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  • House Financial Services Committee Issues Second Interim Report on Bureau’s Role in Fraudulent Accounts Scandal Investigation

    Federal Issues

    On September 19, the Majority Committee Staff of the House Financial Services Committee (Committee) released a second interim report and supporting documents on the investigation of the role the CFPB played in detecting and remedying a major national bank’s practice of opening unauthorized bank accounts. As previously covered in InfoBytes, the first interim report, issued June 6, accused Director Richard Cordray, among other things, of failing to cooperate with the Committee’s “comprehensive investigation.” The second interim report claims the CFPB and Director Cordray failed to comply with the Committee’s repeated requests for documents related to the investigation into the bank’s practices, never conducted its own independent investigation (but, instead, “relied primarily, if not exclusively,” on a third party report), and withheld a crucial Recommendation Memorandum from the Committee for over a year that disclosed analysis of the legal and factual components of the Bureau’s investigation, as well as an evaluation of whether to enter into a settlement. The Committee’s accusations also include claims that Director Cordray allegedly misled Congress about the agency's investigation into the bank’s illegal sales practices and may have “rushed” a settlement with the bank, which resulted in a $100 million fine when it was potentially liable for a statutory civil monetary penalty exceeding $10 billion. Chairman Jeb Hensarling (R-Tex.) said in a press release that “[t]he premature suspension of its investigation means that the CFPB also potentially lost the opportunity to discover recently revealed instances of further consumer harm.”

    Federal Issues CFPB House Financial Services Committee Settlement Enforcement Fraud Investigations

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  • China Bans Commercial Trading of Initial Coin Offerings

    Securities

    On September 4, the People’s Bank of China and several Chinese regulators reportedly jointly announced plans to ban the commercial trading of bitcoin and other cryptocurrencies. This measure, announced in a statement issued by the Ministry of Industry and Information Technology of the People’s Republic of China, will outlaw all fundraising Initial Coin Offerings (ICOs), and declares ICOs and the sale of virtual currency as unauthorized illegal financing behavior, suspected of illegal sale tokens, illegal securities issuance, and illegal fund-raising, including financial fraud, pyramid schemes and other criminal activities. The statement reportedly stresses that virtual currency in China will not be recognized as a legal form of currency and must not be circulated as currency when financing activities. Furthermore, going forward, all cryptocurrency trading platforms are prohibited in China from acting as central counterparties to facilitate the exchange of tokens for virtual currencies. Additionally, one of China’s bitcoin exchanges reportedly published an announcement on its website saying it will close its bitcoin currency trading platform in the country on September 30.

    The SEC recently released an investor bulletin about ICO investment risks and offered fraud prevention guidance. (See previous InfoBytes summary here.) ICO sales are often used to raise capital, and the SEC is monitoring companies who use this method for fraudulent purposes.

    Securities Fintech ICO International Cryptocurrency Bitcoin Fraud Virtual Currency

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  • FTC Files Complaint Against Operators of Online Discount Clubs and Payment Processors for Allegedly Debiting More Than $40 Million from Consumers Without Their Consent

    Consumer Finance

    On August 16, the FTC issued a press release announcing charges against the operators of a group of marketing entities and payment processors (Defendants) for allegedly violating numerous laws when they enrolled consumers into online discount clubs and debited more than $40 million from consumers’ bank accounts for membership without their authorization. According to the August 15 complaint, several of the Defendants promoted their respective online discount club through websites and telemarking calls to offer services to consumers in need of payday, cash advance, or installment loans. Other Defendants then used “Remotely Created Payment Orders” and “Remotely Created Checks” without the consumers’ authorization to debit their bank accounts for the initial application fee as well as automatically-recurring monthly fees. Notably, during the period when one of the discount clubs was launched, several of the Defendants were facing contempt proceedings for allegedly violating a 2008 stipulated final order with the FTC in another deceptive debiting scam. The Defendants purportedly, among other things, (i) engaged in unfair billing practices; (ii) made false, misleading, and deceptive statements when they represented, “directly or indirectly,” to consumers seeking refunds that they were not entitled to a refund because the entities possessed personal and financial information, which served to confirm that the consumers agreed to “purchase the products or services” or authorize money to be debited from their bank accounts; and (iii) provided “substantial assistance or support” in the way of payment processing services while knowing—or “consciously avoiding knowing”—that the actions being supported were in violation of the Telemarketing Sales Rule. The FTC also claims that hundreds of thousands of consumers called to cancel their memberships and request refunds, with thousands more informing their banks about the unauthorized debits. Additionally, more than 99.5 percent of consumers enrolled in a discount clubs apparently never accessed a single coupon—“the only service for which they had supposedly paid.”

