Several fintechs that facilitated loans through the $800 billion Paycheck Protection Program had lax anti-fraud standards that hampered their abilities to stop “obvious and preventable fraud,” according to a scathing report released in December by the House Select Subcommittee on the Coronavirus Crisis.

The panel, which investigated the role fintechs played in the program, claims the nonbank lenders accrued massive profits through PPP administration fees while failing to properly vet applicants.

The 130-page report, which Rep. James Clyburn, D-SC, the subcommittee’s chairman, shared with the Justice Department, also found that multiple banks admitted to having no formal program to monitor fintech partners or to detect fraud in the PPP loans they submitted.

Fintech firms’ lack of fraud controls made them the “paths of least resistance” for criminal gangs and fraudsters looking to exploit the coronavirus relief program, the subcommittee’s report concluded.

“Even as these companies failed in their administration of the program, they nonetheless accrued massive profits from program administration fees, much of which was pocketed by the companies’ owners and executives,” Clyburn said in a statement accompanying the report.

The committee’s investigation into PPP fraud among fintechs Kabbage and Bluevine was spurred by a May 2021 report by ProPublica, which detailed how Kabbage made 378 PPP loans totaling $7 million to fake business entities.

The subcommittee expanded its investigation to include Blueacorn and Womply, which the report concluded were the worst offenders. (Update: The Small Business Administration, which ran PPP, would bar Blueacorn and Womply from working with the agency “in any capacity” a week after the report was published.)

Womply, which collected $2 billion in PPP fees, and Blueacorn, which took in $1 billion, “failed to implement systems capable of consistently detecting and preventing fraudulent and otherwise ineligible PPP applications,” the subcommittee said.

The fintechs’ lending partners, Capital Plus and Harvest, “did little to oversee the activities of the companies to which they delegated their responsibilities,” the panel added. 

Blueacorn chased higher fees by giving priority and less scrutiny to high-dollar loans, designating them as “VIPPP,” according to the report.

“Blueacorn’s ownership directed reviewers to prioritize ‘monster loans [that] will get everyone paid,’” while urging employees to dismiss applications for smaller loans, the committee wrote.

Womply’s fraud prevention practices were criticized by the fintech’s lending partners, one of which described its systems as “put together with duct tape and gum,” according to the report.

Womply also refused to cooperate with the SBA inspector general’s office and lending partner Fountainhead, which requested information to investigate potential fraudulent loan activity carried out by PPP borrowers.

Fountainhead was forced to get “a temporary restraining order against [Womply], so they can’t destroy these [PPP loan] documents,” according to the report.

Blueacorn and Womply did not immediately respond to requests for comment.

‘Sh***y rules’

In Kabbage’s case, the subcommittee cited internal documents that showed the fintech missed “clear signs of fraud” in a number of its PPP applications. 

The firm’s 2020 acquisition by American Express exacerbated its PPP issues, the subcommittee found. 

“PPP borrowers were left at the mercy of an underfunded and understaffed spin-off company that failed to properly service their loans and would later file for bankruptcy,” the panel said.

In a statement to ProPublica, Kabbage said it was proud of the role it played in supporting businesses during the pandemic. 

“Kabbage’s existing online lending platform was able to process the sudden flood of loan applications, in a timely manner, in the midst of a national crisis and in light of ever-changing federal lending rules,” the company said. “Kabbage adhered to the applicable rules and regulations in good faith.” 

While Bluevine initially had its own issues with fraud, the fintech adapted to ongoing threats better than Kabbage, Womply and Blueacorn, because its partner bank, Celtic Bank, urged the fintech to invest in fraud controls and comply with SBA standards, the subcommittee found.

Bluevine, however, still faced difficulties in facilitating timely reporting of fraud to law enforcement, according to the report. 

Those delays caused Celtic Bank to submit late suspicious activity reports, which likely impeded law enforcement efforts to address ongoing fraud, the subcommittee concluded.

As fintechs and lenders observed high rates of PPP fraud, some placed the blame on the SBA and the Trump administration, the panel reported.

“[T]he industry should push hard to make sure the SBA accepts the fraud risk,” Reese Howell, CEO of Celtic Bank, said in an internal email obtained by the subcommittee.

The report also cited a September 2020 email in which Kabbage’s head of policy wrote: “At the end of the day, it’s the SBA’s sh***y rules that created fraud, not [Kabbage].” 

A spokesperson for Bluevine told Reuters the company “has remained committed to establishing and maintaining robust internal controls and governance processes" since its founding in 2013. 

A Celtic Bank spokesperson told the wire service the bank "made extensive and effective” efforts to combat fraud, “as recognized in the report.” 

