Baltimore-area banks ensnared in a check-kiting scheme allegedly orchestrated by a check casher are reevaluating their relationships with money-services businesses.
Last week the $350 million-asset Carrollton Bancorp of Baltimore said it had been duped in the purported scheme and would record a second-quarter after-tax loss of $1.2 million as a result.
That announcement came a week after the $800 million-asset BCSB Bankcorp Inc., also of Baltimore, said it would take an after-tax charge of $6.9 million in its fiscal third quarter after it fell victim to the scheme.
The banks and Maryland banking regulators have said that A&B Check Cashing of Baltimore was behind the alleged check kiting.
As a result both BCSB and Carrollton will take a hard look at their relationships with money-services businesses to decide whether they will continue serving them.
They “may no longer be a part of our business,” said David Meadows, the general counsel at BCSB.
“We’re really exploring all of our options,” said Robert Altieri, Carrollton’s chief executive officer.
Banks have been distancing themselves from money-services businesses. Since the implementation of tighter anti-money-laundering regulations after 9/11, scores of banks have concluded that wire transmitters and check cashers are more vulnerable targets for money launderers, and have begun cutting their ties with them to lower their regulatory risk.
In mid-June the $179 billion-asset SunTrust Banks Inc. in Atlanta informed its money-services customers that their accounts would be closed within 30 days. It was the latest in a growing list of banks to do so.
A&B Check Cashing, which had roughly 20 locations in the Baltimore area, was ordered to close down in late June by Maryland’s commissioner of financial regulation as a result of debts to Carrollton, BCSB, Farmers and Merchants Bank in Upperco, Md., and Global Express Money Orders Inc. of Silver Spring, Md.
James R. Bosley Jr., the president of the $161 million-asset Farmers and Merchants Bank, said his bank had suffered no losses in the scheme and that the material contained in regulators’ cease-and-desist order was not entirely accurate. Still, he said, the check-kiting incident could make it harder for money-services businesses to find banks willing to work with them.
“It certainly does not help from a banker’s standpoint to see something like this happen at the largest check-cashing company in Baltimore,” Mr. Bosley said. “I know that some … [MSBs] have been having problems finding services, and something like this is certainly going to make it worse.”
David Landsman, the executive director of the National Money Transmitters Association, disagrees.
“I don’t think that this situation has any bearing in substance or in image on our bank discontinuance problem,” he said. “It’s a totally separate issue.”
He noted the case of CashPoint Network Services Inc., which the New York State Banking Department shut down in April 2004 after it failed to hand over $38 million of consumer payments to banks and other creditors.
The incident “did not really affect the bank discontinuance problem at all,” Mr. Landsman said.
Gerald Goldman, the general counsel for Financial Services Centers of America, a trade group representing check-cashing businesses, said it would be unfair to hold an entire industry responsible for the actions of a single outfit.
“It’s unusual that a check-cashing business is found to have violated the law,” Mr. Goldman said
Every industry has individual companies that have problems with banks, he added. “If an airline fails, it doesn’t mean that all banks shouldn’t deal with airlines.”
Colleen Inc., the parent company of A&B Check Cashing, filed for bankruptcy in federal court on June 28. Six days earlier, Alec Satisky, one of two brothers who owned Colleen Inc., took his own life at an A&B office.
Carrollton’s Mr. Altieri said that he did not expect regulators to sanction his bank for failing to identify the fraud.
“We don’t see that as a concern,” Mr. Altieri said. “Unfortunately there are people out there that are going to break the law. You try to catch them, but you’re not going to get them all.”
Mr. Meadows said that BCSB already had appropriate compliance and oversight systems in place, but “we want to get to the bottom of this and we’ll make any system changes that are necessary.”
Kathleen Murphy, the president and chief executive of the Maryland Bankers Association, estimates that a dozen Maryland banks have severed their ties with money-services firms in the past 18 months.
“The stakes are just so high in this environment,” she said.
