FINANCIAL INSTITUTION FRAUD Flashcards
Embezzlement Schemes False Accounting Entries
Employees debit the general ledger to credit their own accounts or cover up customer account thefts.
Embezzlement Schemes Unauthorised Withdrawals
Employees make unauthorised withdrawals from customer accounts.
Embezzlement Schemes Unauthorised Disbursement of Funds to Outsiders
Employees cash stolen/counterfeit items for outside accomplices.
Embezzlement Schemes Paying Personal Expenses from Bank Funds
An officer or employee causes the bank to pay personal bills, then causes amounts to be
charged to bank expense accounts.
Embezzlement Schemes Theft of Physical Property
Employees or contractors remove office equipment, building materials, and furnishings from bank premises
Embezzlement Schemes Moving Money from Customers’ Dormant or Inactive Accounts
Persons with apparent authority create journal entries or transfer orders not initiated by
customers to move money among accounts.
Embezzlement Schemes Unauthorised, Unrecorded Cash Payments
A director, officer, or employee causes cash to be disbursed directly to self or accomplices and does not record the disbursements
Embezzlement Schemes Theft and Other Unauthorised Use of Collateral
Custodians steal, sell, or use collateral or repossessed property for themselves or
accomplices
Dormant or inactive accounts are
those defined as “bank or brokerage accounts showing little or no activity, presumably with small and without increasing balances.”
Embezzlement Schemes Detection Methods
if the dollar amount of the embezzlement scheme is small enough such that the financial statements will
not be materially affected, embezzlement fraud can be most effectively detected through the
review of source documents.
or large embezzlements, the most efficient method of detection is an analysis of the financial tatements (which is also a review of documents)
Common Loan Fraud Schemes Loans to Nonexistent Borrowers
False applications, perhaps with inaccurate financial statements, are knowingly or
unknowingly accepted by loan officers as the basis for loans. These types of loan fraud can
be perpetrated by people either external to the lending institution (“external fraud”) or by
officers, directors, or employees of the victim institution (“internal fraud”).
Common Loan Fraud Schemes Sham Loans with Kickbacks and Diversion
Loan officers will sometimes make loans to accomplices who then share all or part of the
proceeds with the lending officer. In some instances, the loans are charged off as bad debts;
in other instances, the bogus loans are paid off with the proceeds of new fraudulent loans.
Common Loan Fraud Schemes Double-Pledging Collateral
Borrowers pledge the same collateral with different lenders before liens are recorded and
without telling the lenders.
Common Loan Fraud Schemes Reciprocal Loan Arrangements
Insiders in different banks cause their banks to lend funds to the others, or sell loans to other banks with agreements to buy their loans—all for the purpose of concealing loans and sales.
Common Loan Fraud Schemes Swapping Bad Loans—Daisy Chains
In a daisy chain, a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process. Its purpose is to mask or hide bad loans by making them look like they are recent and good.
Common Loan Fraud Schemes Linked Financing
Large deposits are offered to a bank (usually brokered deposits) on the condition that loans
are made to particular persons affiliated with the deposit broker. High returns are promised,
but the loans are longer term than the deposits (hot money). Sometimes kickbacks are paid
to the broker or banker.
Common Loan Fraud Schemes False Applications with False Credit Information
Sometimes loan applicants provide false information about their credit situation, and/or overstate their assets.
Common Loan Fraud Schemes Single-Family Housing Loan Fraud
In this scheme, unqualified borrowers misrepresent personal creditworthiness, overstate ability to pay, and misrepresent characteristics of the housing unit.
Red Flags of Construction Loan Fraud
Nonperforming Loans High Turnover in Developer’s Personnel High Turnover in Tenant Mix Increased Change Orders Missing Documentation Loan Increases or Extensions, Replacement Loans Funds Transformation Cash Flow Deficiencies Change in Ownership Makeup Disguised Transactions
Fraud schemes resulting in a nonperforming loan include:
• Fraudulent appraisals—The cash flow cannot support an inflated loan and resulting debt
amount.
• False statements—The loan was made on false or fraudulently presented assumptions.
• Equity skimming—There was never any intention to make the underlying loan payments.
• Construction over-budget items—The over-budget amount might be a concealment method for other schemes such as embezzlement, misappropriation, or false statements.
• Bribery—The loan was made because the lender received a bribe or a kickback from the borrower.
• Land flips—The purpose of the loan was to finance the seller out of a property that has an artificially inflated value.
• Disguised Transactions—Transactions that are sham transactions, without substance, made
to conceal other ills.
Fraudulent appraisals result from any number of situations, some of which are:
• Intentional use of an incompetent appraiser.
• “Stacking the deck” by giving the appraiser improper or false assumptions to use in arriving at the value such as:
− Assume zoning will be changed for a higher and better use when in fact zoning will not be changed.
− Assume unrealistically high vacancy and low expense rates.
− Assume unrealistically high income, selling prices, or absorption – the rate at which vacant space will become rented.
− Otherwise influencing the appraiser, e.g., paying above-market fee or promising
future business.
• Direct collusion with the appraiser to commit fraud.
Uses for Fraudulent Appraisals
• To obtain approval on marginal or substandard loans to attain or exceed goals in order to be promoted or receive commission, bonus, or raises.
• To justify extending or renewing a “bad” loan to avoid recognition of a loss that might defer commission, promotion, bonus, or raises.
• To avoid adverse publicity and regulatory, management, and shareholder disapproval
because of excessive losses.
• To avoid recognition of a loss on real estate owned, and to permit additional capital
infusions.
• To criminally gain money.
Red Flags of “Made-as-Instructed” Appraisals
• The appraiser used has never been used before, is not on an approved list, has no
professional credentials, or those offered are of questionable credibility.
• The appraisal fee is unusually high.
• Invalid comparables are used.
• Supporting information is missing, insufficient, or contradictory.
• Market data does not support the price and absorption figures used to arrive at value.
Detecting Fraudulent Appraisals
(1) Read the appraisal. Does it match the documents in the file
(2) Is there sufficient demand for the project to ensure absorption of the property into the
marketplace?
(3) Are there unique characteristics of the project that will ensure a competitive advantage over other projects?
(4) Is the project sensitive to changes in local economic conditions?
