Washington, D.C. (Feb. 26, 2014) – Today, Senator Jeff Merkley (D-OR), Chairman of the Banking Committee’s Economic Policy Subcommittee, and Representative Elijah E. Cummings (D-MD), Ranking Member of the House Committee on Oversight and Government Reform, along with 11 additional Members of Congress, sent a letter to Attorney General Eric Holder requesting that the Department of Justice (DOJ) continue to crack down on banks and third-party payment processors that facilitate financial scams and predatory payday lending. 

“Banks and third-party payment processors play a central role in the operation of the payment system, and all Americans depend on the vigilance of banks and payment processors to ensure they do not become unwitting victims of fraudulent schemes,” they wrote. “The Department plays a critical role in ensuring system-wide compliance with anti-fraud, anti-money-laundering, and related laws, especially as they apply to the unique risks associated with our payments system, and we urge the Department to continue its vigorous oversight.”

Their letter highlights a number of practices commonly used by scam artists and urges DOJ to “enforce vigorously” the laws requiring banks and other financial institutions to be on the lookout for and report “red flags” that may indicate illegal conduct.

Additional signers on the letter were Senators Tom Udall (D-NM), Dick Durbin (D-IL), Mazie Hirono (D-HI), Elizabeth Warren (D-MA), and Richard Blumenthal (D-CT), and Representatives Maxine Waters (D-CA), George Miller (D-CA), John Conyers, Jr. (D-MI), Henry Waxman (D-CA), Suzanne Bonamici (D-OR), and Allyson Y. Schwartz (D-PA).

The full text of the letter is below:

Dear Attorney General Holder:

We write today to encourage the Department of Justice (the Department) to continue a vigorous review of potential payment fraud, anti-money-laundering violations, and other illegal conduct involving payments by banks and third-party payment processors. We believe this review is particularly important to preventing banks and third-party payment processors from facilitating illegal lending, such as predatory payday lending.  Stopping that facilitation, along with preventing other payment system violations, is vital to protecting consumers across the country and especially in many of the states we represent, where state laws outlaw abusive lending practices.

The nation’s payment system, which clears millions of transactions every day, is the backbone of the U.S. financial and economic infrastructure.  Banks and third-party payment processors play a central role in the operation of the payment system, and all Americans depend on the vigilance of banks and payment processors to ensure they do not become unwitting victims of fraudulent schemes.

Because of the importance of this task, the law obligates banks and payment processors to be on the lookout for “red flags” that may indicate a payment is improper or illegal.  Department enforcement plays a critical role in ensuring banks and payment processors meet these legal obligations.  Unfortunately, recent cases demonstrate the seriousness of the consequences when those obligations are not met.[1]  Accordingly, we urge the Department to enforce vigorously applicable laws pertaining to payment fraud, money-laundering, and other illegal payments, and we highlight below several issues of particular concern.

For example, know-your-customer obligations are critical to ensuring that banks do not process payments for unlawful purposes, such as consumer scams, money-laundering, or unlawful payday lending.[2]  The states we represent have passed strong consumer protection laws that require small dollar lenders to be licensed and impose caps on rates those lenders can charge.  Accordingly, when banks and payment processors process payments for small dollar lenders, know-your-customer due diligence should include a review of whether the lenders hold all required state licenses and lend in conformity with state laws.

We are also concerned by lenders’ growing use of “lead generators” to develop business.  Lead generators do not make loans but instead collect and auction a consumer’s application to the highest bidder.[3]  In some cases, this auction process can result in predatory payday lending that does not comply with state law.  In other cases, consumer information is purchased by entities that fraudulently attempt to collect “debts” the consumer does not owe.  Given this history, payments that are connected to lead generation should be closely scrutinized.

High rates of returned, contested, or otherwise failed debits or the regular use of remotely created checks may also be signs of payment fraud and related violations by the banks or processors that encounter them.  In some scams, fraudsters deceive consumers into believing that they are taking out a one-time loan with a one-time payment but their accounts are then repeatedly debited, even after the consumer has sought to stop payment or even close the account. 

Finally, failure to incorporate or maintain a business presence in the U.S. can also be indicative of fraud and other payment system violations, including money-laundering.  The use of shell entities or other business structures that seek to evade relevant federal and state law is particularly problematic as that can make it difficult for law enforcement and regulators to do their jobs. 

Banking regulators have appropriately deemed processing payments for many payday lenders as a “high risk” activity for banks.[4]  The Department plays a critical role in ensuring system-wide compliance with anti-fraud, anti-money-laundering, and related laws, especially as it applies to the unique risks associated with our payments system and we urge the Department to continue its vigorous oversight. 

Thank you for your time and continued attention to this issue.