Why it matters

A pair of settlements between the Department of Justice (DOJ) and two California banks recently demonstrated that Operation Chokepoint is alive and well. CommerceWest Bank agreed to pay $4.9 million to the DOJ over charges of Bank Secrecy Act and Financial Institutions Reform, Recovery, and Enforcement Act violations in connection with a third party processor and just a few days later, the agency announced Plaza Bank will pay $1.225 million for similar allegations. Both banks facilitated consumer fraud by allowing payment processors to make millions of dollars of unauthorized withdrawals from consumer accounts, the DOJ said. In addition to the million-dollar fines, both banks are subject to a “strict regime” of underwriting and monitoring oversight. “[W]e will hold financial institutions accountable when they choose unlawfully to look the other way while fraudsters use the bank’s accounts to steal millions of dollars from American consumers,” Acting Assistant Attorney General Benjamin C. Mizer of the DOJ’s Civil Division said in a statement. The agency’s initiative—an effort to limit certain lenders and merchants from access to consumers by cutting off their relationships with entities like check cashers and nonbank financial service providers—has been controversial, facing criticism from both industry and lawmakers, who have expressed concern that the operation may be having a negative impact on lawful companies as well. Despite the introduction of legislation to halt the program and a dearth of successes since the DOJ announced an action against a North Carolina bank resulting in a $1.2 million settlement for facilitating fraudulent transactions, the two successful resolutions signal that the agency is continuing its efforts and Operation Chokepoint remains a concern for financial institutions.

Detailed discussion

Irvine-based CommerceWest Bank was the first to reach a deal with the Department of Justice (DOJ).

According to the federal complaint, the bank ignored clear warning signs and knowingly facilitated consumer fraud by allowing V Internet to make millions of dollars of unauthorized withdrawals from consumer bank accounts on behalf of fraudulent merchants for approximately two and one-half years.

Telemarketers operating a scam and a company that charged consumers an unauthorized “loan referral fee” for payday loans were among the merchants. V Internet actually took the reins in the payday loan referral scheme, the DOJ said, operating as the payment processor and sole merchant for a six-month period in 2013.

Indicators like an abnormally high rate of rejected transactions (roughly 50 percent)—some including sworn affidavits in which victims stated the withdrawals were unauthorized—did not result in any action by CommerceWest. Instead, the bank “ignored clear warning signs that V Internet and its merchants were defrauding consumers,” the DOJ alleged. Other banks also complained and tried to warn CommerceWest.

Despite all of these red flags, the bank did not file any Suspicious Activity Reports (SARs) or terminate V Internet, but blocked transactions against accounts at the complaining banks. When a CommerceWest official determined in May 2013 that the third party processor’s transactions were fraudulent and unauthorized, the bank still did not decide to terminate V Internet until early July and even then, allowed the company a 30-day period to wind down its processing activity.

“Only when the department notified CommerceWest that it intended to seek an emergency injunction did CommerceWest immediately terminate V Internet’s ability to access victims’ checking accounts,” the DOJ said.

The agency’s complaint, filed concurrently with a consent decree, accused the company of willful violations of the Bank Secrecy Act for failing to file the required SARs. A criminal charge was deferred pursuant to the consent decree, under which CommerceWest admitted its wrongdoing, gave up any claims to the almost $3 million seized from V Internet’s bank accounts at CommerceWest, and agreed to provide cooperation in other investigations.

In addition, the DOJ alleged that the bank violated the anti-fraud provisions of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The civil settlement includes a $1 million civil money penalty paid to the U.S. Treasury, a $1 million forfeiture to the U.S. Postal Inspection Service (USPIS) Consumer Fraud Fund, and “a strict regime” of underwriting and monitoring “designed to prevent future consumer fraud by third-party payment processors.” In addition CommerceWest agreed to a five year period of additional reporting, monitoring and recordkeeping for the Department of Justice.

Two days later, the DOJ announced a similar deal with another California institution, Plaza Bank.

From July 2007 to mid-2010, the bank knowingly permitted a third-party processor to facilitate illegal withdrawals from consumer accounts in spite of warning signs like rejected transaction rates above 50 percent, hundreds of consumer complaints and sworn affidavits, and inquiries from other banks and law enforcement.

Plaza’s chief compliance official raised concerns about the red flags but was “brushed aside,” by the chief operating officer who also happened to a part owner of the payment processor, the DOJ said. New management that arrived in June 2009 after the bank’s sale failed to change the status quo until “more than a thousand consumer complaints about unauthorized withdrawals reached Plaza, hundreds of thousands of transactions were returned, and tens of millions of additional dollars had been withdrawn from consumer accounts.”

To settle the charges, Plaza Bank agreed to a permanent injunction reforming its practices and payment of $1.225 million (divided between a $1 million penalty paid to the U.S. Treasury and a forfeit of $225,000 to the USPIS Consumer Fraud Fund). Like CommerceWest, Plaza is also subject to a “strict regime” of extended underwriting and monitoring, as well as the implementation of policies regarding disclosure of conflicts of interest by senior executives and board members.

In both cases, the penalties imposed likely will impede any strategic plans and operations that the banks may have in the immediate future.

To read the complaint, consent decree, and deferred prosecution agreement in U.S. v. CommerceWest Bank, click here.

To read the complaint and consent decree in U.S. v. Plaza Bank, click here.