Four Oaks Fincorp (FOFN) in Four Oaks, N.C., and its bank have agreed to pay $1.2 million to settle claims they ignored warning signs of a scheme to defraud customers.
The proposed settlement comes a day after the Department of Justice filed a civil lawsuit against the $809 million-asset company. The deal must still be approved by the U.S. District Court for the Eastern District of North Carolina, Four Oaks said in a Thursday press release.
The Justice Department alleged that, beginning in July 2009, Four Oaks allowed a third-party payment processor direct access to the Federal Reserve Bank of Atlanta, which acts as a clearing house for the Automated Clearing House network. The access allowed the payment processor to illegally process debits against consumers' accounts on behalf of merchants including fraudulent Internet payday lenders, Internet gambling organizations and an alleged Ponzi scheme.
"Four Oaks Bank officials recognized that its business model created a significantly increased fraud risk for the bank and for consumers," the lawsuit claims, because the payment processor "could bypass any direct controls that the bank should have in detect and prevent unauthorized transactions and other abuses."
The complaint also claims that Four Oaks ignored consumers who reported unauthorized withdrawals from their accounts, as well as a warning from the Attorney General of Arkansas and other red flags.
Four Oaks agreed to the settlement "in order to avoid a lengthy and protracted legal fight and so that the bank can continue to focus on its primary business, which is serving its local communities," according to the company's press release. The company also pledged to abide by rules "relating to the provision of banking services for some categories of merchants."
Four Oaks did not admit to any wrongdoing in the settlement.