BANK FRAUD AND INSIDER ABUSE Flashcards
1
Q
9.1 BANK FRAUD & INSIDER ABUSE
What are the subject areas that fraud or insider abuse occur? (SLICTROLLWSM)
A
- Secured Lending;
- Loan Participations;
- Insider Transactions;
- Corporate Culture/Ethics;
- Third Party Obligations;
- Real Estate Lending;
- Offshore Transactions;
- Lending to Buy Tax Shelter Investments;
- Linked Financing/Brokered Deposits;
- Money Laundering;
- Advance Fee Schemes;
- Credit Cards and ATM Transactions;
- Wire Transfers;
- Securities Trading Activities;
- Miscellaneous
2
Q
9.1 BANK FRAUD & INSIDER ABUSE
What are warning signs for corporate cultures/ethics?
A
- Absence of a code of ethics;
- Absence of a clear policy restricting or requiring disclosure of conflicts of interest;
- Absence of a policy restricting gifts and gratuities;
- Lack of oversight by the institution’s board of directors, particularly outside directors;
- Absence of planning, training, hiring and organizational policies;
- Absence of clearly defined authorities and lack of definition of the responsibilities that accompany the authorities;
- Lack of independence of management in acting on recommended corrections;
- CEO controls internal and outside auditors;
- Lax control and review of expense accounts
3
Q
9.1 BANK FRAUD & INSIDER ABUSE
What does insider abuse include? (DAFOAM)
A
- Diverting assets and income for their own use;
- Abuse of expense accounts;
- Failure to disclose their interests that borrow from the institution or otherwise have business dealings with the institution;
- Other questionable dealings related to their positions at the institution. Insider abuse undermines confidence in institutions and often leads to failure;
- Acceptance of bribes and gratuities;
- Misuse of position by approving questionable transactions for relatives, friends and/or business associates;
4
Q
9.1 BANK FRAUD & INSIDER ABUSE
What are some potential problems that can arise with loan participations? (PIPC)
A
- Participations purchased as an accommodation to affiliated institutions often do not receive the same scrutiny as those purchased from non affiliated institutions;
- Informal repurchase agreements between participating institutions may be used to circumvent legal lending limitations and could subject institutions to substantial undisclosed contingent liabilities;
- Participations may also be used to disguise delinquencies and avoid adverse classifications;
- Can lead to substantial losses if not documented properly and if not subjected to the same credit standards and reviews as direct loans
5
Q
9.1 BANK FRAUD & INSIDER ABUSE
What are the actions that examiners must complete when reviewing real estate lending?
A
- Review all real estate files and request any missing documents;
- Review appraisals to attempt to determine whether any land flips have been involved;
- Compare appraised value to other stated values such as assessed value or insured value;
- Attempt to identify any pattern or practice which appears to be suspicious:
- Large number of borrowers having the same employer,
- Large number of properties appraised by the same appraiser,
- Large number of loans presented by the same broker,
- Large number of out of territory borrowers.
6
Q
9.1 BANK FRAUD & INSIDER ABUSE
What are potential problems that can occur with secured lending? (FLOW)
A
- Failure to properly record their liens and/or fail to physically verify the existence of their collateral;
- Lack of independent appraisals to support collateral value;
- Out of territory collateral may be difficult to verify and monitor;
- Where fraud is suspected, it is often difficult to prove in cases where institutions have failed to follow generally accepted procedures for documenting collateral.
7
Q
9.1 BANK FRAUD & INSIDER ABUSE
What can management do to ensure a proper guarantor is in place? (CRIG)
A
- Corporate guaranties and letters of credit from insurance companies and financial institutions should be verified directly with the issuer;
- Review all guaranties to determine that all documentation is complete and that each guarantor is financially sound and reputable;
- If a loan is collateralized by an obligation of an offshore bank, determine if the lender has attempted to verify the existence, reputation and financial stability of the offshore bank;
- Guaranties signed in blank should be reviewed to determine their validity
8
Q
9.1 BANK FRAUD & INSIDER ABUSE
Why should bank’s be wary of lending to customers for the purpose of buying tax shelter investments?
A
- If the Internal Revenue Service (IRS) successfully challenges the tax benefits claimed from the tax shelter, the investor would have to pay not only additional income tax on the amounts disallowed but also interest and possible penalties;
- Should this occur, investors might walk away from their loans, and institutions holding the loans would suffer losses.
