United States: Bank Settles Criminal Bank Secrecy Act And Civil Fraud Charges Arising From Its Inadequate Anti-Money Laundering Program

On March 10, 2015, the U.S. Department of Justice ("DOJ") announced a $4.9 million settlement of criminal and civil charges against CommerceWest Bank ("CommerceWest" or the "Bank") brought pursuant to the Bank Secrecy Act ("BSA"), the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), and the Fraud Injunction Statute. The government alleged that, between December 2011 and July 2013, the Irvine, California-based Bank willfully facilitated consumer fraud by failing to report the suspicious activities of V Internet Corp. LLC ("V Internet"), a Las Vegas-based, third-party payment processor that maintained accounts with CommerceWest.

The CommerceWest settlement is the second case – and the first criminal action – arising from DOJ's Operation Choke Point, an initiative first disclosed in March 2013 that aims to prevent fraudsters from accessing consumer bank accounts by choking off their access to the payments system. Under Operation Choke Point, DOJ targets banks' business relationships with companies believed to be at higher risk for fraud and money laundering, including payment processors and payday lenders. The settlement is also notable for its use of the criminal provisions of the BSA, the civil money penalty provisions of FIRREA, and the injunctive provisions of the Fraud Injunction Statute to extract monetary penalties and impose injunctive relief upon a financial institution whose allegedly lax anti-money laundering program allowed a fraud to flourish.

The BSA requires financial institutions to establish and implement policies to detect and prevent money laundering. One of the BSA's specific mandates is that banks file Suspicious Activity Reports ("SARs") regarding, among other things, "any suspicious transaction relevant to a possible violation of law or regulation." FIRREA authorizes the government to seek civil money penalties against those who have violated certain criminal statutes that affect financial institutions, and the Fraud Injunction Statute authorizes the government to file a civil action to enjoin banking law violations and to freeze assets traceable to those violations.

V Internet processed transactions for merchants that created demand drafts to withdraw money from consumers' bank accounts without authorization. A demand draft (also called a remotely created check or remotely created payment order) is a check created by a third party using an account holder's name and bank account information that contains a statement claiming that the account holder has authorized the check in lieu of the account holder's signature. During the 15 month period addressed in the settlement, CommerceWest accepted more than 1.3 million demand drafts depositing more than $45 million from V Internet.

The government alleged that CommerceWest facilitated V Internet's fraudulent scheme by failing to file SARs, despite numerous red flags pertaining to the transactions. These red flags included the reversal or "return" of about 50 percent of the demand drafts by the consumers' banks for a variety of reasons, CommerceWest's inability to obtain evidence that the processor processed legitimate transactions, and letters and calls from several other banks complaining of fraud and warning CommerceWest that the demand drafts were unauthorized. In response to the consumers' banks' communications, CommerceWest blocked demand drafts destined for the complaining banks, but allowed V Internet to continue charging to other banks.

To settle the criminal and civil charges, CommerceWest agreed: (1) to pay a $1 million civil penalty and an additional $1 million in lieu of administrative forfeiture; and (2) not to assert a claim to the approximately $2.9 million seized from V Internet's accounts at the Bank. In addition, CommerceWest agreed to cooperate with the government's investigation and consented to the entry of a permanent injunction requiring it to perform due diligence on third-party payment processors, and to implement fraud detection, compliance monitoring and reporting, and recordkeeping programs in compliance with the BSA. This settlement reflects coordination among various components of the DOJ, and this multi-pronged civil and criminal approach may well be used as a template for other enforcement actions.

This article is presented for informational purposes only and is not intended to constitute legal advice.