4-4 1Assignment Research Paper
Occupational Fraud Research Paper
Assignment 4-4
ACCT341- E1WW
Professor Filler
February 11, 2012
2Assignment 4-4 Research Paper
Summary
Thousands of Croatians fled Communism, war and genocide over the past century with little
more than hope for a better life in Cleveland. There they found a deeply rooted community that
assured them they were safe because whatever else the world might bring, Northeast Ohio
Croatians could always rely on one another. (Garrett, 2011) With the collapse of the 67-year old
Croatian credit union, some Croatians say they dont know who to trust anymore.
Croatians began arriving in Cleveland during the Civil War. As American Steel &Wire,
Patterson Sargent Paint Co. and other factories grew, so did the Croatian community. They
opened their own Roman-Catholic Church, St. Paul, on Easter Sunday 1904 in the heart of the
community, East 40th Street and St. Clair. According to Garrett, the area was full of workingclass families squeezed into rental homes because bankers refused to lend money to immigrants
By the time World War 2 came around, the parishioners at St. Paul didnt need banks anymore,
they had saved up enough money to start up a credit union of their own. The church members
pooled their money together to create a nonprofit financial cooperative that could make personal
loans and offer other banking services to members and in 1943 the St. Paul Croatian Credit
Union was born.
As the Croatian community spread, the Credit Union maintained its office in the old
neighborhood in Cleveland but also opened a branch inside the American-Croatian Lodge in
Eastlake, Ohio. There Tony Raguz oversaw operations as the Chief Executive Officer.
Everyone trusted Tony. According to Garrett, He was a smart guy, and he came from a large
and respected Croatian family, some of whom sat on the boards of both the credit union and the
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Eastlake Lodge. If you worked at a machine shop and wanted to buy a $100,000 piece of
machinery to launch your own shop in your garage, Tony could make that happen, said John
Didovic, who manages Dubrovnik Garden restaurant and party center inside the lodge. If your
car broke, and you were short on cash, Tony could find a way to float you through. And if you
were a new Croatian in Greater Cleveland, someone always steered you to Tony, who could look
past a short credit history and get you a Visa credit card embossed with a Croatian flag. (Garrett,
2011).
Raguz admitted dispensing millions of dollars worth of loans without requiring any collateral.
Raguz knew the borrowers had little or no assets, no employment history, and often provided
fictitious names, U.S. Attorney Steven Dettelbach said, reading from a plea agreement signed by
Raguz. Most of the borrowers made little or no repayments, Dettelbach said. To cover his trail of
delinquent loans, Raguz and others issued new loans -- known as reset loans -- in the names of
dead people and fictitious companies to cover for the delinquent payments. "I would describe it
as loaning Peter to pay Paul," Dettelbach said. Raguz also admitted to accepting at least $1
million in bribes, kickbacks and gifts from customers from 2002 to 2010. He confessed to
laundering the money in four separate transactions in which he wrote checks to a retirement
fund. (McCarty, 2011).
Fraud Issues
Tony Raguz issued close to $70 million dollars in loans to without requiring any collateral.
According Amanda Garrett, Raguz hatched a scheme with a another guy, Koljo Nikolovski,
not affiliated with the credit union, to drain millions of dollars from the credit union. Around
February of 2003, Nikolovski, who had never worked in the United States before, wanted to take
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out a loan for $260,000. Raguz circumvented credit union procedures and approved it. According
to the article, that same month Nikolovskis ex wife and three other members of her family, with
Nikolovskis guidance, made fraudulent loans on his behalf. All the loans were for $260,000 and
all were approved by Raguz. To cover up this scheme, Raguz would move money around
between the family members credit union accounts. For example, He would issue three checks
from one of the family members fraudulent accounts: $35,000 went to Nikolovskis account to
make payments on his fraudulent loan of $260,000; $160,000 went into Nikolovskis ex wifes
checking account at Key Bank; and $50,000 would go into Raguzs credit union account.
