Kansas Bank's Suit Could Upend FDIC Enforcement Authority

On Nov. 19, 2024, the Federal Deposit Insurance Corp. issued a notice of assessment finding that between December 2018 and August 2020, CBW Bank — a single-branch bank in Weir, Kansas — failed to maintain an adequate anti-money laundering/countering the financing of terrorism compliance program.

According to the regulator, the bank's inadequate AML/CFT compliance program led to multiple violations of the Bank Secrecy Act and represented a "pattern of misconduct."[1]

Why care about alleged BSA and AML failings at a small-town bank in Kansas? You should care because the FDIC assessed a $20 million civil penalty against a bank with approximately $60 million in total deposits.

Given the size of the penalty relative to the size of the bank, the assessment represents an existential threat to the institution's survival.

CBW responded by filing a lawsuit challenging the constitutionality of the FDIC's Office of Financial Institution Adjudication's authority to adjudicate the bank's objection to the notice of assessment.

Among other theories, the bank argues that an administrative law hearing to contest the civil penalty would deprive CBW of its Seventh Amendment right to a jury trial.

In no uncertain terms, the bank is attempting to extend the U.S. Supreme Court's recent holding in SEC v. Jarkesy to the context of bank regulation.

Should the bank's legal theories gain traction with a post-Chevron deference, conservative Supreme Court, CBW Bank v. FDIC could have profound implications for the banking industry.

The Origins of CBW Bank: More Than a Small-Town Deposit Institution

CBW Bank is not your average single-branch community bank.

Founded in 1892, the Citizens Bank of Weir was acquired in 2009 by Google veteran Suresh Ramamurthi and his wife, Suchitra Padmanabhan, formerly of Lehman Brothers. The pair bought the bank with personal savings in 2009 in the wake of the financial crisis, rebranded it as CBW Bank and sought to transform the small-town bank into a hub for financial innovation.

In 2015, Ramamurthi was named American Banker's "Innovator of the Year." CBW was partnering with Silicon Valley fintech startup companies, creating back-end systems to instantly risk-rate transactions and developing early smartphone payment technology.

All the while, CBW continued to serve as the quintessential small-town bank for Weir, Kansas' some 600 residents.

CBW had been characterized as an incubator of financial innovation with all the charm of a Mayberry-esque bank where the mayor of Weir, Kansas, would enjoy fresh chocolate chip cookies while conducting her in-person banking.[2]

As identified by the FDIC in its enforcement action, the majority of CBW Bank's revenues did not come from its relatively modest deposits.

The FDIC's Notice of Assessment

Where CBW Bank's new owners saw the potential for innovation and growth, regulators saw risk.

According to the FDIC, from its unassuming headquarters in Weir, CBW operated a multibillion-dollar international money transfer business, generating the lion's share of its profits from fee-based correspondent banking services for more than 30 foreign financial institutions, at least six money services businesses, and several other businesses providing financial services to individuals and entities in high-risk jurisdictions.[3]

The bank provided high-risk products, including cross-border remote deposit capture and high-volume international automated clearinghouse transfers.[4]

All the while, according to the regulator, the bank failed to adequately maintain, fund and audit its AML/CFT compliance program.[5] The FDIC noted that the bank failed to file hundreds of suspicious activity reports, lacked a risk-based customer due diligence process and did not maintain adequate due diligence for its foreign correspondent relationships.[6]

The notice of assessment highlights several serious AML/CFT lapses. For instance, CBW Bank completed more than $433 million in bulk currency shipments on behalf of a Mexican financial institution.

The bank's monitoring system only analyzed expected versus actual amounts of cash shipments, not where the funds deposited were wired to or from or the identity of the counterparties.

As a result, in 2018, the Mexican correspondent institution wired over 70% of its bulk cash funds to accounts in the Grand Cayman without raising a single red flag.[7]

In another instance, the FDIC highlighted the fact that CBW processed over $27 billion in wire transactions for foreign financial institutions in 2018, even though the bank's total assets only ranged between approximately $52 million to $120 million during the review period.

That year, CBW processed more than $13 billion in Sistema De Pagos Interbancarios en Dolares transactions, a dollar settlement program for Mexican banks considered to be high-risk.

According to the FDIC, the bank failed to monitor that settlement activity for money laundering or terrorism financing indicators and did not timely file any suspicious activity reports on the transactions.[8]

Based on its findings of fact and conclusions of law, the FDIC determined that CBW Bank's violations warranted a $20,448,000 fine.

The relative size of the FDIC's civil penalty may be due to the fact that CBW did not heed multiple warnings about the deficiencies in its AML/CFT compliance program.

The bank received a 2017 report of examination highlighting several similar deficiencies and was subject to a 2020 consent order. As the FDIC documented in subsequent 2022 and 2023 reports of examination, the bank failed to correct many of the BSA issues previously identified.[9]

CBW Questions the Constitutionality of FDIC's Authorities

CBW Bank wasted no time pushing back against the FDIC. On the same day the regulator filed its notice of assessment, the bank filed suit in the U.S. District Court for the District of Kansas.

Pursuant to Title 12 of the U.S. Code, Section 1818(i)(2)(H), CBW Bank can object to the FDIC's notice of assessment by formally requesting a hearing within 20 days to be held before an Office of Financial Institution Adjudication-assigned administrative law judge.

