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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Insights into ACH Fraud - Punishment of First Bank of Delaware


On Monday the FDIC announced severe punishments of First Bank of Delaware. The punishments were so severe that it's almost as if the bank has failed, but technically, it wasn't a bank failure. According to the FDIC press release:

The Delaware Office of State Bank Commissioner terminated First Bank of Delaware’s charter and the FDIC terminated its deposit insurance.

In addition to the charter and deposit insurance termination, the bank will have fines to pay. The Justice Department has details of the fines in its press release:

Under a settlement reached with First Bank of Delaware, the bank will pay a civil money penalty of $15 million to the United States Treasury. The bank also will maintain an account with $500,000 to pay consumer claims arising from the alleged conduct.

Customers of First Bank of Delaware don't have to worry since another bank, Bryn Mawr Trust Company, assumed deposit liabilities from the First Bank. Bryn Mawr Trust Company has some information on its website for First Bank customers. There's no mention about rates on existing CDs.

First Bank of Delaware was a small bank so there are not many bank customers who will be directly affected by this. However, there may be many people who were indirectly affected by First Bank due to what was going on at the bank. The Justice Department's press release has some details about how fraudulent merchants use banks with weak internal controls:

The Department of Justice alleges that from 2009 to 2011, First Bank of Delaware violated the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”) by originating withdrawal transactions on behalf of fraudulent merchants and causing money to be taken from the bank accounts of consumer victims. The government alleges that the bank knew – or turned a blind eye to the fact – that consumer authorization for the withdrawals had been obtained by fraud.

“We are committed to protecting consumers from unscrupulous merchants who use Internet and telemarketing schemes to defraud them. Such merchants need payment processors and banks to help them obtain the victim consumers’ money. This settlement should serve as notice to the banking community that when banks allow themselves to be used to perpetrate these frauds, we will target our enforcement efforts accordingly to hold the banks accountable,” stated United States Attorney Memeger.

“To make money, First Bank of Delaware entered into risky lines of business and chose to disregard its Bank Secrecy Act responsibilities,” said FinCEN Director Jennifer Shasky Calvery. “As a result of its failure to implement systems and controls to identify and report suspicious activities, as required by the BSA, financial predators were able to victimize consumers.”

Banks are a critical key in many consumer fraud schemes. After a fraudster obtains bank account information from a consumer, the fraudster still needs to gain access to the banking system in order to take the consumer’s money. Fraudulent merchants have a difficult time opening their own bank accounts because of laws designed to prevent criminals from accessing the banking system. To overcome this obstacle, fraudulent merchants often obtain indirect access to the banking system through a third-party payment processor that can more easily establish a relationship with a bank.

The Department of Justice alleges that First Bank of Delaware established direct relationships with several fraudulent merchants and third-party payment processors working in cahoots with a large number of additional fraudulent merchants. On behalf of the processors and fraudulent merchants, First Bank of Delaware originated hundreds of thousands of debit transactions against consumers’ bank accounts. The payment processors named in the Complaint include Automated Electronic Checking, Inc., Check Site, Inc., Check, LLC, and Landmark Clearing, Inc.

First Bank of Delaware originated many of the debit transactions using “remotely-created checks” – a transaction instrument widely-known in the banking industry and by the consumer protection and law enforcement community to be favored by fraudulent merchants. At the time of the conduct alleged, First Bank of Delaware and the rest of the banking industry were well-aware of the consumer fraud risks posed by third-party processors and remotely-created checks.

This type of fraud may also explain why many banks have restrictive limits on their ACH transfer service. Several internet banks limit how much money can be transferred using their ACH system. For example, Incredible Bank only "allows a maximum of $10,000 ACH transferred out per day and a maximum of $50,000 ACH in per day." As I explained in this 2009 blog post, a bank that initiates an ACH credit to another bank cannot have that ACH credit recalled. On the other hand, if another bank initiates an ACH debit, the rules allow the bank that received the ACH debit to reverse the transaction.

