The 30 Year Fraud

January 19, 2010 by Paul McCormack

10 comment(s)

Think back to where you were and what you were doing in 1961â€¦some of you were not born yet, others were just beginning school in 1961, Betty Pacocha of New Haven, Connecticut had just embarked upon a career in banking with NewMil Bank. Over the next 45 years, Betty held various positions with the bank including teller, branch manager, Vice President, Compliance Officer and finally Executive Vice President and Corporate Secretary. Based on records available online, when she retired in 2006, Betty was earning quite an impressive salary. To attain such a highly compensated position is a significant achievement, especially given the fact that she began her career as a frontline employee.

Unfortunately, for 30 of the 45 years of her career, Betty was committing fraud as evidenced by her sentencing in December 2009. Federal investigators note that Betty singlehandedly misappropriated approximately $722,000. Over the course of nine US presidential terms, Betty was busy tracking certificate of deposit maturities. Upon maturity Betty would either close the account entirely and steal the proceeds, or reduce the value of the CD and funnel the "five finger" discount to her personal account. Betty allegedly falsified bank records as well as used the proceeds from multiple CDs to cover her tracks. We can only imagine how many red flags were raised during the 30 year fraud, but here is a short list to begin the discussion:

On occasion, Betty transferred the proceeds of the stolen CDs to her personal account. She would also use funds from her personal account to cover shortfalls in maturing CDs. A quick review of Betty's account activity may have uncovered the fraud much earlier
As Betty's role with the bank grew, did anyone notice that she appeared particularly focused on tracking CD maturities? If so, did no one think it odd that Betty was involved in so many CD related transactions? Once technology made its way in to NewMil's branches did the bank fail to implement compliance reporting? (admittedly, it would not help that Betty once held the position of compliance officer!)
What did Betty do with $722,000? Did her standard of living improve? As she climbed the ranks her salary increased considerably, but in the early years were changes in living standard ignored?

As the new book, "Insidious" by Shirley Inscoe and BC Krishna notes, trust creates opportunity. In this case, the bank let their guard down and provided an employee the opportunity to commit fraud over three decades! So what additional red flags do you believe were missed?

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Golfwidow
January 20, 2010 - 1:41 PM

"What about the yardstick you often advocate in your advice? Did she take holidays? If not, why did no-one notice? Who was in charge in her absence if she did? Where they accomplices and did the fraud spread further? These are all elementary precautions you often advise as non-specialist, indeed elementary, ways of guarding against fraud. "

Paul McCormack
January 21, 2010 - 9:00 AM

"Great questions! In order to answer some of your questions, we would need more information about how the fraud grew over time. From my research on this case, I was unable to gather information about how the losses were distributed over the course of Betty's 45 year career. Give the nature of most frauds, I suspect that it started small and grew over time... Regarding holiday / vacation time, since Betty worked for a small community bank it is possible that they did not mandate that all employees use their allotted vacation time. With that said, Betty must have taken some time off during the 30 year fraud for sickness etc. Why the fraud was not detected during those periods, however brief, is somewhat of a mystery... You raise an interesting question regarding accomplices. It is possible that one or more of her colleagues suspected something was amiss. Did Betty pressure them to remain silent? Did she enroll them in the fraud? Only Betty can answer those questions. I am personally not convinced that Betty acted alone all those years. Betty did an outstanding job of concealing and managing the fraud so I suspect that she was highly adapt at manipulating those around her as well. "

Paul McCormack
January 21, 2010 - 9:16 AM

"moleman, You are exactly right. If there is one lesson to learned from this fraud it is that trust can be abused. It is human nature to believe that people are fundamentally good. Unfortunately, that is not always the case... Paul "

moleman
January 21, 2010 - 9:20 AM

"Trust goes a long way to help the fraudster. When people believe a co-worker is trustworthy, they often go to great lengths to justify in their own mind that the person odd behavior is normal. I've seen it happen before and sure will see it happen again. "

