(Source: John P. McDermott The Post and Courier, Charleston, S.C. (MCT) — CresCom Bank is bracing for a loss of as much as $4.5 million in the wake of what it called a check-kiting scheme that went undetected for nearly 10 years.
Charleston-based Carolina Financial Corp., the coastal lender?s privately held owner, disclosed the discovery in its latest quarterly report to shareholders.
The transactions have been traced to one ?business customer? and involved monetary transfers between at least two banks, according to a letter from Bud Watts, chairman of Carolina Financial.
?CresCom was one of those banks,? wrote Watts, a retired Air Force lieutenant general and former president of The Citadel. ?It appears the fraudulent scheme has been occurring for almost a decade.?
He went on to say the loss could range from nothing to as much as $4.5 million.
The bank declined to provide The Post and Courier with the letter, which was dated May 25. The newspaper obtained a copy Thursday.
Watts told shareholders that the alleged fraud was discovered after March 31 and still is being investigated.
Kiters try to take advantage of the lag between when a check is deposited and when it is cleared. The schemes typically involve rapid transfers of nonexistent money between multiple accounts at different institutions.
In his letter, Watts did not indicate why the alleged fraud took so long to detect or where it took place. CresCom has branches in the Myrtle Beach area and the Charleston region.
Watts said the bank?s internal financial controls have been reviewed by ?various groups.?
?During those exams, we have had no significant findings … related to such issues,? he said.
Since learning of the alleged fraud, CresCom has put additional controls in place over its deposit system ?to further reduce this type of risk in the future,? Watts wrote.
Carolina Financial was formed about 15 years ago after raising more than $6 million. It opened its first Community FirstBank branch in 1997 at 288 Meeting St., which remains the headquarters.
The company expanded up the coast to the Grand Strand about a decade ago.
The two separately operated lenders recently merged. They were renamed CresCom about two months ago.
Bank spokesman Scott Brandon said Thursday he could not comment on the specifics of the check-kiting probe. He would not say whether authorities were contacted.
Typically, federal authorities investigate fraud cases occurring at federally insured financial instititions.
Brandon said any losses from the scheme are not expected to have a material effect on CresCom?s finances or capital ratios, a point Watts also made in his letter.
CresCom, which is still recovering from the real estate crash, made about $2.1 million in the first quarter. That?s a nearly twofold jump from the same period of 2011.
?The bank is in excellent financial condition,? Brandon said, ?This isn?t going to have any impact on that.?
Reach John P. McDermott at 937-5572.
©2012 The Post and Courier (Charleston, S.C.)
Visit The Post and Courier (Charleston, S.C.) at www.postandcourier.com
Distributed by MCT Information Services