By Aruna Viswanatha
WASHINGTON, March 20 The U.S. Justice Department
is examining the role financial institutions play in fraud
schemes perpetrated by bank customers offering deceptive
products, a department official said on Wednesday.
Attorneys and investigators in the DOJ's Civil Division are
examining banks' possible role in assisting scammers who offer
questionable payday loans, false offers of debt relief,
fraudulent health care discount cards, and phony government
grants, according to Michael Bresnick, who heads the
department's Financial Fraud Enforcement Task Force.
That task force has been focused on pursuing misconduct that
fueled the financial crisis, but the new priorities suggest
investigators are looking beyond those cases and at other types
of financial misconduct that extends to different industries,
from payday lending to auto loans.
The Bank Secrecy Act does require U.S. banks to report
suspicious activity by customers that may indicate illegal acts
like drug trafficking or terrorist financing. But Bresnick's
comments suggest the department is now planning to more closely
examine banks' roles in types of misconduct they have not often
been held liable for in the past.
Fraudulent merchants often get paid through third-party
payment processors who provide them with access to the U.S.
banking system, Bresnick told the Exchequer Club in Washington,
according to prepared remarks.
Banks often overlook certain red flags, however, and allow
those processors to maintain the accounts, he said.
"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," Bresnick said.
Banks should know their customers, and their customers'
customers, in order to ensure that payment processors are not
working on behalf of scam artists, he said.
The department is also examining banks' relationship with
the payday lending industry, Bresnick said.
The industry has been under scrutiny in recent years for
charging interest rates illegal in some states. Congress sought
to tackle some of these concerns in 2010 when it created the new
Consumer Financial Protection Bureau and gave it authority to
regulate payday lenders.
Payday loans, typically a few hundred dollars in size,
enable cash-strapped borrowers to obtain quick funds to tide
them over until their next paychecks.
Bresnick said it "raises some questions" that banks allow
payday lending companies to directly withdraw funds from
borrowers' bank accounts.
Regulators have been examining the practice, but the Justice
Department interest suggests heightened scrutiny.
Banks' should assess whether their processing of those debit
transactions, especially when the loans may violate state laws,
run afoul of their compliance obligations, Bresnick said.
On Tuesday, JPMorgan Chase & Co announced it was
changing some of its practices to help protect consumers from
inappropriate payments sought by payday lenders and other
AUTO LENDERS ALSO SCRUTINIZED
Separately, Bresnick also said the department was examining
discrimination by auto lenders.
Under current law, auto lenders don't have to give consumers
the best interest rate they qualify for, and can reward their
employees for their ability to charge higher interest rates.
Such practices could violate fair lending laws if minorities
end up being charged more than similar white borrowers, Bresnick
said. The U.S. consumer watchdog, the CFPB, has also been
examining the issue.