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After nearly two years, the Justice Department so far has accused just one bank of facilitating consumer fraud. And the aftermath of that case suggests that prosecutors' strategy is not as effective as they hoped it would be.
December 3 -
The investigation's nickname is "Operation Choke Point," and that seems appropriate, because a noose appears to be tightening around the necks of banks that have ties to online payday lenders.
January 22
WASHINGTON The Department of Justice announced a $4.9 million settlement Tuesday with CommerceWest Bank over charges that the Irvine, Calif., bank knowingly worked with a third-party processor to make illegal withdrawals from consumer accounts.
The deal is the latest development in the law enforcement agency's initiative to combat crime and consumer fraud through the banking system, known as Operation Choke Point. It's the second case associated with the effort, which has come under fire in recent months from Republican lawmakers and the banking industry.
"CommerceWest Bank ignored a parade of red flags indicating that a third-party payment processor was defrauding hundreds of thousands of innocent victims," said Benjamin Mizer, acting assistant attorney general of the Justice Department's Civil Division, in a press release. "[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."
The move is a win for government officials who have faced considerable pushback from bankers and lawmakers concerned that Operation Choke Point is chilling business activity for legal but controversial industries like gun dealers and payday lenders.
The Federal Deposit Insurance Corp. told banks in January that they should carefully evaluate the activities of businesses they contract with, but clarified that they don't need to cut out entire industries in doing so. The FDIC has said that it is not actively involved in Operation Choke Point, though critics have argued that regulators have been distancing themselves because the effort has attracted substantial scrutiny.
As part of this latest crackdown, the Justice Department filed a felony charge against $422 million-asset CommerceWest for violating the Bank Secrecy Act, along with a civil complaint.
Government officials charge that the bank worked with V Internet Corp., a third-party payment processor based in Las Vegas, from December 2011 through July 2013. The processor allegedly worked with several merchants involved in criminal activity, including a telemarketing company and a company that provided payday loan referrals, the latter of which was eventually taken over and run by the processor.
The Justice Department alleges that CommerceWest "ignored clear warning signs" of fraud including the fact that roughly half of the debit transactions that came through the processor were rejected and returned to customers, according to the press release.
The U.S. Postal Inspection Service, meanwhile, has claimed more than $2.9 million from the processor's accounts at CommerceWest. Agents also seized significant property from V Internet's owner, including five airplanes, a Land Rover, a Dodge Charger, multiple tractors, five all-terrain vehicles and a fire truck, purportedly bought with the illegal gains.
The bank agreed to a consent decree filed in the U.S. District Court for the Central District of California.
The Justice Department settled its first caseunder Operation Choke Point with Four Oaks Fincorp last January, and a judge approved the settlement last April. The Four Oaks, N.C., bank agreed to a $1.2 million deal with government officials, who alleged that the bank gave a payment processor access to the Federal Reserve Bank of Atlanta so that it could illegally charge consumers on behalf of fraudulent merchants.
While the Four Oaks case was filed in civil court, the CommerceWest case was the Justice Department's first criminal action related to Operation Choke Point. The criminal charge will be deferred for two years under a deferred prosecution agreement that requires CommerceWest to admit wrongdoing, the Justice Department said.
The bank "does not believe that any bank employee knowingly assisted with or willfully ignored sign of fraud being committed by V Internet, and has not admitted liability in the civil settlement," CommerceWest said in a statement. "In hindsight, the bank recognizes that factors pointed to a problematic customer that deserved more scrutiny" than the bank provided.
The statement adds that the bank has filed a lawsuit against the processor in Orange County Superior Court, and that CommerceWest's compliance officer and two senior officers who handled the account are no longer with the company.
CommerceWest "is pleased that DOJ's investigation is now concluded, and we look forward to continuing to serve our business customers with banking services specifically tailored to their needs," said Ivo Tjan, chairman and chief executive, in the statement.
