FROM: U.S. DEPARTMENT OF JUSTICE
Financial Fraud Enforcement Task Force Executive Director Michael J. Bresnick at the Exchequer Club of Washington, D.C.
Washington, D.C. ~ Wednesday, March 20, 2013
Good afternoon. Thank you for that kind introduction, and thank you all for having me here today. I’d especially like to thank John Ryan, my friend and President and Chief Executive Officer of the Conference of State Bank Supervisors, for inviting me to speak.
As you heard, I am the Executive Director of President Barack Obama’s Financial Fraud Enforcement Task Force. It has been my great pleasure to lead this Task Force for the past year and a half, and to work closely with Attorney General Eric Holder, Deputy Attorney General James Cole, Acting Associate Attorney General Tony West, and so many others throughout government. The Task Force was created in 2009 with the understanding that no matter the office or agency -- federal, state, or local; law enforcement or regulatory -- all of us within government share a common desire and have a core obligation to do everything that we can to protect the American public from the often devastating effects of financial fraud, whether it be mortgage fraud or investment fraud, grant or procurement fraud, consumer fraud or fraud in lending. And we know that we can accomplish so much more by working together than by working in isolated, compartmentalized silos. Through the efforts of the Financial Fraud Enforcement Task Force, that’s exactly what we’ve done.
Today I’m going to start by telling you about some of our recent accomplishments -- which were only made possible by our working together -- and then move on to a few priorities we will be focusing on in the coming year.
Just recently Task Force members announced the filing of parallel civil complaints -- by the Department of Justice and more than ten states -- against the ratings agency Standard and Poor’s, shedding a powerful light on conduct that went to the heart of the recent financial crisis. The Department alleged that from at least 2004 to 2007, S&P lied about its objectivity and independence. The evidence revealed that S&P promised investors and the public that their ratings were based on data and analytical models reflecting the company’s true credit judgment. In fact, internal S&P documents made clear that the company regularly altered, or delayed altering, its ratings models to suit the company’s own business interests. We also alleged that from at least March 2007 to October 2007, S&P issued ratings for certain CDOs that it knew were inflated at the time it issued them. By working closely with the states, and coordinating our collective efforts, we have never been more strategic, or effective.
Moreover, in Fiscal Year 2012, the Department, in close partnership with the U.S. Department of Housing and Urban Development and its Office of Inspector General, sued for or settled claims with banks for losses related to the mortgage crisis totaling over $2 billion, including recovering nearly $500 million from settlements with Deutsche Bank AG, CitiMortgage and Flagstar Bank.
Through the Task Force’s Non-Discrimination Working Group, in coordination with our partners at the OCC, Federal Reserve, and many others, our enforcement of fair lending laws has never been more robust. Since 2010 the Civil Rights Division’s Fair Lending Unit has filed or resolved 24 lending matters under the Fair Housing Act, the Equal Credit Opportunity Act, and the Servicemembers Civil Relief Act. The resolutions in these matters provide for a minimum of $660 million in monetary relief for impacted communities and for more than 300,000 individual borrowers.
The Residential Mortgage-Backed Securities Working Group is actively investigating fraud in the securitization and sale of residential mortgage-backed securities -- conduct that contributed to the financial crisis. Already we have seen significant action from Working Group members, including complaints filed against Credit Suisse and J.P. Morgan by the New York Attorney General’s Office, with the Department of Justice having offered substantial assistance by interviewing witnesses, reviewing documents, and providing additional investigative support. And the Securities and Exchange Commission entered into settlements with both J.P. Morgan and Credit Suisse totaling more than $400 million. Many more investigations are ongoing.
Mortgage Fraud Working Group members are creating training sessions for federal and state prosecutors and civil attorneys, as well as arming distressed homeowners with the information they need to avoid becoming victims of fraud. And efforts by the Consumer Protection Working Group to protect servicemembers and their families from predators targeting them as vulnerable marks includes recently creating and disseminating enforcement tool-kits to state attorneys general, U.S. Attorneys’ Offices, and JAG legal assistance officers that provide an overview of common scams targeting members of the military, available federal and state laws to address these schemes, opportunities for support from federal and state partners, and sample legal materials.
