Emerging Loss Trends Threaten CUs' Financial Health

Internal fraud, third-party litigation claims form a two-pronged threat.

July 08, 2013
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Credit unions are becoming more susceptible to emerging loss exposures, a CUNA Mutual Group risk management specialist said at CUNA's America's Credit Union Conference.

Credit unions face a two-pronged loss threat: fraudulent acts committed directly against the institution, which result in immediate losses; and third-party claims, litigation, and subsequent losses, according to Roger Nettie, senior risk management consultant.

Direct losses can result from myriad reasons, including employee dishonesty, illegal funds transfers and electronic crime, Nettie told Discovery breakout session attendees.

Employee dishonesty is universal but banking and financial services are the most commonly victimized industries, according to the 2012 Global Fraud Study conducted by the Association of Certified Fraud Examiners.

Instances of employee fraud last a median of 18 months before detection, with a median loss of $140,000, the study indicates. More than one-fifth of these incidents caused losses of at least $1 million.

“The longer a perpetrator works for an organization, the higher fraud losses tend to be,” Nettie said. “CUNA Mutual Group claims records show that over a five-year period, employee dishonesty represented just 13% of fraud claims, but 45% of fraud losses.”

Many credit unions believe all their employees are trustworthy and that their internal controls are strong enough to prevent internal theft. Yet, it still occurs.

“Fraud does not discriminate," Nettie said. "There is no immunity to this exposure based on geography, asset size, employee tenure, or past experience."

Another growing area of direct losses is wire fraud, especially from HELOC accounts, with credit unions reporting more than $25 million in losses from 2007 to 2012. The average reported loss in 2012 was $175,000, with some events approaching $1 million.

“Credit unions experiencing losses generally had inadequate security for large dollar transfers, enabling crooks to easily defeat callback security measures,” Nettie said.

Consequently, CUNA Mutual Group implemented new terms with its funds transfer coverage to encourage additional controls for remote requests, and discourage the practice of accepting large-dollar remote requests. Nettie offered a number of recommendations to limit wire fraud, such as spotting red flags and using layered levels of security.

Other forms of electronic crime that cause direct losses include computer malware and money mules that illegally transfer money on behalf of scam operators, typically in another country.

Prevention measures such as cookies, device recognition, Internet protocol and challenge/response questions have limited effect on this fraud. As alternatives, Nettie suggested out-of-band authentication, hardware tokens, digital certificates, and biometrics.

Employment practices liability claims and subsequent litigation continue to be credit unions' top liability loss categories.

“EPL losses make up nearly two-thirds of all of CUNA Mutual Group Management and Professional Liability losses, with the most common allegations being wrongful termination, retaliation, and race and gender discrimination," said Nettie, who suggests credit unions request legal counsel review policies and procedures, then train staff on those guidelines.

Another costly and growing threat is lender liability claims, which generally allege the credit union failed to follow state law requirements in its Notices of Intent to sell repossessed property and Notices of Deficiency letters.

“Usually, this is a case of you getting sued by your worst borrower and then having it mushroom into a class action lawsuit,” Nettie said. “It’s vitally important to have your forms reviewed and approved by legal counsel for each applicable state, and train employees on how to properly complete the forms.”

Follow the links to read more ACUC coverage from News Now and Credit Union Magazine.

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Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

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