North Carolina Bank To Pay $1.2 Million Penalty For Role in Ponzi Scheme, Payday Loans
A North Carolina bank will pay a $1.2 million fine after authorities accused it of failing to maintain proper controls to prevent a payday lender and massive Ponzi scheme from defrauding thousands of customers. Four Oaks Fincorp, Inc., and Four Oaks Bank & Trust Company (“Four Oaks Bank” or the “Bank”), agreed to pay the penalty in connection with civil charges unveiled by the Department of Justice, which accused the bank of violations of the Anti-Fraud Injunction Act and the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"). In addition to the fine, the Bank, which neither admitted nor denied wrongdoing, agreed to assist authorities in any ensuing criminal investigations.
According to authorities, Four Oaks Bank began a relationship with a privately-owned Texas third-party payment processor the ("3rd Party Processor") in 2009. As part of the relationship, the Bank gave the 3rd Party Processor direct access to the Federal Reserve Bank in Atlanta, which allowed the 3rd Party Processor to directly submit Automated Clearinghouse ("ACH") requests for payment to the Federal Reserve. This differed from the typical scenario where the Bank would serve as the intermediary between the 3rd Party Processor and the Federal Reserve, allowing the Bank to employ a variety of controls to ensure that the transactions are not suspicious or potentially fraudulent. Indeed, these controls are required under the Bank Secrecy Act to ensure that the Bank has a customer identification program ("CIP") that sufficiently allows the Bank to verify the identity of each customer. By providing the 3rd Party Processor direct access to the Federal Reserve, the DOJ alleged that the Bank failed to satisfy its "know-your-customer" obligations.
Under the arrangement with the Bank, the 3rd Party Processor was able to originate nearly 10 million ACH transactions on behalf of its merchants for a total dollar value of nearly $2.5 billion. This resulted in the generation of nearly $1 million of fees for the Bank. While the majority of ACH transactions were connected to the 3rd Party Processor's relationship with various payday lenders, authorities also discovered that, in Spring 2012, 3rd Party Processor began allowing direct ACH access to a client named Rex Venture Group, LLC ("RVG"). RVG was the parent company of ZeekRewards, a massive Ponzi scheme that was shut down in August 2012 and which is estimated to have caused over $500 million in losses. According to authorities, the Bank allowed direct ACH access to RVG despite the inability to verify (1) the identity of RVG's principals; and (2) the nature of RVG's business. As a result, RVG was able to use the Bank to raise more than $60 million in just a short span before the Ponzi scheme was discovered.
The settlement comes as authorities are increasingly scrutinizing the compliance of banking institutions with federal laws. These laws, including federal anti-money laundering statutes, require banks to institute sufficient controls to identify and report suspicious activity to authorities. The settlement by Four Oaks Bank comes days after financial juggernaut JP Morgan Chase agreed to a record-$2.6 billion fine for its role in the massive Ponzi scheme perpetrated by Bernard Madoff. Other recent and notable settlements by high-profile banks include a $55 million fine by American Express Bank, a $1.256 billion fine by HSBC, and a $160 million fine by Wells Fargo/Wachovia. Such cases make it clear that authorities are devoting increasing resources to policing banks, and it appears certain that the Bank's settlement is indicative of additional action.
A copy of the DOJ's complaint is below (thanks to ASDUpdates):