As you can see, the Task Force, through its spirited and energetic members, is tackling financial fraud on many fronts, with a focus on enforcement, prevention, and victim assistance. And by working together, we are able to identify fraud trends occurring throughout the country, develop priorities and national fraud enforcement strategies, create and coordinate national initiatives, and establish training events and guidance for our nation’s criminal prosecutors and civil attorneys. It is an example of what we can accomplish when we eliminate unnecessary boundaries and work together towards a common goal.
While the Task Force has done, and continues to do, much in these and other areas, I’d now like to discuss a few additional issues that we have prioritized, among others.
First, Task Force members have been focused on the government’s ability to protect its interests and ensure that it does business only with ethical and responsible parties. According to a recent GAO report, in Fiscal Year 2010 government spending on contracted goods and services was more than $535 billion. Accordingly, we are encouraging greater cooperation with government agencies involved in the suspension and debarment process, actions taken to exclude businesses or individuals who are not behaving in an ethical and lawful manner from receiving contracts.
Second, the Non-Discrimination Working Group has placed an increased focus on enforcement of discrimination by auto lenders. Currently, the law does not require auto lenders to give consumers the best interest rate they qualify for, and does not prohibit lenders from basing compensation on the ability to charge higher interest rates. As we found in the mortgage context, however, this practice may violate the fair lending laws if it causes minorities to be charged more than similarly qualified white borrowers. The Department’s Civil Rights Division is working closely with Consumer Financial Protection Bureau on this issue.
And third, the Consumer Protection Working Group has prioritized the role of financial institutions in mass marketing fraud schemes -- including deceptive payday loans, false offers of debt relief, fraudulent health care discount cards, and phony government grants, among other things -- that cause billions of dollars in consumer losses and financially destroy some of our most vulnerable citizens. The Working Group also is investigating the businesses that process payments on behalf of the fraudulent merchants -- financial intermediaries referred to as third-party payment processors. It’s this third priority that I’d like to discuss in a little more detail.
The reason that we are focused on financial institutions and payment processors is because they are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds. For example, third-party payment processors are frequently the means by which fraudulent merchants are able to get paid. They provide the scammers with access to the national banking system and facilitate the movement of money from the victim of the fraud to the scam artist. And financial institutions through which these fraudulent proceeds flow, we have seen, are not always blind to the fraud. In fact, we have observed that some financial institutions actually have been complicit in these schemes, ignoring their BSA/AML obligations, and either know about -- or are willfully blind to -- the fraudulent proceeds flowing through their institutions.
Our prioritization of this issue is based on this principle: If we can eliminate the mass-marketing fraudsters’ access to the U.S. financial system -- that is, if we can stop the scammers from accessing consumers’ bank accounts -- then we can protect the consumers and starve the scammers. This will significantly reduce the frequency of and harm caused by this type of fraud. We hope to close the access to the banking system that mass marketing fraudsters enjoy -- effectively putting a chokehold on it -- and put a stop to this billion dollar problem that has harmed so many American consumers, including many of our senior citizens.
Sadly, what we’ve seen is that too many banks allow payment processors to continue to maintain accounts within their institutions, despite the presence of glaring red flags indicative of fraud, such as high return rates on the processors’ accounts. High return rates trigger a duty by the bank and the third-party payment processor to inquire into the reasons for the high rate of returns, in particular whether the merchant is engaged in fraud.
Nevertheless, we have actually seen instances where the return rates on processors’ accounts have exceeded 30%, 40%, 50%, and, even 85%. Just to put this in perspective, the industry average return rate for ACH transactions is less than 1.5%, and the industry average for all bank checks processed through the check clearing system is less than one-half of one percent. Return rates at the levels we have seen are more than red flags. They are ambulance sirens, screaming out for attention.
A perfect example of the type of activity I’m talking about is the recent complaint against the First Bank of Delaware filed by the Department in the Eastern District of Pennsylvania, in Philadelphia. There, investigators found that in just an eleven-month period from 2010 to 2011, the First Bank of Delaware permitted four payment processors to process more than $123 million in transactions. Amazingly, more than half of the withdrawal transactions that the bank originated during this time were rejected, either because the consumer complained that the transaction was unauthorized, there were insufficient funds to complete the transaction, or the account was closed, each of which may indicate potential fraud and trigger the need for further inquiry. But the bank did nothing. Nothing, but continue to collect its fees per transaction, while consumers continued to get gouged by unscrupulous scam artists. Ultimately, the government alleged that the bank was engaged in a scheme to defraud under the Financial Institutions Reform, Recovery, and Enforcement Act and the bank agreed to pay a civil money penalty before surrendering its charter and closing its doors.
