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U.S. Whacks First Bank of Delaware

PHILADELPHIA (CN) - First Bank of Delaware ignored federal warnings and processed more than $100 million in consumer-fraud transactions, the United States claims in Federal Court.

"From 2009 to 2011, First Bank of Delaware engaged in a scheme to defraud consumers by originating electronic-payment transactions knowing, or by remaining willfully blind to the fact, that the consumer authorizations for the transactions had not been obtained, or had been obtained by dishonest merchants using fraud, trickery, and deceit," the complaint states.

"First Bank of Delaware originated more than two million debit transactions - worth more than a hundred million dollars - on behalf of third-party payment processors in cahoots with fraudulent Internet and telemarketer merchants, and directly with other fraudulent merchants."

Based in Philadelphia, First Bank of Delaware provided typical bank services, including credit, short-term consumer installment loans, credit cards and prepaid cards.

The bank had more than $200 million in assets and more than $40 million in shareholder equity as of December 2011, according to the complaint.

A liquidating trust took over the bank after its shareholders approved its dissolution in October this year, according to the bank's website.

The government claims that in late 2009 the bank developed an electronic payment program to originate electronic credit and debit transactions on behalf of third-party payment processors and merchants.

The system was designed to handle automated clearing house (ACH) debit transactions and remotely created checks (RCC), which are two of the primary instruments used by fraudulent merchants to take consumers' money, prosecutors say in the complaint.

RCC checks, also called "electronic checks" or "preauthorized drafts," are created by a third party using an account-holder's name and account information. In place of the account-holder's signature, an RCC contains a statement that the customer has authorized the check.

"RCCs are notorious in the banking industry and in the consumer protection community as instruments of fraud," the complaint states. "In a 2005 letter to the Board of Governors of the Federal Reserve System, the Attorneys General of 35 states jointly urged that RCCs be eliminated from the banking system. The Attorneys General explained that RCCs are 'used to perpetrate fraud on consumers' by causing the withdrawal of money from consumers' bank accounts without authorization.

"From 2009 to 2011, First Bank of Delaware originated more than $138 million in RCC transactions on behalf of merchants and third-party payment processors."

Prosecutors say the bank ignored regulatory warnings against providing access to its system to third-party payment processors, who are often used as intermediaries by fraudulent merchants who cannot establish direct relationships with banks.

"Federal bank regulators issued additional explicit warnings to the banking industry about the risk of payment processor relationships in 2008, after Wachovia Bank agreed to settle class action litigation and a regulatory action in connection with alleged consumer fraud," the complaint states. "Wachovia Bank had originated transactions for several third-party payment processors and scores of fraudulent telemarketers causing more than $160 million in consumer losses, resulting in a criminal prosecution of that bank.

"By the time First Bank of Delaware began to originate electronic transactions for third-party payment processors and fraudulent merchants, the FDIC already had warned banks that third-party payment processors and merchants with high rates of returned transactions may indicate fraud against consumers."

The government claims that the bank knew that the ACH debit and RCC transactions that it originated for merchants and third-party processors were not based on consumer authorization, or it simply ignored the signs of fraud.


"Many banks heeded the guidance of federal bank regulators and law enforcement and scrutinized their relationships with third-party payment processors and high-risk merchants to protect consumers from fraud and to protect themselves from reputational, regulatory, and legal risk," the complaint states.

"First Bank of Delaware was not one of those banks. On the contrary, First Bank of Delaware recognized that enormous profits could be reaped by originating electronic transactions on behalf of fraudulent merchants directly and through third-party payment processors. For First Bank of Delaware, the potential profits outweighed the fraud risk to consumers.

"First Bank of Delaware engaged in wire fraud by processing RCC and ACH transactions that it knew were based on fraud against consumers, or by remaining willfully blind to that fact. This was not surprising in light of the bank's history.

"First Bank of Delaware's business practices have become the subject of law enforcement and consumer protection agencies' actions for years. For example, on April 26, 2007, the State of California filed an action against First Bank of Delaware alleging that First Bank of Delaware and others engaged in unlawful and deceptive business practices to avoid California laws regulating the provision of payday loans and other types of short-term consumer loans to California customers. ...

"On or about June 10, 2008, the FDIC initiated an enforcement action against First Bank of Delaware and other financial institutions in connection with the marketing of sub-prime credit cards in violation of the Federal Trade Commission Act. The FDIC and the State Bank Commissioner of Delaware found deficiencies in the bank's management, board participation, strategic planning, oversight of third parties, and compliance management system and audit program. As previously alleged, in a consent order dated on or about Oct. 9, 2008, First Bank of Delaware was required to terminate third-party lending programs and to substantially increase its board of directors and management oversight of its business. The FDIC also required First Bank of Delaware to establish an account in the amount of $700,000 to ensure the availability of restitution to its consumer victims, and to pay a $304,000 civil money penalty to the United States Treasury.

"Forced to end lucrative predatory activities, First Bank of Delaware looked to develop alternative revenue streams that would provide high financial returns, and considered businesses such as electronic payment services, prepaid credit cards, and check cashing operations.

"By June 2009, First Bank of Delaware had decided to develop what it called an 'E-Payments Program' that it anticipated would generate fee income from the origination of electronic payments. The E-Payments Program would have three primary components: (1) originating RCC transactions; (2) originating ACH transactions; and (3) credit card merchant acquisition.

"First Bank of Delaware recognized that the E-Payments Program business model would involve high risk to the bank. The bank specifically knew that it would be providing RCC transaction services to high risk Internet merchants. In fact, Chief Executive Officer Primus and Chief Risk and Compliance Officer Vandercook repeatedly informed the bank's board of directors that the bank would have a 'robust oversight process' to protect against that risk. The oversight process was to include due diligence of third-party payment processors and merchants, monitoring of the 'volume of net returns' of transactions, and a variety of other regular monitoring practices. Primus also announced the creation of an E-Payments Program Risk Committee, which he said would be comprised of officers of the bank."

Nevertheless, the government claims, the bank originated fraud-tainted transactions for third-party payment processors to increase its revenue, ignoring high return rates on RCC transactions and other red-flag warnings of fraud.

Some third-party payment processors had return rates higher than 50 percent on RCC transactions, according to the complaint.

The bank did not fulfill its promise to terminate most high-risk merchants until late spring 2011, despite knowing that they were cheating consumers, the government says.

First Bank of Delaware announced in May that it would sell its assets to another financial institution and cease banking operations by the end of 2012. The bank's shareholders approved its dissolution in October, according to the complaint.

The government seeks civil penalties under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

U.S. Attorney Zane David Memeger signed the 31-page complaint.

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