Guisti was authorized to make consumer loans up to a certain dollar limit without loan committee approvals, which is a standard industry practice. Guisti’ s original lending limit was $ 10,000, the amount of his first fraudulent loan. The dollar limit was later increased to $ 15,000 and then increased again to $ 25,000. Some of the loans, including the one for $ 63,500, far exceeded his lending limit. In addition, all loan applications should have been accompanied by the applicant’ s credit history report, purchased from an independent credit rating firm. The loan taken out in the fictitious name would not have had a credit report and should have been flagged by a loan review clerk at the bank’ s headquarters.
News reports raised questions about why the fraud was not detected earlier. State regulators and the bank’ s internal auditors failed to detect the fraud. Several reasons were given for the failure to find the fraud earlier. First, in checking for bad loans, bank auditors do not examine all loans and generally focus on loans much larger than the ones in question. Second, Greater Providence had recently dropped its computer services arrangement with a local bank in favor of an out-of-state bank. This changeover may have reduced the effectiveness of the bank’ s control procedures. Third, the bank’ s loan review clerks were rotated frequently, making follow-up on questionable loans more difficult.
Guisti was a frequent gambler and used the embezzled money to pay gambling debts. The bank’ s losses totaled $ 624,000, which was less than the $ 1.83 million in bogus loans, because Guisti used a portion of the borrowed money to repay loans as they came due. The bank’ s bonding company covered the loss.
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. The bank denied this charge.
1. How did Guisti commit the fraud, conceal it, and convert the fraudulent actions to personal gain?