Impact on future programs

The report follows an SBA proposal to end a 40-year moratorium on admitting new nonbank lenders to its flagship 7(a) lending program, a move that would allow fintech firms to participate for the first time. 

The report’s authors, however, urged Congress and the SBA to exercise caution when weighing whether fintechs should be involved in future government lending programs.  

“Based on these findings, Congress and the SBA should consider carefully whether unregulated businesses such as fintechs, many of which are not subject to the same regulations as financial institutions, should be permitted to play a leading role in future federal lending programs,” the report’s authors wrote. “In addition to requiring stricter oversight during emergency programs, the experience of the PPP should inform the SBA’s ongoing activities.” 

Greater oversight by the SBA must accompany any expansion of the agency’s programs to unregulated lenders or agents, the authors wrote.

JPMorgan Chase, Bank of America and Wells Fargo are in advanced discussions to create standardized refund procedures for customers scammed through Zelle, the bank-owned peer-to-peer (P2P) payments network, unnamed sources told The Wall Street Journal.

The new refund rules are aimed at boosting security and trust in the platform, sources told the Journal. Zelle is owned by a consortium of seven of the nation’s largest banks and operated by Early Warning Services.

The effort comes as lawmakers have zeroed in on Zelle in recent months, accusing the platform’s owners of creating a payments network that is rife with fraud, and not doing enough to refund customers duped into sending money to scammers.

Under new rules being discussed, banks would share liability inside Zelle’s system for customers who are scammed, and guarantee to reimburse one another, sources told the Journal.

A customer who is tricked into sending funds would receive a refund from the financial institution that houses the deposit account where the money was sent, the sources said.

The banks that own EWS are testing the refund procedure and could implement the rule as soon as early 2023, sources said. 

The rules won’t apply to customers seeking refunds for goods or services they claim they didn’t receive, or for people whose errant payments are the result of typos, the sources told the Journal. 

Once implemented, firms that participate in Zelle would have to comply with the new rules or risk being kicked out of the network, sources said.

More than 10,000 financial institutions participate in the Zelle network, which recorded 1.8 billion transactions in 2021, according to EWS.

During a congressional hearing in September, Senate Democrats pressed the CEOs of the nation’s largest retail banks to answer for scams associated with Zelle, and called for the institutions to implement policies to protect and redress customers defrauded through the platform.

Sen. Elizabeth Warren, D-MA, who has emerged as the platform’s staunchest critic, called the network “unsafe,” claiming Zelle users were defrauded out of $500 million last year.

“You have created a perfect weapon for criminals to use and they have used it and you have not stood behind your customers,” she told the witnesses at the September hearing, which included the CEOs of JPMorgan Chase, Bank of America, Wells Fargo, Citi, Truist, PNC and U.S. Bank. Six of those banks — all but Citi — share in the ownership of Zelle, along with Capital One.

Warren has also called on the Consumer Financial Protection Bureau to bolster regulations governing how banks reimburse scammed customers defrauded on the platform.

But bank trade groups have cautioned the bureau against taking steps that would shift liability for Zelle fraud to banks.

“Shifting liability for payments the customer has authorized and later claims were made to a scammer will harm consumers in the form of higher costs, fewer options, and less competition,” the American Bankers Association wrote in a letter to CFPB Director Rohit Chopra in October.

The group also claimed disputes and complaints about P2P payments are uncommon, especially for Zelle payments when compared to nonbank P2P products.

“As noted, 99.9 percent of the 5 billion Zelle transactions processed in the past 5 years were sent without any report of fraud or scams,” the ABA wrote.

EWS, which operates Zelle, did not return a request for comment by press time.

Sponsored content

By Ubiquity

Despite industry and IRS gains in the fight against tax refund fraud and its ripple effects prior to 2020, the pandemic ushered in a new era of fraud.

Surges in account takeover losses (up 90%) and first-party fraud (54%), have significant downstream impacts, including rising dispute volume. In fact, the cost for banks to manage fraud has ballooned 22.4% since early 2020, up to $4.36 for every $1 lost to fraud, according to LexisNexis survey data. 

Fraudsters and customers are double-dipping

What we’ve seen in our work with digital banking clients is that fraudsters are getting more sophisticated in their attacks and doing more damage (or trying to) within the dispute process. First-party fraud, sometimes called “friendly fraud,” in which a real customer disputes legitimate transactions, may also contribute to significant dispute volume, depending on your customer base. 

Both third-party fraudsters and customers who are trying to game the system have begun to not only file fraudulent claims, but we’re seeing an uptick in people who will:

• file a claim
• spend the provisional credit funds
• and then immediately file a dispute on those transactions as well. 

