type: other

jurisdiction: US

text: b'NATIONAL CREDIT UNION ADMINISTRATION\n\n OFFICE OF INSPECTOR GENERAL\n\n\n\n\n MATERIAL LOSS REVIEW OF\n ST. PAUL CROATIAN\n FEDERAL CREDIT UNION\n Report #OIG-10-16\n October 7, 2010\n\n\n\n\n William A. DeSarno\n Inspector General\n\n\n\nReleased by: Auditor-in-Charge:\n\n\n\n\nJames Hagen Charles Funderburk\nDeputy Inspector General Senior Auditor\n\x0c CONTENTS\n\n\nSection Page\n\n\n\n I EXECUTIVE SUMMARY 1\n\n II BACKGROUND 4\n\n III OBJECTIVES, SCOPE AND METHODOLOGY 6\n\n IV RESULTS 8\n\n Why St. Paul Croatian Federal Credit Union Failed 8\n\n NCUA Supervision of St. Paul Croatian FCU 12\n\n Observations and Lessons Learned 26\n\n\n APPENDICES\n\n A Examination and Supervision History 28\n\n B Risk Indicators 30\n\n C Enforcement Actions 33\n\n D NCUA Management Comments 39\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\n EXECUTIVE SUMMARY\nThe National Credit Union Administration (NCUA) Office of Inspector General (OIG)\nconducted a Material Loss Review (MLR) of St. Paul Croatian Federal Credit Union\n(St. Paul). We reviewed St. Paul to (1) determine the cause(s) of the credit union\xe2\x80\x9fs\nfailure and the resulting loss to the National Credit Union Share Insurance Fund\n(NCUSIF); and (2) assess NCUA\xe2\x80\x9fs supervision of the credit union. To achieve these\nobjectives, we analyzed NCUA examination and supervision reports and related\ncorrespondence; interviewed management and staff from NCUA Region III; and\nreviewed NCUA guidance, policies and procedures, NCUA Call Reports, and NCUA\nFinancial Performance Reports (FPR).\n\nWe determined a suspected fraud was the direct cause of St. Paul\xe2\x80\x9fs failure. As of\nDecember 31, 2009, the credit union had approximately $238.8 million in total assets.\nSt. Paul had a substantial majority of its assets in loans that were supposedly\nsecured by members\xe2\x80\x9f shares. During the December 31, 2009, examination, NCUA\nfound the majority of the loans were not actually share secured and a number of them\nwere allegedly fraudulent. NCUA also found that St. Paul\xe2\x80\x9fs chief executive officer\n(CEO) manipulated loan records and masked the suspected loan fraud by constantly\nrefinancing certain loans or making advance payment on those loans. NCUA\nprojected an estimated loss of $170 million to NCUSIF.\n\nWe also determined that credit union management failed to meet their required\nobligations to implement proper internal controls and oversight. Specifically,\nmanagement did not (1) ensure adequate internal controls were in place; (2) ensure\nadequate policies were in place and adhered to; and (3) resolve prior examiner\nfindings in a timely fashion. For example, because the CEO handled most of the\naccounting and lending processes, credit union staff lacked the fundamental\nknowledge to run operations without the CEO\xe2\x80\x9fs direction after NCUA placed the\ncredit union into conservatorship. In addition, during previous examinations, credit\nunion staff told NCUA examiners that the data processing system did not have the\ncapability to freeze the shares used to secure loans. However, we found that the\nfailure to freeze the shares was not due to system capability, but rather that the CEO\npurportedly instructed the credit staff not to freeze the shares. Furthermore, the\nannual Supervisory Committee audits, although in compliance with NCUA\nregulations, were insufficient for a credit union of the size and complexity of St. Paul\nbecause the external auditor\xe2\x80\x9fs review process could not adequately address the\nneeds of the credit union. Although the CEO allegedly perpetrated the fraud, the\ncredit union Board of Directors and Supervisory Committee should have been more\ninvolved to prevent such issues from occurring in the first instance.\n\nWe further determined NCUA examiners did not adequately evaluate the risks to St.\nPaul operations. Specifically, examiners did not (1) thoroughly evaluate the credit\nunion\xe2\x80\x9fs internal controls when assessing transaction risk; (2) ensure credit union\nmanagement took corrective action on repetitive Document of Resolution (DOR)\nissues; and (3) expand examination procedures when red flags indicated higher risks\n\n\n\n 1\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nto the credit union. We found that prior to the discovery of the alleged fraud, NCUA\nexaminers were aware of some internal control weaknesses yet failed to rate\ntransaction risk as high. For example, during one examination the examiner noted no\nsignificant transaction risk concerns existed. However, the examiner reported a\n$99,000 wire transfer and a $64,000 automated clearinghouse transaction were not\nposted to the credit union books. In addition, examiners did not ensure St. Paul\xe2\x80\x9fs\nmanagement took corrective actions on repetitive DOR items, which included: (1)\nfreezing shares used as collateral; (2) obtaining an annual audit that adhered to\ngenerally accepted accounting principles and generally accepted auditing standards;\nand (3) addressing liquidity and asset liability management issues. Additionally,\nexaminers did not test for hidden delinquency or expand examination procedures\nwhen unusual financial performance ratios, abnormal real estate trends and\ninappropriate member business loans existed. Furthermore, we found the examiners\nnoted multiple red flags during the examinations conducted at St. Paul, but did not\nfollow-up on the exceptions or deficiencies found.\n\nFinally, we found that NCUA\xe2\x80\x9fs Quality Control Program was not effectively present for\nthis credit union. Of the three Supervisory Examiner (SE) evaluations conducted,\nnone of them addressed any of the multiple red flags that the examiners noted during\nthe examinations or the need for stronger supervisory actions for repeated DORs.\nMoreover, we believe the SEs should have questioned the continuous zero\ndelinquency and required the examiners to expand examination procedures and test\nfor zero delinquency. Additionally, we found NCUA Region III Division of Supervision\nwas not required to evaluate1 and review St. Paul\xe2\x80\x9fs written examination reports and\ndid not select any of St. Paul\xe2\x80\x9fs examinations for a random review.\n\nIn addition, we reviewed industry observations regarding occupational fraud. We\nbelieve the industry\xe2\x80\x9fs observations apply directly to issues we observed during our\nreview. We determined St. Paul\xe2\x80\x9fs lax internal control environment created an\nenvironment susceptible to fraud. Our comparative analysis can be found in Section\nC of this report.\n\nThis report does not contain recommendations, but provides observations and\nsuggestions. However, the OIG plans to issue a Material Loss Review capping report\nwith recommendations based on issues raised in this report as well as the other nine\nMaterial Loss Reviews conducted by the OIG. In addition, as resources allow, the\nOIG may also conduct more in-depth reviews of specific aspects of the NCUA\xe2\x80\x9fs\nsupervision program and make additional recommendations, as warranted.\n\n\n\n\n1\n According to NCUA guidelines, Region III Division of Supervision was not required to perform a quality control\nreview on St. Paul\xe2\x80\x9fs examinations because St. Paul was coded a CAMEL 2 and reported less than $250 million in\nassets.\n\n\n\n 2\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nAuditor observations made as a result of our review of St. Paul\xe2\x80\x9fs failure include:\n\n \xef\x82\xb7 Examiners did not consider the lack of adequate internal controls serious\n enough to rate transaction risk high at St. Paul even though this issue is an\n inherent problem in smaller credit unions. We believe the lack of internal\n controls and the repeatedly alleged data processing system issues indicated\n material weaknesses may have existed, warranting expanded examination\n procedures. Opportunities existed for management to reinforce the need for\n additional procedures.\n\n \xef\x82\xb7 Examiners need to be reminded of the importance of understanding that DORs\n are to be developed to outline plans to reduce areas of unacceptable risk, with\n particular emphasis on the types of safety and soundness concerns that were\n clearly present in the years leading up to St. Paul\xe2\x80\x9fs failure. Further, any\n reminder provided to examiners on the DOR process would be remiss if DOR\n follow-up in subsequent examinations were not also emphasized.\n\n \xef\x82\xb7 A lack of emphasis on the importance of additional procedures, such as the\n Red Flag review, and expanding procedures when red flags are detected.\n Specific monitoring triggers could be developed to more easily \xe2\x80\x9ered flag\xe2\x80\x9f areas\n to be investigated, as well as provide a specific time allocation.\n\nFinally, we found NCUA took or planned to take actions that would address changing\nthe effective dates of the examinations, testing for zero or abnormal delinquency, and\nloan file reviews.\n\nWe appreciate the courtesies and cooperation NCUA management and staff provided\nto us during this review.\n\n\n\n\n 3\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nBACKGROUND\n\nSt. Paul Croatian Federal Credit Union\n\nSt. Paul Croatian Federal Credit Union (St. Paul) was located in Cleveland, Ohio. It\nwas chartered as a Federal Credit Union (FCU) in 1943 to serve members of St. Paul\nCroatian Parish, spouses of persons who died while within the field of membership of\nthis credit union, employees of the credit union, persons retired as pensioners or\nannuitants from the credit union, members of their immediate families, and\norganizations of such persons. St. Paul had two branches, ten full-time employees,\nseven Board members and three Supervisory Committee members. As of December\n31, 2009, the credit union reportedly had approximately $238.8 million in total assets\nand served 5,399 members. St. Paul was located in NCUA\xe2\x80\x9fs Region III.\n\nOn April 23, 2010, NCUA placed St. Paul into conservatorship and subsequently, on\nApril 30, 2010, the NCUA Board placed St. Paul into involuntarily liquidation pursuant\nto section 207(a)(1)(A) of the Federal Credit Union Act2 (FCU Act) and appointed\nitself as liquidating agent. St. Paul\xe2\x80\x9fs failure resulted in a loss to the NCUSIF of\napproximately $170 million.\n\nNCUA Examination Process\n\nTotal Analysis Process\n\nNCUA uses a total analysis process that includes: collecting, reviewing, and\ninterpreting data; reaching conclusions; making recommendations; and developing\naction plans. The objectives of the total analysis process include evaluating CAMEL3\ncomponents, and reviewing qualitative and quantitative measures.\n\nNCUA uses a CAMEL Rating System to provide an accurate and consistent\nassessment of a credit union\'s financial condition and operations. The CAMEL rating\nincludes consideration of key ratios, supporting ratios, and trends. Generally, the\nexaminer uses the key ratios to evaluate and appraise the credit union\xe2\x80\x9fs overall\nfinancial condition. During an examination, examiners assign a CAMEL rating, which\ncompletes the examination process.\n\nExaminer judgment affects the overall analytical process. An examiner\xe2\x80\x9fs review of\ndata includes structural analysis,4 trend analysis,5 reasonableness analysis,6 variable\n\n\n\n2\n 12 U.S.C. \xc2\xa71787(a)(1)(A).\n3\n The acronym CAMEL is derived from the following components: [C]apital Adequacy, [A]sset Quality,\n[M]anagement, [E]arnings, and [L]iquidity/Asset/Liability Management.\n4\n Structural analysis includes the review of the component parts of a financial statement in relation to the complete\nfinancial statement.\n5\n Trend analysis involves comparing the component parts of a structural ratio to itself over several periods.\n6\n As needed, the examiner performs reasonableness tests to ensure the accuracy of financial performance ratios.