Employee Dishonesty Prevention and Detection Frontline Risk Management

Employee Dishonesty: Prevention and Detection Frontline Risk Management Series

Over the last 15 years, CUMIS Insurance has paid out over $40, 000 in credit union employee dishonesty losses.

All credit unions are vulnerable to internal theft if the proper controls aren’t put in place and strictly followed.

This session will introduce you to fraud prevention practices.

Use within the framework of your credit union’s guidelines and practices.

How employee dishonesty can affect your credit union

How employee dishonesty can affect your credit union REPUTATION

How employee dishonesty can affect your credit union MORALE REPUTATION

How employee dishonesty can affect your credit union MORALE REPUTATION FOCUS

How employee dishonesty can affect your credit union MORALE REPUTATION FOCUS FINANCIAL

Examples of Employee Dishonesty

Examples • Member services supervisor • Custodian of the main treasury Cash Misappropriation Delayed Cash Account Commercial Lender Member Not-Present • Misappropriated cash from vault • Concealed thefts by manipulating the General Ledger • Cash physically removed

Examples • Clearing Officer • Redirecting items Cash Misappropriation Delayed Cash Account Commercial Lender Member Not-Present • Posted to Suspense Account, transferred to Delayed Cash • Daily balances accumulate in Delayed Cash • Fictitious entries at year-end to conceal the losses

Examples • Thought to be a top performer Cash Misappropriation Delayed Cash Account Commercial Lender Member Not-Present • Circumventing lending requirements • Financial benefit for family and friends • Receiving kickbacks • Other ethical issues and releasing confidential information

Examples • Members flagged suspicious transactions Cash Misappropriation Delayed Cash Account Commercial Lender Member Not-Present • No slips, no member signatures, altered slips, slips with bill payments and withdrawals • Aligned with teller’s personal transactions • Teller committing member-notpresent fraud

Pay special attention to… Suspense Accounts Delayed Cash General Ledger

Pay special attention to… Suspense Accounts Delayed Cash General Ledger Segregation of Duties

Prevention Role of employees Employee screening Internal control systems Segregation of duties “Trust but Verify”

Prevention Role of employees Employee screening Internal control systems Segregation of duties “Trust but Verify” • Strictly follow internal controls § § Dual custody Don’t share passwords / stamps • Question if you are asked to do transactions outside of establish procedures • Report ethical breaches

Prevention Role of employees Employee screening • Will reduce the risk of fraud, misconduct and poor performance. Internal control systems Segregation of duties “Trust but Verify” • Employee selection based on sound character and strong ethical foundation • Completed for all new employees § § § Employment history Criminal record Financial position

Prevention Role of employees Employee screening • Effective controls will limit opportunity Internal control systems Segregation of duties “Trust but Verify” • Ensure key processes are independently monitored • Safeguards in place based on the inherent risk in the activity, not for the person performing it

Prevention Role of employees Employee screening Internal control systems Segregation of duties “Trust but Verify” It is often the most trusted employees that are able to cause the largest dishonesty losses.

Prevention Role of employees Employee screening Internal control systems Segregation of duties • Lack of proper separation of responsibilities has been an issue for credit unions “Trust but Verify” • Ensure that dual custody or segregation of duties is followed in actual practice

Prevention Role of employees Employee screening Internal control systems Segregation of duties “Trust but Verify” • No concentrated control • More than one person involved in the process • No one individual should control all key aspects of a transaction or event

Prevention Role of employees In general, the principal duties to be segregated are: Employee screening Internal control systems Segregation of duties “Trust but Verify” § Custody of assets § Authorization or approval of related transactions affecting those assets § Recording or reporting of related transactions § Reconciliation – making sure transactions reconcile with balances

Prevention Role of employees In general, the principal duties to be segregated are: Employee screening Internal control systems Segregation of duties “Trust but Verify” § Custody of assets § Authorization or approval of related transactions affecting those assets § Recording or reporting of related transactions § Reconciliation – making sure transactions reconcile with balances

