In July last year, the FDIC abruptly shut down Heartland Tri-State Bank. It was unclear what happened then, but it came on the heels of the Silicon Valley Meltdown, so many suspected it was a liquidity issue.
It was not. It was intentional fraud by the bank’s CEO, Shan Hanes. It was all laid out in a court filing this week.
There Were Early Clues in YouTube Comments
After the bank was shuttered, there were rumors it was due to fraud.
I’ve been digging around social media and YouTube, and while many suspected it was a BEC attack, a post on YouTube may reveal a more plausible explanation.
User novaaldo1735 claimed they live near Elkhart (where the bank’s headquarters are), and rumors were swirling about the CEO being arrested for trading crypto with bank funds.
It turns out Elkhart is a small town, and it’s hard to keep secrets. We tried to reach out to the local police there to substantiate these rumors, but they would not release any details.
It All Began In December of 2022 And Quickly Escalated
For Hanes, it all began in December of 2022. He started trading Cryptocurrency with his own money. But when that ran out, he allegedly turned to embezzling funds from a local church group and investment funds.
By May of 2023, having depleted those resources, he shifted his focus to embezzling from his company – Heartland Tri-State Bank. According to the indictment, he did the wire transfers himself or sometimes directed other employees to do it for him.
By July 7th, he had made 11 separate wire transfers for a total of $47 million. Given the relatively small size of the bank, those transfers were a death blow, and the bank was forced into closure.
Rumors That He Was Caught Up In Pig Butchering Scam
According to Bloomberg CEO Shan Hanes, the fraud occurred because Hanes fell for a Pig Butchering investment scam, and those $47 million in wire transfers were sent to scammers in Hong Kong.
His scheme unraveled when on July 5th, a desperate Hanes called in one of the bank’s wealthy clients and asked to borrow an additional $12 million to get his money out of a cryptocurrency investment. He promised he’d pay him back ten days later, offering $1 million in interest to make it worth his while.
About a week later, after learning from a bank employee that Hanes had wired the $12 million, he went to a member of Heartland’s board. He told the director about his meeting with Hanes and asked if the bank might have exposure. A bank representative then went to regulators. On July 28, the Kansas Office of the State Bank Commissioner declared Heartland insolvent and shut it.
How It All Failed: Employees Circumvented Polices Under Hanes Instructions
In an Internal Loss Review conducted by the Office of The Inspector General, they determined that Shan Hanes’s dominant role in the bank and prominent role in the community contributed to a reluctance on the part of Heartland employees to question or report the alleged fraudulent activities earlier.
In fact, they reported that Shan Hanes had requested employees to issue wire transfers that far exceeded the limits and policies of the bank. Specifically, senior bank employees circumvented the bank’s wire policy and daily limits to approve and process his fraudulent request.
For example, the bank’s daily limit for employees was $5 million, yet he instructed employees in June to wire transfer over $10 million in transfers, which exceeded their limit.
Employees Failed To Follow BSA Rules
The OIG also found that Heartland employees did not comply with the bank’s BSA/AML policy. The 10 wires, processed from May 30, 2024, through July 7, 2024, significantly varied in dollar size from Heartland’s typical wire activity and were directed to a cryptocurrency platform, and many exceeded the bank’s daily wire policy limits.
The employees did assess the activity but did not file SARS. It was not until July 24, 2023, after processing the 10 wires, that the bank’s CFO/BSA compliance officer filed a SAR. Three days later they amended the SAR to indicate Shan Hanes involvement in the request.
The Bank Quickly Escalated Their Borrowing Prior To The Collapse
American Banker also reported that Heartland Tri-State Bank amassed some $21 million in advances from the Federal Home Loan Bank system prior to its failure in July.
This chart shows the extent to which the CEO quickly drained the bank of all its capital in his internal fraud scheme.