by: Dan Selznick
Earlier this month, a Law360 article reported that TD Bank (“TD”) was recently sued for its alleged involvement in an approximately $8.5 million Ponzi scheme that took place from 2008-2010. The scheme was headed by former Cherry Hill lawyer Michael Kwasnik (“Kwasnik”) and two others. Kwasnik used TD to first deposit investor funds into a personal checking account and then launder the funds to various fraud entities and other people.
While Kwasnik has already been sanctioned for his involvement in the scheme, the suit against TD is new. The suit is being brought by the New Jersey Lawyers’ Fund for Client Protection and the Pennsylvania Lawyers Fund for Client Security, which are entities of their respective state supreme courts and are designed to reimburse victims of dishonest conduct by members of their state’s bar. Generally, the complaint alleges that “TD Bank knew or should have known of M. Kwasnik and the co-conspirators fraudulent schemes.” Essentially, the complaint alleges that TD was negligent over its handling of the accounts involved in Kwasnik’s scheme.
This is not the first time TD has been implicated in a Ponzi scheme. In 2013, TD paid $52.5 million in a settlement related to a $1.2 billion dollar Ponzi scheme run by Florida lawyer Scott Rothstein from 2008 to 2009. In that suit, TD paid out settlements to the U.S. Securities and Exchange Commission (“SEC”), the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“FinCEN”), and to the U.S. Office of the Comptroller of the Currency (“OCC”). The SEC’s claims (which were settled for $15 million) regarded a TD executive who had an active role in defrauding investors by concealing information and making misleading statements about the accounts used in the scheme. The OCC’s claim (settled for $37.5 million) concerned TD’s negligence for its failure to file suspicious activity reports in accordance with OCC regulations (12 C.F.R. §21.11(c) and (d)).
In addition to the penalties assessed by the SEC, FinCEN, and the OCC, TD ultimately paid over $600 million in restitution to victims of the fraud, and the executive who was directly involved with the fraud was sentenced to prison. These consequences emphasize the importance of diligent account oversight and timely reporting of suspicious behavior by bank management, as well as the significant repercussions of poor security measures.
Diligence requirements are largely set forth in the Bank Secrecy Act (31 U.S.C. § 5311, et seq.) (the “Act”) and cover both the monitoring and reporting of suspicious behavior in existing accounts as well as the running of effective background checks on prospective account holders. Compliance requirements under the Act are set forth in section 5318. Subsection (l) of section 5318, which establishes minimum requirements for account holder identification and verification, prescribes that financial institutions “implement . . . reasonable procedures for verifying the identity of any person seeking to open an account to the extent reasonable and practicable.” Because § 5318(1) is a “reasonableness” standard, it allows banks some discretion in determining the best methods for fraud detection and prevention. This in turn puts the onus largely on banks like TD to learn from previous mistakes and to identify the various reasons behind Ponzi schemes going unnoticed. As we have seen, a failure to do so can have major financial ramifications.
Ultimately, the challenge for large banks like TD, who have hundreds of billions in total deposits (financial information here), is satisfying the requirements of the Bank Secrecy Act without incurring the high costs of overbearing preventative measures. Additionally, banks must decide whether different measures should be required depending on the size of the account. Compared to Scott Rothstein’s $1.2 billion scheme, Kwasnik’s $8.5 million scheme was minuscule. But does that mean that comparatively less attention should be paid to accounts like Kwasnik’s? It is hard to imagine the victims of Kwasnik’s scheme being particularly welcoming to a system where relatively minor frauds are permitted to go unnoticed. On the other hand, the larger the amount in question, the more liable a bank becomes, and so it follows that banks should pay especially close attention to those larger amounts in order to protect themselves. Given these considerations, developing effective policies is no easy task.
It is important to note that Ponzi schemes appear to be on the decline. According to www.ponzitracker.com, a website that monitors Ponzi scheme activity, 2015 saw a 10% decrease from the number of schemes discovered in 2013 and 2014. Additionally, the average scheme losses also declined. While this data could imply that detection efforts were simply not as strong in 2015, it is more likely that banks have developed more effective safeguards over the last five years or so and therefore fraudsters are having a more difficult time carrying out their schemes.
Despite this optimistic data, lawsuits like the recent one against TD serve as an important reminder of the dangers presented by Ponzi schemes and the huge liabilities that financial institutions may face as a result. Financial institutions can certainly limit this liability, however, by implementing adequate compliance programs and remaining diligent over prospective and current accounts. Hopefully the banking industry has learned from its past mistakes and the decline in Ponzi schemes continues.