Holding Financial Institutions Accountable for Fraud

March 27, 2015

Courtesy of the Civil Division’s Consumer Protection Branch

For decades, the Department of Justice, led by the Civil Division’s Consumer Protection Branch, has protected the health, safety and economic security of the American consumer.  Indeed, since its creation more than 40 years ago, the Consumer Protection Branch has worked tirelessly to combat all types of consumer fraud.

But as two of our most recent cases show, fraudsters have become more sophisticated.  It used to be that fraud schemes depended on the willingness of unwitting consumers to hand over their hard-earned savings in person or through the mail.  Today, the interconnectedness of our electronic banking system means a crook just needs to find a way to acquire one piece of information—your bank account number.  Once he has it, and a means to access the banking system, your bank account—and your money—is in his hands.     

Thanks to banking rules designed to prevent money laundering and other illegal activity, American banks generally don’t do business with people who are trying to steal money from consumers.  But fraudsters figured out that they could gain access to the banking system indirectly, through a middleman called a third party payment processor, because they realized some banks would not look past the middleman to evaluate what the fraudster was doing.  And other banks, even if they did find out what the fraudster was doing, would choose to look the other way while they continued to collect fees in exchange for enabling the scheme.

But just as bad actors continuously adapt to modern technology, law enforcement must adapt to protect consumers.  Recognizing this new and serious consumer fraud problem, in 2012, career prosecutors at the department proposed a focused effort to disrupt these illegal third-party payment processor schemes.  The new approach was informally dubbed “Operation Chokepoint”—a recognition that choking off access to consumers’ bank accounts could stop numerous fraud schemes at one time and protect more people from being victimized.

Following up on specific evidence of suspected fraud schemes operating through the banking system, and responding to particular consumer complaints and referrals from other law enforcement agencies, DOJ prosecutors trained their resources on a small number of banks -- around 50 of the roughly 6,000  operating across the country -- that were (wittingly or unwittingly) involved in these schemes.  They used many of the typical tools that are part of fraud investigations, including issuing subpoenas in 2013 seeking information from selected banks.  Once these prosecutors saw the evidence banks provided, they opened multiple civil and criminal investigations into the perpetrators of egregious (and in many instances, ongoing) fraud schemes.  In many cases, they informed banks that they were not themselves subjects of our investigations.  In others, however, they found evidence that the bank itself was aware of the fraud and was permitting the fraudsters to continue their unlawful conduct.

Last week, the Consumer Protection Branch resolved two additional cases involving illegal third party payment processor schemes in which, we allege, the bank ignored glaring warning signs of fraud while permitting fraudsters to illegally withdraw millions of dollars from consumers’ bank accounts.  For example, we allege that CommerceWest Bank was told by other banks such as Wells Fargo and Bank of America that their customers were being defrauded by a CommerceWest accountholder—but that CommerceWest’s response was merely to cut off further charges to customers of the complaining banks while continuing to allow the fraudster unimpeded access to the accounts of other victims.  Similarly, we alleged that Plaza Bank received so many consumer complaints that it had to develop a generic email response that acknowledged the “questionable” transactions that were continuing to be processed through the bank.  Combined, these two banks consciously turned a blind eye to schemes where staggering amounts were being stolen from millions of consumers.     

As these cases demonstrate, the department’s efforts under Operation Chokepoint have proved highly successful in protecting consumers and rooting out widespread fraud that was allowing millions of dollars to be siphoned from consumer bank accounts every month.  Including an earlier case against Four Oaks Bank, the department has been able to disrupt multiple fraud schemes that–until the government stepped in—were actively stealing tens of millions of dollars out of the bank accounts of more than a million different consumers.  The department, the FTC, and state and local law enforcement agencies have brought enforcement cases against other perpetrators of these fraudulent schemes as well.

While our actions have focused solely and squarely on disrupting fraud schemes that gain access to the banking system through third-party payment processors, we are aware of claims that the department unfairly targeted businesses engaged in lawful activity.  Others have confused our efforts with separate, independent actions taken by financial regulators to warn banks about risks involved with conducting business for merchants in certain industries. 

As the department has stated on multiple occasions, the proposal to focus on schemes involving third-party payment processors was developed by career prosecutors following credible leads about fraud schemes being perpetrated using the banking system.  Each subpoena was designed to gather information of illegal conduct, and each investigation focused on specific evidence of unlawful conduct.  And in no case has the department targeted any lawful enterprise, such as gun or ammunition sellers. 

We have briefed Congress, met extensively with industry groups, and taken many other steps to explain the purpose of Operation Chokepoint—and we remain committed to explaining what we are and are not doing.  But the most effective way of showing the success of Operation Chokepoint comes from the results of the cases we have resolved so far, as well as the results that will come from our continued pursuit of the banks, processors and others responsible for the schemes we identified from our focused effort.  Although this effort has largely achieved its goals, the problem that gave rise to it has not completely gone away.  That is why the department expects to bring additional criminal and civil cases related to these third-party payment processor schemes, and why we will continue our work to protect consumers and fight fraud in all its forms.

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Updated March 27, 2015