Underscoring the importance of this case, in the press release announcing a parallel action with the Financial Crimes Enforcement Network, the Acting Chairman of the FDIC, Martin Gruenberg, said, "Effective Bank Secrecy Act and anti-money laundering programs that are commensurate with the risk profile of the institution are vital to protecting our financial system." He added that "[t]he significant penalty assessed in this case emphasizes the importance of having strong internal controls to assure compliance with anti-money laundering regulations and to detect and report potential money laundering or other illicit financial activities."
So, the First Bank of Delaware is a model of irresponsible behavior by a bank.
Of course, this conduct is completely unacceptable. And it is receiving significant attention from the Department of Justice. In fact, right now within the Civil Division there are attorneys and investigators who are investigating similar unlawful conduct, and they will not hesitate to act when they see evidence of wrongdoing. Our message to banks is this: Maintaining robust BSA/AML policies and procedures is not merely optional or a polite suggestion. It is absolutely necessary, and required by law. Failure to do so can result in significant civil, or even criminal, penalties under the Bank Secrecy Act, FIRREA, and other statutes.
Consequently, banks should endeavor not only to know their customers, but also to know their customers’ customers. Before they agree to do business with a third-party payment processor, banks should strive to learn more about the processors’ merchant-clients, including the names of the principals, the location of the business, and the products being sold, among other things. If they are going to allow their institutions to be used by others as a gateway to access the bank accounts of our nation’s consumers, banks need to know for whom they are processing payments. Because if they don’t, they might be allowing some unscrupulous scam artist to be taking the last dollars of a senior citizen who fell prey to another fraud scheme, and hundreds of millions of dollars of additional proceeds of fraud to flow through their institutions. And in that case, they might later find themselves in the unfortunate position of the First Bank of Delaware.
In addition, as part of our focus on the role of financial institutions and third-party payment processors in mass-marketing fraud schemes, we naturally also are examining banks’ relationship with the payday lending industry, known widely as a subprime and high-risk business. We are aware, for instance, that some payday lending businesses operating on the Internet have been making loans to consumers in violation of the state laws where the borrowers reside. And, as discussed earlier, these payday lending companies are able to take the consumers’ money primarily because banks are originating debit transactions against consumers’ bank accounts. This practice raises some questions.
As you know, the Bank Secrecy Act demands that banks have effective compliance programs to prevent illegal use of the banking system by the banks’ clients. Bank regulatory guidance exhorts banks to collect information sufficient to determine whether a client poses a threat of criminal or other unlawful conduct.
Banks, therefore, should consider whether originating debit transactions on behalf of Internet payday lenders -- particularly where the loans may violate state laws -- is consistent with their BSA obligations.
Understandably, it may not be so simple a task for a bank to determine whether the loans being processed through it are in violation of the state law where the borrower resides. The ACH routing information, for example, may not indicate to the bank in which state the consumer lives, and variations in state laws could preclude blanket conclusions. Yet, at a minimum, banks might consider determining the states where the payday lender makes loans, as well as what types of loans it offers, the APR of the loans, and whether it make loans to consumers in violation of state, as well as federal, laws. By asking these questions, a bank may become aware of certain red flags, inviting further scrutiny and further action. The bury-your-head-in-the-sand approach, to the contrary, is certain to result in no action, even where some might be warranted, and is fraught with danger to consumers.
It comes down to this: When a bank allows its customers, and even its customers’ customers, access to the national banking system, it should endeavor to understand the true nature of the business that it will allow to access the payment system, and the risks posed to consumers and society regarding criminal or other unlawful conduct.
As I said at the outset, we in government share a unity of purpose and a common resolve to tackle the most pressing financial fraud issues of our time, and know that we must work together if we are to be successful in protecting the American public from harm. We are committed to doing so, and are approaching these issues in a smart, systematic, and coordinated way.
It has been a pleasure to address this distinguished group today. I thank you, again, for the opportunity, and now look forward to addressing any questions you may have.
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