That double-dipping is also happening in tax refund fraud situations where the stolen deposit is loaded to the account, fraudsters spend it, dispute the transactions, receive provisional credit while the claim is being investigated, spend the funds and then file more disputes. 

Evolving tactics

Fraudulent ATM disputes could be considered a classic scheme, but we're seeing added layers of complexity. For example, fraudsters are better at spreading out their network geographically, stealing cards from mailboxes, activating them and then filing a lot of disputes. 

On the friendly fraud side, people are sharing tips on social media for abusing the dispute process to “get quick cash.” Cardholders are using obvious form letters copied from online sources to file their claims.

Another trend that’s growing in popularity is online recruitment. Fraudsters will offer to buy dormant accounts in exchange for gift cards. Then the fraudster will dispute old purchases, which can lead to significant negative balances when the claims are finalized.

What to do about it

Obviously preventing fraud is more effective than dealing with it on the backend; however, with the dispute process being abused by cardholders and criminal fraudsters, mitigating losses while protecting legitimate consumers is critical. 

Here are three strategies to help stem the tide:

1. Speed up the process. Finalize most claims within two to three days.

Accelerating the investigation and resolution process helps prevent issuing provisional credits on fraudulent claims. Once that money is out the door, it’s not likely coming back. If applicable, contact the merchant or file a chargeback on day 1. 

In addition to fending off fraudsters and abusers, speeding things up also improves the customer experience. It’s definitely helped our clients, many of whom consistently rank high in Net Promoter Scores and customer satisfaction within the dispute process. 

But speed can also increase the possibility for compliance or other errors. So, you have to also move smarter. 

2. Segment your teams by claim type and risk profile: Segmenting by claim type (ATM non-dispense, P2P payments, unauthorized transaction, etc.) and risk profile (geography, dollar value)—and having one investigator handle the claim from start to finish—can boost productivity and compliance. 

For some clients we’ve reduced overall headcount because of productivity gains. Just be certain to apply your segmentation across the board rather than at the customer level, which could violate Unfair, Deceptive, or Abusive Acts, or Practices (UDAAP) rules.

3. Establish a fraud review team within the disputes operation

We also recommend setting up a specialized fraud review team within the dispute operation that proactively monitors and analyzes data to identify patterns of suspicious or suspected fraudulent activity. 

It’s essential to look for patterns (i.e., by merchant, by claim type, by geography, etc) and seek to understand them on a daily basis. Having a better understanding of how dispute trends are changing in real time will provide a framework not only for responding to fraud, but also for ensuring that the team is adequately resourced and organized.

For more tips, watch the video of our webinar: Tax refund fraud & dispute trends: How to mitigate losses amid the surge.

1. https://javelinstrategy.com/press-release/identity-fraud-losses-total-52-billion-2021-impacting-42-million-us-adults
2. https://solutions.transunion.com/global-digital-fraud-trends/

New York Attorney General Letitia James filed a lawsuit  in January against Alex Mashinsky, co-founder and former CEO of cryptocurrency exchange Celsius, alleging he defrauded hundreds of thousands of investors out of billions of dollars in cryptocurrency.

The suit, filed in New York Supreme Court, alleges Mashinsky misrepresented his exchange’s safety to attract billions of dollars in digital assets from investors. As Celsius hemorrhaged money from risky investments, Mashinsky hid the exchange’s financial condition from those investors, James said.

James seeks to require Mashinsky, who did not register as a salesperson for Celsius or as a securities and commodities dealer, to pay damages, restitution and disgorgement. She also seeks to prohibit him from doing further business in New York.

Mashinsky claimed numerous times that Celsius was “safer than a bank,” James’ lawsuit said, adding that investors were promised high yields. Celsius, however, was not subject to the regulatory requirements of banks and did not offer the same protections.

Celsius filed for bankruptcy in July, and Mashinsky stepped down as CEO in September after calls from investors to let go of the reins.

Of the hundreds of thousands of investors affected by Celsius’ collapse, James’ lawsuit alleges that 26,000 were in New York. One, she noted, was a disabled veteran who lost $36,000, which he’d spent a decade saving. Another was a New Yorker who mortgaged two properties to invest in Celsius.

“As the former CEO of Celsius, Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” James said in a statement. “The law is clear that making false and unsubstantiated promises and misleading investors is illegal.”

Celsius did not return a request for comment by press time.

James’ suit against Mashinsky is hardly surprising given her actions against crypto companies in the past two years. She sued crypto platform Nexo in September for allegedly defrauding investors, and reached a $1 million settlement with now-bankrupt BlockFi for offering unregistered securities in June.

