker companies had difficulty in identifying ‘transparent’ processors," the government alleged. "Chad Elie, the defendant, and his associates were, however, able to persuade the principals of certain small, local banks that were facing financial difficulties to engage in such processing. In exchange for this agreement to process gambling transactions, the banks received sizable fee income from processing poker transactions as well as promises of multimillion dollar investments in the banks from Elie and his associates," the government alleged. It also identified one bank, the SunFirst Bank based in St. George, Utah, where it charged this had happened.
Further facts about Vensure suggested that it could have succumbed to this scheme. For example, according to NCUA records, Vensure booked no loans in 2010 but took in over $1.8 million in fee income and paid out almost $700,000 in fees for professional services.
In 2009, the credit union took in $336,000 in fee income and an additional $100,000 in other income and paid out $82,000 in professional fees, even though it had only booked one loan, an unsecured line of credit for just over $5,000 at 5% interest.
Then there were odd things about the credit union's members. In 2009, Vensure claimed 74 members, with presumably at least 74 share accounts (out of what it said were a possible 150 members), and the CU reported paying out $11,651 in interest for those accounts. But in 2010, Vensure reported paying no interest on share accounts even though its members had climbed to 94 and the number of potential members had increased ten times, to 1,500.
Finally, there are indications that the CU's charter might have been hijacked. Vensure FCU had been chartered in 1995 as the Greater Adirondack Federal Credit Union in New York to serve the members of a fraternal lodge that Todd Harper, NCUA's Director of Public and Congressional Affairs, said had gone out of existence.
"As the field of membership shrank, the credit union, in essence, risked becoming defunct. Consistent with NCUA’s policies, the board of directors of Grand Adirondack then applied for and received a new field of membership to serve the members of Vensure Employer Services in Mesa, Ariz., and the company’s subsidiaries," Harper explained. It was unclear what relationship, if any, existed between the credit union's board and Vensure Employment Services.
Reached by phone in his office at Vensure Employment Services, Joe Iorillo, manager of the CU, emphasized that the CU was a completely different organization from the firm, though he acknowledged it shared the firm's communications systems, utilities and physical building. Iorillo ended the interview before he could be asked about the fee income or professional fees.
Whether or not Vensure turned out to have been a well-meaning CU that was defrauded into processing Internet gambling payments or a front for that Internet gambling operation, observers have raised questions about how the agency could not have noticed that something might have gone awry at the credit union. Critics have noted, for example, that the agency's website said Vensure's Call Reports had been validated, a state which Harper explained should not be confused with necessarily having been studied very critically or carefully.
"A validated Call Report means that the Call Report has been submitted and accepted by NCUA," Harper said. "These Call Reports pass NCUA’s error validation process, which compares the data submitted to approximately 680 error edits," he said, adding that "Call Reports are validated by either the assigned NCUA examiner (for federal credit unions) or the state supervisory authority (for federally insured state chartered credit unions). Once a credit union submits their Call Report, the examiner or SSA may review the Financial Performance Report or other reports comparing cycle data prior to validation."
Based on NCUA's statements, it is unclear whether fee income of over $1.8 million at a credit union that did not issue credit cards and listed only 94 members would have been enough to have raised questions from an NCUA examiner.