Justice Department Announces Settlement with California Bank for Knowingly Facilitating Consumer Fraud
The United States filed a civil complaint in the U.S. District Court for the Central District of California today against Plaza Bank of Irvine, California, for knowingly facilitating consumer fraud by permitting a third-party payment processor to make millions of dollars of unauthorized withdrawals from consumer bank accounts on behalf of fraudulent merchants. To resolve the case, Plaza Bank has agreed to pay $1.225 million and enter into a permanent injunction that reforms the bank’s practices to prevent such fraud in the future. The proposed consent decree has been filed with the court, which will determine whether to enter the order.
“Today’s complaint alleges that, in exchange for fee income, the bank ignored its responsibilities and looked the other way while a third-party payment processor and its merchants defrauded unsuspecting victims of millions of dollars,” said Acting Assistant Attorney General Benjamin C. Mizer of the Justice Department’s Civil Division. “A part of our responsibility at the Justice Department is to stop those who knowingly facilitate consumer fraud, and those in the financial industry are no exception.”
The complaint alleges that from July 2007 to mid-2010, Plaza Bank knowingly permitted fraudulent merchants, acting through an intermediary called a third-party payment processor, to illegally withdraw millions of dollars from consumers’ bank accounts. The complaint further alleges that these unauthorized withdrawals resulted in: abnormally high rate of rejected transactions, which hovered between 50 and 55 percent; hundreds of consumer complaints each month in which consumers stated, by sworn affidavit, that withdrawals from their accounts were unauthorized; and inquiries from other banks and law enforcement, both of which expressed their belief that the payment processor’s transactions were fraudulent.
According to the complaint, when Plaza’s chief compliance official raised concerns about these numerous warning signs of fraud, she was brushed aside by Plaza’s chief operating officer—who, unknown to the compliance officer, was one of two corporate officials who also happened to be a part-owner of the payment processor. Plaza thus continued to give fraudsters unfettered access to the bank accounts of tens of thousands of consumers.
Eventually, in June 2009, Plaza was sold to a third-party equity firm, which brought in new bank management. According to the complaint, while new management soon recognized the problematic nature of the bank’s relationship with the payment processor, it did not immediately terminate the processor’s banking capabilities. Instead, the complaint alleges that months passed while Plaza officials debated whether the revenues generated by the payment processor relationship outweighed the possible risk to the bank. Meanwhile, the payment-processor significantly increased the number of fraudulent withdrawals from consumers’ bank accounts, according to the complaint. The complaint further alleges that only after more than a thousand consumer complaints about unauthorized withdrawals reached Plaza, hundreds of thousands of transactions were returned, and tens of millions of additional dollars had been withdrawn from consumer accounts did Plaza finally terminate the relationship.
“Plaza Bank turned a blind eye while consumers lost tens of millions of dollars as unscrupulous merchants reached into accounts and stole hard-earned money,” said Acting U.S. Attorney Stephanie Yonekura for the Central District of California. “Because of its flagrant failure to protect consumers and the integrity of our banking system, Plaza Bank is now subject to a significant penalty and court oversight to ensure it behaves as a lawful corporate citizen.”
According to the terms of the proposed consent decree, Plaza Bank will be required to pay $1 million to the U.S. Treasury as a civil monetary penalty and to forfeit $225,000 to the U.S. Postal Inspection Service’s (USPIS) Consumer Fraud Fund. Plaza will also be required to implement a strict regime of underwriting and monitoring designed to prevent future consumer fraud by third-party payment processors. The bank must also implement and enforce policies regarding disclosure of conflicts of interest by its senior executives and board members. The bank also will be required to cooperate fully in other civil and criminal investigations.
The Justice Department’s case is being handled by Trial Attorney Sang Lee of the Civil Division’s Consumer Protection Branch in coordination with the U.S. Attorney’s Office for the Central District of California.