(Garrett, 2011) Raguz and Nikolovski repeated this scam over and over again, and in just one
year collected over $2 million. Raguz also made more than 1,000 fraudulent loans worth $70
million to more than 300 credit union members. He made the loans without requiring collateral
and knew the borrowers had few assets, no employment history and often used fictitious names.
He accepted bribes totaling $1 million to approve the loans, according to the original indictment.
(Marx, 2011). Raguz also issued checks drawn on his own credit union account payable to The
Vanguard Group, which is where the money laundering scheme started. Raguz and Nikolovski
sent more than half of the cash they stole from the credit union to overseas accounts.
Involvement and How Did This Happen?
Tony Raguz was the ring leader of the whole scheme. He was the CEO of the Croatian Credit
Union. He apparently had the last say as to who is approved or denied any loans. I am assuming
that there were no checks or separation of duties present in this organization, because this fraud
went on for so long, and Raguz was able to cover up his scheme. According to OMally, to
conceal his scheme and to prevent the loans from appearing on the books as delinquent, Raguz
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rewrote the loans with new repayment terms using fictitious names and names of credit union
members without their knowledge, he even rewrote loans in the names of dead people. (2011)
The National Credit Union Administrations inspector generals office released a report that said,
the state of management was so abysmal at a credit union that the 9 person staff wasnt
familiar enough with operations to run without Raguz. (Garrett, 2011)
Koljo Nikolovski was not employed by the credit union, but owned an Algerian night club
financed through the credit union, obtained millions from fraudulent bank loans approved by
Raguz. Because Nikolovski had never worked in the US, and had no credit history, he came up
with an idea to give Raguz some of the loan money is he approved them. There were more
people involved in this case, most of who received the fraudulent loans, in return for bribe or
reward money for Tony Raguz. From my research, this case is still going on, the fraud
examination is still taking place, and more people involved in the case are coming to light. These
people are the ones who sent bribes to Raguz as well as Nikolovski, in return for approved loans.
Laws, Rules, and Ethics
Bribery is the practice of offering, giving, receiving, or soliciting something of value for the
purpose of influencing the action of an official in discharge of his/ public her or legal duties.
Bribery is a gain to an illicit advantage. The U.S. Foreign Corrupt Practices Act of 1977
("FCPA") generally prohibits U.S. companies and citizens, foreign companies listed on a U.S.
stock exchange, or any person acting while in the United States, from corruptly paying or
offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or
retain business (the Antibribery Provisions). The FCPA also requires issuers (any company
including foreign companies) with securities traded on a U.S. exchange or otherwise required to
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file periodic reports with the Securities and Exchange Commission (SEC)) to keep books and
records that accurately reflect business transactions and to maintain effective internal controls
(the Books and Records and Internal Control Provisions). (FCPA enforcement, 2012)
Money laundering refers to the process of concealing the source of illegally obtained money. 18
USC 1956 - Laundering of monetary instruments (a) (1) Whoever, knowing that the property
involved in a financial transaction represents the proceeds of some form of unlawful activity,
conducts or attempts to conduct such a financial transaction which in fact involves the proceeds
of specified unlawful activity (A) (i) with the intent to promote the carrying on of specified
unlawful activity; or (ii) with intent to engage in conduct constituting a violation of section 7201
or 7206 of the Internal Revenue Code of 1986; or (B) knowing that the transaction is designed in
whole or in part (i) to conceal or disguise the nature, the location, the source, the ownership, or
the control of the proceeds of specified unlawful activity; or (ii) to avoid a transaction reporting
requirement under State or Federal law, shall be sentenced to a fine of not more than $500,000 or
twice the value of the property involved in the transaction, whichever is greater, or imprisonment
for not more than twenty years, or both. For purposes of this paragraph, a financial transaction
shall be considered to be one involving the proceeds of specified unlawful activity if it is part of
a set of parallel or dependent transactions, any one of which involves the proceeds of specified
unlawful activity, and all of which are part of a single plan or arrangement. (cornell.edu, 2012)
The ethics that were violated was the trust that was put in Tony Raguz. He held his position as
the CEO and president of the credit union because the people who elected him trusted him. Also
Raguz was accepting bribes. He knew what he was doing was unethical, yet he continued to
proceed with his business as usual. (He was making extra money!)