While reserving its right to seek a formal hearing, the bank argued in its filing that the "FDIC proceedings against CBW deprive it of its constitutional right to a trial by jury in an Article III court," and the "statutes, regulatory provisions, guidance, and/or policies restricting the removal of [Office of Financial Institution Adjudication] ALJs" are unconstitutional.[10]

CBW's complaint is grafted to the U.S. Supreme Court's recent opinion in SEC v. Jarkesy, which held that when the U.S. Securities and Exchange Commission seeks penalties against a defendant for securities fraud, the Constitution affords that defendant the right to a jury trial in federal court, not before an ALJ.[11]

The Jarkesy reasoning hinged on the notion that the Seventh Amendment applies to suits in common law, including statutory claims that are legal in nature.

The court adopted the U.S. Court of Appeals for the Fifth Circuit's reasoning that remedies seeking civil monetary penalties are a "prototypical common law remedy" subject to constitutional protections.[12] Citing directly to Jarkesy, CBW argues that the fact the FDIC is seeking civil monetary penalties "is all but dispositive."[13]

The Jarkesy court rejected the SEC's theory that the "public rights" exception applied, which permits Congress to assign certain matters otherwise considered "legal in nature" to an agency for decision, not a jury.[14]

In its motion to dismiss, the FDIC argues that, despite Jarkesy, the public rights exception applies to CBW because the FDIC's action "addresses governmental prerogatives and defends sovereign interests historically adjudicated without a jury, and implements a statute that has no common-law roots."[15]

The FDIC distinguishes the fraud claims at issue in Jarkesy from the federal banking regulations that directly implicate public funds given that bank failures draw down the Deposit Insurance Fund and the FDIC is authorized to backstop the fund by borrowing from the Treasury.

The FDIC also argues that, unlike fraud, actions to enforce the BSA are not rooted in the common law.

CBW Bank makes a second constitutional argument beyond its right to a jury trial, saying that the use of ALJs violate the bank's constitutional rights by "subjecting [CBW] to an administrative proceeding presided over by an executive officer unconstitutionally insulated from presidential control."[16]

The respondents in Jarkesy made similar arguments, and the Fifth Circuit found that "the insulation of the SEC ALJs from executive supervision with two layers of for-cause removal protections violated the separation of powers."[17]

The Supreme Court explicitly did not reach the removal issue because the jury trial question resolved the case.

Conditions May Be Ripe for CBW Victory, and Implications Would Be Significant

CBW Bank likely faces an uphill battle. There is plenty to distinguish the FDIC's notice of assessment against CBW from the SEC's order against Jarkesy for securities fraud. However, the timing and atmospherics may give odds-makers pause.

The recent Supreme Court decision in Loper Bright Enterprises v. Raimondo dismantled 40 years of Chevron deference and expands the judiciary's power to review and reject administrative agencies' statutory interpretations.

This, coupled with a Trump administration skeptical of the administrative state, may give CBW Bank a puncher's chance before a conservative Supreme Court. The court's decision in Jarkesy split 6-3 along ideological lines.

If CBW Bank v. FDIC reaches the high court, the bank may find it is pushing on an open door.

A CBW victory would have significant implications for the banking industry. If banking regulators are no longer permitted to bring in-house proceedings to enforce civil penalties, the cost and burdens of federal court actions would likely dramatically reduce the agencies' enforcement capacity and risk tolerance.

In many instances, agencies may not have the statutory authority to bring actions in federal court and would be completely foreclosed from enforcing civil penalties.

As Justice Sonia Sotomayor noted in her Jarkesy dissent, "dozens of agencies could be stripped of their power to enforce laws enacted by Congress."[18]

Even a narrowly tailored ruling would invite related litigation to challenge the limits of regulators' authorities in a Trump administration seemingly sympathetic to such arguments.

Watch this space.

Republished with permission. This article, "Kansas Bank's Suit Could Upend FDIC Enforcement Authority," was published by Law360 on January 27, 2025.

Notes: 

[1] In re CBW Bank, FDIC-22-0171k, Notice of Charges & of Hearing, ¶ 100 (Nov. 19, 2024).

[2] See Nathaniel Popper, Small Bank in Kansas is a Financial Testing Ground, N.Y. Times (Dec. 13, 2014), https://archive.nytimes.com/dealbook.nytimes.com/2014/12/13/small-bank-in-kansas-is-a-financial-testing-ground/.

[3] In re CBW Bank, FDIC-22-0171k, ¶ 7.

[4] Id. ¶ 8

[5] See id. ¶¶ 9-13. 

[6] Id.

[7] Id. ¶ 34. 

[8] Id. ¶ 37.

[9] Id. ¶¶ 14-15.

[10] Complaint at 22, CBW Bank v. Fed. Deposit Ins. Corp., No. 24-cv-02535 (D. Kan. Nov. 19, 2024), ECF No. 1.

[11] Sec. and Exch. Comm'n v. Jarkesy et al., 603 U.S. 109 (2024). 

[12] Id. at 123.

[13] Complaint, supra note 10, at 17.

[14] See Jarkesy, 603 U.S. at 135-140. 

[15] Defendants' Motion to Dismiss at 11, CBW Bank v. Fed. Deposit Ins. Corp., No. 24-cv-02535 (D. Kan. Nov. 19, 2024), ECF No. 13.

[16] Complaint, supra note 10, at 3.

[17] Jarkesy, 603 U.S. at 120 (cleaned up). 

[18] Id. at 200-201.