Regulators have hit Evolve Bancorp with a cease-and-desist order related to its third-party fintech relationships, which include the now-shuttered
The Federal Reserve Board announced the action against West Memphis, Ark.-based Evolve Bank & Trust on Friday, citing the community bank's shortcomings related to anti-money-laundering, risk management and consumer protection.
Evolve was one of the primary banking partners of Synapse, a middleware provider that sought to serve as a bridge between licensed banks and nonbank entities looking to take deposits and make loans. Synapse abruptly shut down and filed for bankruptcy protection in April, freezing numerous transactions and leaving $85 million of customer deposits unaccounted for, according to the firm's Chapter 11 bankruptcy proceedings.
The Fed noted that the action, which was issued in conjunction with the Arkansas State Banking Department on Tuesday, was made independent of the bankruptcy proceedings.
An Evolve spokesperson confirmed that the bank had signed the order and agreed to take various steps to improve its compliance and risk management functions, while downplaying the connection to recent events related to Synapse.
"This order, which stemmed from a routine regulatory review in 2023 and is similar to orders received by others in the industry, does not affect our existing business, customers, or deposits," the spokesperson said in a written statement. "Evolve remains well-capitalized and continues to show strong growth across all business lines."
As a result of the order, Evolve will have to review and revise numerous policies and practices, including those related to Bank Secrecy Act/anti-money-laundering requirements and regulations under the Treasury Department's Office of Foreign Asset Control — a body that enforces economic and trade sanctions.
The order also calls for Evolve to develop a risk management plan for its Open Banking Division, which caters to fintechs and other emerging financial service providers. It calls for the bank to produce "written policies and procedures to identify, manage, and monitor potential risks, including compliance, and fraud risks, associated with each fintech partner, product, program, service, business line, or customer."
The Open Banking group is also prohibited from entering new fintech partnerships or exiting existing ones without first getting written approval from supervisors. Evolve will also have to revise its system of governance for these fintech patterns and create a program for dealing with customer complaints.
The 23-page order also calls for improved management of lending and credit risk, interest rate risk, information technology security, customary due diligence as well as transaction and suspicious activity monitoring.
The Evolve spokesperson said the bank welcomed the new requirements and supports "modernizing regulatory guidelines to ensure safe and affordable financial services."
"We've made significant investments in technology and personnel in our enterprise risk management, compliance, and BSA/AML departments to strengthen oversight and enhance the risk framework," the spokesperson said. "With the support of our Senior Management and Board of Directors, we're confident this Order's impact will result in a stronger Evolve."
Founded in 1925 as First State Bank, the institution changed its name to Evolve Bank & Trust in 2005, according to the Federal Deposit Insurance Corp.'s bank database. It has 26 branch locations spread throughout Arkansas, California, Connecticut, Delaware, Georgia, Massachusetts, Maryland, New York, Oregon and Tennessee.
Through its Open Banking platform, Evolve partners with payments groups such as Affirm, Airwallex, Branch, Stripe and Tabapay. Other fintech partnerships include Alloy, Bond, Dave and Mercury.
Former Federal Deposit Insurance Corp. Chair Jelena McWilliams — who is serving as trustee for the Synapse's bankruptcy — said Evolve was unable to reconcile its deposits with Synapse's ledger due to a lack of understanding of its system.
Evolve blames Synapse for failing to provide necessary records, thereby hindering the bank's ability to "verify transactions, confirm end user balances, and comply with applicable law."
"Our primary focus is on ensuring the protection of end user funds. This becomes paramount when essential reporting and information necessary for transaction processing was not forthcoming from Synapse," the bank's spokesperson said. "Evolve is actively working in cooperation with the independent U.S. Trustee appointed in this matter and the other partner banks to assist in determining the appropriate distribution of funds to end users."
