OTS Sets Sights on Insider Abuse

Revised Handbook Addresses Fraud Concerns and Controls
OTS Sets Sights on Insider Abuse
An increase in white collar crime is behind the latest update of the Office of Thrift Supervision's examination handbook. The revisions include internal measures and controls banks and credit unions should use to curb fraud, as well as a list of red fraud flags, including vague fraud policies and frequent changes in auditors.

Internal fraud is to blame for most breaches and financial losses. Identifying it early, or preventing fraud before it starts, must be a priority, the OTS says.

Recommendations and Red Flags

Among the recommended internal controls are anonymous reporting or whistleblower hotlines, as well as proactive fraud-detection systems such as data mining tools and data analysis.

The list of red flags to watch for includes:

  • A dominant officer who has control over the institution or a critical operational area;
  • Internal audit restrictions or unusual reporting relationships, such as the internal auditor not reporting directly to the board of directors or audit committee;
  • Fraud policies are vague and/or are not in writing;
  • Written policies are not followed;
  • Unusual or lavish fixed assets, such as expensive artwork in the office;
  • Management attempts to influence an audit examination or audit findings;
  • Material internal control deficiencies; and
  • Frequent changes of auditors.

The OTS suggests investment fraud and Ponzi schemes are increasing as a result of market deterioration. And many of these schemes, especially in the mortgage-fraud arena, have led to bank failures. Oversight from an institution's board of directors plays a significant role in managing fraud and risk.

Last week's arrest of Lee Farkas, the former head of mortgage lender Taylor Bean & Whitaker, shines a light on the growing mortgage-fraud crisis. Farkas' scheme led to the closure of Montgomery, Ala.-based Colonial Bank, Taylor Bean & Whitaker's biggest lender.

Mortgage fraud is difficult to combat, because it often involves insider abuse. The FBI estimates that 80 percent of all mortgage fraud involves collaboration or collusion by industry insiders.

The Federal Bureau of Investigation says fraud becomes more expensive for financial institutions over time. An estimated 46 percent of all operational risk loss events are related to fraud, with the average loss per instance totaling $70 thousand. Mortgage fraud is one the highest. The FBI recently released its, 2009 Mortgage Fraud Report which says mortgage-fraud incidents rose 5 percent (67,190 reports) in fiscal year 2009, when approximately $14 billion in fraudulent loans are estimated to have originated.

About the Author

Tracy Kitten

Tracy Kitten

Former Director of Global Events Content and Executive Editor, BankInfoSecurity & CUInfoSecurity

Kitten was director of global events content and an executive editor at ISMG. A veteran journalist with more than 20 years of experience, she covered the financial sector for over 10 years. Before joining Information Security Media Group in 2010, she covered the financial self-service industry as the senior editor of ATMmarketplace, part of Networld Media. Kitten has been a regular speaker at domestic and international conferences, and was the keynote at ATMIA's U.S. and Canadian conferences in 2009. She has been quoted by CNN.com, ABC News, Bankrate.com and MSN Money.

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