    Consumer Finance FTC Telemarketing Sales Rule Fraud UDAAP

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  • FTC Files Complaint Against Independent Sales Organization and Sales Agents for Alleged Credit Card Laundering Charges

    Consumer Finance

    On August 7, the FTC issued a press release announcing charges against 12 defendants, comprised of an independent sales organization (ISO), sales agents, payment processors, and identified principals, for allegedly violating the Federal Trade Commission Act and the Telemarketing Sales Rule (TSR) by laundering credit card transactions on behalf of a “telemarketing scam” operation (operation) through fictitious merchant accounts. According to a July 28 complaint filed by the FTC, the defendants engaged in a scheme with the operation to process credit card charges through merchant accounts set up by the operation under fictitious company names instead of processing charges through a single merchant account under the operation’s name. This type of practice, the FTC claims, is known as “credit card laundering” or “factoring” and violates the TSR. The defendants purportedly (i) underwrote and approved the operation’s fictitious companies; (ii) set up merchant accounts with its acquirer for the fictitious companies; (iii) used sales agents to market processing services to merchants; (iv) processed nearly $6 million through credit card networks; and (v) transferred sales revenue from the transactions to companies controlled by the defendants. The FTC seeks “permanent injunctive relief, recession or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten moneys, and other equitable relief.”

    Notably, in 2013, the FTC accused the same “telemarketing scam” operation of allegedly promoting “worthless business opportunities” to consumers and falsely promising that they would earn thousands of dollars. A 2015 summary judgement resulted in over $7 million in consumer injury. (See previous InfoBytes coverage here.)

    Consumer Finance Credit Cards FTC UDAAP Telemarketing Sales Rule Fraud

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  • Enforcement Actions Announced by CFTC for Fraud, Registration Violations in Florida

    Courts

    On July 11, the CFTC announced that the U.S. District Court for the Middle District of Florida entered an order for final judgment by default against two individuals and their company for fraudulently soliciting investors in a commodity pool, misappropriating pool participants’ funds, and committing futures fraud, among other things. According to the CFTC complaint filed on January 26 of 2017, the defendants fraudulently marketed their company to prospective participants, materially misrepresented their past trading success using fabricated high rates of return, provided account statements to investors showing fictitious increases in value, and failed to disclose defendant’s previous permanent injunction on trading.

    In addition to imposing a permanent injunction on trading and registration, the Court ordered defendants to pay civil monetary penalties of almost $1.85 million as well as restitution of $459,613. An appointed monitor will oversee the defendants’ payment of restitution. The Court also required one of the defendants to affirmatively disclose his violations in any future marketing materials, presentations, speeches or websites. The required disclosure names his violations, the amount of restitution and civil penalties he must pay, along with the case numbers of his CFTC actions.

    Both of the defendants recently pleaded guilty to related criminal charges. One defendant was sentenced to one year and one day in prison in connection with her guilty plea to one count of obstruction of justice, and the other defendant is awaiting sentencing in connection with his guilty plea to one count of wire fraud.

    Courts Federal Issues CFTC Securities Enforcement Fraud Litigation

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  • Hawaii Enacts Law to Prohibit Release of Credit Information of Children, Others

    State Issues

    On July 5, Hawaii Governor David Y. Igge signed into law H.B. 651, which was devised to protect children and certain other individuals from identity theft and credit fraud. The law applies to “protected consumers,” defined as minors under the age of 16 years, incapacitated persons, and individuals with appointed guardians or conservators.

    Based on research suggesting that minors may be targeted for identity theft due to their clean credit reports, the legislation permits representatives of protected consumers to place and remove security freezes on protected consumers’ credit files. Because one impediment to requesting such a freeze is the lack of an existing credit file, the legislation also requires consumer credit reporting agencies (CRAs) to create records for the protected consumers. A CRA may not release the protected person’s file when it is in a security freeze until the representative requests a removal of the freeze. In order to request a security freeze or a freeze removal, a protected person’s representative must provide proper identification and evidence of authority to the CRA. Additionally, with a few exceptions, the CRA may charge a fee not to exceed five dollars for each freeze or removal of a freeze to a protected person’s credit file.

    The law will go into effect on January 1, 2018.

    State Issues Credit Rating Agencies Debt Collection Fraud Privacy/Cyber Risk & Data Security State Legislation Consumer Reporting Agency

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  • Former DOJ Fraud Compliance Counsel Resigns, Criticizes President

    Financial Crimes

    Hui Chen, formerly Compliance Counsel Expert in the DOJ Fraud Section, is speaking out about the reasons for her May 2017 resignation, which she has attributed to unacceptable conduct by the President and his Administration. Chen was hired by DOJ in November 2015 after serving as Global Head for Anti-Bribery and Corruption and Standard Chartered Bank. She was the first lawyer to hold this position at the DOJ.

