Most financial institutions are diligent about preventing internal fraud, but according to data from the Financial Crimes Enforcement Network, in 2016 there were over 119,000 forms of reported fraud in the US thru June 2016. While most of them are not internally generated, according to the NCUA (National Credit Union Association) reports, the number of suspicious incidents involving employees is on the rise. A critical issue for Credit Unions and (for that matter) any financial institution is the importance of responding to internal fraud.
While my primary focus is ethics, the reality of the lack of ethical behavior often leads to illegal behavior and that is fraud pure and simple. So let’s look at 4 keys to responding to internal fraud:
What’s Your Fraud Policy?
I asked this question not long ago to a board member for a local Credit Union and his response was priceless: “We fire them!”
Now while he said that with pride, the reality was when pressed further – he honestly had no clue what the formal anti-fraud policy was. Side note, that’s a real problem for a board member.
A written policy might be seen by some as insignificant but from a legal perspective might be one of the most important documents you can have. In internal policy offers a layer of protection that most lawyers defending claims wants to see. It demonstrates that you have taken the time to document your culture, your intent and (hopefully) communicate your policy to all employees.
An attorney friend who was defending a “wrongful termination” lawsuit said that when it became clear that the terminated employee was terminated for a clear violation of the written policy that they agreed to, the attorney’s on the other side knew that their suit was quickly a losing proposition. When the board member above said, “we fire them” – in today’s environment that is not enough. Specifics and clear violations are what make actions for fraud stick. The policy is one clear way that Credit Unions should be responding to fraud.
The content of the policy is crucial. What is “fraud” – at least what is it according to your policy? Anyone would think that theft is fraud, but is taking a ten out of the drawer and making change with cash in your possession (your personal) funds to make change fraud? What amount constitutes fraud? What if the action doesn’t involved cash. Can taking office supplies or equipment constitute fraud?
I have a fortune 50 client that has a policy that says, “De minimis” use of office supplies is within the acceptable bounds of behavior and not considered unethical. What is your threshold?
Lastly, what do you want an employee to do if they suspects fraud? While the idea of a “whistleblower” is displeasing to some, the reality is according to the Association of Certified Fraud Examiners (ACFE) the #1 way fraud is discovered (or uncovered) is from whistleblowers. And as we consider your fraud policy an effective way of responding to internal fraud is making sure that there is an anti-retaliation clause present to protect the brave whistleblower who might be the most effective deterrent to internal fraud.
What Happens When Fraud is Reported?
You hear from your whistleblower hotline about a suspected fraud. What do you do?
The problem is our first action may be a reaction fraught with emotion and that might just be wrong. Now while I’m not proud of my past (over 25 years ago) behavior, I committed fraud and know from the perpetrator end what the collapse of an illegal action feels like. The best action is a measured action that allows the Credit Union to meet with the suspected wrongdoer. What would appear to be obvious I’ll state here: (1) make sure the meeting includes more than just the interviewer and the perpetrator (or suspected perpetrator). A witness is critical; (2) Likewise, expect the interview to be recorded (by the perpetrator) using his/her cell phone. Take nothing for granted and make sure the rules of the interview are clear. Do not let the perpetrator have time to craft a story. People, by nature, will tell you the truth when they are faced with specific questions that they don’t have time to craft a lie to cover.
Of course all are innocent till proven guilty so make sure that you have consulted with appropriate counsel before making any potentially false accusations. Open ended questions that allow someone to come clean makes for a far better outcome. If you have specific proof of the allegation provide what is needed as it is needed in order to make clear to the perpetrator that there is no option other that clear and truthful transparency.
From personal experience, I know that my fraud was collapsing and there was no option other than to tell the truth. That was difficult, but once out, the process of dealing with the consequences and making a different set of choices began. While the perpetrator will, most likely, resist the collapse of the fraud – responding to internal fraud through direct confrontation is most effective when done well.
You’re Right its Fraud – What Now?
Responding to internal fraud requires you to report and do so quickly. If there is suspicious activity FinCEN requires a Suspicious Activity Report within 30 days. Likewise, there is a strong likelihood that law enforcement and NCUA will become involved. For goodness sake, don’t fail to report what might be a problem just because you want to avoid publicity or protect a valued employee that might have gone rogue.
Equally important is report the suspicious activity to your bond carrier. Many bonding policies have certain procedures that must be followed and benefit of immediate notification cannot be overstated.
A credit union client (for ethics training) reported to me after the fact, that their delay in reporting unethical/illegal activity created substantial problems in receiving coverage for their claims.
Likewise, prosecute! If you have a culture of strict ethics and compliance action, then responding to internal fraud requires that you prosecute anyone involved in an illegal action or report a suspect of illegal action to law enforcement. If you want your policy to have teeth, then you have to be willing to let those teeth bite. It is said that employees respect what management inspects. In this case, when responding to internal fraud, by being willing to prosecute every time, there is a clear message sent that the consequence will be swift and painful.
Make Sure Your Ethics Training is Effective!
As an ethics trainer, it’s clear to me that most ethics training is highly ineffective. The focus seems to be on what the rules are and gaining agreement on making sure that they are followed vs. on the motivation behind what causes good smart people to make dumb stupid choices. Human behavior follows a pattern. By establishing ethics training that focuses on the pattern of behavior it is possible to bring subconscious behavior possibilities to the light and by doing so reduce the likelihood that an employee will respond to internal fraud temptations. An effective ethics training program is a fundamental key to accomplishing legal protection and behavior change.
YOUR COMMENTS ARE WELCOME!