\n\n\n\n 4\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\ndata analysis,7 and qualitative data analysis.8 Numerous ratios measuring a variety\nof credit union functions provide the basis for analysis. Examiners must understand\nthese ratios both individually and as a group because some individual ratios may not\nprovide an accurate picture without a review of the related trends.\n\nFinancial indicators such as adverse trends, unusual growth patterns, or\nconcentration activities can serve as triggers of changing risk and possible causes for\nfuture problems. NCUA also instructs examiners to look behind the numbers to\ndetermine the significance of the supporting ratios and trends. Furthermore, NCUA\nrequires examiners to determine whether material negative trends exist; ascertain the\naction needed to reverse unfavorable trends; and formulate, with credit union\nmanagement, recommendations and plans to ensure implementation of these\nactions.\n\nSt. Paul received composite CAMEL code 1 rating in March 2004. From December\n2004 through March 2009, the credit union received composite CAMEL code 2 rating.\n(See Appendix A Table A-1 for St. Paul CAMEL ratings.)\n\nRisk-Focused Examination Program\n\nIn May 2002, NCUA announced its new Risk-Focused Examination (RFE) Program,\nfor implementation in the fall of 2002. Risk-focused supervision procedures often\ninclude both off-site and on-site work that includes reviewing off-site monitoring tools\nand risk evaluation reports. The RFE process includes reviewing seven categories of\nrisk: Credit, Interest Rate, Liquidity, Transaction, Compliance, Strategic, and\nReputation. Examination planning tasks may include (a) reviewing the prior\nexamination report to identify the credit union\xe2\x80\x9fs highest risk areas and areas that\nrequire examiner follow-up; and (b) analyzing Call Report and FPR trends. The\nextent of supervision plans depends largely on the severity and direction of the risks\ndetected in the credit union\xe2\x80\x9fs operation and on management\xe2\x80\x9fs demonstrated ability to\nmanage those risks. A credit union\xe2\x80\x9fs risk profile may change between examinations.\nTherefore, the supervision process encourages the examiner to identify those\nchanges in profile through:\n\n \xef\x82\xb7 Review of Call Reports,\n\n \xef\x82\xb7 Communication with credit union staff,\n\n \xef\x82\xb7 Knowledge of current events affecting the credit union.\n\n\n\n7\n Examiners can often analyze an examination area in many different ways. NCUA\xe2\x80\x9fs total analysis process\nenables examiners to look beyond the "static" balance sheet figures to assess the financial condition, quality of\nservice, and risk potential.\n8\n Qualitative data includes information and conditions that are not measurable in dollars and cents, percentages,\nnumbers, etc., which have an important bearing on the credit union\'s current condition, and its future. Qualitative\ndata analysis may include assessing lending policies and practices, internal controls, attitude and ability of the\nofficials, risk measurement tools, risk management, and economic conditions.\n\n\n\n 5\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nOn November 20, 2008, the NCUA Board approved changes to the risk-based\nexamination scheduling policy, creating the 12-Month Program.9 NCUA indicated\nthese changes were necessary due to adverse economic conditions and distress in\nthe nation\xe2\x80\x9fs entire financial structure, which placed credit unions at greater risk of\nloss. The NCUA stated that the 12-Month Program will provide more timely relevant\nqualitative and quantitative data to recognize any sudden turn in a credit union\'s\nperformance.\n\nObjectives, Scope and Methodology\n\nThe FCU Act10 requires that the NCUA Office of Inspector General (OIG) conduct a\nmaterial loss review when the NCUSIF incurs a material loss with respect to an\ninsured credit union. The Act defines a material loss as (1) exceeding the sum of $10\nmillion11 and (2) an amount equal to 10 percent of the credit union\xe2\x80\x9fs total assets at\nthe time at which the Board initiated assistance or was appointed liquidating agent.\nNCUA notified the OIG that the estimated loss reserve for St. Paul would exceed $10\nmillion. Consequently, in accordance with the FCU Act and Chapter 3 of the NCUA\nSpecial Assistance Manual, we initiated a material loss review (MLR).\n\nThe objectives of our review were to (1) determine the cause(s) of St. Paul\xe2\x80\x9fs failure\nand the resulting loss to the NCUSIF, and (2) assess NCUA\xe2\x80\x9fs supervision of the\ncredit union. To accomplish our objectives we conducted fieldwork at NCUA\xe2\x80\x9fs\nheadquarters in Alexandria, VA, at the regional office located in Atlanta, GA, and in\nCleveland, Ohio. Our review covered the period from December 2004 to April 2010,\nSt. Paul\xe2\x80\x9fs liquidation date.\n\nTo determine the cause of St. Paul\xe2\x80\x9fs failure and assess the adequacy of NCUA\xe2\x80\x9fs\nsupervision we:\n\n \xef\x82\xb7 Analyzed NCUA examination and supervision work papers, reports and related\n correspondence;\n\n \xef\x82\xb7 Reviewed NCUA Regional and E&I staff summary reports;\n\n \xef\x82\xb7 Interviewed NCUA staff; and\n\n \xef\x82\xb7 Reviewed NCUA guidance, policies and procedures, Call Reports (5300\n Reports), and FPRs.\n\nWe used computer-processed data from NCUA\xe2\x80\x9fs Automated Integrated Regulatory\nExamination Software (AIRES) and Credit Union Online systems. We did not the test\n\n9\n The 12-month program requires either an examination or a material on-site supervision contact within a 10 to 14\nmonth timeframe based on risk-based scheduling eligibility.\n10\n The FCU Act \xc2\xa7216(j), 12 U.S.C. \xc2\xa71790d(j).\n11\n On July 21, the President signed into law the Wall Street Reform and Consumer Protection Act of 2010, raising\nthe threshold for future material loss reviews to $25 million.\n\n\n\n 6\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\ncontrols over these systems. However, we relied on our analysis of information from\nmanagement reports, correspondence files, and interviews to corroborate data\nobtained from these systems to support our audit conclusions.\n\nThis report does not make recommendations but provides observations and\nsuggestions. However, the OIG plans to issue a Material Loss Review capping report\nwith recommendations based on issues raised in this report as well as the other nine\nMaterial Loss Reviews conducted by the OIG. In addition, as resources allow, we\nmay also conduct more in-depth reviews of specific aspects of the NCUA\xe2\x80\x9fs\nsupervision program and make recommendations, as warranted\n\nWe conducted this performance audit from April 2010 through October 2010 in\naccordance with generally accepted government auditing standards and included\nsuch tests of internal controls, as we considered necessary under the circumstances.\nThose standards require that we plan and perform the audit to obtain sufficient,\nappropriate evidence to provide a reasonable basis for our findings and conclusions\nbased on our audit objectives. We believe that the evidence obtained provides a\nreasonable basis for our findings and conclusions based on our audit objectives.\nManagement reviewed a discussion draft of this report and we incorporated their\nsuggested changes where appropriate.\n\n\n\n\n 7\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nRESULTS IN DETAIL\n\nWe determined a suspected misappropriation of credit union funds through allegedly\nfraudulent loans most likely caused the failure of St. Paul. We also determined that\nSt. Paul\xe2\x80\x9fs management inactions facilitated the suspected fraudulent activity. In\naddition, we determined that, had NCUA examiners performed additional procedures\nwhen indicators of potential problems, such as examination red flags, were present,\nNCUA might have mitigated or even prevented the loss to the NCUSIF.\n\nA. Why St. Paul Croatian Federal Credit Union Failed\n\n We determined a suspected fraudulent act committed\n Suspected Credit by St. Paul\xe2\x80\x9fs CEO, through allegedly fictitious loans,\n Union Loan and caused the credit union to fail. Specifically, the CEO\n Share Fraud allegedly misappropriated funds by manipulating\n records for loans reportedly issued by St. Paul and this\nresulted in an estimated loss of $170 million to the NCUSIF.\n\nIn January 2010, representatives from the Federal Bureau of Investigation (FBI) and\nthe Internal Revenue Service (IRS) met with NCUA staff regarding NCUA\xe2\x80\x9fs\nexamination program and process. The Federal representatives were concerned that\npotential criminal activity was occurring at St. Paul. Consequently, NCUA started an\nin-depth examination and hired an independent certified public accounting firm to\nperform a fraud audit. NCUA staff and the firm both concluded there were large\nconcentrations of loans with insufficient collateral or collateral owned by unrelated\nmembers.\n\nSt. Paul had a substantial majority of its assets in loans. In addition, all of St. Paul\xe2\x80\x9fs\nreal estate loans were non-traditional five-year balloon loans. NCUA examiners\ndetermined there was rapid loan growth that exceeded peer ratios12 and continued\neven during the recent economic downturn. For example, the loans to asset ratio\nincreased from 95 percent to 98 percent from 2004 to 2009, while peer ratios\ndecreased from 65 percent to 64 percent. In addition, the majority of these loans\nwere designated as share secured.13 Specifically, 52 percent of all loans were share\nsecured in 2004, 70 percent in 2005, 66 percent in 2006, 76 percent in 2008, and 88\npercent in 2009. Furthermore, many of the loans were supposedly secured by\nshares of members not related to the loan recipient. However, NCUA staff\nsubsequently determined that the majority of the loans were not actually share\nsecured and a number of them were allegedly fraudulent.\n\nDuring an interview conducted by NCUA staff, credit union employees alleged the\nCEO maintained a list of loans that the CEO constantly refinanced. According to\ncredit union employees, during previous examinations when NCUA examiners\n\n12\n Peer ratios are a benchmark against credit unions of similar asset size measuring a variety of credit union\nfunctions and performance.\n13\n Share secured loans required less documentation and had little or no loan underwriting.\n\n\n\n 8\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nrequested loan files, the CEO stated the files were stored at the other branch and the\nCEO would have them available the next morning. The credit union employees\nalleged the CEO gathered the entire staff that evening and directed them to create\nloan documentation to support the loans the examiners selected. Since a majority of\nthe loans was supposedly share secured, the CEO instructed the staff to find a\nmember with sufficient shares in their account to cover the pledged shares. This\naccount was listed on the share pledge security agreement for that borrower. Credit\nunion staff would then allegedly \xe2\x80\x9cwitness\xe2\x80\x9d forged signatures on the share pledge\nagreement. Furthermore, credit union staff members stated they would have\nmembers with large share balances sign blank share pledge agreements in the event\ncredit union members needed a loan in a hurry.\n\nAccording to NCUA staff, the CEO would then deliver the alleged fraudulent loan\ndocuments to the examiners the following day. However, if a member had a real\nestate loan or a car loan, those loan documents were more likely authentic. NCUA\nstaff also discovered the CEO allegedly maintained a list of loans from which he\nwould instruct credit union employees to either refinance the loan or advance\nsufficient funds on the loan to make up to three monthly payments. The refinancing\nand the loan advances with subsequent payments on the same loans masked any\nloan delinquency. For example, NCUA AIRES loan download statistics showed a\nlarge percentage of the loans reported as paid ahead or with accrued interest greater\nthan the payment, yet no loans were reported as delinquent.