9/24/2015
What you don’t know about will
hurt you!!!
 GREATEST RISK OF SUBSTANTIAL & MATERIAL
LOSS
1.
2.
3.
Suspects are familiar with systems and
procedures
Suspects have abundant opportunity
Many already may have a need
The misuse or misappropriation of
funds or property entrusted to an
employee
Employee trust provides the crutch
for supporting internal theft
1
9/24/2015
• Accounts for 30% of US business failures
• Average US business loses about 6% of gross
revenue to internal fraud ($400 billion annually)
• 41% of inventory shrinkage attributed to
employee theft vs. 35% attributed to shoplifting
• Banking ranks 3rd nationwide in the number of
unemployed of US industries
◦ Drugs
◦ Sex
◦ Gambling
◦ Expensive living standards
◦ Recover sudden loss of income
◦ Growing Family
 Company owes them (Seniority,
Performance)
 Arrogance (Don’t believe they will get
caught)
 Company can afford it
2
9/24/2015
 Employees irritated or angry
◦ Current situation or employment status
◦ Company policies
◦ Fellow employees
◦ Management
 Lax controls
 Acting in the moment (Impulsive)
• Excitement (Adrenaline Rush)
• Mental superiority
• Gamesmanship
• No need for what they steal
• 19 to 30 years of age
• Mid-level management or lower
• Divorced or husband unemployed
• Typically begin by borrowing from cash
drawer $1000 - $2,500
• Account for 40% of reported cases
3
9/24/2015
• 25 to 30 years of age
• Executive or administrator
• Upscale lifestyle or habit (gambling, drugs,
pornography)
• Feels challenged by the system feels the
need to defeat it
• $10,000 to $25,000
• Account for 60% of reported cases
•
•
•
•
•
•
Heavily in debt
Significant behavior changes
Lavish Lifestyle
Put in a lot of hours (overtime)
Avoid vacations
Assume responsibilities that are not
normally theirs (Control of area)
4
9/24/2015
• Fraudulent investment operation that pays
returns to its investors from their own money
or the money paid by subsequent investors,
rather than from the profit earned by the
return on the initial investment.
• The scheme uses the promise of abnormally
high, short term returns to entice investors.
• Named After Charles Ponzi who used the
scheme in 1920.
• The fraudulent securities operation stole so
much money it became famous and known
throughout the United States as the Ponzi
scheme.
• Stole $10-17 Billion Dollars from Investors
• Conducted over Twenty (20) Years
• Scheme Offered Modest Returns
• Madoff Conducted Legitimate Business
Simultaneously with Ponzi Scheme
5
9/24/2015
• Founded Bernard L. Madoff Investment
Securities LLC in 1960 as a penny stock
trader
• Started the firm with $5,000
• Began using innovative computer
technology to disseminate quotes
 The technology Madoff used helped develop
and became the National Association of
Securities Dealers Automated Quotations
(NASDAQ)
 The NASDAQ is the 2nd largest stock
exchange in the world with a total
capitalization of over $4.5 trillion
• Chairman of the Board for the National
Association of Securities Dealers
• Board of Directors Securities Industry
Association along with his brother (SIFMA)
• Madoff’s niece was active on the Executive
Committee of SIFMA’s Compliance & Legal
Division
6
9/24/2015
• Contributed approximately $240,000 to
Democratic federal candidates, parties and
committees
• Prominent Philanthropist who served on
the boards of nonprofit institutions
• Donated millions of dollars to charities
such as Leukemia/Lymphoma and bone
marrow research along with hospitals and
theaters
 Investigated by SEC in 2004 but the
investigation was quashed due to “other
priorities”.
 During that time, an assistant director of
the investigating dept. married Madoff’s
niece.
• While awaiting sentencing, Madoff told an
SEC Inspector that he should have been
caught in 2004 but investigators never
examined his stock records or asked the
right questions.
• Madoff also admitted his longtime friendship
with the SEC Chairman and the SEC
Commissioner may have played a role.
7
9/24/2015
• Geek
• Administrator of Credit Union’s Loan
Origination Software
• Well Known and Long Time Associate
• Random Review of Member Accounts by
Finance on Interest Payments
• (3) Loans in Question
• Unusually Low Interest on Payments
8
9/24/2015
• Using the Test Area of the Loan Application
System to Make Changes and Uploading
the Changes to Production
• Re-opening Closed Loans on Acct and
Funding with Small Amts.
• Transferring Funds to Deposit Acct using
Home Banking
• Siphoned off approximately $90k during a 3
year period
• Forthcoming and Honest in the Investigation
• Incarcerated and Released
• Repaid Approximately $2k in last 4 years
9
9/24/2015
• Recent New Hire for a Branch that was Under
Producing
• Branch Manager from Another Local FI
• Personable, Charming, Poster Child for
Community
• Re-Staffed Branch/Recommended other
Associates
• Complaint from Elderly Member of $43k
Unauthorized Cash Withdrawal
• Member Rarely Appeared at the Branch
• Member Known to be Forgetful
10
9/24/2015
• Initial Complaint made by Member
Reported to Telebranch and Referred to
Tiffany Look
• Look Reported Complaint to Loss
Prevention
• Acct Research Revealed Evidence that
Look conducted Transaction and
Performed Other File Maintenance
• Signatures on Withdrawal Receipts
Materially Different from Normal
Signatures
• Withdrawal Occurred Nearly (5) Months
Prior to Discovery by Victim
• Look Used Associate Trust to Circumvent
Basic Controls and Policy
11
9/24/2015
• Not a Member
• Customer of FI where Look was formally
was Employed
• Used Victim’s Information to open new acct
and secure $25k Unsecured Loan
• Notified of Possible Victim by Another FI
• Acct and Loan were unknown to the Victim
• All Acct Setup and Loan Documents
completed and Processed by Look
12
9/24/2015
• Siphon Small Amounts of Funds from Acct
that would go Unnoticed by Victim
• Redirected $6k in Social Security
Payments over a 5 month period using
official check withdrawals from Member
Acct
• Look offered information during
subsequent interview
Kenneth Gutshall
Age: 92
• Decedent’s parents appeared at branch
office to settle affairs.
• Parents unaware of all assets of acct.
• Look created several official checks for
funeral expenses, etc., including a check
for $62k made payable to another FI that
she kept and deposited
13
9/24/2015
• Approximately $136k stolen from Member Accts
• Look used her personality to steal $$$ right in
front of people
• Exposed weaknesses in controls
• Look plead guilty to Mail Fraud and Theft by
Deception in Federal Court and Sentenced to
Federal Prison Term.
•
•
•
•
•
•
Heavily in debt
Significant behavior changes
Lavish Lifestyle
Put in a lot of hours (overtime)
Avoid vacations
Assume responsibilities that are not
normally theirs (Control of area)
14
9/24/2015
• Adverse Publicity
• Damaged Public Image
• Loss of Morale
• Trauma to Co-Workers
• Create, implement and communicate
procedures for treatment of employee
unethical and criminal conduct
• Know your employee
• Due diligence in hiring (background
checks, check references)
• Be mindful of red flag behavior
• Create a Culture of Honesty
• Build awareness
• Loss Prevention and internal fraud
employee training
• Define and communicate unethical
behavior
• Provide communication channel to report
unethical or illegal behavior
15
9/24/2015
• Integrate Technology
• Camera surveillance (Deterrent)
• Access Control (Limit opportunity)
• Limit employee awareness of system capabilities
• Target asset protection based on risk
• Monitoring
• Dual Control
• Heighten awareness of changes in employee
baseline behavior (All levels)
16