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Missing funds confound Schweitzer Labs

Fri., Oct. 27, 2006

On June 2, Schweitzer Engineering Laboratories officials working in Mexico noticed $400,000 had suddenly disappeared from the company’s Monterey bank account.

After a quick call to the office of Banco Santander Serfin, SEL’s people were told by the bank manager that the account was locked down and he’d help find the culprits.

That same afternoon the bank manager, his face somber, visited SEL’s Monterey office to discuss the problem and answer questions.

Ed Schweitzer, the president of SEL, recounts what happened next: “That very day, our director of finance and the bank manager observed, while seated together by the computer, another $200,000 disappear on the screen, right after the guy said the account was locked down.”

The full saga of SEL’s $600,000 loss — in a still-unsolved case of Internet bank theft — was Schweitzer’s contribution to a conference on cybercrime held Wednesday and Thursday in Spokane Valley. SEL, a Pullman-based company whose manufacturing operations in Mexico produce power-utility equipment, was the conference’s chief sponsor.

Schweitzer’s point for conference attendees was basic: one can’t assume that all banks will do the right thing for their customers.

To date, officials at Banco Santander Serfin officials have denied they’re at fault. As a gesture of conciliation, however, the bank gave SEL $50,000.

Schweitzer, who started privately held SEL in 1982, feels the Mexican bank is following unethical practices that banks in this country would never tolerate.

“We’ve said to them, ‘It’s our money we entrusted to you. It disappeared, now give us our money back.’ They said to us, ‘We don’t have any obligation to do so.’ “

Said Schweitzer, “You go into a bank in this country or Mexico, and you assume they have armed guards and big vaults and they keep your money secure … But what we’ve learned is that really bad stuff happens.”

In effect, Banco Santander Serfin’s response has been that SEL’s own people may have been involved or were careless with the account password, Schweitzer said.

SEL audited all its Monterey employees to see if anyone was involved. Schweitzer said he believes the theft occurred either through an outside hacker or through a bank employee who found the password and sold it.

Marion Gerhardt, SEL’s general counsel, said numerous efforts to encourage the bank’s support have been fruitless.

Schweitzer is taking the story public, hoping more attention sheds light on the problem. He’s also talked with reporters from the St. Petersburg (Fla.) Times and the Wall Street Journal.

The Florida paper this summer looked at Mexican banking and found numerous similar cases of online bank theft.

One story noted that, unlike banks in the United States and Europe, Mexican banks don’t guarantee the security of client accounts

“The banks simply deny any responsibility,” Enrique Arias, director of financial analysis for the National Commission for the Protection and Defense of Financial Service Users, told the paper. “Unfortunately there is a lack of regulation and clients have little recourse.”

SEL has about 120 workers in Mexico, mostly in the company’s Monterey operation, where workers assemble power relay equipment that’s sold in that country and elsewhere. The company has more than 1,300 employees worldwide, with about 1,000 in Pullman.

Schweitzer said the situation in Mexico is the company’s first encounter with bank theft. “We’ve had credit card fraud but nothing out of the ordinary,” he said.

After the June losses were discovered, SEL started criminal proceedings that led to identifying several accounts at other Mexican banks where SEL’s funds had been transferred.

That effort tracked down about $150,000. But since it took weeks before the exact transfer locations were found, most of the money has apparently been moved to offshore banks, said Schweitzer.

Gerhardt said a few of those transfers apparently were tied to at least one other individual already convicted of similar crimes. But no one so far has been charged with the SEL theft, said Schweitzer.

Efforts to reach officials with Banco Santander Serfin were not successful. It’s a subsidiary of Spain-based Grupo Santander, one of the world’s larger financial institutions. Its global revenues in 2005 came to $41 billion.

Schweitzer noted that Banco Santander Serfin had tightened its bank account security system at some point prior to June 1 but didn’t notify SEL. The change was from a single-user authentication step — essentially a user name and password — to a two-party verification method.

“That was negligent on their part to not tell us that,” said Schweitzer.

In addition to anger toward Banco Santander Serfin, Schweitzer crossed swords with Bank of America, which owns 24.9 percent of the Mexican company. Bank of America was, until this summer, the bank SEL used for most of the past 24 years, he added.

After writing twice to Ken Lewis, the CEO of Bank of America, and receiving no reply from the top executive, Schweitzer grew even more frustrated. A Bank of America staffer wrote to him saying, in effect, the bank could do nothing to help SEL, said Schweitzer.

Since then, SEL has switched its American accounts to Wells Fargo Bank, and its Mexican accounts to Citibank affiliate Banamex.

SEL’s attorneys are considering filing suit against Banco Santander Serfin, said Schweitzer.

The loss comes to more than just a principle, he said. It represents after-tax profits that could have gone back into growing the business in Mexico.

All this has forced SEL to focus harder on internal security, said Schweitzer.

“We have to make sure how these things work. But we also now are making sure we work with partners who practice the values their mother taught them.”


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