\n\n We determined that credit union management, which\n Limited Oversight includes the Board of Directors and Supervisory\n by Management Committee, failed to meet their required obligations to\n implement proper internal controls and oversight.\nSpecifically, management did not (1) ensure adequate internal controls were in\nplace; (2) ensure adequate policies were in place and adhered to; and (3) resolve\nprior examiner findings in a timely fashion. As a result, the CEO was able to conduct\nthe suspected fraud for an undetermined amount of time.\n\nAccording to NCUA guidance, supervisory committees are responsible for ensuring\nthat credit union Boards of Directors and management establish practices and\nprocedures that sufficiently safeguard member assets.14 In addition, the supervisory\ncommittee must determine whether policies and control procedures are sufficient to\nsafeguard against error, conflict of interest, self-dealing, and fraud.15 Furthermore,\nfederally insured credit unions are required to obtain a supervisory committee audit at\nleast once every calendar year.16 If an audit is performed or contracted out, a review\nof the structure of the credit union\xe2\x80\x9fs internal controls and accuracy of the credit\nunion\xe2\x80\x9fs record must be performed.17\n\n\n\n14\n NCUA Rules and Regulations Section 715.3(a)(2).\n15\n NCUA Rules and Regulations Section 715.3(b)(4).\n16\n NCUA Rules and Regulations Section 715.4, 715.5, 715.7.\n17\n Supervisory Committee Guide 4.03.\n\n\n\n 9\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nLack of Segregation of Duties\n\nAccording to NCUA management, the CEO handled most of the accounting and\nlending processes and the credit union staff was only allowed to take specific\ninstructions from the CEO. For example, the CEO prepared and certified 2009 year-\nend call report and the staff was instructed to perform certain functions, some of\nwhich were possibly illegal. In addition, credit union staff lacked the fundamental\nknowledge to run operations without the CEO\xe2\x80\x9fs direction after NCUA placed the\ncredit union into conservatorship. Consequently, there were no institutional\nconstraints on the CEO to prevent him from committing the suspected loan fraud.\n\nInformation System Issues\n\nSeveral information system issues existed at St Paul. For example, during previous\nexaminations, credit union staff told NCUA examiners that the data processing (DP)\nsystem could not freeze the shares used to secure loans. As a result, during the\nDecember 31, 2007, examination, and repeated in the December 31, 2008,\nexamination and the March 31, 2009, supervision contact, the examiner identified as\na Document of Resolution (DOR) item the need for the manager to contact the\nsoftware provider regarding the inability to freeze shares. However, during the\nDecember 31, 2009, examination examiners determined the shares could be frozen\nand the CEO purportedly instructed the staff not to freeze the shares.\n\nAdditionally issues include the DP system truncating large numbers, for instance\n$1.8 million appeared as $.8 million. This occurred when printing loan documents\nwith a large amount. In addition, the DP system did not generate reports that\nensured Bank Secrecy Act (BSA)18 compliance. For example, the system did not\ndifferentiate cash transactions from check transactions. If a member conducted a\ntransaction with both cash and checks, the transaction was designated as a mixed\ndeposit on the activity monitoring report, which did not allow for adequate suspicious\nactivity monitoring. Unless the transactions were completely conducted in cash, it\nwould have been necessary to review each deposit ticket to determine the actual\nnature of the mixed deposit and whether a suspicious activity report was necessary.\n\nSupervisory Committee Audits Not Sufficient\n\nNCUA examiners determined the annual Supervisory Committee audits, though in\ncompliance with NCUA regulations were not sufficient for a credit union of this size.\nThe credit union engaged an external auditor to complete the Supervisory\nCommittee annual audit. However, given the size and complexity of St. Paul, the\nauditor\xe2\x80\x9fs review process was not sufficient to address the needs of the credit union.\nFor example, while the liquidity issues had been a concern for many years, the\n\n\n18\n BSA requires United States financial institutions to keep records of cash purchases of negotiable instruments,\nfile reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that\nmight signify money laundering, tax evasion, or other criminal activities.\n\n\n\n 10\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nauditor only noted the liquidity ratios and did not provided input regarding\nperformance concerns. We found the following concerns:\n\n \xef\x82\xb7 The 2006 and 2007 Supervisory Committee reviews were completed on work\n papers from an obsolete NCUA Supervisory Committee Guide;\n\n \xef\x82\xb7 The reviews focused only on verifying balance sheet accounts and did not\n include income statement testing or alternate delinquency testing;\n\n \xef\x82\xb7 There are no tests of internal controls noted in the audit reports;\n\n \xef\x82\xb7 The loan review work papers were full of white out and cross out corrections,\n and it was difficult to determine what the corrections signified;\n\n \xef\x82\xb7 It was highly irregular that audit work papers contained white outs; and\n\n \xef\x82\xb7 Since the modifications were not initialed, it was impossible to determine who\n made the corrections.\n\nNCUA determined, and we agree, the reviews seem more appropriate for a $10\nmillion credit union than for a $240 million credit union.\n\nBSA/OFAC Controls Did Not Ensure Compliance\n\nFollowing the discovery of the alleged fraud, NCUA staff subsequently concluded that\nSt. Paul had not exercised due diligence in complying with BSA and Office of Foreign\nAssets Control19 (OFAC) requirements. NCUA examiners discovered that the credit\nunion\xe2\x80\x9fs BSA records were insufficient to ensure compliance. As stated earlier, there\nwas no system in place to separate mixed check and cash deposits. Examiners also\ndetermined St. Paul\xe2\x80\x9fs Board did not complete the required BSA training. In addition,\nexaminers found the following deficiencies: OFAC lists of suspicious persons were\nnot verified against the recipients of out-going wire transfers; the wire transfer log was\nmanually kept; documentation for wire transfers was inadequate; and St. Paul staff\ndid not update the OFAC list on a regular basis.\n\nLoan and Policies/Practices Were Minimal\n\n Although most loans were supposedly share secured, financial performance report\ndata from December 2004 through December 2009 showed St. Paul had unsecured\nloans. However, no unsecured loan or member business loan (MBL) policies existed.\nDuring the December 31, 2009, examination, examiners discovered that many of the\nloans reported as share secured were in fact not share secured and included MBLs.\n\n19\n Under OFAC regulations, credit unions must block or freeze the assets, funds transfers, and all transactions of\nall designated countries and their agents, specially designated terrorists, foreign terrorist organizations, specially\ndesignated narcotics traffickers and blocked persons. In addition, OFAC may require the credit union to reject or\nreturn incoming transfers from prohibited sources.\n\n\n\n 11\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nFurthermore, real estate loan policies were scant. For NCUA examinations\nconducted from 2004 through 2009, the real estate loan exceptions work papers\nshowed loan appraisal issues and high loan to values (over 94 percent). Specifically,\nexaminers noted during the December 31, 2004, examination that very few loans had\nincome verifications in the loan files; moreover, during the December 31, 2009,\nexamination, examiners noted income verification was not required on any loan.\nThese were strong indications of poor management oversight. Furthermore, during\nthe December 31, 2009, examination, examiners found loan documentation\ncontained unapproved corrections marked on the documents, and tax assessment\nvalues were used instead of real estate appraisals. Although the CEO allegedly\nperpetrated the fraud, the credit union board and Supervisory Committee needed to\nbe more involved to prevent such issues from occurring.\n\nB. NCUA Supervision of St. Paul Croatian Federal Credit Union\n\n We determined NCUA examiners did not adequately\n Credit Union Risks Not\n evaluate the risks to St. Paul operations. Specifically,\n Adequately Evaluated\n examiners did not (1) thoroughly evaluate the credit\n union\xe2\x80\x9fs internal controls when assessing transaction\nrisk; (2) ensure credit union management took corrective action on repetitive DOR\nissues; and (3) expand examination procedures when red flags indicated higher risks\nto the credit union. As a result, NCUA missed opportunities to mitigate the loss to the\nNCUSIF caused by St. Paul\xe2\x80\x9fs failure.\n\nNCUA\xe2\x80\x9fs risk focused examination process should determine the adequacy of internal\ncontrols and the degree of reliance on the work efforts completed by competent,\nprofessional individuals and documented in reports and audits.20 For example,\nevaluating internal controls involves:\n\n \xef\x82\xb7 Identifying the internal control objectives relevant to the credit union;\n\n \xef\x82\xb7 Reviewing pertinent policies, procedures, and documentation;\n\n \xef\x82\xb7 Discussing controls with appropriate levels of personnel;\n\n \xef\x82\xb7 Observing the control environment;\n\n \xef\x82\xb7 Testing transactions as indicated by the level of risk;\n\n \xef\x82\xb7 Sharing findings, concerns, and recommendations with the board of\n directors and senior management; and\n\n \xef\x82\xb7 Determining that the credit union has promptly corrected noted\n deficiencies.21\n20\n NCUA Examiner\xe2\x80\x9fs Guide, Chapter 1.\n21\n NCUA Examiner\xe2\x80\x9fs Guide, Chapter 4.\n\n\n\n 12\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nIn addition, NCUA guidance indicates examiners should base the scope, type, and\ndepth of an internal control review on the credit union\xe2\x80\x9fs size, complexity, scope of\nactivities, and risk profile. An assessment of the credit union\xe2\x80\x9fs audit function plays an\nimportant part in this determination. When management or examiners note internal\ncontrol weaknesses, the credit union should take immediate action to correct the\ndeficiencies.\n\nFurthermore, according to NCUA guidance, internal control is the process, developed\nby a credit union\'s board of directors, management, and other personnel, designed to\nprovide reasonable assurance in the effectiveness and efficiency of its operations,\nthe reliability of its financial reporting, and the credit union\xe2\x80\x9fs compliance with\napplicable laws and regulations. NCUA internal control examination objectives help\nto:\n\n \xef\x82\xb7 Determine whether the credit union has implemented efficient and effective\n operations and risk management systems;\n\n \xef\x82\xb7 Determine whether the credit union accurately records transactions;\n\n \xef\x82\xb7 Determine timeliness and reliability of financial reporting;\n\n \xef\x82\xb7 Determine whether the credit union complies with regulations, internal policies,\n and internal procedures; and\n\n \xef\x82\xb7 Assess whether the credit union has implemented adequate internal controls\n to safeguard assets.22\n\nIn our opinion, NCUA did not adequately achieve any of these objectives. Although\nthe examiners, Supervisory Committee and external auditor may have performed\ntheir required minimum procedures, none of them properly assessed the adequacy of\nthe credit union\xe2\x80\x9fs internal control structure nor tested its operational effectiveness.