Fraud cited as agency closes island’s bank

Up to $1.7 million in financial fraud by at least one former employee of the Deer Island Credit Union was a significant factor in the decision by the regulatory agency that has been managing the facility to close the only financial institution on the island. After the end of this month, islanders will now have to conduct all of their banking on the mainland.

At a meeting at the Deer Island Community School on March 17, over 100 members of the credit union were told it would be closed in 14 days. The action is the third in a series of credit union closures in the area this past year, with the Charlotte County Credit Union closing its branches on Campobello and in Blacks Harbour last June for financial reasons.

The Deer Island Credit Union will be merged with the Charlotte County Credit Union, and all loan and deposit accounts will be transferred and accessible from the St. George and St. Stephen branches. Two of the staff have been offered positions at the Charlotte County Credit Union.

Joyce Stuart, chairman of the West Isles Local Service District Advisory Committee, comments, "We're all very disappointed. The credit union's been here 28 years, and we hate to lose it, but I guess it's a done deal." With a three-hour trip, including two ferry crossings, to go to St. George and back, Stuart says, "It will be very inconvenient. It seems like we're losing everything."

Floyd Richardson, who was a member of the board of directors of the credit union until the board was disbanded in June 2007, observes, "With an aging population, it's harder for older people to get to the mainland and back for their old age pensions." He adds, "We'll be as bad off as 30 years ago" when there was no bank on the island.

"We're going to suffer heavily for something we had no control over," says Richardson concerning the fraud. "It's a high price to pay for somebody's indiscretion." Stuart echoes, "If there was fraud by people, I think it's a shame that all have to suffer for what somebody else did."

Fraud outlined

In 2007 an external auditor could not issue a finalized audited financial statement as a result of being unable to reconcile several internal credit union accounts. In late 2007 the credit union was placed under the supervision of Risk Management Agency, the regulator for the credit union system in the province.

Mark Flewwelling, CEO of Risk Management Agency, told those at the March 17 meeting that estimates of the amount of the fraud, which occurred over several years, ranged from an eventual insurance claim settlement of $1.3 million to $1.75 million. He said the credit union "suffered substantially" as a result of the fraud. The matter was referred to the RCMP "and now rests in the hands of the insurers in how it may be dealt with going forward." No charges were ever brought in the case.

The fraud involved a person who worked two days a week at the credit union and was in charge of bank reconciliation, Richardson says. The person took the money from the credit union's operating account, moving it to the person's own account, and "cooked the books," he says. No money was taken from any individual accounts. While the credit union's general ledger indicated there was $2.3 million in the operating account, there was actually only perhaps $700,000. "One individual was definitely identified," but no charges were brought, since the person has since died, according to Richardson.

The credit union's board was acting under the supervision of Risk Management for about a year before the fraud was discovered, according to Richardson. He says the board was told the action was taken because a greater degree of approval was needed for loans, along with "a few things that could be done better." However, Richardson says that Risk Management gave the credit union "a clean bill of health" in January 2007 and that the auditor, not Risk Management, eventually discovered the fraud.

Richardson questions why Risk Management Agency accepted the lower figure of $1.3 million from the insurance company. "They say the $400,000 difference is the reason for closing it," he notes, adding, "But it was a well operated credit union. We were not losing money."

Flewwelling says that while the insurance paid only $1.3 million, the insurance firm had its auditors investigate the fraud, too. Also, during the meeting on the island, he reported that, at the end of January 2010, the credit union's equity had decreased to only $17,290, and the credit union was suffering an operating loss monthly, despite a reduction in hours. "All business must operate in a profitable position to survive. It is no different for a financial institution. A reduction to $17,000 net profit will not sustain this credit union or any credit union for that matter." He added that there is a legislative requirement that credit unions must maintain a 5% equity cushion, while that cushion is less than 0.5% for the Deer Island Credit Union.

Options proposed

Richardson is upset that there was "no opportunity given to the community to salvage the credit union." He says that the credit union could look at a broader region for support and notes that there is a proposal to amalgamate the credit unions in New Brunswick, Nova Scotia and Prince Edward Island into an Atlantic Canada Credit Union Central that would have economies of scale. He says smaller credit unions could participate with larger ones in loans, as the Deer Island Credit Union recently did for a loan to a church in Moncton. In addition, seniors over 65 do not pay any fees to belong to the Deer Island Credit Union, but he thinks they might be willing to pay a small service fee, to help retain it. "None of those options were given, though," he points out. If a board had been reinstated, then some options might have been developed.

In addition, the former board member suggests that instead of offering two of the Deer Island staff positions in St. George, the Deer Island Credit Union could be amalgamated with the Charlotte County Credit Union and be kept open on the island, with another person added.

However, Flewwelling says that "all options were explored before the business decision was made" by Risk Management Agency.

Richardson also is critical of the credit union management by the regulatory agency after the board was disbanded, since there was almost no communication with the members. One meeting, which was poorly attended, was held about a year and a half ago. Richardson says the poor attendance was because the meeting was not well announced. "There was a lot of speculation on the island about what was happening and fear that it would be closed. But nothing was told to the members for three years," he says. "There was a lot of unease by the islanders. They could have given us a financial statement."

Flewwelling responds, "There was nobody in a position to comment, unless it was supported by evidence and fact." He adds that the fraud investigation took some time.

Last July the credit union's hours were reduced, and it was only open two days a week. However, very few members left following that action, according to Richardson. "Everybody pretty well stayed with the credit union here." With the closure, he expects some members will switch to another banking institution.

Richardson comments that it seems strange to send two staff over to St. George to work at the credit union there, but the Deer Island one "will get padlocked." He adds, "It did work and it worked well for over 25 years. It provided a great service here."