Fraud has already claimed two banks, and 2025 is far from over. The January collapse of Chicago's Pulaski Savings Bank, followed by June's failure of The Santa Anna National Bank in Texas, marks a disturbing acceleration in fraud-related bank failures.
These financial institutions (FIs) are part of an alarming pattern that has seen four banks fail due to inadequate internal controls for banks in just four years. Each failure was preventable, each more costly than necessary, and each shared control weaknesses that many community banks would recognize in their own operations.
Now is the time for FIs to be on high alert and strengthen their internal controls to prevent similar fraud-related incidents from happening at their institutions. Building a strong foundation and maintaining continuous monitoring can mean the difference between a thriving institution and one on the brink of failure.
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What makes these recent bank failures particularly alarming — and relevant to community FIs nationwide — is that every bank had assets under $150 million. Each FI had its own specific vulnerabilities, but all shared critical weaknesses that made them prime fraud targets. Common issues included less sophisticated internal controls for banks, limited staff for proper checks and balances, weak fraud prevention resources, and dangerously concentrated executive power that could override controls for fraud prevention.
Also, three of these banks are located in communities with populations of less than 3,000 people, which amplifies the broader implications beyond immediate financial losses. The FDIC's 2020 Community Banking Study suggests that the loss of a community bank represents more than just the loss of a financial service provider — it's the loss of an institution that understands and is committed to local economic conditions, potentially accelerating economic decline in already vulnerable communities.
For small communities, community banks serve as critical providers of relationship-based lending and local business financing that larger institutions often cannot replicate, making their failure particularly devastating to local economic stability.
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On January 17, 2025, Pulaski Savings Bank was closed by the Illinois Department of Financial and Professional Regulation. The Chicago-based bank had deposit liabilities of at least $20.7 million, which were not recorded in the bank’s core system. These unrecorded deposits (discovered by a third-party contractor) had no matching assets, depleting the bank’s equity and rendering it critically undercapitalized. While no fraud or criminal charges have been made, the Office of Inspector General (OIG) has emphasized the impact of operational risks, especially on smaller banks.
The loss to the FDIC’s Deposit Insurance Fund (DIF) was $28 million, or 62% of Pulaski’s total assets. After suspecting fraud, the agency launched an in-depth review, discovering significant unresolved discrepancies in suspense accounts.
The bank’s poor manual processes and lack of documentation were a significant factor in its demise. Between 2017 and 2023, regulators noted many issues — downgraded CAMELS ratings, poor management oversight, ineffective board governance, risk exposure, and poor earnings, to name a few — but the bank failed to take corrective actions.
After 92 years, the Office of the Comptroller of the Currency (OCC) closed The Santa Anna National Bank. The bureau acted after the bank’s “unsafe or unsound practices” caused assets to fall dramatically. The FDIC also noted that suspected fraud contributed to the bank’s failure.
The estimated loss to the FDIC’s DIF is $23.7 million, with an additional $2.8 million in deposits exceeding FDIC insurance limits.
While the specifics of Santa Anna’s practices have not been identified, unsafe and unsound practices are often attributed to weak internal controls, poor risk management, poorly managed lending, and insider misconduct. Without a strong risk management program, FIs can fall victim to a range of risks — both internal and external.
In 2023, the Kansas Office of the State Bank Commissioner closed Heartland Tri-State Bank when its CEO initiated $47.1 million in wire transfers as part of a cryptocurrency scam. Pushed by leadership, bank employees bypassed internal controls and processed the transfers.
Bank leadership overrode established controls — a stark reminder that checks and balances must apply to every role, no matter the position or community standing.
In October 2024, the OCC shut down the First National Bank of Lindsay. Despite appearing financially healthy months earlier, gaps developed in their controls for fraud prevention, including “false and deceptive bank records.” The bureau also found that the FI was engaging in unsafe or unsound business practices, and its assets were less than its obligations to creditors and others.
The failure is estimated to cost the FDIC $43 million.
The bank’s breakdown suggests severe issues with internal controls, especially over financial reporting, recordkeeping, and cash/asset oversight. The case is yet another example of how poor internal controls can snowball and impact an institution and its customers.
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Community FIs face unique operational realities that require thoughtful approaches to internal controls for banks:
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Establishing strong controls for fraud prevention is an investment that requires evaluating the costs against the benefits.
Based on the four recent fraud-related failures,costs averaged $37.5 million per incident (calculated from FDIC loss estimates ranging from $23.7 million to $54 million). Comprehensive controls for fraud prevention typically cost between $200,000 and $650,000 annually — representing less than 2% of potential failure costs.
Beyond financial protection, enhanced internal controls for banks provide additional benefits:
Consider these questions when assessing your institution's current internal controls:
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The recent bank failures are a wake-up call for FIs, but the good news is that making improvements doesn’t have to be overwhelming. An organized, systematic approach that integrates with existing operations is key.
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The financial services industry continues to evolve, and institutions that proactively strengthen their fraud prevention capabilities position themselves for long-term success. Rather than viewing recent cases as cautionary tales, forward-thinking FIs can use these lessons as stepping stones toward more secure, efficient, and competitive operations.
By strengthening internal controls, investing in fraud prevention technology, and building a culture of accountability, community FIs can protect themselves while continuing to serve their communities with confidence.
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