In one creative scheme involving fraudulent life insurance policies, a Virginia man admitted to stealing more than $53 million from banks in several states (details in the right-hand box). He then purchased a fleet of exotic sports cars and an 8,000-square-foot home that eventually wound up in the hands of creditors.
In order to prevent a similar fraud from taking place at your institution, consider the following:
Does your bank confirm life insurance policies? Although it is not unusual to accept universal or whole life insurance policies as collateral, verifying their authenticity is crucial. Loan applicants should willingly provide permission to contact insurance companies to confirm that the policies are legitimate. Relying exclusively on information provided by borrowers increases the probability that a fraudulent policy will be offered as collateral. Consider referencing a third-party data service such as Dun & Bradstreet or Lexis/Nexus to verify the insurance company’s existence. URL and email verification. In the Virginia life insurance fraud case, the criminal created fake domain names and email addresses and fabricated Federal Express mailings as part of his scheme to convince bankers that the life insurance policies were legitimate. To help prevent this from happening at your institution, implement a process to investigate the URLs provided as part of a loan application. There are a number of free online tools that can provide information on the age, ownership and traffic associated with a domain name.
Conduct a background check. Depending on the size of the loans being issued, it may be prudent to conduct a formal background check. There are a number of reputable services that can provide biographical information that can then be compared to the borrower’s loan application. In addition, it may be appropriate to conduct background checks as well as Internet searches once the loan is funded. In the case of the Virginia life insurance fraud, conducting an Internet search using the borrower’s name would have uncovered an article that appeared in the Washington Post 18 months before he was apprehended. The article included a picture of the criminal as well as a list of the exotic cars he owned and his monthly insurance premium. This information may have triggered an in-depth review of the man’s accounts before he fled the country.
Understand a borrower’s entire financial picture.It is unclear under what circumstances the Virginia criminal received the life insurance policies; however, consider requesting documentation that details previous premium payments or the initial payment that funded each policy. In addition, consider seeking approval from the borrower to contact other banks or financial institutions where he or she maintains a relationship. As with the verification of insurance policies, do not accept contact names and phone numbers from the borrower. Instead, locate the bank’s main telephone number and call the institution directly. If your bankers are not familiar with the bank in question, consider using your institution’s resources as well as Internet resources to verify that you are talking with a real bank and not one created by the borrower to facilitate fraud. Finally, the borrower must be required to submit detailed financial statements as well as forecasts showing how the loan proceeds are to be used. These forecasts can then be used to track the borrower’s financial performance over time.
Build a relationship with borrowers.Disbursing millions of dollars to a customer who has little or no track record at your bank is risky. Instead, consider increasing loan amounts over time based on the borrower’s prudent use of the proceeds. If the borrower provides financial statements prepared by a CPA firm, always verify that the firm is a legitimate business. If possible, consider requesting that your client allow you to talk directly with his or her CPA firm. Some firms are very reluctant to express concerns about clients in writing, but they may be willing to share their concerns over the phone or in a face-to-face meeting.
Implement fraud training.Consider developing targeted fraud training for high-risk branches or departments. For example, all employees involved in processing loan applications could share information about cases such as this one. The training should include a review of red flags that may be indicative of fraud as well as how best to report suspected cases to the appropriate department within the bank.
Contact the specialists.It is crucial that employees know when to engage your bank’s fraud or anti-money laundering department. These departments have considerable resources that most employees do not have access to, including highly-trained specialists. Your branch employees are your bank’s first — but not its only — line of defense. Engaging your bank’s experts as soon as a problem arises can significantly reduce exposure to losses and allow your institution to demonstrate a proactive approach to compliance.
For more information on how we can help your community bank, please contact Sonny MacArthur at firstname.lastname@example.org or 404-420-5631.