Fraud Identification Training Sept-Oct 2022

CASE STUDY 7

THE CASE OF HOW CAN WE LOSE?

Situation:

You are a team member assigned to the detail portion of an examination at an $80 million bank in Eastern Iowa. Historically, the bank has not been viewed as a problem, but prior Reports of Examination (ROE) have indicated that President Sylvester (Sly) Fox also is the bank’s Investment Officer and management is not very sophisticated. Nevertheless, the bank operates in a rural location and management has typically “kept it pretty simple.” Your first assignment is to review the bank’s investments. You appropriately review the Investment Policy, Investment Committee minutes, investment portfolio printout, and safekeeping receipts. This review reveals that the $18 million portfolio generally conforms to parameters in the Investment Policy, with the exception of $4 million in what appears to be long-term (30-year maturity), zero-coupon certificates of deposit (CD) from various banks nationwide. This type of investment is not discussed in the Investment Policy and you are unclear as to how it fits with the bank’s investment strategy. These CDs are held in safekeeping at the Arizona location of Wild West Trust Company (WWTC), an affiliate of Western Frontier Brokers, Reno, Nevada (WFB). The safekeeping receipts received from WWTC match information on the investment portfolio printout. After discussing your initial findings with the Operations Manager (OM) and Examiner In Charge (EIC), you scan the purchase invoices for more information and determine the CDs were obtained from WFB. WFB is not on the Board-approved securities dealer list. You also note that the invoices and safekeeping receipts reflect Average Annual Yields (AAY) that appear to be in line with market yields. Before discussing your investment questions with President Fox, the OM suggests that you begin your next task, which is to review the bank’s asset/liability management practices. Your review of the pre-examination planning memo indicated that the bank has had some difficulty attracting core deposits for funding, as has been the case at many banks, and obtained approximately $10 million in broker-placed CDs. You review the Asset/Liability Management Policy, noting that the use of brokered deposits is permitted. Because you have not encountered brokered deposits before, the OM directs you to review the broker contract, interest rates, and maturities as a training exercise. You note that the brokered CDs were also placed by WFB. The CDs have maturities of one year or less and interest rates well below those for comparable size and maturity CDs in the local market.

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