“Over and over again, investors are losing billions because of risky cryptocurrency investments,” she said in a June warning to investors. “Even well-known virtual currencies from reputable trading platforms can still crash and investors can lose billions in the blink of an eye.”

Stablecoins Terra and Luna had depegged from the U.S. dollar a month earlier, triggering a wave of losses in the crypto market that encompassed hundreds of billions of dollars.

James issued a notice in October 2021, directing unregistered crypto lending platforms to cease operations. Nexo, one of James’ targets, agreed in December to cease U.S. operations.

JPMorgan Chase in January shut down the website for Frank, the college financial planning platform it bought for $175 million in September 2021.

"Frank is no longer available,” the website reads. "To file your Free Application for Federal Student Aid (FAFSA), visit StudentAid.gov."

JPMorgan sued Frank’s founder, Charlie Javice, and a second executive in December in federal court in Delaware, accusing Javice of vastly exaggerating the platform’s customer base, then creating fake student accounts to back up her claims.

In pitch materials and verbal presentations, Javice claimed Frank had 4.25 million users, but the platform’s actual customer base numbered fewer than 300,000, the bank said in its suit, filed Dec. 22.

"To cash in, Javice decided to lie, including lying about Frank's success, Frank's size, and the depth of Frank's market penetration in order to induce JPMC to purchase Frank," the bank said in its suit, according to CNBC.

When JPMorgan asked Javice to share Frank’s customer list, she first said she couldn’t because of privacy concerns, the bank said.

“After [JPMorgan] insisted, Javice chose to invent several million Frank customer accounts out of whole cloth,” JPMorgan said, according to The Wall Street Journal.

JPMorgan realized there were errors with the user list when it sent marketing emails to a batch of 400,000 Frank customers, and roughly 70% of the emails bounced back, the bank said in its suit.

Javice’s suit

Javice, for her part, sued JPMorgan in Delaware Chancery Court, alleging the bank launched an internal investigation of the Frank deal last spring, then fired her in November from her role as head of student solutions to get out of paying her a $20 million retention bonus, Bloomberg reported.

In her suit, Javice called the investigations “groundless” and said the bank “manufactured a for-cause termination in bad faith,” according to The Wall Street Journal.

"After JPM rushed to acquire Charlie's rocketship business, JPM realized they couldn't work around existing student privacy laws, committed misconduct and then tried to retrade the deal," attorney Alex Spiro, who is representing Javice, told the publication. "Charlie blew the whistle and then sued.”

Javice “was not and is not a whistleblower,” Pablo Rodriguez, a JPMorgan spokesperson, told CNBC in a statement. “Any dispute will be resolved through the legal process.”

Olivier Amar, the second executive named in JPMorgan’s suit, could not be reached by The Wall Street Journal. An attorney for Amar could not be identified by Bloomberg.

The customer list

After JPMorgan asked for a Frank customer list, Javice asked her engineering chief to create "fake customer details,” including names, birthdays and schools they attended, using algorithms, the bank alleges in its suit. 

When the engineer refused, Javice and Amar hired a data science professor at a New York-area college to create the accounts, the bank said. The professor is not named in the suit and was allegedly paid $18,000.

JPMorgan included in its suit emails between Javice and the professor, which the bank could access because it had acquired Frank’s technology systems, CNBC reported.

“Our plan was to sample first name and last name independently and then ensure none of the sampled names are real,” the professor wrote to Javice, according to the suit.

In one exchange, Javice allegedly asked the professor: "Will the fake emails look real with an eye check or better to use unique ID?" 

Embarrassing episode

The Frank dust-up is an embarrassing development for JPMorgan, which, when it acquired the startup, trumpeted its “desire to have lifelong, engaged relationships with all of our customers.”

“Charlie and her team have built an amazing connection to the student population,” Jennifer Roberts, JPMorgan’s head of consumer banking, said in 2021. JPMorgan had exited the private student-lending space in 2013.

It wouldn’t be JPMorgan’s first egg-face episode over its dealings outside of banking. The bank faced brutal backlash in 2021, when it agreed to underwrite up to $4.8 billion toward a breakaway European soccer league that crumbled before even one match was played.

Regulations prohibit JPMorgan from acquiring additional U.S.-based deposit-taking institutions because the bank already holds more than 10% of U.S. deposits. Nonetheless, CEO Jamie Dimon pledged in 2020 to be “much more aggressive with acquisitions across the board.”

JPMorgan, in 2021 and 2022, made a series of banking-adjacent acquisitions, including restaurant platform The Infatuation, British digital wealth-management platform Nutmeg and a 49% stake in the Greek fintech Viva Wallets.

JPMorgan is seeking material damages in the Javice suit "in an amount to be proven at trial, but not less than $175 million," the bank said, according to CNBC.