\nWe reviewed NCUA examinations23 conducted prior to the discovery of the alleged\nfraud and determined NCUA examiners were aware of some of the internal control\nweaknesses. For example, when the examiners arrived to conduct the examinations,\nthe CEO stated the loan files were stored at the other branch and would make them\navailable the following morning. In addition, while the credit union staff repeatedly\nclaimed the data processing system did not allow pledged shares to be frozen, NCUA\nexaminers failed to elevate the repeated DOR items for stronger supervisory action.\n\nWe found NCUA examiners did not determine that internal controls were weak until\nthe discovery of the alleged fraud. We believe the examiners did not adequately\n\n22\n NCUA Examiner\xe2\x80\x9fs Guide, Chapter 4.\n23\n We reviewed NCUA examinations and supervision contacts from December 31, 2004 through December 31,\n2008, and the pre-scheduled the December 31, 2009, examination that was conducted after NCUA met\nrepresentatives from two Federal agencies. However, NCUA significantly expanded the number of hours for the\nDecember 2009 examination after the meeting.\n\n\n\n 13\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nassess the risks to St Paul during the examinations and contacts conducted prior to\nthe alleged fraud discovery. Specifically, NCUA examiners did not rate transaction\nrisk high until after the suspected fraud was uncovered. Appendix B contains the\nnine factors comprising the transaction risk indicators.\n\nTransaction Risk Not Rated High\n\nExaminers did not consider the following issues serious enough to rate transaction\nrisk high at St. Paul:\n\n \xef\x82\xb7 Weak internal controls;\n\n \xef\x82\xb7 Serious weaknesses in audit coverage;\n\n \xef\x82\xb7 Significant weaknesses in transaction and information processing activities;\n and\n\n \xef\x82\xb7 Failure of management to make required corrections to improve transaction-\n processing risk controls.\n\n Specifically, we found:\n\n \xef\x82\xb7 During the December 31, 2004, examination, the examiner noted no significant\n transaction risk concerns existed. However, the examiner reported that a\n $99,000 wire transfer and a $64,000 automated clearinghouse transaction\n were not posted to the credit union books.\n\n \xef\x82\xb7 The examiner rated transaction risk low during the December 31, 2005,\n examination because the review of major general ledger accounts showed\n amounts traced back to supporting documentation, employees had a tradition\n of long-term tenure, the annual audit was performed by an outside vendor, and\n membership was limited to the church parishioners. Furthermore, the\n examiner did not note any concerns or problems with the Supervisory\n Committee audit. Nevertheless, the examiner found all documentation for the\n last call report supported the report except for nonmember deposits.\n\n \xef\x82\xb7 During the June 30, 2007, supervision contact, the examiner noted for the first\n time that St. Paul had outgrown its current audit provider. A DOR item from\n the December 31, 2007, examination stated the audit should conform to\n generally accepted accounting principles (GAAP) and generally accepted\n auditing standards (GAAS). In addition, the examiner noted a review of the\n hardware and software operations showed there were several areas for\n improvement. Yet, the examiner only rated transaction risk as moderate.\n\n \xef\x82\xb7 The examiner noted during the December 31, 2008, examination that\n oversight of the financial condition and internal controls were still being viewed\n\n\n\n 14\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\n from the perspective of a small credit union. The examiner also noted that, as\n a result, adjustments made to the year-end call report were indicative of the\n need for a more detailed analysis. Although the examiner further noted\n instances were created where reporting under GAAP was questionable, the\n examiner only rated transaction risk as moderate.\n\nWe also found that the examiners noted on the Supervisory Committee Audit and\nVerification Review checklists, from December 31, 2004 through December 31, 2009,\nthat there were no reportable conditions or material weaknesses found during review\nof the credit union\xe2\x80\x9fs audit reports. However, we believe that the lack of segregation\nof duties and lack of internal controls over share secured loans were material\nweaknesses. Additionally, we found no evidence that the examiner reviewed whether\nanyone performed any internal control reviews. Furthermore, the examiners stated\nthat, for most examinations there were no Supervisory Committee minutes.\nConsequently, NCUA examiners did not perform additional, or expanded examination\nprocedures.\n\n(See Appendix A, Table A-2 for risk ratings)\n\nExaminers Did Not Elevate Repeated DOR Issues for Stronger Supervisory\nActions\n\nExaminers did not ensure St. Paul\xe2\x80\x9fs management took corrective actions on\nrepetitive issues detailed in DOR items to prevent them from becoming problems.\nThis included freezing shares used as collateral, obtaining an annual audit that\nadhered to GAAP and GAAS, and addressing liquidity and asset liability management\nissues. We believe the delay in issuing a DOR, the multiple instances of repeat\nDORs and the failure to take more stringent supervisory actions resulted in missed\nopportunities to uncover the suspected loan fraud.\n\nThe credit union allegedly did not have a system in place to ensure shares used to\nsecure loans were frozen, thereby preventing the same shares from being used to\nsecure other loans or being withdrawn. We found during the December 31, 2007,\nexamination, a DOR item required the credit union\xe2\x80\x9fs manager to contact the software\nprovider to determine the procedure necessary to show that funds were frozen as\ncollateral on loans and to ensure that they were not accidently used twice. The\nexaminers repeated this as a DOR item for the December 31, 2008, examination and\nthe March 31, 2009, supervision contact, yet it was never resolved. In addition, we\nfound examiners were aware of the issue as far back as the December 31, 2002,\nexamination. In a summary report, NCUA staff determined that during the December\n31, 2002, examination, the examiner noted St. Paul\xe2\x80\x9fs management was in the\nprocess of ensuring that shares securing loans were properly identified in the data\nprocessing system to prevent withdrawals. However, there was no formal\nrequirement in the examiner findings or a DOR to correct the issue until 2007.\nNCUA staff also determined that during the December 31, 2004, examination a team\nmember reviewing loans issued a memo to the examiner in charge stating St. Paul\n\n\n\n 15\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nmanagement needed to devise a method to track accounts or certificates securing\nloans to ensure the same account does not secure more loans than funds existing in\nthe deposit account. In addition, the examiner noted that one loan had insufficient\nshares as collateral and that the same share certificates backed two loans, but were\ninsufficient to cover both loans.\n\nWe also found that during the June 30, 2007, supervision contact, the examiner\ndetermined St. Paul had outgrown its audit provider and needed to consider obtaining\nan annual opinion audit.24 Furthermore, during the December 31, 2007, examination,\nthe examiner recommended that the credit union obtain a CPA25 audit performed by a\nfirm with an in-depth understanding of credit union operations and knowledgeable of\nGAAP and GAAS. The examiners listed this as a repeat DOR item on the next and\nfinal two examinations. For instance, during the December 31, 2008, examination,\nexaminers noted the auditor only documented the general ledger and balancing of\naccounts, and that management needed to engage the auditor to perform the next\naudit in conformance with GAAP and GAAS requirements.\n\nWe further found, for six of the eight examinations and supervision contacts26\nconducted prior to the December 31, 2009, examination, the examiners issued\nrepeated DORs for liquidity risks. Specifically, for five of the six contacts, NCUA\nexaminers recommended St. Paul revise its funds management/liquidity policy for\nratio limits. During the June 30, 2007,27 contact, the examiner stated St. Paul needed\nto increase liquidity to five percent of assets. In addition, one of the DOR items from\nthe March 31, 2009, contact directed the credit union to establish a line of credit with\nanother source other than the corporate credit union. Furthermore, for four of the\neight examinations and supervision contacts,28 the examiner issued repeated DORs\nfor St. Paul to (1) develop an asset liability management policy addressing interest\nrate risk; (2) establish cash flow risk limits; and (3) develop internal controls and\nreporting requirements.\n\nWe found the examiners did not elevate any of these issues to the Supervisory\nExaminer for stronger supervisory actions such as a Regional Director\xe2\x80\x9fs Letter, or a\nLetter of Understanding and Agreement. As a result, NCUA missed opportunities to\nmitigate the loss to the NCUSIF caused by St. Paul\xe2\x80\x9fs failure.\n\n(See Appendix C for DORs)\n\n\n\n\n24\n An opinion audit expresses an opinion on the fair presentation of the financial statements in all material\nrespects in accordance with generally accepted accounting principles.\n25\n Certified Public Accountant.\n26\n The six examination and supervision contact dates were December 31, 2004, December 31, 2005, June 30,\n2007, December 31, 2007, December 31, 2008, and Mar 31, 2009.\n27\n The five of six examination and supervision contact dates were December 31, 2005, June 30, 2007, December\n31, 2007, December 31, 2008, and Mar 31, 2009.\n28\n The four of eight examination and supervision contact dates were December 31, 2004, December 31, 2007,\nDecember 31, 2008, and March 31, 2009.\n\n\n\n 16\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nExamination Procedures Not Expanded When Red Flags Present\n\nWe found loans amounted to well over ninety percent of St. Paul\xe2\x80\x9fs assets and the\nexaminers rated credit risk low prior to the December 31, 2009, examination primarily\nbased upon the assumption that the majority of loans were share secured and the\ncredit union was reporting zero delinquency. In fact, the credit union reported zero\ndelinquency and charge-offs from, at least, 2004 through 2009. Examiners believed\nthis was reasonable, stating that faith-based credit unions such as St. Paul usually\nhave low delinquency. It was not until the December 31, 2009, examination that the\nexaminers rated credit risk high. The examiners determined that many of the loans\nwere in fact not share secured, loan documentation contained many unauthorized\ncorrections, and data processing controls were weak.\n\nWe also found examiners did not perform sufficient testing and analysis when risks\nwere readily apparent. Specifically, the examiners did not test for hidden delinquency\nor expand examination procedures when unusual financial performance ratios,\nabnormal real estate trends, and inappropriate member business loans existed. We\nfound that the examiners noted multiple red flags during the examinations conducted\nat St. Paul, but did not follow-up on the exceptions or deficiencies found. In addition,\nNCUA guidance29 indicates examiners should be aware of any red flags, which may\nindicate that the examiner needs to expand analysis and review of the applicable\noperations. We found the following red flags existed at St. Paul:\n\nDelinquency/Loan File Red Flags\n\nIn spite of the economic downturn and contrary to other credit unions, St. Paul\nreported zero loan delinquency and charge-offs from 2004 through 2009. We\ndetermined that the delinquency/loan file red flags the examiners found, but for which\nthey did not expand examination procedures, listed by examination, included:\n\n \xef\x82\xb7 December 31, 2004\n\n o Eight of twenty-three paid-ahead loans reviewed were technically\n delinquent since monthly loan payments were not made;\n\n o Very few loans had income verifications in the loan file;\n\n o Numerous credit reports had scores in the 400 to 600 range; and\n\n o Two loans had old credit reports, one loan showed several accounts in\n collection, and two contained credit reports obtained after the loan was\n approved, of which one also showed several accounts in collection.