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Unveiling of Bank Fraud Failures (dirty little secrets)
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After about 6 months of compiling data and analyzing what variables to utilize, I made a very concerning observation. I had nailed down 12 very strong variables which I felt would properly identify those banks with the highest possibility to fail. While 96 percent of all failures come from C and D rated banks, an alarming number came from A or A+ rated banks. Of course, you would assume these would be the Best of the Best with the lowest possibility of failure. After I did some AI research (copilot) of these banks, it was clear most had one common denominator, they were victims of bank fraud. Six banks in my data base were rated A+ and four of those had failed because of bank fraud. In fact, the most recent failure also closed due to bank fraud. Santa Anna National Bank in Texas was shut down by regulators on June 27, 2025. Co-pilot cited potential embezzlement, asset diversion, or falsified reporting due to a substantial runoff in deposits.
Of course, we are concerned about falsified reporting since our numbers come from public financial disclosures. If the bank is covering up problems, then there is no way for us to identify issues through analyzing falsified numbers. In fact, the list below shows how many of the A or A+ rated banks failed due to bank fraud in the past 10 years.
| Bank Name | Year Failed | Bank fraud |
| Heartland Tri-State | 2023 | crypto-currency scam |
| Enloe State | 2019 | over 100 fake loans totaling $11Mil. |
| Washington Federal | 2017 | 16 individuals embezzled $31 Mil. |
| The Freedom State | 2014 | falsified call reports $2.5 Mil. |
Nevertheless, most bank failures have much lower ratings as noted above. Signature Bank was rated a “B” by our ratings. First Republic Bank was the lone exception that was an “A+” rating with no fraud. In a sort of flashback to SVB, First Republic had far too many long-term investments at low yields and a run on the bank as well. In short, it was due to mismanagement not bank fraud.
The following chart reflects bank rating and failures from our data sample.
By far the largest category of failures comes from the D rating category. Also, worth noting, the largest sample of Pass Banks is in the A+ category.
Why does this happen? The Risk Management manual for the FDIC states, “A lack of proper supervision and lack of effective internal controls [could] make an institution especially vulnerable to fraud and insider abuse”. There are literally 30 different circumstances listed in their manual as potential problems such as lack of code of conduct to not following policies. High on the list of potential problems, “Dominant figures [which are] allowed to exert influence without restraint”. Even though Dominant officials come under some very heavy scrutiny when it comes to Regulation O of the Federal Reserve and Regulation 23(a) and 23(b), bad things can still happen.
What constitutes a dominant official? A dominant official can be an individual, family, shareholder, or group of persons with close business dealings or otherwise acting together regardless of whether the individual or any other members of the family or group have an executive officer title or receive compensation from the institution. The definition of dominant official is not intended to capture individuals who merely occupy multiple positions, particularly in small institutions, if they do not also exert material influence over virtually all decisions involving the bank’s policies and operations.
The presence of a dominant official is not necessarily negative or a supervisory concern. For example, in a small bank with limited staff, a dominant official may emerge because no one else at the bank has the skills or experience to operate the bank. The presence of a dominant official does however present two potential challenges for boards of directors: incapacitation or loss of the dominant official and difficulties in resolving mismanagement, should it occur.
Problem situations resulting from mismanagement by a dominant official are more difficult to solve through normal supervisory efforts. The presence of a dominant official coupled with other risk factors such as ineffective internal controls, inadequate board oversight, or high-risk business strategies irrespective of established board policies, are a supervisory concern and require enhanced supervision.
Situations involving dominant officials may involve boards that simply put their trust in the dominant officer without providing adequate oversight or effective challenge to management. This lack of effective challenge by boards may arise for various reasons. In particular, when first elected some directors may have a limited understanding of banking operations or of their oversight responsibilities and therefore feel dependent on operating management with more banking experience. Also, directors nominated by dominant officials may believe they owe allegiance to those dominant officials. In some cases, the dominant official may control the flow of information to the board of directors and could limit the board’s knowledge of daily management activities, thereby contributing to the lack of adequate oversight or effective challenge to bank management by the board.
Conversely, the dominant official could be an officer or non-officer board chair and/or principal shareholder who dominates the bank’s affairs through the threat of dismissal of non-compliant officers and/or control of the board of directors.
So, with that said, how would you possibly know if there is a dominant official in your bank? More importantly, how would you know if it’s a problem. I wish I could tell you a definitive way to determine this, but there is usually no way to know unless you are inside the organization. Generally, speaking, I think there are three roles in a bank that need to be completely separate. The owner or a close group of owners, the President/CEO, and the Risk Officer. If one of these roles controls at least one other role in the bank, this should be a red flag. Owners do not typically run a bank; they provide the capital and allow those with experience to run the bank. Presidents/CEO’s typically don’t have the capital to buy a bank or wherewithal to inject capital if the bank is struggling, but they do know banking. Finally, a Risk Officer needs to be the voice of reason. In the fog of war known as business, someone needs to play devil’s advocate or at the very least point out obvious facts about potential risks. Someone who says, does this initiative fit into our overall strategic plan? If the bank doesn’t have a Risk Officer, that is a red flag also. Each of these roles should not be allowed to have undue influence over the others for the good of the bank and its shareholders. The old saying, if everyone is thinking alike, then no one is thinking is very true and can lead to poor results or worse.