Internal Routine & Controls (IRC)
& Fraud
2015 New York Region Directors College
FEDERAL DEPOSIT INSURANCE CORPORATION
Discussion Topics
Fraud: What It Is and Why People Commit It
Fundamentals of IRC and Fraud Prevention
Insider Fraud
Fraud Trends in the New York Region
IRC/Fraud Resources
Case Studies
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FEDERAL DEPOSIT INSURANCE CORPORATION
Fraud: What Is It?
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• The unlawful and intentional
making of a misrepresentation
with the intent to deceive and to
defraud by causing actual and
potential prejudice
• Wrongful or criminal deception
intended to result in financial or
personal gain
FEDERAL DEPOSIT INSURANCE CORPORATION 4
Fraud Triangle
FEDERAL DEPOSIT INSURANCE CORPORATION
Fundamentals of IRC and
Fraud Prevention
Board and Management’s Role
Prevention
Detection
Reporting
Duty of Loyalty
Duty of Care
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FEDERAL DEPOSIT INSURANCE CORPORATION
Fundamentals of IRC and
Fraud Prevention
Potential Director Liability
Failure to satisfy the duties of loyalty and care:
Director/officer engaged in dishonest conduct or
condoned abusive transactions with insiders;
Director/officer was responsible for the failure of the
bank to adhere to applicable laws, regulations, or bank
policies;
Directors failed to establish proper underwriting
policies and to monitor adherence thereto, or
approved loans that they knew or should have known
were improperly underwritten.
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FEDERAL DEPOSIT INSURANCE CORPORATION
Fundamentals of IRC and
Fraud Prevention
Basic Elements of an Internal Control System
Organizational Structure
Protection of Physical Assets
Accounting Procedures
Audit
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FEDERAL DEPOSIT INSURANCE CORPORATION
Fundamentals of IRC and
Fraud Prevention
Organizational Structure
An internal control system, at a minimum, should
provide for:
Directors’ Approvals
Segregation of Duties
Rotation of Personnel
Sound Personnel Policies
Vacation Policies
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FEDERAL DEPOSIT INSURANCE CORPORATION
Fundamentals of IRC and
Fraud Prevention
Protection of Physical Assets
Protection of assets can be accomplished by various
procedures including:
Cash Control
Joint Custody or Dual Control
Employee Hiring Procedures
Reporting Shortages
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FEDERAL DEPOSIT INSURANCE CORPORATION
Insider Fraud
Insider abuses include:
Failure to disclose their interests that borrow from the
bank or otherwise have business dealings with the bank
Diverting assets and income for their own use
Misuse of position by approving questionable
transactions for relatives, friends, or business associates
Abuse of expense accounts
Acceptance of bribes and gratuities
Other questionable dealings related to their positions at
the institution
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FEDERAL DEPOSIT INSURANCE CORPORATION
Insider Fraud
Insider Fraud Prevention
Strong code of conduct and ethics policy
Policy restricting or requiring disclosure of conflicts
of interest
Policy restricting gifts and gratuities
Full auditor access to the board
Control and review of expense accounts
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FEDERAL DEPOSIT INSURANCE CORPORATION
Insider Fraud
Insider fraud red flags include:
Living beyond their apparent means
Dramatic change in lifestyle/personality
Protective of certain customers
Disregard for established internal controls
Rarely takes vacations (or vacations are short)
Comes into work during vacation
First one to work/last one to leave
Overtime without additional pay
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FEDERAL DEPOSIT INSURANCE CORPORATION 13
Insider Fraud
Common Target Areas for Insider Fraud
Correspondent Bank Accounts
General Ledger Suspense Accounts
Payroll Accounts
Travel/Expense Reimbursement Accounts
Cashier’s Check/Official Check Accounts
Dormant Deposit Accounts
Bank Owned Deposit Accounts (Clearing Accounts)
FEDERAL DEPOSIT INSURANCE CORPORATION
Fraud Trends in the New York Region
Common Insider and Non-Insider Frauds
Embezzlement
Identity Theft/Account Takeover
Loan Fraud
Wire Fraud
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FEDERAL DEPOSIT INSURANCE CORPORATION
IRC/Fraud Resources
Statement Concerning the Responsibilities of Bank Directors and Officers • http://www.fdic.gov/regulations/laws/rules/5000-
3300.html#fdic5000statementct
Financial Crimes Enforcement Network • http://www.fincen.gov
FDIC: Risk Management Manual of Examination Policies – Internal Routine and Controls (Section 4.2) • https://www.fdic.gov/regulations/safety/manual/section4-
2.html
FDIC: Risk Management Manual of Examination Policies – Bank Fraud & Insider Abuse (Section 9.1) • www.fdic.gov/regulations/safety/manual/section9-1.html
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FEDERAL DEPOSIT INSURANCE CORPORATION
Case Study
Accommodating Officer
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FEDERAL DEPOSIT INSURANCE CORPORATION
Case Study
Accommodating Officer
What are the red flags?
What are the improper practices?
What actions should the bank take to prevent this
situation?
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FEDERAL DEPOSIT INSURANCE CORPORATION
Questions?
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