Fed dings top midsize bank over money laundering concerns

One of the top midsize banks in the country has drawn the ire of federal regulators over deficiencies related to its screening processes for money laundering and sanctions compliance. 

The Federal Reserve Board issued an enforcement action against Malvern, Pa.-based Customers Bank this week, citing the $22 billion-asset bank and its holding company for insufficient practices related to digital assets and instant payments products.

The regulatory action, released Thursday, noted deficiencies related to anti-money-laundering rules, the Bank Secrecy Act and regulations set forth by the Treasury Department’s Office of Foreign Asset Control, which oversees the government’s sanctions regime. 

Customers Bancorp was ranked the No. 1 bank in the $10 billion to $50 billion category of American Banker’s recently released top performing banks list of 2024 after posting a three-year return on average equity of 19.5% between 2021 and 2023 and a net interest margin of 3.29%.

A representative for the bank did not immediately respond to requests for comment.

Customers Bank offers consumer, small business and commercial product lines, but the enforcement action calls out its “banking services to digital asset customers” and its Consumer Bank Instant Token network, a blockchain-based instant payments service that caters to cryptocurrency exchanges such as Coinbase, Gemini and Kraken.

The Fed and other regulators have broadly taken a skeptical view of banks engaging with the crypto sector since the fall of 2022, which saw the collapse of the FTX exchange and other related entities. The ripple effects of that episode contributed to the elective winddown of the crypto-focused Silvergate Bank, which in turn fueled the bank runs that led to the failures of Silicon Valley Bank and other large regionals during spring of 2023. But crypto industry participants say the government’s approach to their sector amounts to a debanking effort.

The enforcement action against Customers Bank does not list specific violations, as is typical of such announcements. It notes the concerns arose during the most recent examination of the bank by supervisors from the Federal Reserve Bank of Philadelphia. The document states that the bank has taken steps to improve its anti-money-laundering and Bank Secrecy Act, or AML/BSA, compliance since that inspection.

As a result of the enforcement action, the bank has agreed to make oversight changes related to AML/BSA and OFAC compliance, including at the board level. It has also pledged to improve its process around reviewing transactions as well as flagging and reporting suspicious activities.

Despite headwinds for medium-sized banks and the digital assets sector, Customers has shown signs of resilience. Its core deposit rate was more than 81% last year and it posted a net income of $45.9 million during the first quarter of this year. The bank also acquired a $631 million Signature Bank loan portfolio from the Federal Deposit Insurance Corp. last year and hired 30 venture capital-focused bankers from the failed New York bank.

Yet, recent developments from the bank have not been exclusively positive. Earlier this year, it parted ways with its chief financial officer, Carla Leibold. Initially the bank said it fired the executive for cause, but in a subsequent filing with the Securities and Exchange Commission, it stated that the separation was “mutual” and would come with a $2.5 million severance package for Leibold.