By Michael Mulholand

No credit union manager wants to think his/her employees are stealing money or member information. But internal fraud (employee fraud) is a major problem for financial institutions of all sizes—not just the biggest banks.

In fact, as more of the larger banks implement sophisticated fraud detection systems, the problem of fraud is migrating to credit unions, which are seen as vulnerable, trusting institutions ripe for fraud.

While fraud often is a hidden problem, each incident generates thousands of dollars in losses for credit unions and exposes members to losses of funds and private data. Plus, fraud damages your credit union's reputation.

Internal fraud covers any type of fraud perpetrated by one of your employees—working alone, with others within the credit union, or (more often now) in collusion with crime rings outside your institution.

A wide-ranging issue

Internal fraud includes employees making inappropriate fee reversals from the general ledger, manipulating incentive pay, self-dealing, raiding dormant accounts, adjusting expense reports, and more.

And internal fraud isn't just about money, it also includes stealing member data that can then be sold to identity theft rings—or used to commit other types of financial fraud, such as applying for a line of credit.

Why do some employees do this? They may feel undercompensated or underappreciated. They may view stealing as simply taking an inappropriate loan they intend to pay back.

They may have a drug or gambling habit, debt they're having trouble repaying, or a burdensome mortgage. There are many rationalizations and motivations for committing fraud.

For credit unions, the problem becomes even more personal given the inherent close-knit nature of these organizations. Fraudsters aren't always the newest employees. They also can be longtime, highly trusted employees—those with the deep knowledge of how your credit union works and how best to steal from it.

Proactive fraud monitoring

Acts of fraud leave evidence hidden within the data streams your credit union generates. You may find it within the general ledger (i.e., fee reversals), member accounts, or other data. But you'll find it only if you're proactively monitoring for potential problems—vigilantly and consistently.

The average duration of an internal fraud incident is 18 months. By then, the losses are large and the damage is done.

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