CommerceWest Bank agreed to forfeit $4.9 million to federal authorities and admit wrongdoing to settle civil and criminal charges that the Irvine business lender "ignored a parade of red flags" in allowing unauthorized withdrawals from customers' accounts.
The U.S. Justice Department said Tuesday that, under an agreement, a felony charge against the bank will be put on hold for two years, then dropped if the bank abides by a promise to monitor its customers' activities better.
Prosecutors had charged CommerceWest, a 14-year-old bank with $423 million in assets, with violating the Bank Secrecy Act for failing to report suspicious transactions by a client to the government.
The Justice Department said CommerceWest enabled fraud by allowing V Internet Corp., a Las Vegas payments firm, to make millions of dollars of unauthorized withdrawals from customer accounts on behalf of fraudulent merchants.
Among the merchants that tapped into consumer bank accounts without authorization was a telemarketing company and a company that charged hundreds of thousands of victims for payday loan referral fees they had never authorized, the government said.
In early 2013, V Internet took over the payday loan referral scheme, operating as the payment processor and sole merchant from January 2013 through July 2013, the government said.
The government complaint said that even in the face of explicit warnings and complaints from other banks, CommerceWest did not terminate V Internet or alert the government to possible illegal activity. Many of the complaints included affidavits in which victims stated under penalty of perjury that the withdrawals were not authorized.
Instead, the government said, CommerceWest and V Internet began blocking transactions against accounts at those banks that complained, but allowed the transactions to continue against accounts at other banks.
"CommerceWest Bank ignored a parade of red flags indicating that a third-party payment processor was defrauding hundreds of thousands of innocent victims," the Justice Department said.
The bank will pay a $1-million civil penalty to the U.S. Treasury and forfeit another $1 million to a consumer fraud fund maintained by the U.S. Postal Inspection Service, which investigated the case. It also agreed to give up any claim to $2.9 million that the postal inspectors seized from accounts held by V Internet.
V Internet did not answer telephone calls seeking comment.
CommerceWest said in a statement that the Bank Secrecy Act compliance officer and two senior officers who managed the relationship with V Internet no longer work for the bank. It denied that employees had "knowingly assisted with or willfully ignored signs of fraud."
Of its failure to file suspicious-activity reports, the statement said: "In hindsight, the bank recognizes that factors pointed to a problematic customer that deserved more scrutiny."