But observers have asserted the bank may want to reflect on whether it suffers from lax due diligence or overspending.

“They are blaming straight fraud, which could be true, but that means their vetting teams need to be better detecting this,” David Donovan, an executive vice president at technology-consulting firm Publicis Sapient, told Bloomberg.

Dimon, on a fourth-quarter earnings call in January, defended the bank’s centralized team responsible for performing due diligence, saying they’ve “been doing it for 20 years.”

Dimon characterized the Frank acquisition as “a huge mistake,” but also reinforced the bank’s strategy, saying he doesn’t want JPMorgan to be so “terrified of errors that we don’t do anything,” Bloomberg reported.

JPMorgan’s estimate that it would spend $77 billion last year drew rebukes from analysts. The expenses — meant to boost the bank’s technology, compete for talent and build out its offerings — marked an 8.6% increase over 2021.

Wells Fargo analyst Mike Mayo said the Frank deal “raises to the fore questions about whether JPMorgan is spending too much too fast.”

“The purchase price is less than half of 1% of this year’s earnings, but it still stands as a potential microcosm of a broader issue that perhaps JPMorgan is wasting more money than desired as it pursues such aggressive spending,” Mayo told Bloomberg.

Crypto bank Anchorage Digital announced eight executive moves in January designed to boost the company’s compliance.

The bank hired Mark duBose to serve as its chief compliance and risk officer. He previously filled similar roles at Circle and Centre, and spent two years as Santander’s Boston-based chief operational risk officer. He also worked for four years as a senior vice president at Bank of America, according to his LinkedIn profile.

Rachel Anderika, previously Anchorage Digital’s chief risk officer, will become the bank’s chief operating officer. In that role, she will manage Anchorage Digital’s day-to-day bank operations, including new asset support, tech infrastructure, model development and planning, the bank said.

Anderika and duBose’s appointments are pending supervisory non-objection from the Office of the Comptroller of the Currency.

Anchorage Digital hired Dustin Palmer to serve as its interim Bank Secrecy Act officer. Palmer comes to the digital bank from Berkeley Research Group, where he serves as managing director of its financial institutions advisory service. Anchorage Digital wants Palmer to further develop its anti-money laundering controls. Palmer has significant legal experience in government, having served as an attorney for the Department of Homeland Security and as a senior adviser to the Treasury Department’s general counsel on financial crimes enforcement, AML and countering the financing of terrorism, according to his LinkedIn profile.

Anchorage Digital also hired Frieder Weichelt as its chief information security officer. Weichelt previously served as chief risk officer at the crypto platform BitGo.

The executive moves come roughly nine months after the OCC ordered Anchorage Digital to overhaul its AML program and hire a BSA officer. The regulator found the bank failed to implement internal controls for customer due diligence and procedures for monitoring suspicious activity. Anchorage Digital also had failed to implement adequate BSA training for its staff, the OCC said.

In a January statement, the bank affirmed it has “set out to meet the highest regulatory requirements, and [is] committed to continuing to work aggressively to do so.”

“We’re reinforcing our commitment to strong regulatory standards and controls today by ushering in new leadership and capabilities that advance a forward-thinking path for regulated crypto,” the bank said.

Anchorage Digital became the first crypto firm to receive a national trust bank charter in January 2021.

For his part, Anchorage Digital CEO Nathan McCauley touched on the timeliness of the C-suite changes.

“Recent market events have reaffirmed what we have long believed: that security and regulation are key to increasing trust in the crypto economy,” he said. “Selecting a federal charter has been the cornerstone of our mission to best protect our clients, and we believe the addition of these members to our team is just the latest step in our longstanding commitment to compliant, secure-by-design digital asset banking.”

The bank named four other executives to new roles. Mo Abdoolraman, an alum of Chime, Goldman Sachs and Citi, will serve as Anchorage Digital’s interim head of know-your-customer. 

Daniel Sankey will lead Anchorage Digital’s financial intelligence unit. Sankey previously served as head of financial crimes compliance at Brex and has held various BSA compliance, reporting and investigative roles at Coinbase, Square and Wells Fargo. 

Anchorage Digital also named Scott Schwartz as its deputy BSA officer, in addition to retaining his duties as Office of Foreign Assets Control officer. 

Jessica Perkins will become Anchorage Digital’s enterprise risk management lead, expanding on her role overseeing third-party risk management, the bank said.

Charlottesville, Virginia-based Blue Ridge Bank named Kirsten Muetzel, a 10-year veteran of the Federal Reserve, as president of its fintech division, the bank announced in January.

