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Friday, July 19, 2024 | Back issues
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Feds Accuse N. Carolina Bank of Fraud

RALEIGH, N.C. (CN) - Four Oaks Bank & Trust, of North Carolina, facilitated $2.4 billion in transactions by fraudulent and usurious payday lenders and made $850,000 from it, federal prosecutors said in a lawsuit Wednesday.

The United States of America sued Four Oaks Fincorp, holding company for co-defendant Four Oak Oaks Bank & Trust Co. The federally insured bank, based in Four Oaks, N.C., has 14 offices in the state, about 195 employees, and assets of $812 million.

"From at least July 2009 until the present, Four Oaks Bank knew or was deliberately ignorant of the use of its accounts and its access to the national banking system in furtherance of a scheme to defraud consumers," prosecutors said in the 39-page lawsuit.

Uncle Sam claims the bank is blowing off federal laws and regulations and "ignoring red flags that signal unlawful practices by business account holders, including a third-party payment processor and its fraudulent merchant-clients."

"As a consequence, Four Oaks Bank is permitting millions of unauthorized debit transactions against consumers' bank accounts."

Prosecutors say the bank skirted or trampled a number of "know your customer" banking regulations. It did so for profit, at the behest of a "privately-owned third-party payment processor located in Texas, referred to as TPPP-TX" in the lawsuit.

Here's how it worked, prosecutors say in the complaint: "In a twist on the ordinary relationship between a bank and a payment processor in which the processor submits ACH [Automated Cleaning House] debit requests to its bank and the bank forwards the ACH debit requests to the Federal Reserve (or another ACH clearing house), Four Oaks Bank provides TPPP-TX with direct access to the Federal Reserve Bank of Atlanta. Describing the anticipated business model with TPPP-TX, a Four Oaks Bank executive stated that the Bank would be 'sponsoring' TPPP-TX to provide it with direct access to the Federal Reserve Bank of Atlanta, a primary clearing house for the ACH network."

The bank executive said Four Oaks "would have access to TPPP-TX's transaction activity; however, the Bank anticipated it would likely only 'monitor weekly for a while, then monthly when we are comfortable with the processes,'" prosecutors said.

The lawsuit continues: "Four Oaks Bank officials recognized that its business model with TPPP-TX created a significantly increased fraud risk for the Bank and for consumers because TPPP-TX could bypass any direct controls that the Bank should have in place to detect and prevent unauthorized transactions and other abuses. Referring to the high risk inherent in its anticipated relationship with TPPP-TX, one Bank executive stated: 'If we can get comfortable, it would be some nice revenue.'"

Revenue it got, prosecutors said: "Since the inception of Four Oaks Bank's relationship with TPPP-TX, Four Oaks Bank has permitted TPPP-TX to originate more than 9.8 million ACH debits on behalf of TPPP-TX's merchants. In dollar value, Four Oaks Bank has permitted TPPP-TX to process more than $2.4 billion in ACH network transactions for its merchants. In return for access to the ACH network, TPPP-TX has paid Four Oaks Bank more than $850,000 in gross fees."

Ninety-seven percent of TPPX-TX's dealings through Four Oaks are payday lenders, prosecutors say in the lawsuit. "Annualized interest rates for Internet payday loans frequently range from 400 percent to 1,800 percent or more - far in excess of most states' usury laws," the complaint states.

It adds: "Four Oaks Bank has permitted TPPP-TX to originate ACH network debits against consumers' accounts on behalf of Internet payday lenders engaged in fraud. Moreover, Four Oaks Bank also has permitted TPPP-TX to originate ACH debit transactions on behalf of other merchant-clients engaged in allegedly illegal activity, including alleged Internet gambling entities and an alleged Ponzi fraud scheme."

Uncle Sam seeks an injunction against bank fraud (18 U.S.C. § 1345) and civil penalties for wire fraud (12 U.S.C. § 1833a).

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