Guisti Fraud Case Study

♣ Guisti was able to commit the fraud because he was a trusted 14-year employee, previous internal auditor, and manager of a Greater Providence Deposit and Trust. He was authorized to make consumer loans up to a certain dollar limit, starting at $10,000 and increasing to $15,000 and then $25,000, without loan committee approvals. He used this authority to create 67 fraudulent 90-day notes requiring no collateral or the applicant’s credit history report which should have been purchased from an independent credit rating firm. As the scheme progressed, he was able to bypass the loan committee approval as some of his loans exceed his loan limit.

♣ Guisti was able to conceal the scheme by making the 67 loans out in five names. The names included

his wife’s maiden name, his father’s name, and the names of two friends. These people denied receiving stolen funds or knowing anything about the embezzlement. The fifth name was James Vanesse, who police said did not exist. He continued to conceal his fraud by using a portion of the borrowed money to repay the loans as they came due. Since Guisti was an ex internal auditor he understood that in checking for bad loans, bank auditors do not examine all loans and generally focus on loans much larger than the ones in question.
♣ Gusiti was able to convert this fraud with the help of two of his coworkers, Lucy Frailoi and Marci Perfectto. Lucy Fraioli was the customer service representative who cosigned the checks. She said “Guisti was her supervisor and she thought nothing was wrong with the checks, though she did not know any of the people.” Marcia Perfetto, head teller, told police she cashed checks for Guisti made out to four of the five persons. Asked whether she gave the money to Guisti when he gave her checks to cash, she answered, “Not all of the time,” though she could not recall ever having given the money directly to any of the four, whom she did not know.
♣ Pressures: Guisti was a frequent gambler and used the embezzled money to pay gambling debts.

♣ Opportunities: Guisti was the manager of a North Providence branch office, a trusted 14-year employee who had once worked as one of the bank’s internal auditors. He had the ability and knowledge of the internal controls and how to manipulate them. Along with manipulating the internal controls, he also had the ability to manipulate his coworkers, Fraioli and Perfectto.

♣ One way Greater Providence Deposit & Trust could improve their control procedures over the disbursement of loan funds to minimize the risk of this type of fraud is to set up a training program or handbook that discusses this issue. The training program or handbook would discuss the proper control procedures such as depositing loan funds in a checking account in the borrower’s name or writing a check to the borrower. This way, Guisti would have had to present a photo identification when cashing the checks or withdrawing money from the

account.
♣ This case indicates a lack of proper segregation of duties by having Lucy Fraioli, who worked under Guisti, co-sign checks to borrowers.

♣ One way Greater Providence Deposit & Trust may improve their its loan review procedures at bank headquarters to minimize its fraud risk is to acquire a computer services arrangement at the headquarters, not at a neighboring bank or a bank out-of-state. This system should notify bank officials if a loan has been granted without a credit report or above the lending officer’s lending limit. These loans should then be examined by the internal auditors for fraud and unless there was prior approval to grant these loans; the lending officers should face consequences.

♣ There are pros and cons to rotating the assignments of loan review clerks. A pro would be that a loan review clerk and a lending officer couldn’t collude and create a fraud. But, a con in this case is that the rotation of review clerks made follow-up on questionable loans more

difficult.
♣ There are two indications that the internal environment at Greater Providence Deposit & Trust may have been deficient. The bank experienced other adverse publicity prior to the fraud’s discovery. First, the bank was fined $50,000 after pleading guilty to failure to report cash transactions exceeding $10,000, which is a felony. Second, bank owners took the bank private after a lengthy public battle with the State Attorney General, who alleged that the bank inflated its assets and overestimated its capital surplus to make its balance sheet look stronger. This violates the element of risk appetite, integrity an ethical values, and commitment to competence in the internal environment.