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A Dominant CEO
On May 30, 2023, Heartland Tri-State Bank CEO Shan Hanes allegedly initiated a series of wire transfers, pulling $47 million out of the Elkhart, Kansas-based bank over a matter of weeks.
The $139 million Heartland failed after Hanes fell victim to a crypto scam, investigators say. Promised profitable returns by the scammers, he began purchasing cryptocurrency several months earlier, apparently using his own funds and then later, money borrowed by the bank from a correspondent bank and a federal home loan bank, according to the Office of Inspector General for the Federal Reserve.
How did Hanes purportedly embezzle those funds so quickly? In its review of the failure, the OIG points to two root causes: internal control failures and a dominant CEO.
Heartland’s board had policies in place that should have prevented the wires. In fact, directors approved a new policy on June 24 — while the fraud was going on — to lower the daily limit from $5 million to $3 million per sender. Most of Hanes’ wires exceeded those limits. He could not be reached for comment.
The activity was unusual for Heartland. The amounts transferred were higher than the norm, and the recipient — a cryptocurrency platform — was atypical for the ag lender. But the bank’s employees, including the unnamed chief financial officer, signed off on the transactions, according to the OIG report.
Hanes was a prominent figure among Kansas bankers and was active in banking associations as well as in his local community. He joined the bank in 1993, and led an investor group that acquired the institution almost two decades later, in 2011. All that — and the fact that the employees were his subordinates — made them reluctant ”to raise questions or report the suspicious activity sooner,” per the report.
While the circumstances are unusual, it’s common for small banks to have a dominant executive. Often, regulators aren’t concerned. But for Heartland, “the CEO’s position and prominence in the community contributed to the failure,” said the OIG.
Heartland’s board — largely farmers and local business owners — apparently trusted executives to follow approved policies and provide the information it needed to oversee the bank. That’s by design: Management runs day-to-day operations, and the board has a fiduciary duty to oversee the institution.
The consequences can be dire when directors don’t get the information they need.
• Emily McCormick, vice president of editorial & research for Bank Director
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