One of TransferWise's US banking partners had 'unsafe and unsound banking practices'
One of TransferWise's partners in the US is a bank that had "unsafe and unsound banking practices" in the past, according to the US Department of the Treasury.
There is no indication that TransferWise committed any wrongdoing, or broke any laws, by partnering with Community Federal Saving Bank (CFSB). There is no evidence that the problem at CFSB in any way affected or was linked to TransferWise's business.
But CFSB is the second of TransferWise's US banking partners to have received scrutiny from regulators.
TransferWise said it is "confident that [the bank] had taken steps to address the issues raised," and that it was "aware of, and welcomed, the enhanced level of regulatory oversight that our partnership would be under."
The European fintech startup opened its doors in the US in February 2015, promising to bring cheaper money transfers to North America.
While it works to get its own banking licenses to operate independently, much of TransferWise's business in the US is conducted with licensed banking partners - including the Community Federal Savings Bank (CFSB), a New York bank with one branch whose logo is displayed at the bottom of the startup's US website. "The TransferWise program in the United States is sponsored by Community Federal Savings Bank," the website says, "to which TransferWise is a service provider."
And TransferWise's terms of use for US customers make clear that customers are dealing with the CFSB via TransferWise.
However, government documents show that CFSB has run into regulatory issues over the last few years
A year before TransferWise officially launched in the US, CFSB signed an agreement with the Comptroller of Currency, a division of the US Department of Treasury, that says the Comptroller "found unsafe and unsound banking practices relating to management and earnings."
The agreement included requirements that CFSB inform the OCC (Office of the Comptroller of Currency) of any changes to its board or executive team, prevents any "golden parachute" payments to any leaving senior employees, and that the bank not pay any dividends. It remains in force today.
The OCC agreement followed an earlier 2011 Cease and Desist filed against CFSB by now-defunct US federal agency the Office of Thrift Supervision (OTS). The OTS order alleges that CFSB operated "with an inadequate level of capital protection for the volume, type and quality of assets held," that it had "inadequate earnings to fund growth and augment capital, and that it had "an excessive level of adversely classified loans and non-performing assets."
Peter Henning, a professor of law at Wayne State University Law School, told Business Insider that the agreement between the OCC and CFSB is "significant," because it shows that the regulator and the bank were unable to resolve the issues at stake privately, so it was moved "up the ladder."
"The first few steps are private, no-one would ever hear about them. Now it's gone public, so that indicates that this is a serious concern for the OCC. Now they haven't taken an enforcement action so it's not the most serious, but they have imposed some conditions on the bank and they have made it public they are concerned about the bank's management and operations so it is important in that regard."
He added: "They're not going to shut the bank down ... or order people terminated, that would be the next step in the process if the bank can't cure its deficiencies. Then it can get really serious. In the spectrum, it's serious, but it can get worse. They have a chance to address this."
TransferWise has come under scrutiny over its US partners in recent weeks. In April, The Financial Times reported on its relationship with PreCash, an organisation it used the licenses of as an "authorised delegate" as it goes through the long-winded process of applying for its own licenses with the different US state regulators.
In June 2015, PreCash was fined $15,000 for "serious" unspecified violations by Texas regulators. TransferWise is now working with other banking partners - including CFSB - for its licensing needs while it works to get its own licenses.
"We conducted due diligence on a number of potential partners for our US launch," TransferWise spokesperson Michael Goodbody told Business Insider. "As part of our due diligence, which we conducted over the course of many months, we were aware of the OCC agreement - which is relatively common for banks in the US. Based on that due diligence, we were confident that they had taken steps to address the issues raised. We also were are aware of, and welcomed, the enhanced level of regulatory oversight that our partnership would be under from the OCC as a result of the agreement that was in place and we were very comfortable with that."
CFSB and the OCC did not respond to requests for comment.