Whether an employee created fake loans in a relative's name, siphoned funds from a member's account or paid personal expenses with a company credit card, creditunions have been hit especially hard recently by internalfraud.

In many of those incidents, embezzlement and other criminalactivities continued for years without detection.

Embezzlement and other fraud by credit union employees led to$311.4 million in losses for the share insurance fund between 2010and 2013 at liquidated institutions, according to the NCUA.

Usually those losses are never recovered, but the NCUA recentlyreceived almost $5.4 million in restitution from a fraudprosecution, which will be returned to the share insurancefund.

Sadly, credit union criminals are often long-term, once-trustedemployees.

Employees with the most tenure typically cause the highestinternal fraud losses because they can leverage greater knowledge,more access to funds, more authority and a higher level oftrust throughout the organization, according to the Association ofCertified Fraud Examiners' 2012 Global Fraud Survey.

In the credit union industry, experts say, it's imperative tokeep a close eye on the coffers to prevent financial loss andreputational risk because the damage done by internal fraud canhave a long, lingering impact.

“The potential for employee fraud should always be a concern forcredit union officials and volunteers,” NCUA Board Chairman DebbieMatz stated in a recent press release.

Fortunately, Matz said, credit unions can take a proactiveapproach to prevent internal fraud and learn how to discover itquickly.

Click through to learn seven fraud-fighting tips from securityexperts.

1. Bump up thechecks and balances.

A credit union without adequate checks and balances is a primebreeding ground for embezzlement and other forms of internal fraud,said Chris Marquet, founder of Marquet International Ltd. inWellesley, Mass., a risk management firm that publishes an annualfraud report.

“Improving checks and balances or financial controls is the mostimportant step to prevent internal fraud,” Marquet said. “Thatmeans credit unions must have multiple signatures on checks, randomaudits, separation of duties and close oversight.”

Many smaller institutions, where separation of powers is moredifficult to achieve, have fallen victim to dishonestemployees.

“I saw one case where the embezzler was the only employee of thecredit union,” Marquet said.

In effort to decrease losses to the share insurance fund, theNCUA recently created a seven-part online series entitled“Deterring, Preventing and Detecting Employee Dishonesty.”

The videos were developed by the Office of Small Credit UnionInitiatives in partnership with CUNA Mutual Group as part of theNCUA's efforts to minimize fraud, the agency said.

The first three episodes are posted on NCUA's YouTube channeland can be viewed here.

CUNA Mutual Group also posted several resources for CUTimes' readers, including a report on “Controlling Employee DishonestyRisks and a videoby Jay Isaacson, vice president of commercial products forCUNA Mutual.

2. Boostboard oversight.

Lack of adequate internal controls and board oversight enabledtwo employees at the $4.2 million Milledgeville Community CreditUnion in Milledgeville, Ill., to steal more than $320,000 in separate incidents that spannednumerous years, according to a recent press release from the U.S.Attorney's Office.

By increasing efforts to identify fraud schemes, credit unionscan help minimize liquidity risk and transaction risk, which can becaused by unauthorized loans, inaccurate financial reports andother fraudulent activity, the NCUA said.

To improve internal controls, credit union boards must enforceseparation of duties, review employee and family member accounts,monitor file maintenance transactions and take other measures toboost oversight, according to security experts.

“Close oversight by the board is very important for creditunions that want to prevent internal fraud,” Marquet said. “It iskey that operational staff understand that their actions will bescrutinized. While every credit union has a board, not allboards are active in effective oversight. Once again, if noone is watching the henhouse, the foxes may run wild.”

Boards have fiduciary responsibility to update records and toorder audits, and many cases warrant a qualified fraud audit firm,according to the NCUA.

CUNA Mutual Group cautions credit unions to pay close attentionto the Credit Union Bond (underwritten by CUMIS Insurance Society,Inc., a member of the CUNA Mutual Group), which stipulates that thebond's coverage for an employee or director terminates immediatelywhen any director, officer or supervisory staff – not in collusionwith the alleged criminal – learns of any internal fraud byemployees or board members.

3. Set a zero tolerance fraud policy.

All credit union boards should draft a formal fraud policy, with the assistance of legal counsel, toaddress specific items, establish guidelines for investigations andexplain consequences, according to CUNA Mutual and other riskmanagement experts.

“Zero tolerance sets the tone from the top,” Marquet said.“Employees involved in misconduct should be disciplined – severelywhen we are talking about theft or threats, etc. Make sure everyoneknows that the credit union operates with the highest standardsapplicable to all.”

When creating a fraud policy, one key ingredient is a writtenstatement, which should be read and signed by all staff membersduring annual reviews, said Joette Colletts, senior manager of riskmanagement at CUNA Mutual Group.

“It really sets guidance in case an embezzlement should occur inthe credit union, and it really helps deter against employeedishonesty because you're requiring that that employee review it onan annual basis, and that they sign it and date it so they'reacknowledging what they shouldn't be doing in a credit union,”Collette said in the NCUA video series.

The deterrent effect upon an employee, who is made aware of thepolicy on the first day of employment and periodically remindedthat such a policy exists, cannot be underestimated, according toCUNA Mutual Group.

An employee's chances of successfully charging wrongfuldismissal or malicious prosecution may be significantly reducedwhen the credit union can produce signed statements acknowledgingan understanding of what is considered dishonest and unacceptablebehavior, the organization said.

The policy should include guidelines for potential terminationor suspension of dishonest employees and steps for notifying theappropriate law enforcement agency, regulatory agency and the bondprovider, the organization said.