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Impact on the Stakeholders
This scheme ultimately forced the Croatian Credit Union to liquidate. As of now there is no
more Croatian credit union in Cleveland. The people who used the credit union feel they cant
trust anyone with their money. According to the Eastlake Mayor Ted Andrzejewski, If you cant
trust your church credit union and the people in your church, who can you trust(Garrett, 2011)
With the closing of the credit union, many of the Croatians across Northeast Ohio panicked.
Some said, If you saw government officials closing a local bank in Eastern Europe, you
assumed you had lost everything and ran home to protect your livestock before corrupt officials
took the farm animals too. Most of the union members wanted their money immediately!
Some people had up to $7million of their life savings in one account. When they went to the
credit union, according to Garrett, they learned two disturbing things:
There were outstanding business loans in their names.
National Credit Union Administration Insurance covers individual accounts up to
$250,000.
The National Credit Union Administration helped sort out these problems. As a few weeks
passed they found that many of the loans were fake, and officials helped large account holders
work around the $250,000 insurance cap so members could get all their money back. In the end
the agency said only about $4.5 million of the credit unions reported $238million in assets were
not covered by insurance. (Garrett, 2011)
Measures That Could Have Been Taken
To Prevent This Type of Fraud.
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There are many measures that could have been taken to prevent these types of fraud. The
credit union should have tailored their efforts to specific red flags and characteristics of certain
types of fraud. They should have instructed their employees to call a special hotline if they
suspected abnormal activity. They should have had someone monitoring the books, other than
the CEO, to make sure everything was properly stated. More than one person should have had to
sign off on new loans. Raguz seemed to be the only one signing talking to the people inquiring
about loans, doing the background checks and approving just anybody. There should have
been a separation of duties between these elements of the business.
Any and every organization should have and established written ethics policy which
prohibits employees from soliciting or accepting any gift or favor from a customer. These
policies should also depressingly forbid employees from engaging in any transaction on behalf of
the organization when they have an undisclosed personal interest in the transaction. This serves
two purposes: (1) it clearly explains to employees what types of conduct are considered to be
improper, and (2) it provides grounds for termination if an employee accepts a bribe or kickback
while preventing the employee from claiming that he did not know that such conduct was
prohibited. (Wells, 2011)
References
Cornell.edu. (2012) 18 USC 1956 - Laundering of monetary instruments. Retrieved on
Feburary 11, 2012 from http://www.law.cornell.edu/uscode/text/18/1956
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FCP Enforcement.com (2012) THE FCPA EXPLAINED. Retrieved on Feburary 11, 2012 from
http://www.fcpaenforcement.com/explained/explained.asp
Garrett, Amanda. (April 24, 2011) $70 Million Credit Union Collapse Shakes Croatian
Community of Northeast Ohio. The Plain Dealer. Retrieved on February 10, 2012 from
http://blog.cleveland.com/metro/2011/04/credit_union_collapse_shakes_c.html
Marx, Claude R.(October 5, 2011) St. Paul Croatian Ex-CEO Pleads Guilty. Credit Union Times.
Retrieved on February 10, 2012 from http://www.cutimes.com/2011/10/03/st-paulcroatian-ex-ceo-pleads-guilty
McCarty, James F (September 27, 2011) Chief executive officer of Croatian credit union pleads
guilty to stealing $70 million, bankrupting the Eastlake bank. The Plain Dealer. Retrieved
on February 10, 2012 from
http://blog.cleveland.com/metro/2011/09/chief_executive_officer_of_cro.html
ODonnell, Patrick (April 2, 2011) Federal jury finds two guilty in mortgage fraud scheme that
ripped up Cleveland neighborhoods. The Plain Dealer. Retrieved on February 5, 2012
from http://blog.cleveland.com/metro/2011/04/federal_jury_finds_two_guilty_1.html
Wells, Joseph T. (2011). Principles of Fraud Examination. Third Edition. John Wiley and Sons,
Inc. Hoboken, NJ