The move comes roughly four months after the Office of the Comptroller of the Currency ordered the bank to improve its oversight of third-party fintech partnerships.

Blue Ridge and another Virginia-based bank, FVCB, terminated a planned merger in January 2022, about two months after delaying the transaction over “certain regulatory concerns” the OCC found with Blue Ridge.

“Kirsten is a respected thought leader in the industry, and she brings the perfect combination of banking supervision experience coupled with fintech industry knowledge and business acumen,” Blue Ridge CEO Brian Plum said in a statement. “Kirsten will be instrumental as we continue building the necessary infrastructure to support current partnerships while preparing the foundation upon which to build future success.”

Muetzel served in a host of roles for the Federal Reserve Bank of San Francisco between 2008 and 2019. She specialized in financial sector policy and analysis and counterparty credit risk analysis before serving as chief of staff for the region’s financial institutions supervision and credit unit, and capping her tenure as a central point of contact, according to her LinkedIn profile. 

She later served as head of finance for two fintechs, Metal and EarnUp, and chief risk officer for two more: Synctera and Fundid. Muetzel also spent more than three years focused on capital raising and mergers-and-acquisitions advisory services at Goldman Sachs.

At Blue Ridge, Muetzel is set to manage a portfolio of partners, strengthen regulatory compliance and advance the bank’s banking-as-a-service strategy. 

“There continue to be significant opportunities for banks to develop relationships with fintech firms and create new revenue streams while in turn enhancing products and services to existing customers,” Muetzel said. “Many of these fintech arrangements are focused on improving access to financial services, which can make a real difference in someone’s day-to-day life, and thereby inspires me.”

Under the OCC’s order, Blue Ridge must obtain the regulator’s non-objection before entering into any new contracts with fintech partners or adding new products in cooperation with existing partners.

The bank also agreed to show, in an “action plan,” how it would better monitor suspicious activity, including “high risk customer activity involving … third-party fintech partners.”

A Blue Ridge-appointed compliance committee must also provide quarterly details of corrective actions the bank intends to implement, the timelines to complete them, the names of the people responsible and status updates on those measures.

Appointing a fintech division chief presumably puts a new name atop that list.

A jury in a Minnesota bankruptcy court in November ordered BMO Harris Bank to pay $564 million in damages in connection with a Ponzi scheme orchestrated by a client of a bank BMO acquired.

BMO plans to “file a number of post-trial motions … to reverse the verdict or reduce the damages, and we intend to pursue all avenues” to overturn the outcome, including appealing the case to the 8th U.S. Circuit Court of Appeals, the bank said in a statement.

The bank will take a C$1.12 billion ($833.6 million) charge from the judgment — a total that includes interest payments it may have to make. That will result in a $617.8 million after-tax charge to be recorded in 2022’s fourth quarter, BMO said.

The jury found BMO Harris — the U.S. arm of Canadian lender Bank of Montreal — liable for aiding and abetting breach of fiduciary duty, but not liable on three other counts, including aiding and abetting fraud.

The $564 million payout breaks down to $484.2 million in compensatory damages and $79.5 million in punitive damages. The compensatory damages total roughly one-quarter of the $1.9 billion sought by a trustee in bankruptcy proceedings for companies controlled by Tom Petters, who was convicted in 2009 of masterminding a $3.7 billion Ponzi scheme and sentenced to 50 years in prison.

"It has been a long, 14-year road to this verdict, and we are extremely pleased with the jury's decision to hold BMO Harris Bank accountable for its role," Michael Collyard, a partner at Robins Kaplan who represented the plaintiffs, told American Banker in a statement. "This is a fantastic result for the trust pursuing recovery for the people who lost money in this fraud.”

Collyard said the prejudgment interest his client seeks could boost the award to more than $1 billion, according to The Globe and Mail. Collyard added he intends to seek 10% annual interest.

BMO Harris, however, asserted it is entitled to recover about 21% of the amount paid to the trustee.

“We are confident that we have strong grounds for appeal,” the bank said, adding the verdict “is not supported by the evidence or the law.”

The ruling spotlights the risks banks take when acquiring other institutions — and the culpability they may endure after they absorb them.

Bank of America, for example, in October agreed to pay $1.84 billion to bond insurer Ambac Financial Group to settle a lawsuit connected to securities backed by loans underwritten by Countrywide Financial, which the bank bought in 2008.

The lawsuit against BMO Harris originated in 2012 and sought to recoup $1.9 billion — an amount the trustee based on sums Petters transferred from an account at Milwaukee-based Marshall & Ilsley Bank, which BMO bought in 2011.

That money became unavailable for repayment to creditors when the fraud was uncovered in 2008, the trustee said, according to Reuters.

