Financial institution bonds (FI bonds) play a critical role in helping financial institutions mitigate losses. Offering protection from direct losses incurred as a result of fraudulent and dishonest acts of employees and officers, financial institution bonds are a critical and necessary coverage for all financial institutions.
When financial institutions first discover employee fraud, it is very disconcerting. Don’t panic. The following checklist will guide your financial institution from fraud discovery to submitting a financial institution bond claim.
When you first discover fraud, what should you do?
- Act quickly and start by gathering facts; mitigate further losses by preserving evidence and potential avenues of recovery.
- Alert law enforcement, your insurance broker, correspondent bank, and if applicable, IT forensic specialist and attorney.
- Gather documents including policies and procedures, relevant transaction details, notes from employee interviews, IT forensic specialist reports, a list of names of persons/companies involved, applicable customer agreements, disclosures and relevant call logs and email/correspondences.
How can you best mitigate losses?
- Stop transfers still in progress.
- Prevent overseas withdrawals.
- Determine if the cause of the loss was due to hacking, employee dishonesty or carelessness.
- Take no actions which could jeopardize insurance coverage, do not settle or credit customer accounts without consent of insurance carrier.
- Report any/all claims suspected or actual to your broker. Reserve the right to investigate all matters thoroughly. In difficult and complex situations, obtaining counsel may be necessary to protect your bank no matter who your carrier is.
What should the bank say to the customer?
- First, sympathize and apologize that this happened and tell them that you are aware of how upsetting the situation is.
- Explain what steps the bank is taking to assess the cause of the loss, and promise to keep them updated in a timely manner.
- Don’t admit culpability and pay customers outright. Explain that paying them now would defeat insurance.
- Advise the customer that understanding sufficiently what occurred and deciding what to do to rectify the situation is a necessary investigatory step. Urge them to cooperate in the investigation with IT forensic specialist, including participating in interviews and providing access to their personal computers.
- Determine your customer’s short-term cash needs and with your insurance carrier’s consent, consider making a temporary interest-free loan to the customer, pending the conclusion of the investigation.
Determine who is responsible for the loss.
Consult the bank’s agreement(s) with the customer as well as the bank’s policies and procedures and applicable provisions of the Uniform Commercial Code in determining responsibility.
File a claim.
- Consider relevant insurance policies including your institution’s cyber, D&O, E&O, FI bond, crime, and business services bond insurance policies.
- Does it matter that some funds came from a line of credit? The insurer may assert that there is no coverage for the advances under the “loan loss” exclusion, while the bank will be at risk of non-payment. If the customer is liable, the bank will have to make collection efforts.
Contact your HUB financial specialist today to find out how HUB can help you secure the right financial institution bonds and limits for your financial institution.