\n\n\n\n\n29\n NCUA Examiner\xe2\x80\x9fs Guide, chapter 7.\n\n\n\n 17\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\n \xef\x82\xb7 December 31, 2007\n\n o Minor exceptions existed mostly for high risk loans with no explanation\n on poor credit reports;\n\n o Three loans with balances between $416,000 and $658,000 appeared\n to be delinquent. Specifically, one showed no payment on the principal,\n one had accrued interest of four months and the third had five months\n of accrued interest;\n\n o Four loan files had credit quality issues such as a credit report showing\n delinquent loans and the loan amount greater than the secured\n collateral; and\n\n o Three real estate loans were listed as loan exceptions.\n\n \xef\x82\xb7 December 31, 2008\n\n o Four loan security agreements were corrected without member\n approval;\n\n o Three loans files showed bad credit history. Two members had\n bankruptcies and one member had a past due real estate loan;\n\n o One loan document disclosed the wrong payment;\n\n o One car loan security agreement did not list the vehicle identification\n number ; and\n\n o A large number of share loans were secured by shares from accounts\n other than the loan recipient.\n\nThe delinquency/loan file red flags the examiners found, during the December 31,\n2009, examination and after the allegation of suspected criminal activity included:\n\n o Loans encoded as share secured did not always contain the required\n share collateral documentation in the loan file;\n\n o Actual share secured loans largely secured by individuals not party to\n the loan;\n\n o Share pledge agreements were not always signed;\n\n o Loan files did not always contain an assignment of shares;\n\n\n\n\n 18\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\n o Data processing system did not have sufficient record length to support\n size of large loans;\n\n o Correction fluid commonly used on loan documents without\n authorization;\n\n o No income verification required on any loan; and\n\n o Fifty-four consumer loan exceptions consisted of mostly share secured\n documentation issues\n\nFinancial Performance Red Flags\n\nAlthough the nation\xe2\x80\x9fs economy took a downturn in 2007, St. Paul\xe2\x80\x9fs financial\nperformance appeared to be excellent. For example, St. Paul\xe2\x80\x9fs return on assets\n(ROA) was over two percent, while peer ratio ROA steadily dropped and loan growth\nwas always above the peer ratio. In addition, member loan yields were higher than\npeer credit unions, and loan delinquency and charge-offs both were reported as zero.\nWe found examiners did not expand procedures or test for hidden delinquency even\nthough there were inherent risks with a reported zero delinquency. Moreover, we\nfound no evidence that examiners performed more than minimal procedures when\nassessing St. Paul\xe2\x80\x9fs financial performance. See the below chart for St. Paul alleged\nfinancial performance versus peer credit unions\xe2\x80\x9f performance.\n\n\n St. Paul Financial Performance Ratios\n Ratio 2004 2005 2006 2007 2008 2009\n ROA 2.26 2.55 2.30 2.21 2.28 2.38\n Peer 0.9 0.8 0.77 0.64 0.29 0.01\n Loan Growth 42.51 22.29 13.99 6.28 14.75 21.98\n Peer 10.56 10.54 7.45 5.36 6.88 4.41\n Loan Yield 7.46 7.51 7.46 7.46 7.47 7.47\n Peer 6.37 6.28 6.64 6.9 6.77 6.5\n Loan Delinquency 0 0 0 0 0 0\n Peer 0.77 0.8 0.75 1.01 1.39 1.71\n Charge Offs 0 0 0 0 0 0\n Peer 0.54 0.54 0.46 0.49 0.72 0.98\n\n\n\n\n 19\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nReal Estate Loan Red Flags\n\nThe real estate market was the primary driver in the 2007 economic downturn. St.\nPaul\xe2\x80\x9fs total real estate portfolio was relatively constant, averaging approximately $34\nmillion from 2004 to 2006. While this amount dropped in 2007 to $22 million,\nprimarily due to a participation loan agreement with another credit union, real estate\nloans increased to $42 million in 2008 and to $63 million in 2009. This occurred even\nas the economic downturn affected most of the county. In addition, all of these loans\nwere non-traditional five-year balloon notes with payments amortized over 30 years.\nWe found the examiners did not expand procedures even though there were inherent\nrisks with these types of real estate loans. We determined that during reviews of real\nestate loan files, the examiners found multiple loan exceptions that were red flags\nand should have led to expanded examination procedures. Those red flags, listed by\nexamination, included:\n\n \xef\x82\xb7 December 31, 2004\n\n o One real estate loan file contained an appraisal for a previous loan, for\n which the purchase price was greater than appraisal. The file also\n contained a credit report that was over one year old;\n\n o Another loan file contained a credit report, which showed the borrower\n had several accounts in collection and a low credit score. In addition,\n there was no final insurance policy. Also, the examiner noted that it\n may have been a business loan since the purchase agreement included\n items needed to operate a pizza parlor;\n\n o One real estate loan was due to be refinanced; and\n\n o One loan file contained a credit report dated after loan date and the\n credit report showed several collection accounts.\n\n \xef\x82\xb7 December 31, 2007\n\n o One loan was for an amount greater than the collateral used and the\n hazard insurance was less than the loan amount;\n\n o One loan file contained a year old credit report; and\n\n o One loan file did not have the final title commitment or the recorded\n mortgage.\n\n \xef\x82\xb7 December 31, 2008\n\n o All four of the real estate loans reviewed by examiners contained loan\n exceptions;\n\n\n\n 20\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\n o One loan had a loan to value of 94 percent, which was greater than St.\n Paul\xe2\x80\x9fs policy of 80 percent;\n\n o Another loan file did not contain an updated mortgage lien. The loan\n had been refinanced, but the enclosed lien was for a loan due October\n 2003;\n\n o One loan file contained a credit report that was obtained after the note\n was signed, the loan to value was 95 percent and the mortgage had not\n been filed; and\n\n o For one loan, the property evaluation was based on the tax assessment\n instead of a real estate appraisal and the mortgage had not been filed.\n\nDuring the December 31, 2009, examination, examiners determined policies were\ninadequate to control risk, specifically for geographic area of operation and appraisal\nrequirement.\n\nMember Business Loans Red Flags\n\nMember business loans (MBL) were present, but were not viewed as MBLs. The\nexaminers apparently took at face value that these loans were share secured and\ntherefore not MBLs. We found no evidence of any additional procedures performed\nby examiners even though the following red flags were present. For example:\n\n \xef\x82\xb7 During the December 31, 2004, examination the examiner stated \xe2\x80\x9cthere were\n two loans that might have been business loans\xe2\x80\x9d;\n\n \xef\x82\xb7 The examiner noted for the December 31, 2007, examination that a large\n number of share secured loans were for large dollar amounts and It appeared\n that this was a way for the credit union to make business loans without a lot of\n documentation;\n\n \xef\x82\xb7 For the December 31, 2008, examination, the examiner noted there was\n evidence of MBLs, but all the loans were apparently share secured and\n therefore, not subject to NCUA MBL Rules and Regulations;\n\n \xef\x82\xb7 Examiners did not take exception to many issues until after the FBI and IRS\n met with NCUA staff in January 2010. For example, during the December 31,\n 2009,30 examination the examiners found:\n\n o St. Paul had an MBL portfolio of 133 loans valued at $68.6 million with\n $2.4 million originated prior to 2008, $18.6 million in 2008, $41.8 million\n in 2009, and the remainder during 2010;\n30\n December 31, 2009, is the effective date of the examination. The examiners conducted this examination from\nFebruary to April 2010.\n\n\n\n 21\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\n\n o Evidence that some of the MBLs had been on the credit union\xe2\x80\x9fs books\n for years;\n\n o Several loans classified as share secured loans were actually MBLs;\n\n o The credit union did not have an MBL policy;\n\n o The data processing system did not track MBLs; and\n\n o Business loans were not supported by adequate documentation such\n as corporate designation of authority to borrow.\n\nIn addition, we found strategic, transaction and compliance risks existed prior to the\ndiscovery of the alleged fraud. However, examiners did not view the risks as safety\nand soundness concerns until the December 31, 2009, examination. Specifically the\nred flags were:\n\nTransaction Risk Red Flags\n\nNCUA defines transaction risk as the risk to earnings or capital arising from fraud or\nerror that results in an inability to deliver products or services, maintain a competitive\nposition, and manage information.31 Prior to the December 31, 2009, examination, in\naddition to the freezing of the share issues, examiners also voiced concerns that the\nannual audit was not sufficient for the size and complexity of this credit union.\nHowever, neither issue was ever resolved. Subsequently, examiners found the data\nprocessing system truncated numbers on loan documents and loan documentation\nwas very poor. During the December 31, 2009, examination, NCUA staff found a\nlack of segregation of duties with the CEO handling most functions and the staff\napparently unable to perform anything but the most basic tasks. Examiners also\nnoted several areas as having transaction risk issues. For example, DOR items\nincluded training the staff on document preparation, ensuring monitoring reports\ncontain sufficient information, and taking action to correct or place sufficient internal\ncontrols on loan advances.\n\nWe determined that member account confirmations did not include a verification of\npledged shares. We also determined that although it is not required, it would have\nseemed prudent to verify pledged shares, considering other controls were absent on\nthese shares. We further determined there was little evidence that examiners\nfocused much attention on the above internal control concerns, since we saw no\nevidence that they performed any additional substantive examination procedures.\n\n\n\n\n31\n NCUA Examiner\xe2\x80\x9fs Guide, chapter 1.