Holding Accountable Financial Institutions that Knowingly Participate in Consumer Fraud

Courtesy of the Civil Division’s Consumer Protection Branch 

Frauds targeted at consumers threaten to cause significant harm to the American public.  The Justice Department has made it a priority to hold the perpetrators of consumer fraud accountable.  In the past few weeks, we have successfully prosecuted the operators of lottery scams, the promoters of fake business opportunities, and the criminals behind a telemarketing fraud targeting Spanish-speaking customers.  But fraudsters often can’t act alone.  They need access to the banking system to get money from their victims.  And when financial institutions choose to process transactions even though they know the transactions are fraudulent, or willfully ignore clear evidence of fraud, they are profiting from illegal activities as well as breaking federal law.  That’s why we are proud to highlight an important result in one of the first civil cases we have brought against a financial institution for unlawfully facilitating a fraudulent scheme to take money from consumers’ bank accounts.  On April 25, 2014, the U.S. District Court for the Eastern District of North Carolina entered a consent order and approved a settlement resolving the department’s complaint against Four Oaks Bank.  According to the department’s complaint, Four Oaks unlawfully allowed third party merchants to work through the bank to defraud consumers.  Four Oaks’ clients included a Texas-based third-party payment processor – a company that acts as an intermediary between a bank and a merchant in a financial transaction, and often provides access to the national payment system to a wide variety of merchants.  At a merchant’s direction, a payment processor will originate a debit transaction against an individual consumer’s bank account, receive the consumer’s money into its own bank account, and transmit the money to its merchant client.   Four Oaks, according to the complaint, was specifically informed that many of the transactions requested by the third-party payment processor and facilitated by the bank were reported as fraudulent.  Four Oaks received hundreds of notices from consumers’ banks that the people whose accounts were being charged had not authorized a debit transaction originated by the third-party payment processor.  The bank also knew that at least 13 of the merchants served by the third-party payment processor had over 30 percent of the attempted debit transactions returned or charged back, including one merchant with a return rate of over 70 percent.  (A 30 percent rate is more than 20 times the national average.)  And the bank had substantial evidence of efforts to conceal the true identities of the merchants that were serviced by the third-party payment processor.  Nevertheless, according to the department, Four Oaks permitted the third-party payment processor to originate $2.4 billion of debit transactions against consumers’ bank accounts in exchange for more than $850,000 in fees that were paid to the bank. The consent order approved by the court requires Four Oaks Bank to pay $1 million to the U.S. Treasury as a civil monetary penalty and to forfeit $200,000 to the U.S. Postal Inspection Service’s Consumer Fraud Fund.  It also obligates Four Oaks to comply with a series of measures designed to prevent it from ever again permitting fraudulent merchants access to the national payment system.  Specifically, the order permanently prohibits Four Oaks from providing banking services to any third-party payment processor that serves merchants determined by banking regulators to be high-risk absent a strict regime of investigation and monitoring designed to prevent future consumer fraud.  The Four Oaks case was prosecuted by Assistant U.S. Attorney Joel Sweet of the Eastern District of Pennsylvania, and Trial Attorneys John W. Burke and James W. Harlow of the Civil Division’s Consumer Protection Branch, with assistance from Assistant U.S. Attorney G. Norman Acker, III of the Eastern District of North Carolina.  Investigative assistance was provided by the U.S. Postal Inspection Service.  The result in this case demonstrates that banks and third-party payment processors cannot profit from violating federal law.  Of course, we recognize that most of the businesses that use the banking system are not fraudsters.  We’re committed to ensuring that our efforts to combat fraud do not discourage or inhibit the lawful conduct of these honest merchants.  Our goal in investigations like Four Oaks is simply to enforce the laws that make the financial marketplace work for consumers.