Sheila Keefe, CFE, CPA
Principal, BDR Advisors LLC
Lousy Tone at the Top Breeds Fraud
Pamrapo Savings Bank of New Jersey first made headlines last March when pleading guilty to conspiracy to commit Bank Secrecy Act (BSA) violations and forfeiting $5 million. Pamrapo admitted it had willfully violated the BSA to avoid the expenses associated with compliance (those pesky compliance expenses). It concealed its customers’ illegal or suspicious activities by failing to file Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs) and willfully failed to maintain adequate anti-money laundering programs.
Per Assistant Attorney General Lanny A. Breuer, DOJ Criminal Division, “This case is a good example of how disregarding reporting and compliance can turn into a crime. [The] guilty plea by Pamrapo Savings Bank should remind financial institutions, large and small across the country, of the high price they will pay for ignoring the law.” Read the full article here.
Well, perhaps the DOJ enforcement action did remind other financial institutions of the importance of ethical business practices, but unfortunately for Pamrapo Savings Bank, the lessons were quickly forgotten. Within a year of the DOJ settlement, a Pamrapo Savings Bank affiliate, Pamrapo Service Corporation, was in the news when a former managing director embezzled more than $600,000 in commissions and was convicted of 33 counts of mail fraud.
Lousy tone-at-the-top was definitely the culprit with the Pamrapo Service Corporation embezzlement, with the ill-gotten gains in the form of ‘commissions’ approved by the bank founder and fraud perpetrator’s father. The ‘commission’ compensation arrangement was developed when the son went to the father seeking additional income in response to a pay cut. The ‘commissions’ were deemed fraudulent because: (a) the commissions represented a change in accounting treatment for ongoing business activities for which the son had previous received no personal economic benefit and (b) no other officer or director of either the bank or the subsidiary was aware of the new arrangement.
Other organizations have suffered similar losses due to unreported conflicts-of-interest and improper related party transactions. It is notable with the Pamrapo organization because they had so recently been reprimanded and apparently made little effort to change their ways. In the aftermath of a fraud detection, it is crucial that organizations take action to prevent additional fraud. Lousy tone-at-the-top can be especially difficult for companies to correct. However, little can change without it.
Read more of Sheila's insights on her blog, Business Done Right.