NCUA Failed to Identify Fraud Risk at El Paso FCU: IG Report
The NCUA could have reduced losses to the share insurance fund had the regulator done a better job of identifying and following up on fraud risk factors at the failed $5 million El Paso Federal Credit Union, according to a material loss review dated Aug. 28.
The report released by NCUA Inspector General James Hagen said the Texas credit union, which was liquidated Sept. 28, 2012, also blamed former Manager Lou Hernandez and financially unsophisticated volunteers for the failure. And, the report revealed that the credit union’s examiner-in-charge later joined the credit union’s board.
Examiners failed to note or question excessive fee income and other unusual transactions, including non-member shares, on two Call Reports in 2009 and 2011 that did not appear on other Call Reports.
“Examiners did not detect the faulty reporting of these shares until the January 2012 contact,” the report said. “Likewise, the fact that no clear business purpose existed for these shares did not raise an issue until this contact.”
The report contained several redacted sections that concealed details. However, one passage left untouched said share certificates were omitted from the credit union’s books.
The report also highlighted challenges within the NCUA to detect and address fraud, including a lack of specific fraud detection training for examiners, no minimum procedures to identify or respond to suspicions of fraud, and challenges due to scheduling issues to follow up on risk factors.
Achieving appropriate internal controls is also a challenge for small credit unions, the report said.
“Examiners often rely on procedures performed by the Supervisory Committee and Board of Directors as internal controls,” the report said. “During our review of examination working papers, primarily the Examination Overviews, we found that this was the case at EPFCU.
“However, these examination working papers were silent regarding examiners’ attempt to document problems with relying on the Supervisory Committee and the board as internal controls or that other issues related to these institutions constituted a fraud risk.”
Additionally, the report said volunteers were too close to management to effectively oversee the credit union, spending considerable time together and interacting socially.
A recently retired NCUA examiner, who had been the credit union’s examiner-in-charge, joined the credit union’s board during the EPFCU’s last year before liquidation.
The investigation found no link between the examiner and the credit union’s failure, and his appointment complied with NCUA rules and regulations. However, because the credit union failed due to suspicious activity that may have occurred while the examiner was supervising the credit union, his later participation could appear to be a conflict of interest, the report said.
“We suggest the NCUA remain aware of the potential risk to the integrity of NCUA's
supervisory program in having former NCUA employees join the Supervisory Committee or Board of Directors of any credit union in which they have previously examined,” the report said.
The report also noted a change in tone of the examiner in 2011, who delivered a glowing assessment of the credit union’s management and staff during an August exam, saying employees were most accommodating, professional and helpful.
Three months later, during an exam in November, working papers noted that management felt picked on, and subsequently asked the credit union’s previous manager, who had retired, to join the board.