\n\n\n\n 22\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nStrategic Risk Red Flags\n\nAccording to NCUA guidance, strategic risk is the current and prospective risk to\nearnings or capital arising from adverse business decisions, improper implementation\nof decisions, or lack of responsiveness to industry changes.32 We found that\nalthough St. Paul continued to have severe liquidity issues from at least 2004 through\n2009, the examiners did not take stronger enforcement actions. In addition, the credit\nunion did not have adequate policies, procedures and internal controls. Furthermore,\none of the most critical internal controls was the credit union\xe2\x80\x9fs continued lack of\nresolution on the freezing of pledged shares. NCUA examiners noted, as far back as\nthe December 31, 2002, examination, that the credit union was in the process of\nensuring shares securing loans were properly identified in the data processing\nsystem to prevent withdrawals. However, the examiners did not make this a DOR\nitem until the December 31, 2007, examination. While this was a repeated DOR item\nin subsequent examinations, NCUA examiners neither performed additional\nprocedures nor held St. Paul\xe2\x80\x9fs management accountable by taking stronger\nenforcement actions. During the December 31, 2009, examination, examiners found\nthere were a lack of segregation of duties, lending policies, and internal controls, and\nsubsequently rated strategic risk as high. However, prior to this examination,\nstrategic risk was only rated moderate; consequently, examiners did not perform any\nadditional procedures.\n\nCompliance Risk Red Flags\n\nCompliance Risk is the current and prospective risk to earnings or capital arising from\nviolations of, or nonconformance with, laws, rules, regulations, prescribed practices,\ninternal policies and procedures, or ethical standards.33 During the December 31,\n2009, examination, examiners determined that St. Paul\xe2\x80\x9fs data processing system\nreports were not sufficient to ensure compliance with BSA. Specifically, system\nreports did not separate checks and cash when both cash and checks were\ndeposited at the same time. Although the examiner had previously noted this issue,\nthe credit union never corrected the problem. In addition, the examiner noted\nsignificant BSA violations during the December 31, 2005, examination, which\naccording to the examiner all but one of the seven violations were resolved by\nSeptember 30, 2006. Furthermore, the wire transfer log was a manual system and\nwas not sufficient for OFAC and BSA purposes. In addition, non-members partied to\nwire transfers were not matched against the OFAC listing. Although examiners\ndiscovered these issues prior to the December 31, 2009, examination, the issues\nwere never corrected.\n\nSee Appendix A, Table A-2 for risk ratings\n\n\n\n\n32\n NCUA Examiner\xe2\x80\x9fs Guide, chapter 1.\n33\n NCUA Examiner\xe2\x80\x9fs Guide, chapter 1.\n\n\n\n 23\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nNCUA\xe2\x80\x99s Quality Control Review Was Ineffective\n\nAn objective of NCUA\xe2\x80\x9fs examination evaluation and review process is to measure the\nquality and effectiveness of its examination and supervision program by assessing\nthe quality of examiner problem identification, recommendations for resolution and\nrisk mitigation, and effectiveness of communication with officials. To help ensure\nquality control, NCUA evaluates and reviews examination reports through\nSupervisory Examiner (SE) and Division of Supervision (DOS) reviews. SEs\nevaluate all of the examiners\' work as part of the examiner\xe2\x80\x9fs development and overall\nappraisal; and DOS analysts perform a quality control function, and as such, limit\ntheir review to the written reports. According to NCUA guidance, the quality of the\nexamination report can cause a risk to the NCUSIF.\n\nSEs must select at least five reports each year from each examiner for formal\nevaluation. These evaluations should determine the following:\n\n \xef\x82\xb7 Examiners receive consistent, prompt feedback regarding the quality of their\n work, including the strengths, weaknesses, and suggestions for improving\n performance;\n\n \xef\x82\xb7 Examiners prepare an appropriate and effective scope and report that\n adequately addresses risk, identifies problems, and makes sound\n recommendations to resolve major problems within acceptable time frames;\n\n \xef\x82\xb7 Examiners have written a report that stands alone and documents a complete\n administrative record of the examination contact; and\n\n \xef\x82\xb7 Examiners minimize NCUSIF losses through adequate identification and\n resolution of problems.\n\nDOS analysts review all reports meeting the following criteria:\n\n \xef\x82\xb7 All credit unions coded CAMEL 4 or 5 with assets greater than $100,000;\n\n \xef\x82\xb7 All credit unions coded CAMEL 3 with assets greater than $50 million;\n\n \xef\x82\xb7 All credit unions coded CAMEL 3 for longer than 36 months and with assets\n greater than $5 million;\n\n \xef\x82\xb7 All credit unions with assets greater than $250 million; and\n\n \xef\x82\xb7 A selected sample of examinations and supervision contacts determined by\n the regional director.\n\nDOS analysts review reports to identify existing or emerging trends, common or\nfrequently occurring findings, and systemic risk factors. DOS analysts can further\n\n\n\n 24\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nobserve trends within the credit unions and in the examination process. DOS reviews\nfocus on quality control and should address whether the report:\n\n \xef\x82\xb7 Addresses risk through an appropriate and effective scope;\n\n \xef\x82\xb7 Focuses on results and includes plans for correcting problems promptly;\n\n \xef\x82\xb7 Addresses negative trends and includes sound recommendations to resolve\n major problems within acceptable time frames;\n\n \xef\x82\xb7 Complies with uniform examination, insurance review, and supervision\n standards;\n\n \xef\x82\xb7 Presents a stand-alone document of the examination contact; and\n\n \xef\x82\xb7 Provides a complete administrative record of the examination contact.\n\nThe SEs and DOS analysts will conduct the evaluation and review processes\nindependently. Both SEs and DOS analysts will complete and disseminate their\nevaluations and reviews within 30 days of the report upload. Regional policy\ndetermines whether the region will release DOS Reviews to examiners. Each region\nwill develop its own policy to identify and resolve material differences between DOS\nReviews and SE Evaluations.34 According to NCUA Region III current guidelines, the\nDOS forwards the quality control report to the SE and the SE then forwards it to the\nexaminer.35\n\nWe believe NCUA\xe2\x80\x9fs Quality Control Program was not effectively present for this credit\nunion. Specifically, we found that through 2009, NCUA SEs conducted three\nevaluations36 of St. Paul examinations. However, none of the evaluations addressed\nany of the multiple red flags that the examiners noted during the examinations.\nMoreover, for each evaluation, the SEs agreed with the examiner\xe2\x80\x9fs risk assessments\nand/or assigned the CAMEL ratings. We believe the SEs should have questioned the\ncontinuous zero delinquency and required the examiners to expand examination\nprocedures and test for zero delinquency. Furthermore, the SEs did not address the\nneed for stronger supervisory actions for repeated DORs such as freezing the shares\nused as collateral or having an annual audit that conformed to GAAP and GAAS.\n\nAccording to NCUA guidelines, Region III DOS was not required to perform a quality\ncontrol review on St. Paul\xe2\x80\x9fs examinations. From December 2004 through March\n2009 because St. Paul was coded a CAMEL 2 and reported less than $250 million in\nassets, Region III DOS was not required to evaluate and review St. Paul\xe2\x80\x9fs written\nexamination reports. We found that Region III DOS did not select any of St. Paul\xe2\x80\x9fs\nexaminations for a random review.\n\n34\n NCUA Examiner\xe2\x80\x9fs Guide, chapter 22.\n35\n NCUA Region III Guide, section IX.\n36\n The evaluations covered the December 31, 2005, December 31, 2007 and December 31, 2008 examinations.\n\n\n\n 25\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nC. Observations\n\nWe reviewed industry observations regarding occupational fraud.37 We believe the\nindustry\xe2\x80\x9fs observations apply to issues we observed during our review of St. Paul\xe2\x80\x9fs\nfailure. For example, the Association of Certified Fraud Examiners (ACFE) reported\nin their 2008 report to the nation38 that the implementation of anti-fraud controls has a\nmeasurable impact on an organization\xe2\x80\x9fs exposure to fraud. ACFE examined 15\nspecific anti-fraud controls and measured the median loss in fraud cases depending\non whether organizations did or did not have a given control in place at the time of\nthe fraud. In every comparison, the ACFE found significantly lower losses when\ncontrols had been implemented. We determined St. Paul\xe2\x80\x9fs lax internal control\nenvironment created an environment susceptible to fraud.\n\nThe following table lists other industry observations regarding fraud and how they\ncompare to our observations about St. Paul\xe2\x80\x9fs failure:\n\n Industry Observations NCUA OIG Observations of\n of Fraudulent Activity St. Paul\xe2\x80\x99s Failure\n Lack of adequate internal Lack of segregation of duties.\n controls is the most Data Processing system control issues.\n common factor that\n allows fraud to occur.\n\n Small businesses have Lack of segregation of duties due to low number\n been determined to be of employees (ten employees for two offices).\n most susceptible to One person handled most of the accounting and\n occupational fraud. lending processes.\n\n Lack of management Supervisory Committee not fully active.\n review allows fraud to\n occur. Repeated DOR items not addressed.\n\n\nAlthough we determined that more diligent and aggressive supervision on the part of\nNCUA may have mitigated the loss, we believe the cause of St. Paul\xe2\x80\x9fs failure was\ndirectly attributable to the suspected fraud committed against its members through\nthe actions of one individual.\n\n\n\n\n37\n The Association of Certified Fraud Examiners defines occupational fraud as \xe2\x80\x9cthe use of one\xe2\x80\x9fs occupation for\npersonal enrichment through the deliberate misuse or misapplication of the employing organization\xe2\x80\x9fs resources or\nassets.\xe2\x80\x9d\n38\n Association of Certified Fraud Examiners, 2008 Report to the Nation on Occupational Fraud and Abuse.\n\n\n\n 26\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nAuditor observations made as a result of our review of St. Paul\xe2\x80\x9fs failure include:\n\n \xef\x82\xb7 Examiners did not consider the lack of adequate internal controls serious\n enough to rate transaction risk high at St. Paul even though this issue is an\n inherent problem in smaller credit unions. We believe the lack of internal\n controls and the repeatedly alleged data processing system issues indicated\n material weaknesses may have existed, warranting expanded examination\n procedures. Opportunities existed for management to reinforce the need for\n additional procedures.\n\n \xef\x82\xb7 Examiners need to be reminded of the importance of understanding that DORs\n are to be developed to outline plans to reduce areas of unacceptable risk, with\n particular emphasis on the types of safety and soundness concerns that were\n clearly present in the years leading up to St. Paul\xe2\x80\x9fs failure. Further, any\n reminder provided to examiners on the DOR process would be remiss if DOR\n follow-up in subsequent examinations were not also emphasized.\n\n \xef\x82\xb7 A lack of emphasis on the importance of additional procedures, such as the\n Red Flag review, and expanding procedures when red flags are detected.\n Specific monitoring triggers could be developed to more easily \xe2\x80\x9ered flag\xe2\x80\x9f areas\n to be investigated, as well as provide a specific time allocation.\n\n\n\n\n 27\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\n Appendix A: Examination and Supervision History\n\nThe following provides a summary of NCUA\xe2\x80\x9fs supervision of St. Paul, which includes\nexaminations, and on-site and off-site supervision contacts from December 2004\nthrough the December 2009 examination during which NCUA placed St. Paul under\nconservatorship.