00:00:00 Dan Ramey
Hello, I'm Dan Ramey, contributing editor to Internal Auditor Magazine's Fraud Department and president and founder of Houston Financial Forensics.
00:00:10 Dan Ramey
I am pleased to introduce this episode of Fraud on the All Things Internal Audit Podcast, which provides fictionalized accounts of fraud based on actual events.
00:00:23 The IIA
The Fall of the Trusted Leader, Part 1, The Bank Everyone Trusted.
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Prairie Crest Bank didn't look like the kind of place where fraud took root.
00:00:34 The IIA
The Colorado-based community bank was small, stable, and proud of its hometown reputation.
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Its CEO, Grant Huxley, donated to schools, sponsored youth sports teams, and greeted customers by name in the lobby.
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To most people, Huxley wasn't just a banker.
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He was a pillar of the community.
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Inside the bank, Daniela Danny Alvarez had earned a reputation of her own.
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The internal auditor was known for her calm demeanor and relentless attention to detail.
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Colleagues joked that Danny noticed things other people walked right past.
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If something didn't quite add up, she would find it.
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During Prairie Crest's annual audit of commercial lending, everything initially appeared routine.
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Loan balances were stable.
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Performance ratios set comfortably within expectations.
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Nothing raised alarms until Alvarez noticed 3 borrower names she hadn't seen before.
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Sierra Plains Logistics, Harbor Trail Supply, Milo Ridge Development.
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Part 2.
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Patterns don't lie.
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Individually, the loans looked ordinary.
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Together, they didn't.
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All 3 had been personally approved by Huxley.
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Each loan had been restructured in nearly identical ways.
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Even more unusual, the borrowers made payments in the exact same amounts, often on the same dates.
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Alvarez didn't call it proof, but she knew it wasn't normal.
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She requested the original underwriting documents.
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They weren't available.
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The collateral valuations were described as in transit.
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Cash flow statements were temporarily restricted due to an IT upgrade.
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One missing file might have been a delay.
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Several missing files tied to the same executive felt deliberate.
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So Alvarez shifted tactics.
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Her next step was to trace the payments backward from the bank to the borrower.
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The payments weren't coming from the borrower's accounts.
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They were coming from Huxley Consulting Services.
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Part 3, pressure builds.
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Alvarez documented everything and expanded her testing.
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Two days later, Huxley stopped by her office.
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I hear you're reviewing some of my legacy accounts, he said in a friendly tone.
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Nothing concerning, I hope.
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Those borrowers are salt-of-the-earth folks.
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In response, Alvarez asked Huxley for the missing underwriting documents.
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I'll look into it, he replied, but she never received them.
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The next morning, Alvarez couldn't access the lending system.
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Her credentials had been suspended for maintenance.
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A department head suggested she should wrap up the audit quickly.
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A senior manager told her the loans didn't need that level of scrutiny.
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At that point, Alvarez knew the issue wasn't just the loans.
00:04:03 The IIA
It was the resistance.
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She contacted the audit committee chair, Frank Dillon, and laid it all out for him.
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Missing documentation, suspicious payment routing, repeated obstruction.
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Dillon didn't hesitate.
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You did the right thing, he said, and immediately contacted state banking regulators.
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Part 4.
00:04:32 The IIA
What the files revealed.
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Regulators arrived unannounced the next morning with subpoenas in hand.
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They accessed the very files Alvarez had been denied and quickly realized the issue extended far beyond three loans.
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They uncovered dozens of loans tied to shell companies with no legitimate operations.
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False accounting entries hid loan losses and inflated the bank's capital position.
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Personal expenses for luxury vehicles, international travel, and real estate were paid from bank accounts and disguised as loan offsets.
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Anti-money laundering controls had broken down.
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Records had been withheld.
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Bank examiners were misled.
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What started as a routine audit became a full-scale enforcement action.
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Investigators determined the scheme had been operating for at least two years.
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They alleged that Huxley had issued loans to friends and neighbors that were never repaid.
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Some borrowers didn't even realize loans had been posted to their names.
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Other loans were used to offset overdrawn customer accounts.
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In one case, maturity dates and payment schedules were repeatedly changed to make a loan appear healthy.
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even though only one payment had ever been made.
00:06:06 The IIA
Part 5, the cost of trust.
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Federal bank examiners took control of Prairie Crest's systems.
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Regulators shut the bank down.
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Employees watched as federal agents escorted Huxley out of the building.
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A federal grand jury later indicted him on 15 counts, including bank fraud, conspiracy, falsifying records, obstruction of regulators, and failure to implement anti-money laundering controls.
00:06:45 Speaker 3
This has been the All Things Internal Audit Fraud Podcast, fictionalized accounts based on actual events, brought to you by the Institute of Internal Auditors.
00:06:54 Speaker 3
IIA members can access the full story in this month's issue of Internal Auditor Magazine, including bonus materials on lessons learned.
00:07:04 Speaker 3
To read more, visit internalauditor.theia.org.
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For more fraud-related resources, including guidance and thought leadership from the IIA and the ACFE, visit theiia.org/acfefraud.
