Pub. 10 2015-2016 Issue 3

www.nebankers.org 18 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2015 Bert Ely FCS Southwest Finally Reveals Cost of Massive Loan Fraud F CS SOUTHWEST, WHICH SERVES most of Arizona, has finally issued revised financial state- ments reflecting the cost of a massive loan fraud stretching back into the last decade. According to a July 29 letter to its borrower/stockholders, FCS Southwest reported that “cumulative losses resulting from [certain] identifi- able loans totaled $49.7 million.” After discovering this problem during the third quarter of 2014, FCS Southwest withdrew its annual reports dating back to 2010. At the same time, the Farm Credit Administration (FCA) pulled from its website all FCS Southwest call reports filed after 2009, pending an au- dit and restatement of FCS Southwest’s financial statements from2010 forward. The year it took FCS Southwest to com- plete this restatement is an indication of the complexity of this mess. Despite this loss, FCS Southwest remains adequately capitalized, assuming no further losses emerge. Quite troubling, though, restat- ed call reports for FCS Southwest have not yet been posted on the FCA website. From a call-report perspective, FCS Southwest has not existed since 2009. How many other Farm Credit Sys- tem (FCS) associations face this type of problem? Is this the tip of an iceberg? The FCS Southwest letter went on to state that “after evaluating strategic alternatives and considering many factors, including the events of 2014 described above, our efforts to comply with the supervisory letters and the volatility that agriculture in our region has experienced over the past years, in January 2015 your board ultimately decided to enter into a letter of intent to merge with FarmCreditWest.” Transla- tion: FCS Southwest has been so badly managed that the FCA and CoBank, FCS Southwest’s funding bank, are forcing it to merge with FarmCredit West, which is also funded by CoBank. Interestingly, the borrower/shareholders of both in- stitutions are supposed to vote on the merger this month or next. However, there is no indication on the website of either institution that disclosure materials pertaining to the merger have been sent to the borrower/stockholders. This suggests that perhaps this shotgun merger is not moving ahead as fast as the FCA and CoBank would like. FCA Issues Whistleblower Guidance In a July 9 informational memoran- dum, the FCA issued guidance to FCS institutions on implementing whistle- blower (WB) programs. According to this guidance, “every [FCS] institution must have an effective internal control process as required [by an FCA regula- tion], and a WB program can be a key part of the process.” One can reason- ably wonder if the large loan fraud caper at FCS Southwest sparked the launch of this WB program, for in its second paragraph the memorandum states: “A WB program provides ways to confidentially report complaints or tips about a violation of law, regulation, or policy, as well as fraud, corrup- tion, or operational weaknesses. A WB program is most effective when both internal parties (directors, officers, and employees) and external parties (borrowers, shareholders, applicants, and others ) can report a complaint, misconduct, or tip for corrective ac- tion.” [Emphasis supplied.] The “oth- ers” referred to presumably includes bankers, who can file WB complaints about FCS lending abuses. Hopefully, bankers will be aggressive in filing WB complaints.