FCS Southwest Finally Reveals Cost of Massive Loan Fraud

By Bert Ely

FCS Southwest, which serves most of Arizona, has finally issued revised financial statements 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] identifiable loans totaled $49.7 million.” After discovering this problem during the third quarter of 2014, FCS Southwest withdrew its annual reports dating back to the 2010. At the same time, the Farm Credit Administration (FCA) pulled from its website all FCS Southwest call reports filed after 2009, pending an audit and restatement of FCS Southwest’s financial statements from 2010 forward. The year that it took FCS Southwest to complete 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, restated 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 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 Farm Credit West.” Translation: FCS Southwest has been so badly managed that the FCA and CoBank, FCS Southwest’s funding bank, are forcing it to merge with Farm Credit West, which is also funded by CoBank. Interestingly, the borrower/shareholders of both institutions are supposed to vote on the merger this month or next yet there is no indication on the website of either institution that disclosure materials pertaining to the merger have been sent to the borrower/stockholders, which suggests that perhaps this shotgun merger is not moving ahead as fast as the FCA and CoBank would like.

FCA issues whistleblower guidance to FCS institutions

In a July 9 Informational Memorandum, the FCA issued guidance to FCS institutions on implementing whistleblower (WB) programs. According to this guidance, “every [FCS] institution must have an effective internal control process as required [by an FCA regulation], and a WB program can be a key part of the process.” One can reasonably 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, corruption, 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 action.” [emphasis supplied]. The “others” referred to presumably includes bankers, who can file WB complaints about FCS lending abuses. Hopefully bankers will be aggressive in filing WB complaints.

The guidance goes on to provide that WB “reports can be made through WB links on the institution’s website with a best practice of having the WB link available on all website pages.” The challenge today for bankers and others will be to find the WB link. For example, CoBank has done a good job of burying the link to its WB reporting page. Only by scrolling to the bottom of a very long site map for CoBank’s website did I find a link to CoBank’s whistleblower webpage. Hopefully this link will get lots of use. Checking the websites of a few other large FCS institutions revealed some interesting anomalies. For example, FCS America does not use the word “whistleblower.” Instead, it merely has a link to “anonymous reporting,” whatever that is supposed to mean. A search on its website for “whistleblower” turned “0 search results.” Farm Credit Mid-America does not have a search mechanism for its website but clicking down through several levels of its website brings an avid searcher to “Anonymous Reporting.” Again no use of the word “whistleblower” under Corporate Governance.

Checking the websites of a few other large FCS institutions produced mixed results, from no obvious whistleblower link to Farm Credit East, where typing “whistleblower” into its search mechanism provided a link for reporting complaints anonymously with a third party, ethicspoint.com. How well this whistleblower reporting system will work has not yet been tested. Clearly the FCA has a lot of work to do in getting every FCS institution to install highly visible, easy-to-use whistleblower reporting procedures on key pages of their websites. The FCA should set an example by clearly providing on its website a link for whistleblowers to register complaints about FCS lending abuses. At present, the FCA link only receives complaints related to FCA employment practices.

Comptroller Curry acknowledges FCS competition

In an August 4 speech, Comptroller of the Currency Thomas Curry candidly acknowledged the unfair competition bankers face from the FCS. In speaking at an Interagency Outreach Meeting on the Economic Growth and Regulatory Paperwork Reduction Act, Comptroller Curry noted that “rural banks face a number of challenges,” including agricultural borrowers who “almost certainly face the prospect of reduced net income. At the same time, some of your competitors, including Farm Credit institutions, have pricing advantages that make it more difficult for you to compete with them.” [emphasis supplied] Hopefully this acknowledgement of the FCS’s competitive edge by a key banking regulator will help to spark congressional hearings on the unlevel playing field on which bankers must compete against the FCS as well as the FCS’s increasingly outrageous lending abuses.

CoBank sponsors a golf tournament

On top of its inappropriate lending to large, highly creditworthy corporations, CoBank, to quote a newspaper headline, “bets on golf, gets naming rights to Colorado Open Championships.” This “five-year-deal [is] worth $1.5 million,” which includes “the $250,000 purse for three tournaments” sponsored by the Colorado Open Golf Foundation. Golf is a great game and championship events provide excellent opportunities for private-sector corporate sponsors, such as Coca Cola and IBM, to put their name in front of current and potential customers. But CoBank is not a private-sector corporation (although it increasingly acts like one), and has no business, as a government-sponsored enterprise using even a tiny portion of its taxpayer subsidy to sponsor golf tournaments and similar events. When Congress holds its first hearing on abusive FCS activities, CoBank’s sponsorship of a golf tournament should be added to the list of highly questionable FCS practices. Perhaps someone should file a whistleblower complaint about this inappropriate use of CoBank’s taxpayer subsidy.

About Bert Ely

Bert Ely
Bert Ely is a consultant specializing in banking issues. He writes ABA's monthly Farm Credit Watch email bulletin.
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