Internal Fraud in Credit Unions: Practical Controls That Protect Members and Employees.

Internal fraud is not a comfortable topic.

But it is a necessary one.

Over the past few years, internal fraud cases have continued to surface in credit union publications, enforcement actions, and industry updates. Many of them follow familiar patterns: access that went unchecked, reviews that were delayed, or concerns that never had a safe place to land.

This is not about assuming the worst of employees.It is about designing systems that reduce risk, support integrity, and protect everyone involved.

Why internal fraud deserves attention

Internal fraud often happens quietly.

It rarely starts with a dramatic event.

Instead, it grows in environments where:

• One person has too much unchecked access

• Reviews are infrequent or informal

• Monitoring exists, but no one is clearly responsible for follow-up

• Employees do not feel safe reporting concerns

The impact is real. Financial loss, regulatory scrutiny, reputational damage, and strained employee morale all tend to follow.

The good news is that strong fundamentals still work.

Confidential reporting is a Must!

If there is no safe way to report concerns, fraud lasts longer.

Every time!

Employees are often the first to notice when something feels off. But without a confidential reporting mechanism, those early warning signs stay unspoken.

An effective reporting process is:

Confidential - Employees can raise concerns without fear of retaliation or exposure.

Credible - Reports go to a defined group that knows how to respond and investigate.

Consistent - Every report follows the same intake, documentation, and follow-up process.

Common options include:

• Third-party ethics or whistleblower hotlines

• A dedicated internal reporting email monitored by a limited group

• A secure online reporting form

• Direct access to the audit committee for escalated concerns

  
  

Just as important as the mechanism itself is how it is communicated. Employees should understand what to report, how confidentiality is handled, and what happens after a concern is raised.

Dual control reduces temptation and protects employees

Dual control is often framed as a fraud prevention tool.

It is also an employee protection tool.

When one person controls a process end-to-end, two risks emerge:

• Fraud becomes easier to commit

• Honest employees lose the ability to prove what they did not do

  
  

Strong dual control practices include:

• Two-person vault access with documented entry and exit

• Dual authorization for wires, ACH, cashier’s checks, and GL entries

• Secondary review of high-risk account maintenance changes

• Independent approval of overrides, exceptions, and rate concessions

When staff say, “We don’t have time for that,” the issue is usually staffing or workflow design, not the control itself.

Frequent reviews of high-risk activity catch problems early

Internal fraud often hides in areas that receive little routine attention.

Focus reviews on activities that historically carry higher risk:

• Cash overages and shortages

• General ledger entries and reversals

• Dormant account activity

• Address or contact changes followed by withdrawals or transfers

• Overrides and exceptions by employee

• Teller activity patterns over time

  
  

Effective reviews are:

• Short and repeatable

• Documented with sign-off

• Assigned to someone independent of the activity

• Followed through until resolution

Infrequent or informal reviews are easy to postpone. Fraud relies on that delay.

Monitoring only works when alerts are acted on

Many credit unions have monitoring systems in place.Fewer have monitoring programs that consistently close the loop.

Strong monitoring includes:

• Alerts tied to realistic fraud scenarios

• Clear ownership for reviewing alerts

• Documentation of why alerts were cleared

• Defined escalation thresholds

  
  

Employee activity should be part of monitoring programs. Not because distrust is assumed, but because transparency protects both the institution and the employee.

Controls protect honest employees, not just the credit union

This part often gets overlooked.

When controls are weak, honest employees can be put in impossible positions:

• Working alone with access to cash

• Making exceptions without documentation

• Handling urgent requests without secondary approval

  
  

Strong controls create a defensible record.Logs, approvals, reviews, and monitoring notes tell a clear story when questions arise.

That paper trail is not bureaucracy.It is protection.

A few questions to ask yourself

• Do employees have a confidential, trusted way to report concerns?

• Are there areas where one person still carries too much access?

• Which activities receive routine review, and which quietly do not?

• When alerts fire, does someone clearly own the response?

• Would an employee be able to clearly demonstrate what they did if questions were raised?

Most credit union leaders care deeply about their teams and their members. The challenge is making sure internal controls reflect that care in day-to-day operations.

If you’re thinking about where your controls may need reinforcement, let’s talk.