The trustee argued that Marshall & Ilsley facilitated what was, at the time, the largest Ponzi scheme in history — since surpassed by the Bernie Madoff scam. 

The bank stood by as Petters moved tens of millions of dollars into and out of his corporate and personal accounts, the trustee alleged. The pattern of money movement was wholly inconsistent with what Marshall & Ilsley understood to be the business model of Petters’ companies, the trustee asserted.

In 2019, a bankruptcy court judge ruled that Marshall & Ilsley destroyed computer backup tapes in 2010 and 2011 that likely contained documents and memos concerning the Petters accounts.

BMO Harris employees in 2014 found some tapes that may have contained evidence, but falsely told the court that the tapes were gone, the judge said.

The bank “has failed to be candid and has fought discovery at every step … has lied to this court and has attempted to hide evidence on several occasions,” the judge said, according to The Globe and Mail.

BMO Harris has denied the allegations.

During a civil trial that began in October, a district court judge told jurors they could draw an adverse inference about BMO Harris because of the finding that certain evidence had been destroyed, American Banker reported. But, at the same time, jurors were not required to make that connection.

The ruling comes also as BMO awaits regulatory approval of its proposed $16.3 billion acquisition of Bank of the West from BNP Paribas. (Update: The Federal Reserve and Office of the Comptroller of the Currency approved that deal in January 2023.)

Coinbase has agreed to pay $100 million to settle allegations from New York's Department of Financial Services that failures in the cryptocurrency exchange’s compliance program made it “vulnerable to serious criminal conduct, including … fraud, possible money laundering, suspected child sexual abuse material-related activity, and potential narcotics trafficking,” the regulator announced in January.

Under the agreement, Coinbase will pay a $50 million penalty and invest another $50 million to improve its compliance function over the next two years.

Specifically, Coinbase’s transaction monitoring system, which flags suspicious activity, saw a backlog that grew to more than 100,000 unreviewed alerts in late 2021, the regulator found. That prevented the company from filing timely suspicious activity reports, and at times, potentially concerning activity went uninvestigated for months, NYDFS said.

“Coinbase failed to build and maintain a functional compliance program that could keep pace with its growth,” NYDFS Superintendent Adrienne Harris said in a statement.

Coinbase’s platform saw 25 times the level of transaction activity in November 2021 that it did in January 2020, NYDFS found. The company also saw 15 times as many customer signups by May 2021 as it had in January 2020, the regulator noted, and a backlog of 14,000 customers needing enhanced due diligence had gone unaddressed.

That required NYDFS to install an independent monitor in early 2022, Harris said. Under the settlement, the monitor will continue to work with Coinbase for another year — and possibly more, if the regulator deems it necessary.

Coinbase’s customer onboarding requirements were treated as a “simple check-the-box exercise,” NYDFS said in a press release.

“It is critical that all financial institutions safeguard their systems from bad actors, and the Department’s expectations with respect to consumer protection, cybersecurity and anti-money laundering programs are just as stringent for cryptocurrency companies as they are for traditional financial services institutions,” Harris said.

In a blog post, Coinbase Chief Legal Officer Paul Grewal said the company has “taken substantial measures to address these historical shortcomings and remains committed to being a leader and role model in the crypto space.”

Grewal said he believes the company’s compliance investment “outpaces every other crypto exchange anywhere in the world” and that customers should feel safe while using the platform.

Regulators have observed problems within Coinbase’s AML controls as far back as 2018, a year after it became licensed to transmit money in New York state, The New York Times reported.

Coinbase’s penalties come at a time when regulators have crypto in their cross-hairs. The Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued a joint statement in January, warning banks of “a number of key risks associated with crypto-assets and crypto-asset sector participants.”

Former FTX CEO Sam Bankman-Fried pleaded not guilty in January on eight charges including wire fraud and conspiracy to commit campaign finance violations in U.S. district court in Manhattan.

Bankman-Fried, who is accused of defrauding investors and diverting billions of dollars in FTX customer deposits to sister company Alameda Research, entered the plea following the spectacular collapse of his cryptocurrency exchange that has since led to further challenges in the broader crypto market.

U.S. District Judge Lewis Kaplan said he was “shooting” to put Bankman-Fried on trial Oct. 2, but that he “may move that a day or so later or earlier,” according to Inner City Press.

Bankman-Fried has owned up on Twitter to “fuck[ing] up,” and claimed at the New York Times DealBook Summit in December that he “unknowingly commingled funds.” However, he’s said publicly he doesn’t think he “personally” has criminal liability in FTX’s downfall.