Emmanuel C. Okorie
January 26, 2010 - 7:35 AM

"I think that were many things the management of the bank ignored that led to the success of the fraud, perhaps as a result of the size of the bank. Besides the trust, as stated above, that might have created the enabling environment for Betty, the bank did not put adequate checks and balances into place. While she was a compliance officer, was she also tracking and passing/posting entries in respect of the CDs? Did the investigators bother to find out if there were reports by the compliancce officers against her before she herself became a compliance officer? Did the management of the bank encourage her by not acting on the compliance officers' reports, if any? Did she voluntarily decide to take all the blame and save her accomplices the scandal? Surely, she could not have acted alone for such long period "

AML-Assassin
January 26, 2010 - 7:28 PM

"If I read this right, she would skim interest off from maturing CDs. If this is the case, she could have pulled it off without any accomplices - if she happened to be out for any reason, "Oh well, missed that one." She couldn't have done this to every CD the institution had over all those years or she would have been found out long ago. She had to have used her knowledge of the customers to know which ones she could do this to and which ones she could not. As far as if a report had ever been filed on her, well, I guess that explains why some institutions I know have policies that if any employee is the subject of any SAR - no matter how trivial it may seem - they are terminated. No reason given, but they are gone - be it a teller of a director. "

Paul McCormack
January 26, 2010 - 7:28 PM

"Emmanuel, Thanks for posting! You make a very important point re following up on allegations made against employees. If reports were made, I agree that failing to pursue those allegations may have given Betty all the encouragement she needed to commit fraud. Most people that I discuss this case with also believe that Betty had accomplices. I just can't imagine she did it all by herself all those years! Paul "

Paul McCormack
January 27, 2010 - 8:33 AM

"AML-Assassin, Thanks for the comments. Very good point about her knowledge of customers. I agree that she was ideally placed to pick her targets wisely... Based on my reading of the sentencing, it appears that she actually took the entire principal versus just the interest: "...by either completely closing the CDs or by reducing them in value." Taking the interest would have been much less risky, and probably a better way to go. In fact, she may have done both...with that said, she had a very long run! Why NOT take the entire balance?!? Re SARs - very interesting. I know some banks that fire with one SAR as well. However, depending on how influential HR may be within the bank, the employee may get a second chance. Not a great idea to assume that liability, but there you have it... Very glad you took the time to comment. Look forward to reading more of your posts! Paul "

Paul McCormack
February 18, 2010 - 11:39 AM

"To follow up on my response, I researched the situation from both a criminal and civil perspective. First, it obviously depends on the statutes in the relevant jurisdiction. However, there is a key element missing in the scenario you provided - intent. The teller could be found to be criminally negligent which may not require intent. You could argue that by ignoring policies known to prevent fraud that they were criminally negligent. That said, it would still be really difficult to prove. Further, I have yet to come across a statute that makes not following a corporate policy a criminal offense. Put differently, policies are often not followed and do not mean that the employee was involved in criminal conduct. From a civil perspective you would normally have to prove breach of duty of care for damages to result. Alternatively, it is very unlikely that the employee has signed a contract that requires damages be paid when they fail to follow policies. Regardless of criminal, or civil, it is very difficult to pursue the employee in the scenario you detailed, especially when the employee is following their manager's request. Finally, as I stated previously, this is not legal advice. In the words of my attorney friends - "no reliance without consent". Hopefully, this gives you a general idea of what may be applicable. Again, thanks for joining the discussion! "

Ralph Garcia
February 18, 2010 - 11:43 AM

"Sorry for joining late in this discussion. In cases I have seen similar to this, the offender was never able to operate his or her scheme alone. As others have already mentioned here, the offender relies on the trust they build with their co-workers. It is the trust that an accomplice (whether or not they realize there are assisting with the commission of a crime) will overlook policies or checks and balances to assist the offender with a transaction. There is a question my colleagues and I often ponder. Let's say a bank teller cashes a check drawn on a client's account per the instruction of a bank manager (aka the offender) when the client is not present. The bank teller essentially assisted the bank manager in the commission of a crime, but is probably completely unaware. During an interview with investigators, the bank teller fully admits he or she was aware a firm policy was being broken when the check was cashed, but did not have the intent to commit a crime. Can the teller be held criminally liable? What about civil charges? I'd love to only hear your opinion, but it would also be great if you could point to some historical examples. "

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