Factors to be considered include the nature of the offense,dollar amount involved, existing policies, effect on bond coverage,union restrictions, state laws and regulatory considerations, theorganization said.

Even if a dishonest act does not result in a loss, the creditunion should still report the activity to bond provider, CUNAMutual Group said.

CUMIS reviews dishonest activities to determine if employeesinvolved present an increased risk to the credit union bond, theorganization said.

Depending on the crime, credit unions might have to file aSuspicious Activity Report, according to federal regulations.

If an embezzler makes financial restitution, the directors mightnot take action against the alleged embezzler, but failure to actmay result in release of surety from liability for any futureshortages and directors may be personally liable for lossessustained, according to the NCUA Guidelines.

4. Spot red flags.

NCUA's video series on employee dishonesty refers to “The FraudTriangle,” which includes an employee's motivation, rationalizationand opportunity to engage in criminal activity.

It's vital for credit union managers and board members to beaware of the numerous ways that employees can embezzle and learnhow to spot potential risk, the NCUA said.

The most common forms of credit union embezzlement involvewriting fictitious loans, issuing unauthorized loans to employeesand family members, doctoring expense ledgers, pilfering depositsin transit, kiting, creating false or fraudulent statements andstealing from closed or dormant accounts, according to the NCUA'sExaminer Guide.

In its Supervisory Committee Guide, the NCUA cautions creditunions to remain alert for common risk factors such as a lack ofboard approved policies for areas such as lending, investing,borrowing and operating expenses; lack of segregation of duties;lack of mandatory vacation policy; failure to maintain adequateaudit trails; incomplete or inadequate audits or verifications;inactive supervisory committees; repeated record keeping problemsand manipulated bank reconcilements.

Red flags for employee dishonesty can include attitude changes,not taking vacations, keeping records in disarray and lifestylechanges such as excessive spending or borrowing, the agencysaid.

5. Conduct surprise cashcounts.

Surprisingly, audit procedures are not a normal part of the NCUAexamination process, according to the agency's guidelines.

Although the NCUA provides guidance to federally insuredinstitutions that discover a shortage of funds, credit unionofficials must take ultimate responsibility for providing adequateinternal controls, detecting shortages and taking appropriateaction, the agency said.

Surprise cash counts are necessary to ensure that dishonestemployees don't have the ability to hide their crimes, according tothe NCUA.

Credit union management should count cash in the presence of theemployee responsible for the funds and all cash items should beincluded, Colletts said.

Teller funds, travelers' checks and ATM counts could beconducted on separate days, the NCUA said.

Cash bundles should also be broken down and cash totals shouldbe verified with the general ledger, Colletts said

“It's important to break down the bundles because there havebeen cases where someone has replaced $100 bills in the center of abundle with $1 bills,” she explained in the NCUA video.

If examiners suspect an internal shortage, they should expandthe exam as necessary to determine if a shortage exists, accordingto the guide.

Following up on shortages is part of district management and itis the board's responsibility to take appropriate action, the NCUAsaid.

After discovering and documenting a pattern of potential fraud,the supervisory committee must investigate and resolve theshortage, the guidelines said.

6. Keep track ofloans.

In most credit unions, examiners find it impossible to reviewall loan files for evidence of unauthorized or fictitious loans,but a random sample of loans may not uncover an illegal scheme,according to the NCUA.

In many recent cases of unauthorized or fictitious loans,embezzlers have created all loan documents and forgedsignatures.

One way to avoid fraudulent loans is to review for currentpayments, valid approval signatures and adequate share balances forshare secured loans, according to security experts.

To conceal unauthorized loans, dishonest employeessometimes destroy member statements or change the mailing addressto a post office box, their home address or the credit union's ownaddress, the NCUA said.

To detect fraudulent loans, credit union boards should reviewloans, especially those made to employees or volunteers, to confirmvalidity of dates, signatures and collateral listed on loans, theagency said.

NCUA cautioned that red flags for fraudulent loans includelisting a next payment due date that is more than 60 days in thefuture; having loans that are not reported as delinquent, butrecords indicate interest due; or accounts where the original andthe current loan balance are approximately the same, although thepayment schedule indicates that the current balance should besignificantly less.

If suspicious activity is spotted, it's important to verify theborrower's name and address from non-credit union documents, suchas telephone directories, certificates of title and sponsorrecords, the NCUA said.

Another simple step is to call the purported borrower to verifythe accuracy of loan information.

7. Keep a closeeye on member shares.

The NCUA encourages supervisory committees to review employeeand director accounts as well as related family member accounts,bank statements and reconciliations.

Indicators of illegal activity include significant withdrawalsor transfers, negative balances in accounts, the lack ofnon-sufficient fund fees or reversal of such fees, posting ofdrafts out of sequence and manual clearing of checks, the NCUAsaid.

Employees should not be performing transactions on family memberaccounts, the NCUA said, and dormant and closed accounts arefrequently used to perform unauthorized transactions.

Credit union boards should compare records of inactive accountsfrom a year ago with current inactive accounts, and scrutinizemember statements for accounts that do not appear on the mostrecent inactive list, the NCUA said.

If a suspicious withdrawal involves transfer to another account,officials should review the account and contact the member directlyor by telephone to determine the legitimacy of the withdrawals, theagency said.

Credit union officials should use caution when they discover aninstrument containing an apparent forgery of the name of arelative.

Frequently, these persons will claim that they gave permissionfor use of their names.

The negative share and share draft report should be examined atrandom times –instead of just at month-end – to uncover overdrawnamounts that dishonest staff may fix at the end of each month, theNCUA said.