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Fed Takes Action Against Evolve Bank Over Shortcomings in Risk Management, Consumer Compliance

3 min read

The Federal Reserve has issued an enforcement action against West Memphis-based Evolve Bancorp. Inc. and its subsidiary Evolve Bank & Trust over “deficiencies” in the bank’s anti-money laundering, risk management and consumer compliance programs.

Evolve has grown rapidly in recent years as a banking-as-a-service provider, partnering with hundreds of fintech companies, which in turn provide access to banking products and services to their end customers.

The Fed said it reviewed Evolve’s banking practices in August and January and found that Evolve had “engaged in unsafe and unsound banking practices by failing to have in place an effective risk management framework” for those partnerships.

The June 11 order, issued in conjunction with the Arkansas State Bank Department, blocks Evolve from entering into any new fintech partnerships or establishing any new products, programs, services, or program managers related to open banking without approval from the Fed.

For current partnerships with fintech companies, the action requires Evolve to strengthen its risk management practices to address potential risks by implementing “appropriate oversight and monitoring” of those relationships, including enhanced record-keeping and consumer compliance measures, the Fed said in a news release.

The central bank has set deadlines of 60 days and 90 days for Evolve to submit written improvement plans in those areas.

In a statement to Arkansas Business, a spokesperson for Evolve said the bank had agreed to “take certain measures to further bolster our compliance oversight and enterprise risk management functions.” The bank said the Fed’s action “stemmed from a routine regulatory review” and doesn’t affect its existing business, customers, or deposits.

Evolve ranked No. 1 on Arkansas Business’ 2023 list of the largest trust departments in Arkansas with $8.14 billion in total trust assets under management.

“Evolve remains well-capitalized and continues to show strong growth across all business lines,” the bank spokesperson said. “As a leading Banking-as-a-Service provider and member of the American Fintech Council, we advocate for modernizing regulatory guidelines to ensure safe and affordable financial services.

“We’ve made significant investments in technology and personnel in our Enterprise Risk Management, Compliance, and BSA/AML departments to strengthen oversight and enhance the risk framework. With the support of our Senior Management and Board of Directors, we’re confident this Order’s impact will result in a stronger Evolve.”

The Fed said the action against Evolve is not related to bankruptcy proceedings regarding Synapse Financial Technologies Inc., which abruptly shut down services last month for some of its bank partners, including Evolve. Evolve estimated that the shutdown left under 200,000 customer accounts frozen.

Evolve’s fintech partners include Affirm, Bond, Airwallex and Dave.

Federal authorities linked virtual accounts issued to some of Evolve’s fintech partners to more than $15 million in fraud, money laundering and cryptocurrency scams in a January complaint for forfeiture. The U.S. Secret Service seized $5 million from Evolve as part of the investigation, Fintech Business Weekly reported.

Evolve President and CEO W. Scott Stafford told Arkansas Business in 2022 that the bank was mindful of compliance and fraud risks in open banking and that it had made significant investments in compliance systems and its Bank Secrecy Act framework.

“That is something regulators are very focused on, as we are,” he said. “And for those who are considering this space, they need to make sure they have the right people to manage the risk. We’ve certainly done that.”

The Associated Press contributed information to this report.

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