Overview of Federal Banking Regulations

by Tal Lifshitz | June 2019

Charles PonziFraudsters cannot act alone to perpetrate their schemes. They universally require professionals — banks, accountants, law firms, or a combination of all of the above — to provide legitimacy and enable a fraud to survive.

To address the reality that banks in particular are often integral to a fraudulent scheme, federal law requires banks to monitor, recognize, and report suspicious account activity. Federal law requires banks to know their customers and understand their banking behavior. Banks must develop a customer due diligence program that both assists in predicting the types of transactions, dollar volume, and transaction volume each customer is likely to conduct, as well as provides the bank a way to identify unusual or suspicious transactions for each customer. Banks and their personnel also must be able to identify and take appropriate action once put on notice of any of a series of money laundering “red flags” set forth in the Federal Financial Institutions Council’s Bank Secrecy Anti-Money Laundering Examination Manual – those “red flags” include: (1) repetitive or unusual fund transfer activity; (2) fund transfers sent or received from the same person to or from different accounts; (3) transactions inconsistent with the account holder’s business; (4) transfers of funds among related accounts; (5) loans that are secured by account deposits; (6) loans that lack a legitimate business purpose, provide the bank with excessive fees for assuming little or no risk, or obscure movement of funds; and (7) multiple accounts established in various corporate names that lack sufficient business purpose to justify the account complexities. Banks also generally have an obligation pursuant to internal policies, industry standards, and regulatory guidelines to refrain from participating in suspicious transactions.

Nevertheless, time and again banks are found to have failed to take appropriate action in spite of red flags, or to have knowingly aided and abetted wrongdoing. There are various reasons why banks knowingly participate in such schemes: to preserve their role as banker to an important client; for gifts or outright fraudulent payments; or simply to boost a bank employee’s performance for increased compensation and fees.

Regardless of the motive, banks can be and are regularly held liable for their knowing assistance to a fraudulent scheme.

Kozyak Tropin & Throckmorton

Tal Lifshitz
Tal concentrates on complex litigation while specializing in class actions, financial fraud, and Ponzi schemes. Prior to joining the firm he served as a judicial law clerk to the Honorable Kenneth A. Marra, and currently serves as a Director of the Board for the South Florida Chapter of the Federal Bar Association.

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