    In a June 25 LinkedIn post, Chen unleashed several criticisms against the President, including regarding lawsuits, conflicts of interest, and ongoing investigations. She said that she would “not tolerate” those conducts in a company, but “worked under an administration that engaged in exactly those conduct.” Chen further elaborated on her criticisms in a July 4, 2017 interview with CNN, stating that the firing of FBI James Comey tipped the scales in favor of resignation. 

    The DOJ had previously posted an opening to hire a new Compliance Counsel, but that listing has now expired. It is not clear if anyone has been hired to replace Ms. Chen.

    Financial Crimes DOJ Trump Fraud

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  • SFO Announces Charges Against British Multinational Bank and Four Former Executives in Qatar

    Financial Crimes

    On Tuesday, June 20, the UK Serious Fraud Office (“SFO”) announced charges against a British multinational bank and four former executives for conspiracy to commit fraud and provision of unlawful financial assistance in violation of the Companies Act 1985. These charges relate to the bank’s capital raising arrangements with a Qatar's state-owned holding company and a contract oil and gas land drilling provider in June and October 2008, as well as to a $3 billion loan facility made available to the State of Qatar acting through the Ministry of Economy and Finance in November 2008. According to the SFO press release, the investigation was first announced in 2012, and the individuals charged include a former Chief Executive Officer of the British multinational bank, a former Executive Chairman of the bank’s Capital Investment Banking and Investment Management in Middle East and North Africa, a former Chief Executive of the bank’s Wealth and Investment Management, and a former European Head of the bank’s Financial Institutions Group.

    While no US-based charges have been announced, the SFO’s announcement comes on the heels of the bank’s March 2017 disclosure to the SEC in which the company stated that “the DOJ and SEC are undertaking an investigation into whether the Group’s relationships with third parties who assist the bank to win or retain business are compliant with the U.S. Foreign Corrupt Practices Act.”

    Financial Crimes SEC UK Serious Fraud Office Fraud

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  • DOJ Intervenes in False Claims Act Litigation Against City of Los Angeles for Alleged Misuse of HUD Funds

    Courts

    On June 7, the Department of Justice (DOJ) announced that the United States has intervened (see proposed order here) in a lawsuit against the city of Los Angeles (City) alleging that the City misused Department of Housing and Urban Development (HUD) funds intended for affordable housing that is accessible to people with disabilities. See U.S. ex rel Ling et al v. City of Los Angeles et al, No. 11-00974 (D.C. Cal. 2017).

    The DOJ joins in the lawsuit originally instituted by a disabled Los Angeles resident, who filed the False Claims Act (FCA) suit as a whistleblower. The FCA whistleblower provision allows private citizens to file suit on behalf of the government and likewise permits the government to intervene in the suit. Together, the DOJ and the whistleblower allege that the City and a city agency called the CRA/LA falsely certified compliance with federal accessibility laws, including the Fair Housing Act and Section 504 of the Rehabilitation Act as well as the duty to further fair housing in the City, in order to receive millions of dollars in HUD housing grants.

    As recipients of the HUD funds, the City and the CRA/LA were obligated to ensure that (i) “five percent of all units in certain federally-assisted multifamily housing be accessible for people with mobility impairments”; (ii) “an additional two percent be accessible for people with visual and auditory impairments”; (iii) “the City and the CRA/LA maintain a publicly available list of accessible units and their accessibility features”; (iv) “the City and the CRA/LA have a monitoring program in place to ensure people with disabilities are not excluded from participation in, denied the benefits of, or otherwise subjected to discrimination in, federally-assisted housing programs and activities solely on the basis of a disability.” The false certifications resulted in too few accessible housing units, the suit claims.

    The City denies the allegations.

    Courts HUD Litigation Fraud False Claims Act / FIRREA Whistleblower Fair Housing DOJ

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  • Connecticut Law Expands Credit Card Fraud Statutes, Addresses Penalties for Rent Collections on Foreclosed Property

    State Issues

    On June 6, Connecticut Governor Dannel Malloy signed into law Public Act No. 17-26, which expands the statutes on credit card fraud to cover crimes involving debit cards—including payroll and ATM cards—and outlines larceny penalties for collecting rent on foreclosed property. Paper and electronic checks or drafts are excluded from the definition of debit card under revised measure. Additionally, the law specifies changes pertaining to how “notice of a card’s revocation must be sent for purposes of these crimes and expands certain credit card crimes to cover falsely loading payment cards (credit or debit cards) into digital wallets.” Regarding larceny penalties, the law provides that a “previous mortgagor of real property against whom a final judgment of foreclosure has been entered” cannot continue to collect rent after the final judgment if there is no lawful right to do so. Penalties vary from a class C misdemeanor to a class B felony depending on the amount involved. The law takes effect October 1.

    State Issues Credit Cards Debit Cards Prepaid Cards State Legislation Financial Crimes Mortgages Digital Commerce Fraud

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