Justice Department probing banks' role in fraud by customers

The 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.


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.

(Reporting by Aruna Viswanatha; Editing by Chris Reese)