The failure of a credit union is an event which must be given top priority by the NCUA in order to determine what happened, why it occurred, who contributed to its demise and what needs to be done going forward to prevent a reoccurrence at another credit union.

A failure of any credit union impacts every credit union. Not only is there the potential of a loss to the share insurance fund, but also there is the negative publicity that impacts the entire industry. That is why an independent analysis of the reasons for the failure is important for the industry, regulator and insurer.

A recent article in CU Times (NCUA Declines to Indentify Exam Changes, April 17, CU Times) addressed the failure of the Taupa Lithuanian Credit Union and the report issued by the NCUA Inspector General. It keyed on the examination process, what the IG said could have been done better and how NCUA responded to the findings.

Financial regulators are and should be very cognizant of the fact that when an institution over which they have regulatory authority fails; they bear the burden of responding why such an event occurred. In addition, they are mandated to put in place the steps necessary to correct any missteps on their part that contributed to the failure.

The article contains quotes from a high level NCUA employee who, when asked what action has been taken to prevent another Taupa, stated that steps have been taken but would not get into specifics, saying, “it's part of the exam process and we really don't discuss that in detail.”

This response is somewhat concerning since the report on the failure issued by the IG was specific on areas where NCUA could have done a better job.

In his analysis, the IG cited the NCUA as well as the Ohio regulator for clearly missing signs of impropriety. The IG referenced credit union activities that raise red flags that the examiner missed; found that the NCUA examiner and Ohio Supervisory Authority could have reduced or mitigated the $33.5 million loss; stated that examiners relied on statements provided … instead of performing a confirmation of cash balances and found credit union board minutes missing. The IG cited previous fraud recommendations to the NCUA to implement a more comprehensive strategy for responding to red flags; fraud training for examiners; implement procedures to address fraud risks and establish fraud resources and tools.

One can appreciate the NCUA not wanting to publically talk about all the methods and tools they use to detect fraud. However, they need to go beyond saying they are doing things and instill a confidence within the industry that they have a handle on the problem.

In addition, it would help to know that the members of the NCUA board are satisfied that the criticisms and failures have been adequately addressed. It would help to know that they have been briefed on the specifics of fraud detection and are satisfied that everything possible is being done to uncover and control this abuse. It would help to know that they are the ones making the decisions that the procedures put in place are adequate to handle the problem.

It would also be reassuring if the IG initiated his own review of what the NCUA has put in place, how examiners are being trained and if his past recommendations have been implemented. He bears the responsibility to ensure the errors he found have been corrected and that must be done before there is another failure resulting from fraud.

The ways to detect fraud and the procedures used by examiners are not state secrets. The books and records reviewed, the questions that should be asked as well as the verifications that should be made are regulatory best practices. NCUA must be open, honest and transparent on what they do and how they do it.

Perhaps everything possible is being done but it is up to the NCUA board to verify that and show the industry they are in charge.

Michael E. Fryzel

Attorney

Chicago

Instant Insights /

NCUA Fraud Detection Specifics Needed: Letter to the Editor

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