Prevention Role of employees In general, the principal duties to be segregated are: Employee screening Internal control systems Segregation of duties “Trust but Verify” § Custody of assets § Authorization or approval of related transactions affecting those assets § Recording or reporting of related transactions § Reconciliation – making sure transactions reconcile with balances

Prevention Role of employees In general, the principal duties to be segregated are: Employee screening Internal control systems Segregation of duties “Trust but Verify” § Custody of assets § Authorization or approval of related transactions affecting those assets § Recording or reporting of related transactions § Reconciliation – making sure transactions reconcile with balances

Prevention Role of employees In general, the principal duties to be segregated are: Employee screening Internal control systems Segregation of duties “Trust but Verify” § Custody of assets § Authorization or approval of related transactions affecting those assets § Recording or reporting of related transactions § Reconciliation – making sure transactions reconcile with balances

Prevention Role of employees Employee screening Internal control systems Segregation of duties “Trust but Verify” • Controls designed to prevent both errors and fraud • Use the concept of “Trust But Verify”

Detection Mandatory Vacation Report Monitoring Surprise Cash Counts Loan File Reviews Audits High Risk Accounts Complaint Handling Anonymous Reporting

Detection Mandatory Vacation Report Monitoring Surprise Cash Counts Loan File Reviews Audits High Risk Accounts Complaint Handling Anonymous Reporting • A mandatory vacation policy should be enforced for all employees • Opportunity to discover suspicious / fraudulent transactions that can’t be covered by perpetrator if they aren’t working at the credit union

Detection Mandatory Vacation Report Monitoring • Diligent review of exception reports Surprise Cash Counts Loan File Reviews Audits High Risk Accounts Complaint Handling Anonymous Reporting • Identify transactions that fall outside the scope of what has been identified normal or standard • Investigate to help clarity

Detection Mandatory Vacation Report Monitoring • Always should be a surprise – no advance notice Surprise Cash Counts Loan File Reviews Audits • Done at least quarterly and on different days / times High Risk Accounts Complaint Handling Anonymous Reporting • Count various treasuries together • Report findings of all cash counts to head office

Detection Mandatory Vacation Report Monitoring Surprise Cash Counts Loan File Reviews Audits • Ensure employees are subject to regular performance reviews • Reviews can uncover irregularities High Risk Accounts Complaint Handling Anonymous Reporting • Loan file reviews on employees whose activity is outside of normal ranges

Detection Mandatory Vacation Report Monitoring • Robust audit procedures with direct reporting to the Board Surprise Cash Counts Loan File Reviews Audits High Risk Accounts • If a credit union is heavily dependent on external auditors, have a verification process. Complaint Handling Anonymous Reporting • Don’t do auditors job for them, but make sure you use the concept of “Trust But Verify”

Detection Mandatory Vacation Report Monitoring Surprise Cash Counts Loan File Reviews Audits High Risk Accounts Complaint Handling Anonymous Reporting • Scrutinize high exposure areas such as: § § § § § Control environment Employee accounts Suspense accounts Loans Overdrafts Inactive accounts Treasury balances Adjusting entries Write-offs

Detection Mandatory Vacation Report Monitoring Surprise Cash Counts Loan File Reviews Audits • Have a formal complaint handling process for your membership • Take all complaints seriously High Risk Accounts Complaint Handling Anonymous Reporting • Investigate all complaints and do so in a timely manner

Detection Mandatory Vacation Report Monitoring Surprise Cash Counts Loan File Reviews Audits High Risk Accounts Complaint Handling Anonymous Reporting • Anonymous tip reporting is a leading detection method for employee dishonesty • Watch our “Integrity in Action Program” webinar for more information on: § § § Why employees steal Red flags A free and anonymous tip line available to you

Thank you for Participating! These Fraud Prevention Practices are provided as a source of general information to assist your credit union in developing its own practices and procedures. However, these suggested practices do not address all possible types of fraud, nor will insurance coverage protect your credit union against all types of fraud loss. While the information contained herein was obtained from sources believed to be reliable, we cannot represent that it is accurate or complete and should not be considered legal or compliance advice. We are not legal advisors and we recommend credit unions seek independent advice from a professional advisor on all legal and compliance related matters.