In October 2021, two years after private investor Francois Legendre bought Vermont State Bank and installed lifelong banker Gary Rever as chairman, the tiny, one-branch lender in rural Illinois ventured into a pair of potentially lucrative, but high-risk lines of business.
By August 2022, the two lines—remote deposit capture, or RDC, and remote check creation, or RCC—had come to account for 10 percent of the lender’s revenue despite consisting of only two clients, both hundreds of miles away in Florida. They also drew the attention of the Federal Deposit Insurance Corp., which began an examination of the bank that month.
Vermont State Bank had three compliance officers on staff at the time of the examination, according to the FDIC, but an executive committee consisting only of Legendre, Rever and Thomas Haley, the bank’s president, oversaw “all aspects” of the lender’s efforts to guard the RDC and RCC programs from exploitation by money launderers and other criminals.
In a notice of hearing issued to the bank in July, the FDIC found that neither the compliance officers nor the executive committee had the training, knowledge and experience necessary to ensure the programs complied with anti-money laundering and counterterrorist financing rules.
“RDC and RCC may expose financial institutions to various risks, including money laundering, fraud, information security and illicit transactions,” the FDIC found. “Despite the elevated risks that RDC and RCC programs present, the bank failed to establish and maintain adequate policies.”
According to the notice, which the FDIC published last month, Vermont State Bank specifically neglected to monitor the two RDC and RCC clients on an ongoing basis, update their know-your-customer profiles in line with the financial crime-related risks they posed and identify any suspicious transactions they conducted.
Examiners also found anomalies in the descriptions and amounts of several transactions that the bank, or, more specifically, the bank’s executive committee of Legendre, Rever and Haley, failed to notice and subsequently review for signs of potentially illicit, reportable activity.
Constantine Lizas, former acting supervisory counsel in the FDIC’s enforcement section, told ACAMS moneylaundering.com that examiners do not conduct deeper reviews of transactions they identify as suspicious to determine whether money laundering truly occurred.
Still, the alleged deficiencies in Vermont State Bank’s compliance program “are more than a case of not dotting the ‘i’s and crossing the ‘t’s,” said Lizas, now a partner at the Harris Beach law firm in Washington, D.C. “When I look at the internal controls allegations, it doesn’t look like it’s an independent compliance function.”
Vermont State Bank also set a threshold of $500,000 of account activity per month for triggering reviews of the financial statements of their two RDC and RCC clients, but neither ever approached the limit.
“There was no basis provided for setting the manual review amount at a level that is unlikely to be triggered,” the FDIC stated in the notice.
Legendre, Rever and Haley did not respond to inquiries from moneylaundering.com on what drew them to a one-branch bank with only $25 million in assets, in a town with fewer than 600 residents.
Whatever the reason, Vermont State Bank’s case followed a familiar pattern: A small, remote lender struggles to turn a profit, changes owners, neglects to balance business interests with risk management, and falls short with regulators.
A similar case arose in September 2020, when Jean Chalopin, chairman of Deltec Bank in the Bahamas, used FBH Corp., his holding company in Baltimore, to buy Farmington State Bank, a rural lender 40 miles south of Spokane, Washington, with $10 million in assets on its books.
In February 2021, five months after Farmington State Bank’s acquisition by Chalopin, Rever joined the lender’s board of directors while keeping his position at Vermont State Bank.
Thirteen months later, Alameda Research, the Hong Kong-headquartered venture fund and cryptocurrency trading platform owned by Sam Bankman-Fried, the young, soon-to-be indicted co-founder of the FTX cryptocurrency exchange, invested $11.5 million with Farmington.
The small, rural lender immediately rebranded as Moonstone Bank and moved forward with plans to provide cryptocurrency creation and depository services.
“Moonstone Bank first serves its local community but also offers banking solutions for innovative industries and professional individuals that lack sufficient access to reliable banking services, most often because of these industries’ perceived (not actual) risk,” the lender explained in a statement in November of last year.
But those same solutions breached Moonstone Bank’s prior agreement with the Federal Reserve to refrain from entering into new business without first obtaining the approval of the agency, which issued a consent order against the company in July that bears Rever’s signature.
According to the consent order, Moonstone Bank, once again doing business as Farmington State Bank, began winding down and voluntarily liquidating pursuant to an agreement signed in May.
Josey Booth, the bank’s director of business operations, told moneylaundering.com that no legal or commercial ties exist between his lender and Vermont State Bank in Illinois, and referred further questions to Rever.
FTX and Alameda filed for bankruptcy in November 2022, a month before Bankman-Fried’s arrest in the Bahamas and extradition to New York to face charges of wire fraud, securities fraud, commodities fraud, money laundering and illegally diverting funds from clients to political campaigns.
Remote deposit capture, a service frequently used by check cashers and other money services businesses, consists of using a bank-issued scanner to photograph and electronically transmit an image of a check for deposit.
“Remote deposit capture is a risky line of business—you have to know what you’re doing,” said Robert Pasley, former assistant director of enforcement and compliance at the Office of the Comptroller of the Currency.
The inability to examine an original copy of a remotely deposited check and interact with the beneficiary in person places RDC at elevated risk of fraud and money laundering.
Banks may also encounter difficulty in controlling and monitoring the scanners they issue to MSBs and other clients, according to the Federal Financial Institutions Examination Council, or FFIEC, as such equipment can easily be moved to another jurisdiction.
Remote check creation, sometimes referred to as “tele-check,” allows telemarketers and other merchants to generate checks by obtaining the bank account and routing numbers of their payors, alongside an electronic authorization or audio clip of their voice in lieu of a signature.
RCC’s inherent vulnerability to fraud produces high rates of returned checks and disputed drafts from the accounts of payors, according to the FFIEC.
Building a case
Rather than cite a limited set of one-off, internal-control problems, the FDIC’s notice of hearing suggests that the agency believes that Vermont State Bank’s anti-money laundering program failed seriously, said Liza, and thus lays the groundwork for a possible cease-and-desist order.
The FDIC also typically offers banks a consent order with mandatory steps for remediation before scheduling them for an administrative hearing. The absence of a such an order with Vermont State Bank may indicate that the lender rejected the agency’s calls to change its business practices or revamp its AML controls.
“They may believe they have an internal control failure but don’t have a complete program failure,” Liza said.
Asked whether Vermont State Bank was offered a consent order, a spokesperson for the FDIC told moneylaundering.com that the agency does not comment on litigation or hearings.
Rever, the bank’s chairman, did not respond to an email query.
Vermont State Bank generated more than $600,000 from remote-deposit-capture fees and other service charges on depository accounts from March 1 to June 30, roughly 10 times the income those charges generated over the same four months last year.
The bank’s total interest from loans and securities meanwhile yielded $525,000 in income.
A longtime resident of Vermont, Illinois, who has used Vermont State Bank for 20 years told moneylaundering.com on condition of anonymity that the lender began offering online banking services after changing owners in 2019, but only recently began issuing debit cards.
The lack of debit cards prompted some residents to obtain financial services elsewhere, the resident said.
Contact Fred Williams at firstname.lastname@example.org
|Topics :||Anti-money laundering|
|Document Date:||September 13, 2023|