Banking Exec Sentenced for Fraud Scheme

Theft Proves Anti-Fraud, Ethics Training Are Necessities

By , November 28, 2012.
Banking Exec Sentenced for Fraud Scheme

A former banking executive in Ohio has been ordered to pay more than $72.5 million and serve 14 years in prison for the role he played in a 10-year loan-fraud plot that led to one of the largest credit union failures in U.S. history, federal authorities say.

See Also: Digital Identity Verification for Fraud Mitigation

The ponzi scheme, which involved loans paid out to fictitious businesses, led to the April 2010 liquidation of St. Paul Croatian Federal Credit Union, which wound up costing the National Credit Union Share Insurance Fund $170 million, according to the Federal Bureau of Investigation.

On Nov. 26, Anthony Raguz, the former chief operating officer of the $250 million institution, was sentenced in a federal district court after he pleaded guilty last year to six counts, including bank fraud, money laundering and bank bribery.

Between 2000 and April 2010, Raguz issued more than 1,000 fraudulent loans totaling more than $70 million to more than 300 account holders at St. Paul. He accepted more than $1 million worth of bribes, kickbacks and gifts in exchange for the fraudulent loans he issued, according to court documents.

Anti-Fraud Measures

Raguz' scheme is a classic example of why executives at smaller institutions must be subjected to the same separation-of-duty and cross-check policies as other employees, says Peter Tapling, a financial fraud expert and president of online authentication provider Authentify (see $14 Million Fraud Scheme Shutters CU).

"The one area that should be heavily policed is when money is flowing out of the bank," he says. "In smaller institutions, there is short-list group of individuals at the top that makes all of the decisions. ... not driven by technology, but driven by people that let things like this get through."

John Warren, vice president and general counsel of the Association of Certified Fraud Examiners, says St. Paul's fate should serve as a reminder that financial institutions must ramp up anti-fraud as well as corporate ethics training.

"Somewhere along the way, somebody had to have known or suspected that the COO of this bank was engaging in improper activities," Warren says. "It may very well be that those who suspected either didn't know how to recognize a fraud [event], how to report it, or why it was important to follow up and review the COO's transactions."

Basic controls should have prevented a scheme of this magnitude from going undetected for so long, Warren says. But oftentimes, controls are not implemented and enforced.

Fraudulent Loans

Raguz approved loans for accountholders with little or no assets, income or employment history and oversaw the fraudulent repayment of older loans with new loans issued to false companies, including Auto Truck Company and B.S. Construction, court records show.

He then laundered the funds through $372,000 in checks issued on his St. Paul account payable to The Vanguard Group, authorities say.

"This was a complicated fraud scheme, with shell companies and loan-payment manipulation," says Alphonse Pascual a security, risk and fraud researcher for Javelin Strategy & Research. "But an in-depth review by the NCUA [National Credit Union Administration] of previous examinations would have likely uncovered the crime, and there were enough red flags that there should have been a review."

Pascual contends the scheme was enabled by poor regulatory oversight and no due diligence from the credit union's board.

"The CU reported a 0 percent loan delinquency rate, which was also never questioned [by regulators]," Pascual says. "But what I find most unsettling is that the CU was repeatedly cited by NCUA examiners for certain issues, but no enforcement action was taken after the CU repeatedly failed to remediate examiners' concerns."

Tapling and Pascual say Raguz' sentence was appropriate. "The fact that he got any time at all is good," Tapling says. "And being asked to pay restitution for all of the money he stole is almost unheard of. It definitely is more than we've seen paid for white-collar schemes before."

Follow Tracy Kitten on Twitter: @FraudBlogger

  • Print
  • Tweet Like LinkedIn share
Get permission to license our content for reuse in a myriad of ways.
ARTICLE Spear Phishing: A Bigger Concern in 2015

Spear phishing is going to be a leading worry for banks in 2015, as hackers increasingly target...

Latest Tweets and Mentions

ARTICLE Spear Phishing: A Bigger Concern in 2015

Spear phishing is going to be a leading worry for banks in 2015, as hackers increasingly target...

The ISMG Network