The issue of reversing ACH transactions is important to note for two reasons. First, if you spot a fraudulent ACH debit from your account, your bank should be able to reverse the debit based on the rules I mentioned above. Second, these types of ACH reversals appear to have been one of the indicators that First Bank failed to monitor. A PDF document from the Financial Crimes Enforcement Network (that was linked to by the FDIC press release) describes this:

First Bank's Remotely Created Check ("RCC") service was created as a major component of its E-Payments business line. First Bank served as the depository institution for five RCC third-party payment processors. From the earliest activity in the RCC service, potential BSA/AML compliance risks were evident, including much higher transaction rates than originally anticipated as the program experienced rapid growth, as well as high rates of unauthorized returns. Merchants utilizing the RCC service were responsible for total return rates of over 60% which vastly exceeded any reasonably expected rate for such activity.

Everyone who banks online knows how easy it is to move money with ACH transfers. It appears it's this money transfer system that scammers were able to abuse. As the Justice Department describes, the scammers "need payment processors and banks to help them obtain the victim consumers’ money."

I've seen some readers who have described cases in which banks have closed their accounts with no apparent reasons and with no explanation. Some of these account closures may have been due to suspected fraud. As in this case with First Bank of Delaware shows, banks are required to monitor accounts for any suspicious activity. I wouldn't be surprised if there are some false positives.

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me1004   |     |   Comment #1
Wow! Good sanctions.

But maybe not good enough. Am I to understand that the bank knew of, meaning was part of, knowingly participated in, this fraud? But the bank officers are simply losing their jobs, no other sanction against them for mounting this fraud -- which sounds like it was set up by the Mafia? The only ones being hurt here are the stock investors, who will be losing all their investment. But the bank officers who perpetrated it were able to negotiate a deal in which nothing happens to them, it happens to a piece of paper called a bank, meaning to the stock investors?! They are not being criminally prosecuted and sent to jail? They are simply walking away with their paychecks?
Anonymous   |     |   Comment #2
me1004:  I am also sick of crimes being allowed where these type people just get a tap on the wrist but if a customer were to steal a few dollars from a bank, they would land in jail!  Rules are just for us.  Not for them!  
Anonymous   |     |   Comment #3
Somewhat unrelated.....But many banks take your opening deposits for new accounts like CD's by ACH......then hold the funds for several days....sometimes even a week.....without paying you interest. This makes me furious.  Whenever I complained......they would say the funds are in the "bizzaro,never-never land of ACH transfers". ....which is complete trash. They have my money and are earning interest on it for those several days.  Nowadays that would not mean much with rates so low.......but a few years ago it could be some nice cash. I have CD's at banks that did this. I will NEVER do business with them again.
Anonymous   |     |   Comment #4
FDIC should go after the crooked employees too. Otherwise they will repete the fraud at some other banks.
Anonymous   |     |   Comment #5
The complaint filed in this case by the Department of Justice states that it's a civil action directed exclusively against the bank. There's little  reason to doubt that criminal charges against the bank's officers aren't pending. So, don't jump to conclusions. Moreover, if it hasn't already done so, the FDIC will likely also file an enforcement action to bar the bank's officers from further participation in banking.
Anonymous #5
Anonymous #5   |     |   Comment #6
Errata: I should have stated that: There's little reason to BELIEVE that criminal charges against the bank's officers aren't pending.
Anonymous   |     |   Comment #7
Besides suspected fraud is suspected money laundering.
Anonymous   |     |   Comment #8
This is a job for FBI and the secret service not FDIC. If the criminals escape, they will do bigger damage to other banks and individuals.
Anonymous #5
Anonymous #5   |     |   Comment #9
#8 This is in essence a widespread conspiracy to commit bank fraud against credit card customers. The way the Department of Justice investigates bank fraud is through the FBI. Depending on the situation, the FBI will work in conjunction with the agency that examined the bank to gather evidence of a crime. In this case, the FDIC was both the insurer and examiner of First Bank of Delaware. Since the Department of Justice has aready settled its civil action against First Bank of Delaware, it's clear that the investigation process had already gone some distance. It's likely to take a bit longer to put the criminal case together because of all the defendants involved. However, you may eventually expect to see a raft of federal criminal indictments being issued against the perpetrators.

