LOS ANGELES (CN) - CommerceWest Bank will pay $4.9 million to settle a case involving millions of dollars of unlawful withdrawals from customer accounts.
The United States sued the bank on March 10 in Federal Court. The bank was charged in a criminal information with a felony violation of the Bank Secrecy Act.
"CommerceWest Bank ignored a parade of red flags indicating that a third-party payment processor was defrauding hundreds of thousands of innocent victims," the Department of Justice said in a statement.
The 35-page civil complaint alleged that in November 2011 the bank contracted with a third party payment processing company called V Internet Corp., of Las Vegas.
The bank, which has assets of roughly $422 million, "knowingly or with deliberate ignorance" allowed the company owner "to facilitate the theft of tens of millions of dollars from the bank accounts of unsuspecting, innocent consumers," according to the complaint.
V Internet's unidentified owner used the fraudulently obtained money to buy five airplanes, a Land Rover, a Dodge Charger, tractors, five all-terrain vehicles and a fire truck, prosecutors said.
The property has been seized.
Beginning in June 2012, V Internet processed payments for just three merchants - YR Benefits, Loan Assistance and a copycat company of Loan Assistance which the V Internet owner ran, prosecutors said. The government claims the three companies were involved in a multimillion-dollar consumer fraud scheme.
YR Benefits ran a telemarketing scheme targeting the elderly, and Loan Assistance was a payday loan scam, according to the complaint.
Despite thousands of complaints from consumers and banks, CommerceWest allowed V Internet to process thousands of remotely created checks - known as demand drafts, the government says.
Demand drafts are created by third-party processors, with the account holder's name and bank account and routing numbers. The drafts are not signed by the account holder. Payment processors are not required to deposit a hard copy of the draft, only an electronic image of the check. The absence of paper copies leaves consumers vulnerable to frauds such as the one perpetrated by V Internet, the government says.
CommerceWest "ignored a series of glaring red flags," prosecutors said, including return rates in excess of 50 percent after consumer banks rejected the unauthorized transactions.
Despite the suspicious activity, CommerceWest allowed V Internet to increase demand draft deposits each day from 4,900 to 7,000, according to the lawsuit.
All told, from April 2012 to July 2013, CommerceWest processed more than $1.3 demand drafts for total of $45 million in withdrawals.
CommerceWest "generated over $5 million in fees, including approximately $4.29 million after July 2012," the lawsuit states.
"The fees CWB generated from its relationship with V Internet were an important source of revenue. In 2012, CWB earned more than $2.9 million in gross fees from V Internet and reported a bank-wide profit of $4.2 million. In the first half of 2013, CWB earned nearly $2.2 million in gross fees from V Internet and reported a bank-wide profit of $2.9 million," the complaint states.
CommerceWest Bank agreed to pay victims $4.9 million in restitution and enact fraud prevention reforms. The bank will pay a $1 million civil penalty and forfeit an additional $1 million.
Under a deferred prosecution agreement, the bank is required to admit wrongdoing for failing to act on V Internet's suspicious activity.
Prosecutors said that CommerceWest was aware by May 2013 that V Internet's transactions were fraudulent.
After the bank terminated its business relationship with V Internet in early July 2013, it gave the processor 30 days to wind down its service, prosecutors said.
"Only when the department notified CommerceWest that it intended to seek an emergency injunction did CommerceWest immediately terminate V Internet's ability to access victims' checking accounts," the Justice Department said in a statement Wednesday.
Authorities seized more than $2.9 million from V Internet's CommerceWest Bank accounts.
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