\n\nTable A-1\n St. Paul Assets and CAMEL Ratings \xe2\x80\x93 2004 to 2009\n\n Examination\n or Contact Assets39 Composite C A M E L\n Date\n 12/31/2009 $238.8 4 4 4 5 5 4\n 3/31/2009 $202.5 2 1 1 3 1 3\n 12/31/2008 $195.8 2 1 1 3 1 3\n 12/31/2007 $171.0 2 1 1 2 1 3\n 6/30/2007 $161.3 2 1 1 2 1 3\n 9/30/2006 $156.9 2 1 1 2 1 3\n 6/30/2006 $151.9 2 1 1 2 1 3\n 12/31/2005 $144.2 2 1 1 2 1 3\n 12/31/2004 $108.7 2 1 2 1 1 2\nC=Capital; A=Asset Quality; M=Management; E=Earnings; L=Liquidity\n\nTable A-2\n St. Paul Risk Ratings \xe2\x80\x93 2004 to 2009\n\nExamination\nor Contact SR TR CMR CRR IR LR RR\nDate\n 12/31/2009 High High High High High High High\n 3/31/2009 Mod. Mod. Mod. Low Mod. High Mod.\n 12/31/2008 Mod. Mod. Mod. Low Mod. High Mod.\n 12/31/2007 Mod. Mod. Mod. Low Mod. High Mod.\n 6/30/2007 Mod. Mod. Low Low Low High Mod.\n 9/30/2006 N/A N/A N/A Low N/A N/A N/A\n 6/30/2006 N/A N/A N/A Low N/A N/A N/A\n 12/31/2005 Mod. Low High Low Low High Low\n 12/31/2004 Mod. Low Low Low Mod High Low\nSR=Strategic Risk; TR=Transaction Risk; CMR=Compliance Risk; CRR=Credit Risk;\nIR=Interest Rate Risk; LR=Liquidity Risk; RR=Reputation Risk; Mod= Moderate;\nN/A=Not Applicable\n\n\n39\n Dollar amounts are in the millions.\n\n\n\n 28\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nTable A-3\n St. Paul Balance Sheet Composition \xe2\x80\x93 2004 to 2009\n\n Examination or Loans/Assets\n Assets40 Loans Shares\n Contact Date Ratio\n 12/31/2009 $238.8 $233.6 $208.5 97.82%\n 12/31/2008 $195.8 $191.5 $169.9 97.80%\n 12/31/2007 $171.0 $166.9 $147.0 97.63%\n 12/31/2006 $161.1 $157.0 $139.4 97.48%\n 12/31/2005 $144.2 $137.8 $130.4 95.55%\n 12/31/2004 $119.1 $112.7 $108.7 94.60%\n\n\n\n\n40\n Dollar amounts are in the millions.\n\n\n\n 29\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nAppendix B: Risk Indicators\n\nThe following summarizes NCUA Examiner\xe2\x80\x9fs Guide, Chapter 2, Attachment 2.1, which\nprovides examiners with guidance in the assignment of risk level.\n\nTransaction Risk Indicators\n\n Factor Low Moderate High\n Board and Fully understands all Reasonably understands Does not understand, or\n Operational aspects of transaction key aspects of transaction chooses to ignore key\n Management risk. risk. aspects of transaction risk.\n Understanding\n Responsiveness Anticipates and Adequately responds to Does not anticipate or take\n to Market and responds well to changes. timely or appropriate actions\n Technological changes. in response to changes.\n Conditions\n Risk Exposure Only a slight probability Possible loss to reputation, Weak internal controls\n of damage to earnings or capital exists but expose the credit union to\n reputation, capital, or is mitigated by adequate significant damage to\n earnings. internal controls. reputation, or loss of\n earnings or capital.\n Transaction History or sound History of adequate History of transaction\n Processing operations. Likelihood operations. Likelihood of processing failures.\n Controls of transaction transaction processing Likelihood of future failures\n processing failures is failures is minimized by is high due to absence of\n minimal due to strong generally effective internal effective internal controls.\n internal controls. controls.\n Systems and Strong control culture Adequate operating and Serious weaknesses exist in\n Controls that results in systems, information processing operating and information\n internal controls, audit, systems, internal controls, systems, internal controls,\n and contingency and audit coverage, and audit coverage, or\n business recovery plans contingency and business contingency and business\n that are sound. recovery plans are evident. recovery plans.\n MIS Satisfactory Minor deficiencies may exist Significant weaknesses in\n that relate to transaction and transaction and information\n information processing processing activities.\n activities.\n New Products or Favorable performance Planning and due diligence Inadequate. CU is exposed\n Services in expansions and prior to introduction of new to risk from the introduction\n introductions of new services are performed or expansion of new\n products and services. although minor weaknesses products and services.\n exist.\n Conversion Conversion plans are Conversion plans are CU may be exposed to\n Management clear, comprehensive, evident, although not always processing risks due to poor\n and followed. comprehensive. conversion management,\n either from the integration of\n new acquisitions with\n existing systems, or from\n converting one system to\n another.\n Problem Management identifies Management recognizes Management has not\n Identification and weaknesses quickly and weaknesses and generally demonstrated a commitment\n Corrective Action takes appropriate takes appropriate action to make the corrections\n action. required to improve\n transaction processing risk\n controls.\n\n\n\n\n 30\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nStrategic Risk Indicators\n\n Factor Low Moderate\n High\n Risk Practices are an integral Quality is consistent with the Practices are inconsistent\n Management part of strategic planning. strategic issues confronting with strategic initiatives. A\n Practices the credit union. lack of strategic direction is\n evident.\n Strategic Strategic goals, objectives, Demonstrated the ability to Operating policies and\n Planning culture, and behavior are implement goals and programs inadequately\n effectively communicated objectives and successful support strategic initiatives.\n and consistently applied implementation of strategic The structure and talent of\n throughout the institution. initiatives is likely. the organization do not\n The depth of management support long-term strategies.\n talent enhances strategic\n direction and organizational\n corporate efficiency.\n Management/St Changes in key Key management or staff Key management or staff\n aff Turnover management or staff are changes recently occurred. turnover is high and poorly\n well managed and minimal. Succession plans are managed. Succession plans\n Succession plans are adequate. are non-existent,\n documented and effective. inadequate, or ignored.\n Track Record Management has been Management has a Deficiencies in management\n successful in reasonable record in decision-making and risk\n accomplishing past goals decision-making and recognition do not allow the\n and is appropriately controls. institution to effectively\n disciplined. evaluate new products,\n services, or FOM\n expansions.\n MIS Management information Management information Management information\n systems effectively support systems reasonably support systems supporting strategic\n strategic direction and the credit union\xe2\x80\x9fs short-term initiatives are seriously\n initiatives. direction and initiatives. flawed or do not exist.\n Risk Exposure Exposure reflects strategic Exposure reflects strategic Strategic goals emphasize\n goals that are not overly goals that are aggressive significant growth or\n aggressive and are but compatible with business expansion that is likely to\n compatible with developed strategies. result in earnings volatility or\n business strategies. capital pressures.\n Impact and Risk Initiatives will have a Actual practices have only The impact of strategic\n of Initiatives negligible impact on capital, minor inconsistencies with decisions is expected to\n systems, or management planned initiatives. Initiatives significantly affect net worth.\n resources. The initiatives are reasonable considering Strategic initiatives may be\n are well supported by the capital, systems, and aggressive or incompatible\n capital for the foreseeable management. Decisions are with developed business\n future and pose only not likely to have a strategies. Decisions are\n nominal possible effects on significant adverse impact either difficult or costly to\n earnings volatility. on earnings or capital and reverse.\n can be reversed without\n significant cost or difficulty.\n Appropriatenes New products/services are New products/services will Strategic goals are unclear\n s of New supported by sound due not materially alter business or inconsistent, and have led\n Products & diligence and strong risk direction, can be to an imbalance between the\n Services management. The implemented efficiently and credit union\xe2\x80\x9fs tolerance for\n decisions can be reversed cost effectively, and are risk and willingness to\n with little difficulty and within management\xe2\x80\x9fs supply supporting resources\n manageable costs. abilities. for new product/service\n offerings.\n\n\n\n\n 31\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nCompliance Risk Indicators\n\n Factor Low Moderate\n High\n Board and Fully understands all aspects Reasonably Does not understand, or has chosen to\n Operational of compliance risk and understands the key ignore, key aspects of compliance risk.\n Management exhibits a clear commitment aspects of compliance The importance of compliance is not\n Understanding to compliance. Commitment risk. Commitment to emphasized or communicated\n is communicated throughout compliance is throughout the organization.\n the institution. reasonable and\n satisfactorily\n communicated.\n Authority and Authority and accountability Authority and Management has not established or\n Accountability for compliance are clearly accountability are enforced accountability for compliance\n defined and enforced. defined, although some performance.\n refinements may be\n needed.\n Response to Anticipates and responds Adequately responds to Does not anticipate or take timely or\n Changes well to market or regulatory market or regulatory appropriate actions in response to\n changes. changes. market or regulatory changes.\n Product and Compliance considerations While compliance may Compliance considerations are not\n Systems are incorporated into product not be formally incorporated in product or systems\n Development or systems development. considered when development.\n developing product or\n systems, issues are\n typically addressed\n before they are fully\n implemented.\n Violations & Risk Violations, noncompliance, The frequency or Violations, noncompliance, or litigation\n Exposure or litigation are insignificant, severity of violations, expose the credit union to significant\n as measured by their number noncompliance, or impairment of reputation, value,\n or seriousness. litigation is reasonable. earnings, or business opportunity.\n Error Detection When deficiencies are Problems can be Errors are often not detected internally,\n and Corrective identified, management corrected in the normal corrective action is often ineffective, or\n Action promptly implements course of business management is unresponsive.\n meaningful corrective action. without a significant\n investment of money or\n management attention.\n Management is\n responsive when\n deficiencies are\n identified.\n Risk Good record of compliance. Compliance Compliance management systems are\n Management The CU has a strong control management systems deficient, reflecting an inadequate\n culture that has proven are adequate to avoid commitment to risk management.\n effective. Compliance significant or frequent\n management systems are violations or\n sound and minimize the noncompliance.\n likelihood of excessive or\n serious future violations.\n Controls and Appropriate controls and No shortcomings of The likelihood of continued violations or\n Systems systems are implemented to significance are evident noncompliance is high because a\n identify compliance problems in controls or systems. corrective action program does not exist,\n and assess performance. The probability of or extended time is needed to implement\n serious future violations such a program.\n or noncompliance is\n within acceptable\n tolerance.\n Training and Training programs are Management provides Management has not provided adequate\n Resources effective and the necessary adequate resources and resources or training.\n resources have been training given the\n provided to ensure complexity of products\n compliance. and operations.