9
Q
9.1 BANK FRAUD & INSIDER ABUSE
What are various warning signs for linked financing/brokered deposits? (8)
A
- Short term volatile deposits are used to fund long term loans of questionable credit quality;
- A generous point spread exists between the loan interest rate and the interest rate on deposits, which are usually below prevailing market rates;
- Out of territory lending to previously unknown borrowers;
- Large dollar deposits are offered in consideration for favorable treatment on loan requests, but deposits are not pledged as collateral for the loans;
- Brokered deposit transactions where the broker’s fees are paid from the proceeds of related loans;
- Institution is presented with a large loan request that cannot be funded without the use of brokered deposits;
- An unsolicited offer to purchase the institution comes at about the same time as brokered deposits and related loans are processed;
- Long term discounted certificates of deposit pledged or matched at face value and not actual book value and structured to repay the loan automatically.
10
Q
9.1 BANK FRAUD & INSIDER ABUSE
What are suggested actions that can be done by bank’s to prevent credit cards and ATM transaction fraud? (RBRMCRR)
A
- Review customer complaints, no matter how insignificant they may appear to be, and review the institution’s follow up procedures;
- Be sure proper controls are in place at all points throughout the card issuing and transaction processing functions;
- Review possible causes of frequent malfunctions of the payment authorization system and follow up on remedial actions taken by the institution;
- Monitor the level of authorization requests to spot potential problems before sales drafts are deposited;
- Conduct on site inspections of merchant’s operations;
- Review contracts and correspondence between the institution and Visa, MasterCard, etc.;
- Review contracts with third party servicers, secured credit card programs and marketing agencies to determine possible exposure to liability.
11
Q
9.1 BANK FRAUD & INSIDER ABUSE
What is the key to avoiding direct losses and/or potential legal liability in an advance fee scheme?
A
- “Know the Customer”;
- Carry out an extensive due diligence review;
- Each proposal involving any offer of large sums of money from previously unknown sources should be thoroughly investigated;
- No commitments should be made until all references are directly verified through some reputable and reliable source;
- Until references are verified, telex and written communications concerning the transactions should be avoided;
- Fees should not be paid until funds are verified and physically transferred;
- Suspicious transactions should be immediately reported to the FDIC and to the FBI;
- Remember, if the deal sounds too good to be true, it probably is.
12
Q
9.1 BANK FRAUD & INSIDER ABUSE
What are potential problems when dealing with offshore transactions? (MOON ML)
A
- Many are only “shell” institutions with little or no capitalization, no actual main office, no fixed asset investment, no actual staff and few other characteristics of a legitimate institution;
- Obligations have been purchased for a fraction of their face value for the sole purpose of defrauding legitimate institutions and other businesses;
- Offshore companies, including financial institutions, are frequently established for the purpose of:
- Hiding the true identity of the principals,
- Laundering money,
- Inflating financial statements
- Issuing false documents to secure loans;
- Names of offshore “shell” institutions are often similar to those of major legitimate financial institutions which are listed in international banking directories;
- Many instances of fraud involving obligations of offshore institutions, including certificates of deposit, letters of credit, drafts, commitments, etc.;
- Licenses for many offshore financial institutions are issued upon receipt of relatively nominal fees and minimal background verifications
13
Q
9.1 BANK FRAUD & INSIDER ABUSE
What can examiners to do detect possible fraud with wire transfers? (RFVR)
A
- Review wire transfer procedures for possible circumvention of internal controls and system security measures;
- Follow up on any exceptions;
- Verify source and disposition of suspicious wire transfers;
- Review accounts with frequent wire transfers to determine if the activity appears legitimate.
14
Q
9.1 BANK FRAUD & INSIDER ABUSE
Suggested actions that can detect or prevent money-laundering are: (RPRR)
A
- Review results of the institution’s independent testing for compliance with the Bank Secrecy Act;
- Perform Bank Secrecy Act examination procedures;
- Request verification of Currency Transaction Reports filed by the institution;
- Review all transactions involving offshore institutions to see if they appear to represent legitimate business activities.
15
Q
9.1 BANK FRAUD & INSIDER ABUSE
What are the warning signs of fraudulent securities trading activities? (SOLID MIT)
A
- Securities held for short term trading are not appropriately identified and segregated from those that are held primarily as a source of investment income;
- Overreliance is placed on the purported safety of the securities since they involve U.S. Government issues;
- Little or no attention is given to “interest rate risk” prior to the transaction taking place;
- Investments bear no reasonable relationship to the institution’s size or its capital accounts;
- Delayed settlements over unreasonable time periods sometimes allow management to make imprudent purchases and avoid booking the transaction on a timely basis;
- Management lacks the expertise needed to fully understand the ramifications of proposals made by brokers and/or they perceive an unrealistic opportunity to enhance income;
- Institution engages in reverse repurchase agreements with brokers which allows institutions to erroneously defer recognition of losses;
- Trading account securities are not revalued periodically and are not reported consistently at market value or the lower of cost or market value.
