LEXINGTON, N.C. — Another layer of the ZeekRewards.com Ponzi scheme was peeled away Thursday, leaving a N.C. community bank exposed as a participant in permitting the flow of illegal financial transactions for the defunct Lexington company.
Four Oaks Fincorp Inc., of Four Oaks in Johnston County, agreed to a civil settlement with the U.S. Justice Department for its involvement with a privately owned, third-party payment processor in Texas most commonly known as TPPP-TX.
A proposed consent order, already signed by Four Oaks’ top executive Ayden Lee Jr., says the bank has agreed to pay a $1 million civil penalty to the U.S. Treasury, and a $200,000 fine to the consumer fraud fund of the U.S. Postal Inspection Service related to wire fraud allegations.
The U.S. District Court for the Eastern District of North Carolina still has to agree to the settlement.
The settlement also bans the bank from continuing to process certain payments for TPPP-TX and its Internet payday lender clients. Many of those clients are listed as charging customers annualized interest rates between 400 and 1,800 percent on short-term loans.
It is not clear whether Four Oaks faces sanctions and fines from its regulators, the N.C. Office of the Commissioner of Banks and the Federal Reserve Bank of Richmond.
The state banking commission said today it could not comment specifically on any banks due to state and federal confidentiality laws.
At its essence, Justice’s complaint was that Four Oaks knowingly allowed, and profited from, TPPP-TX having direct debit-transaction processing access to the Federal Reserve Bank of Atlanta from July 2009 to the present.
That meant TPPP-TX, along with at least 22 Internet payday lenders it had as clients, could make authorized and unauthorized debit withdrawals from customer accounts through the ACH (automated clearing house) electronic payment network. As a result, the groups could keep making debit withdrawals even after a customer had fulfilled payment obligations.
The way the ACH network works is that a payment processor submits a transaction to a bank. The bank is required to review transactions for “red flags” that include fraud or a potential illegal request before deciding whether to forward the transaction to a federal reserve bank for processing and payment. The bank also is required to know the true identifies of the entities requesting payment processing.
Four Oaks’ supervisory role on those debit transactions included “being responsible for their content,” according to the complaint. However, Justice accused the bank of being lax with its monitoring policy, if it was used at all at times.
Where ZeekRewards.com comes into the picture is that in the spring of 2012, Four Oaks agreed to give Rex Venture Group LLC, an affiliate of ZeekRewards and a TPPP-TX client, access to its agreement with TPPP-TX.
Rex Venture was able to process about $60 million in ACH transactions before Rex Venture and ZeekRewards.com were shut down by federal regulators on Aug. 17, 2012.
The latest figure on how much the Ponzi scheme raised is nearly $900 million, according to a criminal complaint filed against two ZeekRewards.com officers filed in the U.S. District Court for the Western District of N.C.
That means Four Oaks was responsible for allowing the processing of at least 7.5 percent of ZeekRewards.com’s overall financial transactions in just a five-month window.
The Securities and Exchange Commission has accused Rex Venture Group, Zeekler, ZeekRewards.com and Paul Burks of raising the money through unregistered securities.
The companies had at least 2.2 million customers, including more than 230,000 in the United States, 47,000 in North Carolina and at least 1,500 in the Charlotte area.
The Justice complaint said Four Oaks permitted the ZeekRewards.com transactions even though it knew “Rex Venture’s principals could not be identified through business database searches.”
The bank also “could not independently verify the type of legitimate business in which Rex Venture Group was engaged.”One of two addresses given by Rex Venture was a vacant lot. A submitted Social Security number for one of the Rex Venture officers could not be verified.
The Justice complaint includes that an unidentified Four Oaks executive “even concluded that the purported owner of Rex Venture Group ‘keeps changing company names so his reputation will not catch up with him.’ “
In the grand scheme, ZeekRewards.com played a small role in the TPPP-TX debit transactions allowed by Four Oaks.
According to the complaint, Four Oaks officials knew that the contract with TPPP-TX “created a significantly increased fraud risk for the bank and for consumers.” One unidentified bank executive was quoted in the complaint as saying, “If we can get comfortable, it would be some nice revenue” for a bank with $812 million in assets as of Sept. 30.
Since the five-year contract between Four Oaks and TPPP-TX began in July 2009, the complaint listed the bank permitting 9.8 million ACH debits on behalf of at least 22 TPPP-TX clients. The dollar value of the debit transactions was estimated at $2.4 billion.
In return, TPPP-TX paid Four Oaks more than $850,000 in gross fees.
The complaint said Four Oaks officials were told by state law enforcement agencies that TPPP-TX’s Internet payday lenders “were misleading borrowers and violating state laws.” An unidentified bank executive was quoted in the complaint as saying “I’m not sure ‘don’t ask/don’t tell’ is going to be a reasonable defense if a state comes after one of our originators.”
Four Oaks said it agreed to the settlement, as well as limitations on how it conducts banking services for “some categories of merchants.” In its brief statement, the bank makes clear that “it does not admit any facts alleged in the accompanying complaint nor does it admit to any liability.”
“The company’s board feels that this settlement is justified in order to avoid a lengthy and protracted legal fight,” the bank said.