\n\n\n\n\n 32\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nAppendix C: Enforcement Actions\n\nThe following tables provide a summary of repetitive recommendations/DORs to\ncorrect problems identified by examiners from December 31, 2004 through March 31,\n2009. The DORs are categorized by issue.\n\nTable C-1\n Liquidity Risk\n\nExamination or DOR Items\nContact Date\n12/31/2004 Develop liquidity policy and standard including ratio limits,\n projected cash flows, prioritized funding sources, monitoring\n responsibilities and report requirements.\n\n12/31/05 Revise funds management/liquidity policy for ratio limits,\n minimum cash available, reporting requirements, cash flow\n analysis, monitor unused LOCs, quarterly reports to board on\n borrowings and non-member deposits, and break out non-\n member shares on the general ledger.\n\n6/30/07 Increase liquidity to 5% of assets.\n Revise funds management/liquidity policy for ratio limits,\n minimum cash available, reporting requirements, cash flow\n analysis, establish sufficient LOCs, quarterly reports to board on\n borrowings and non-member deposits, and break out non-\n member shares on the general ledger.\n\n12/31/07 Revise funds management/liquidity policy for ratio limits.\n\n12/31/08 Revise funds management/liquidity policy for ratio limits.\n\n3/31/09 Revise funds management/liquidity policy for ratio limits.\n Establish and maintain sufficient liquidity levels of overnight\n funds. Execute mortgage loan sale/participation. Develop\n strategies to fund non-member CDs as they mature. Establish\n LOC other than at the corporate.\n12/31/09 Revise funds management/liquidity policy for ratio limits.\n Establish and maintain sufficient liquidity levels of overnight\n funds. Execute mortgage loan sale/participation. Develop\n strategies to fund non-member CDs as they mature. Establish\n LOC other than at the corporate.\n Adopt Investment policy to meet 12CFR Part 703.\n\n\n\n\n 33\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nTable C-2\n Credit Risk\n\nExamination or DOR Items\nContact Date\n12/31/09 Have an independent third party review all loans, especially\n MBLs for adequate documentation of validity and value of\n pledged collateral.\n Obtain legal opinion on enforceability of Assignment of CD and\n Loan and Security Agreement and Disclosure Statements, which\n were altered.\n Place moratorium on MBLs until the credit union is in compliance\n with NCUA Rules and Regulations. Refrain from refinancing\n MBLs.\n Revise RE loan policy to include geographic areas, types of\n properties and required documentation.\n Develop and adopt formal policy for RE appraisals.\n\n\nTable C-3\n\n Strategic Risk\n\nExamination or DOR Items\nContact Date\n12/31/04 Review and revise business plan including long and short term\n goals, products and services.\n\n12/31/05 Develop a plan to reduce non-member deposits to a maximum\n of 20% of total shares. Address the rapid growth in deposits and\n loans by setting limits and goals.\n\n12/31/07 Develop and revise written IT policies and procedures where\n needed.\n\n12/31/09 Develop business plan to divest of impermissible accounts.\n Document annual business plans.\n Monitor activity to bring about changes in products and services.\n Ensure sufficient research is performed up front with new\n products and services for regulatory issues, compliance issues\n and sound internal controls.\n\n\n\n\n 34\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nTable C-4\n Compliance Risk\n\nExamination or DOR Items\nContact Date\n12/31/05 Complete independent testing of BSA program. Update BSA\n policy to achieve effective internal controls for required SAR\n filings, provide adequate due diligence to monitor accounts for\n suspicious activity, require CIP information prior to opening an\n account.\n\n12/31/08 CU has not been verifying wire transfers with non-member\n parties for OFAC \xe2\x80\x93 Examiner Finding.\n\n12/31/09 Ensure all non-real estate loans will not exceed a 15-year\n maturity including five-year balloons.\n Develop BSA training program for officials.\n Develop and maintain appropriate records to monitor all\n aggregate cash deposits and withdrawals.\n Institute procedure to document wire transfers. Should be on an\n electronic spreadsheet.\n Complete annual OFAC audit.\n Timely compare entire membership to a current OFAC list\n Ensure all non-members who are a party to any transaction are\n compared to the most current OFAC listing.\n TIL \xe2\x80\x93 Ensure loan documents are signed by all interested parties\n to the loan.\n TIS \xe2\x80\x93 Ensure additional deposits are not made to CDs.\n Institute procedure to properly complete membership cards.\n Ensure business accounts are within the FOM.\n\n\n\n\n 35\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nTable C-5\n Interest Rate Risk\n\nExamination or DOR Items\nContact Date\n12/31/04 Develop ALM policy with NW goals, addressing interest rate risk,\n establish cash flow risk limits, and develop internal controls and\n reporting requirements.\n\n12/31/07 Develop ALM policy addressing interest rate risk, establish cash\n flow risk limits, and develop internal controls and reporting\n requirements.\n\n12/31/08 Develop ALM policy addressing interest rate risk, establish cash\n flow risk limits, and develop internal controls and reporting\n requirements.\n\n3/31/09 Develop ALM policy addressing interest rate risk, establish cash\n flow risk limits, and develop internal controls and reporting\n requirements.\n12/31/09 Develop ALM policy addressing interest rate risk, establish cash\n flow risk limits, and develop internal controls and reporting\n requirements.\n\nTable C-6\n Transaction Risk\n\nExamination or DOR Items\nContact Date\n6/30/07 Have annual audit conform to GAAS and GAAP standards \xe2\x80\x93\n Examiner Finding.\n\n12/31/07 Have annual audit conform to GAAS and GAAP standards.\n Contact software provider to determine procedure necessary to\n freeze shares used as loan collateral.\n\n12/31/08 Have annual audit conform to GAAS and GAAP standards.\n Contact software provider to determine procedure necessary to\n freeze shares used as loan collateral.\n Prepare formal reconciliations of all major balance sheet\n accounts. Investment activity had some improper recording -\n Examiner Finding. Small payroll cash account was not\n reconciled \xe2\x80\x93 Examiner Finding.\n\n3/31/09 Have annual audit conform to GAAS and GAAP standards.\n Contact software provider to determine procedure necessary to\n\n\n 36\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\n freeze shares used as loan collateral.\n Prepare formal reconciliations of all major balance sheet\n accounts.\n\n12/31/09 Require \xe2\x80\x9cfreezing\xe2\x80\x9d of share accounts and certificates that are\n pledged to secure loans.\n Address record length for printing loan documents accurately.\n Address ability to enter security on Loan and Security\n Agreement and Disclosure Statement.\n Establish reasonable reporting parameters for BSA/AML.\n Obtain DP input training for staff.\n Establish internal controls to disallow loan advances on closed\n end loans to make payments on other loans or to make wire\n transfers to make payments on other loans; capitalizing interest\n on closed end loans; adding a deposit to an existing CD;\n redeeming a share certificate without penalty and paying\n accrued interest at redemption.\n\nTable C-7\n Reputation Risk\n\nExamination or DOR Items\nContact Date\n12/31/09 Independent third party to review MBLs to assess potential loss.\n Independent third party to review share secured loans for\n existence of security.\n Independent third party to review membership cards for\n verification of eligibility. Establish membership eligibility\n process.\n Independent third party to review loan documentation for\n corrections.\n\n\n\n\n 37\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\nAppendix D: NCUA Management Comments\n\n\n\n\n 38\n\x0cMATERIAL LOSS REVIEW OF ST. PAUL CROATIAN FEDERAL CREDIT UNION\nOIG-10-16\n\n\n\n\n 39\n\x0c'


type: wikipedia

text:
Jožefa je žensko osebno ime.
 Izvor imena
 Ime Jožefa je ženska oblika imena Jožef.
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 Fina, Fini, Finika, Josefa, Josefina, Josefine, Josipa, Josipina, Josipi, Jozefa, Jozefina, Joža, Jožefina, Joži, Jožica, Jožika, Jožka, Pepa, Pepca, Pepica, Pepka, Pina, Zefina.
 Tujejezikovne različice imena
 pri Angležih, Nizozemcih, Nemcih: Josephine
 pri Dancih: Josefine
 pri Italijanih: Giuseppina
 pri Hrvatih: Josipa
 pri Slovakih, Poljakih: Jozefina
 pri Švedih: Josefina
 Pogostost imena
 Po podatkih Statističnega urada Republike Slovenije je bilo na dan 31. decembra 2007 v Sloveniji število ženskih oseb z imenom Jožefa: 11.361. Med vsemi ženskimi imeni pa je ime Jožefa po pogostosti uporabe uvrščeno na 6. mesto.
 Osebni praznik
 V koledarju je ime Jožefa uvrščeno k imenu Jožef.
 Glej tudi
 seznam osebnih imen na J
 seznam najpogostejših imen v Sloveniji
 Viri
 Ženska osebna imena
 da:Josefine
 de:Josephine
 en:Josephine (name)
 hu:Jozefina
 it:Giuseppina
 nl:Josephine
 pl:Józefina (imię)
 sk:Jozefína
 sv:Josefina


type: caselaw

jurisdiction: EU

text:
 27.3.2010
 ES
 Diario Oficial de la Unión Europea
 C 80/25
 Auto del Juez de medidas provisionales de 5 de febrero de 2010 — De Post/Comisión
 (Asunto T-514/09 R)
 (Procedimiento sobre medidas provisionales - Contratos públicos - Procedimiento comunitario de licitación - Solicitud de suspensión de la ejecución y de medidas provisionales - Inexistencia de urgencia)
 2010/C 80/45
 Lengua de procedimiento: inglés
 Partes
 Demandante: De Post NV van publiek recht (Bruselas) (representantes: R. Martens y B. Schutyser, abogados)
 Demandada: Comisión Europea (representantes: E. Manhaeve y N. Bambara, agentes, asistidos por P. Wytinck, abogado)
 Objeto
 Demanda de medidas provisionales que tiene por objeto, en sustancia, en primer lugar, que se suspenda la ejecución de la resolución por la que la Oficina de Publicaciones de la Unión Europea (OP) adjudicó el contrato objeto de licitación no 10234 «Transporte y entrega diarios del Diario Oficial, libros, y otras revistas y publicaciones» a la Entreprise des Postes et Télécommunications Luxembourg, en segundo lugar, que se prohíba proceder a la firma de dicho contrato en la mencionada licitación y, en tercer lugar, en caso de que el contrato ya se haya celebrado, que se suspenda su ejecución hasta que el Tribunal se pronuncie sobre el fondo del recurso.
 Fallo
 1)
 Desestimar la demanda de medidas provisionales.
 2)
 Reservar la decisión sobre las costas.


text:
 4.5.2015
 PL
 Dziennik Urzędowy Unii Europejskiej
 C 146/36
 Wyrok Sądu z dnia 18 marca 2015 r. – Naazneen Investments/OHIM – Energy Brands (SMART WATER)
 (Sprawa T-250/13) (1)
 ([Wspólnotowy znak towarowy - Postępowanie w sprawie stwierdzenia wygaśnięcia prawa do znaku - Słowny wspólnotowy znak towarowy SMART WATER - Rzeczywiste używanie - Artykuł 51 ust. 1 lit. a) rozporządzenia (WE) nr 207/2009 - Obowiązek uzasadnienia - Artykuł 75 rozporządzenia nr 207/2009])
 (2015/C 146/49)
 Język postępowania: angielski
 Strony
 Strona skarżąca: Naazneen Investments Ltd (Limassol, Cypr) (przedstawiciele: adwokaci P. Goldenbaum, I. Rohr i T. Melchert)
 Strona pozwana: Urząd Harmonizacji w ramach Rynku Wewnętrznego (znaki towarowe i wzory) (przedstawiciel: A. Pohlmann, pełnomocnik)
 Stroną postępowania przed Izbą Odwoławczą OHIM była również, interwenient przed Sądem: Energy Brands, Inc. (Nowy Jork, Nowy Jork, Stany Zjednoczone) (przedstawiciele: S. Malynicz, barrister, i D. Stone, solicitor)
 Przedmiot
 Skarga na decyzję Drugiej Izby Odwoławczej OHIM z dnia 18 lutego 2013 r. (sprawa R 1101/2011-2) dotyczącą postępowania w sprawie stwierdzenia wygaśnięcia prawa do znaku między Energy Brands, Inc. a Naazneen Investments Ltd.
 Sentencja
 1)
 Skarga zostaje oddalona.
 2)
 Naazneen Investments Ltd zostaje obciążona kosztami postępowania.
 (1) Dz.U. C 207 z 20.7.2013.