The FDIC does not have the authority to initiate criminal actions. It has the authority to initiate civil enforcement actions to bring insured banks into compliance with various consumer and other banking laws. Among these is the ability to permanently prohibit banker's who commit offenses like this from participating in banking. Moreover, these guys are unlikely to slip into another banking because (1) they are now notorious and (2) employment as an officer of an FDIC insured bank requires FDIC approval. Moreover, once the FDIC obtains evidence of bank fraud or other substantial violations of federal banking statutes, it immediately turns that information over to the Department of Justice. As previously discussed, this is where the FBI  agents step in.

Bank fraud is fairly common in this country although not always of this magnitude and, as a result, the FDIC's bank examiners are entirely familiar with the procedures for working with the Department of Justice to apprehend the criminals committing these acts. This bank has already received the death penalty and I'm curious to see how the criminal side of this case proceeds.
Truthseeker   |     |   Comment #10
It seems to me that this was not "ACH fraud" but, rather, more akin to bill payment fraud.

I have never had a bank that allowed me to send an ACH to a third party. The sending and receiving banks, or the Fed intermediary, seems to check that both accounts are titled identically. For example, I tried to ACH funds from my business account (in the name of my wholly owned corporate entity) to my personal name, as an easy way of paying myself my bonus one year. The transaction was refused.

That said, probably the same basic Federal Reserve computer system is used to send bill payments, as to send ACH. In any case, however they managed to facilitate the frauds, I'd throw the book at these crooks...
Truthseeker   |     |   Comment #11
I just read the Fed position paper, and it appears that both ACH transfers between accounts owned by the same person, and the various methods of electronic payments, including Billpay, ATM transactions, etc., do run through the same two systems, only one of which is run by the Federal Reserve.
me1004   |     |   Comment #12
Anonymous #5, actually, the typical approach is to handle CRIMINAL action first, for multiple reasons, but one of which being that civil settlement can compromise a criminal action and cause its dismissal, at least in some jurisdictions. In fact, that is a reason the potential defendants will push to get a civil settlement. So, it is very unlikely any criminal charges will follow.

Besides, from the info here, the bank officers are not even being fined 1¢. 
Rosedala   |     |   Comment #13
To Anonymous #3:

That banks make money out of ours doesn’t bother me as long as it isn’t from my own...whenever possible.  ACH is usually free so we can hardly demand they take less time.  However, when I questioned them once they quickly offered me to use a Wire Transfer a cost

To Anonymous #5:  

<<Bank fraud is fairly common in this country...>> 
Why singling out America???   I know for a fact that frauds of ALL kinds are being perpetrated in all other countries, especially the banks kinds!
Anonymous   |     |   Comment #14
All banks in USA are connected to the FEDs for all money transactions. Therefore, they know when a fraud occurs when the SS number in the ACH do not match both ends and the demand is transated by a third party.
Anonymous   |     |   Comment #16
The previous post from anonymous #14 is not accurate.
Anonymous   |     |   Comment #17
As I recall, buried deep within the FDIC regulations, there is a clause which provides the FDIC the ability not to cover deposit losses due to fraud at the institution.  I'm sure this is quite a complicated matter but if still existing could be troublesome.  Could be a good topic for a future blog topic!
Anonymous   |     |   Comment #18
Here's what the FDIC says about that:

"By law, the FDIC only protects insured deposits if a banking institution fails. However, banks and other financial institutions typically purchase special private insurance policies to cover losses from criminal acts."

Anonymous   |     |   Comment #19
This is ludicrous and misleading as well.  To say the bank "knew or turned a blind eye" to what its merchants were doing is probably an issue of fact that cannot be proven.  The FDIC, , the bank's primary regulator is required to montior and do a thorough examination of ACH transfers, are they just as much responsible for turning a blind eye as well.  The key question is whether the establishment of the relationships on part of the bank  were made with the intent to defraud consumers. Without intent it would have been inadvertance or oversight at best on the part of the bank. Or maybe even lack of internal controls which again would ride on the FDIOC's shoulders and not big DOJ who is just looking for a headline.  There probably wont be any criminal charges filed because there was no criminal acts done on the part of any individuals at the bank.  The DOJ should be fighting crime and in this case the only crime that is being committed is by the third party processors, which who has more or less gotten away scott free.
Anonymous   |     |   Comment #20

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