Bankman-Fried pleaded not guilty to conspiracy to commit wire fraud on customers, wire fraud on customers, conspiracy to commit wire fraud on lenders, wire fraud on lenders, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering and conspiracy to defraud the U.S. and violate campaign finance laws. 

In addition to the criminal charges, Bankman-Fried also faces charges of securities violations from the Securities and Exchange Commission and a lawsuit from the Commodity Futures Trading Commission.

Bankman-Fried was arrested Dec. 12 in the Bahamas — a month and a day after FTX filed for Chapter 11 bankruptcy protection. He spent a number of days in jail before extradition to the U.S. on Dec. 21. Soon after his extradition, Bankman-Fried posted $250 million bail.

“[T]his was not a case of mismanagement or poor oversight, but of intentional fraud, plain and simple,” U.S. Attorney Damian Williams said Dec. 13, of Bankman-Fried’s actions.

“Bankman-Fried knowingly defrauded the customers of FTX.com through the misappropriation of the customer deposits to pay expenses and debts of a different company he also owned as well as make other investments,” FBI Assistant Director Michael J. Driscoll said in the same release.

The former FTX CEO, who at one time had a net worth of $26 billion, has been required to wear a monitor and live with his parents, Joseph Bankman and Barbara Fried, at their California home.

Bankman-Fried’s lawyers told Kaplan that both Bankman and Fried have been subject to harassment since posting their son’s bond and requested that two remaining sureties remain anonymous to the public because of a "steady stream of threatening correspondence,” that his parents have received, including “a desire that they suffer physical harm.”

Kaplan has granted the lawyers’ request.

Bankman-Fried’s not guilty plea follows guilty pleas by former FTX Chief Technology Officer and co-founder Gary Wang and former Alameda Research CEO Caroline Ellison, who face 50 years and 110 years in prison, respectively. 

The charges leveled against Ellison include wire fraud and wire fraud conspiracy against FTX and Alameda Research customers, conspiracy to commit commodities and securities fraud, and conspiracy to commit money laundering. Wang is charged with wire fraud, wire fraud conspiracy, and conspiracy to commit commodities and securities fraud.

Ellison and Wang are reportedly cooperating with the Justice Department and the SEC.

The Consumer Finance Protection Bureau has received 8,300 crypto-asset complaints since October 2018 with the majority of those in the past two years, according to a November bulletin.

Consumers listed fraud and scams as the main issue in 40% of the crypto-related complaints registered since October 2018, the agency said.

“Our analysis of consumer complaints suggests that bad actors are leveraging crypto-assets to perpetrate fraud on the public,” CFPB Director Rohit Chopra said in the bulletin. “Americans are also reporting transaction problems, frozen accounts, and lost savings when it comes to crypto-assets.”

Complaints surged with the rise of price volatility and the adoption of crypto assets in recent years, the bureau said.

The bulletin comes in the wake of a proposed — and later canceled — acquisition of crypto exchange FTX by competitor Binance. 

Binance CEO Changpeng Zhao said Nov. 8 he would bail out FTX amid a “liquidity crunch.” Zhao reversed course the next day, after looking at FTX’s balance sheet. (FTX would file for bankruptcy protection on the day this story was published.)

The Securities and Exchange Commission, Commodity Futures Trading Commission, and Justice Department, incidentally, are investigating whether FTX improperly handled customer funds.

The drama that unfolded on social media prompted Rep. Patrick McHenry, R-NC, the ranking member of the House Financial Services Committee, to ask for tougher regulations around digital assets.

Money transmission licenses primarily regulate most cryptocurrency exchanges at the state level, but there is a lapse from the federal government, American Banker reported. Many businesses dealing with digital assets are registered with the Financial Crimes Enforcement Network, but not all follow the anti-money laundering guidelines the agency issues.

Poor customer service was the common theme running through most of the complaints, the CFPB found. Transactional issues made up one-quarter of the complaints, while lack of availability when needed made up 16%.

“Hacks by malicious actors have marred crypto-assets, and led to significant financial loss by consumers with no recourse for recovering stolen funds,” the bulletin indicated.

Fraudsters know their way around crypto exchange platforms and can obscure their movement of crypto assets to other accounts making it difficult and time-consuming for regulators and law enforcement to trace the stolen crypto assets, the CFPB said.

The bureau also cautioned against romance and “pig butchering” scams, and other tricks employed by “malicious actors” to extort money. Since there are no government agencies or financial regulators to insure crypto assets, clients must rely on the online resources of the Federal Trade Commission and the CFPB to identify scams, the agency said.

“People should be wary of anyone seeking upfront payment in crypto-assets, since this may be a scam,” Chopra said. “We will continue our work to keep the payments system safe from fraudsters targeting Americans.”