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.