After nearly three decades working with credit unions to detect and prevent employee dishonesty, I’ve seen the same triangle of causation nearly every time an employee is caught embezzling money: need, opportunity, and rationalization.
The need is usually a personal financial emergency brought on by divorce, an extramarital affair, a child’s financial distress, uninsured medical costs, an addiction, etc.
The opportunity to embezzle usually stems from inadequate internal controls, inaccurate audits, lack of oversight, or abuse of authority.
Rationalization is the psychological technique criminals use to justify their actions. Some folks convince themselves—at first—that they’re just borrowing the money and will pay it back.
Other times, perpetrators believe their employer owes them something. Perhaps they were passed over for a promotion or a raise.
Take these steps to take to detect or prevent embezzlement:
1. Know who you’re hiring
It’s basic: Verify employment and education histories on applications. Contact references.
I recall a large lending loss that could have been avoided had the credit union taken these simple steps before hiring a loan officer. A background check should be performed, to include at least a credit report and criminal record check.
Your bond provider should offer a bondability verification service for prospective employees. You may also want to consider drug screening.
2. Document—and enforce—a zero-tolerance fraud policy
Your board of directors, with legal counsel, should develop a fraud policy, and all employees should read and sign it.
To give the policy teeth, establish a procedure to protect whistle-blowers and encourage employees to report concerns to the appropriate senior manager or supervisory committee. The procedure must keep all reports confidential and guarantee the credit union will not retaliate against whistle-blowers.
3. Establish strong internal controls
A simple system of checks and balances can hold individuals accountable for their actions—and they’d have prevented many employee embezzlement losses I’ve seen over the years.
Here are a few basic safeguards:
►Segregate duties. Most lending processes, or processes for handling or accounting for funds, can be broken into separate functions so one employee doesn’t have complete control.
►Require individual responsibility for cash. Each employee responsible for a cash supply should have a lockable container (drawer, tray, etc.) under his or her exclusive control.
►Have forced dual control of the cash supply. If you use dual control of your money safe, it must be “forced.” That is, you must use a dual control feature on the cash container so two employees must gain access to the cash together.
Examples: Each person has half of a lock combination, or they use a combination lock in conjunction with a key lock so one person has the combination and the other has the key.
►Require vacations. Require employees to take seven consecutive days off once per year, and delegate their duties completely to another employee. Watch for irregularities to surface during the employee’s absence.
►Audit nonfinancial transaction reports. Review lending reports and pay close attention to payment due dates that were advanced, interest rate changes, payment amount and frequency changes, and multiple address changes to a particular address.
Someone who doesn’t have transaction authority and isn’t involved in the lending process should review this report.
A U.S. District judge Monday dismissed three lawsuits--including one by the National Credit Union Administration--brought against U.S. Bank National Association and Bank of America, National Association regarding their duties as trustees of residential mortgage-backed securities.