Capital One Board Beats Del. Suit Over AML Shortfalls

By Yin Wilczek

Oct. 18 — Capital One Financial Corp.'s board didn't consciously ignore red flags in its oversight of the company's anti-money laundering (AML) program, the Delaware Chancery Court said Oct. 18 in dismissing a shareholder's lawsuit ( Reiter v. Fairbank , 2016 BL 345995, Del. Ch., No. 11693-CB, 10/18/16 ).

The plaintiff, Michael Reiter, alleged that the directors fell short in their responsibilities because Capital One's compliance program was deficient with respect to its check-cashing business.

Chancellor Andre Bouchard found that at most, the directors ignored “yellow flags of caution” about the company's escalating AML risk, a risk that occurred “in tandem with heightened regulatory scrutiny of AML compliance in the financial services industry.”

Heightened Focus

Capital One's management made efforts to comply with the tightening regulations and more aggressive regulatory actions, and kept the board regularly apprised of its efforts, the judge found. In addition, the bank designated a new chief AML officer, implemented monthly training and quarterly audits and ultimately exited the check-cashing business altogether, he said.

The shareholder's allegations didn't show that the board acted in bad faith by consciously allowing the bank to violate the law, Bouchard said.

Reiter's allegations involved the bank's acquisition of North Fork Bancorporation Inc. in 2006. A year before the acquisition, Capital One signed a memorandum of understanding with the Federal Deposit Insurance Corporation and the New York State Banking Department regarding weaknesses in North Fork's AML compliance program. Capital One assumed North Fork's obligations under the agreement.

Asked to Continue

According to the decision, Capital One considered exiting the check-cashing business after the acquisition, but New York regulators encouraged the company to stay in to “serve the unbanked and underbanked.”

Subsequently, Capital One received grand jury subpoenas from the New York District Attorney's office in 2013 and 2014 regarding the bank's AML controls and check-cashing clients. In 2015, the bank received a grand jury subpoena from the Justice Department requesting documents that the bank turned over to the state prosecutors.

In July 2015, Capital One agreed to the Office of the Comptroller of Currency order finding that the bank failed to adopt and implement an adequate compliance program. The OCC order was issued shortly after the bank decided to exit the check-cashing business.

According to the court, the New York and DOJ investigations remain open.

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Seth Stern at

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