Fraud Identification Training Sept-Oct 2022

CASE STUDY 7

What is your next course of action?

You discuss the WFB tie-in of the zero-coupon CDs and brokered CDs with your OM and EIC. The EIC thinks additional investigation may be needed, but first wants to talk with President Fox. Mr. Fox stated the transactions with WFB had occurred over the past 13 months, and the bank had not gotten around to updating the Investment Policy and securities dealer list. When questioned about the transactions, President Fox indicated that a broker from WFB originally approached him about taking “market rate” brokered deposits (liabilities). This contact was a ‘cold call.’ President Fox reasoned that the bank could pay market rate for local deposits of this size just as easily, so he declined the offer. Several weeks later, the broker approached President Fox with something he called a “reverse arbitrage” transaction. According to President Fox, the WFB representative explained that the bank would buy long-term zero-coupon CDs in return for accepting below market funding from brokered CDs. President Fox stated that he made no attempt to check the asset yields and relied on the broker’s expertise; however, he reasoned that since the assets were at market rate and the liabilities were below market rate, there was “no way the bank could lose.” He indicated that the bank used WWTC for safekeeping of the CDs because that is whom WFB normally used. No due diligence checks were performed on either WFB or WWTC.

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