Bank 'turned blind eye' to scheme

Court documents released Wednesday reveal that during the past two years CommunityOne Bank experienced more than $283 million in losses that brought it to the brink of failure.

Further, the bank's accounts were utilized in a $40-million Ponzi securities fraud and money laundering scheme.

That left the Asheboro-based bank with few choices for survival: raise new capital, sell or merge.

In the end, the bank did all three.

A merger agreement announced Wednesday revealed it will merge with Bank of Granite (see related story), while two outside equity firms will deliver a cash injection of more than $155 million into the bank's parent company FNB United Corp. Meanwhile, FNB United will raise $300 million in capital.

The merger also means CommunityOne, as well as Bank of Granite, will get a new leadership team.

Those steps, according to the U.S. Attorney's Western North Carolina District Office allow the "critically under capitalized" bank to survive and "avoid losses from a bank failure to innocent account holders and to the FDIC fund estimated at $500 million."

With a new leadership team focused on fully implementing "significant anti-money laundering measures," the bank avoids criminal charges tied to the Ponzi scheme operated through its accounts, according to a release from the U.S. Department of Justice.

"Banks asleep at the switch need to wake up," said Anne Tompkins, U.S. Attorney for the Western North Carolina District. "Federal law requires banks to implement a robust and proactive anti-money-laundering program to detect fraud and protect the public from harm. This bank's failure to detect and report a Ponzi scheme cost it 16 percent of its value.

Other financial institutions should heed this warning: the Bank Secrecy Act applies to more than just drug and terrorist financing."

Assistant U.S. Attorney General Lanny Breuer said CommunityOne "turned a blind eye to criminal conduct occurring under its nose."

As part of a settlement, CommunityOne will pay $400,000 toward restitution for about 240 victims of a third-party Ponzi-scheme that operated through accounts maintained at the bank and its Ashe County location. That total settlement amounts to 16 percent of its $2.5 million value as reported in its recapitalization and merger.

According to court documents released Wednesday, the settlement agreement comes at the end of an investigation of Keith Franklin Simmons. Through a company called Black Diamond Capital Solutions LLC, Simmons operated a $40-million Ponzi scheme during two and a half years and almost entirely through one bank account at CommunityOne. Simmons was convicted of securities fraud, wire fraud and money laundering in December 2010 and faces up to 80 years in prison.

From April 2007 to September 2009, Simmons deposited more than $35 million in investor funds into one account at CommunityOne, and during the same time span, withdrew more than $35 million from the same account. According to court documents, the bank failed to detect and report these suspicious transactions, as required by the Bank Secrecy Act, due to deficiencies in the bank's anti-money laundering program.

The bank did not file a SAR, or suspicious activity report, on Simmons during the time period, despite hundreds of suspicious transactions that took place during the two and a half years.

In addition, court documents reveal Simmons diverted more than $2 million to other accounts with the bank that he controlled to operate his other business; diverted almost $800,000 in cash withdrawals, gift cards and transfers to his personal account with the bank; and diverted numerous payments to support a luxurious lifestyle including payments for private jets, vehicles and gifts.