MasterCard, Visa, and the Card Sharks

Hallmark Bank & Trust, headquartered in the Turks and Caicos islands, enjoys a valuable relationship with one of the best-known brands in consumer finance: the credit-card giant MasterCard (MC). Hallmark, like other banks, pays MasterCard for the right to use its name on the cards Hallmark issues to customers. MasterCard also receives a percentage of sales made with those cards.

Hallmark, despite its homespun name, has a checkered reputation. (It has no connection to the greeting card company.) In a civil lawsuit filed in 2007 in federal court in Hawaii, the U.S. Internal Revenue Service alleged that two American accounting firms advised scores of clients to evade taxes by moving money out of the country by means of Hallmark-issued MasterCards. The bank isn't named as a defendant in that case. Brian F.J. Trowbridge, Hallmark's president, formerly served as a director of Lake Shore Alternative Financial Asset, also based in the Turks and Caicos. In February 2009, a federal grand jury in Chicago accused the president of Lake Shore affiliate Lake Shore Asset Management, Philip J. Baker, of tricking U.S. currency investors out of a total of $300 million. Trowbridge isn't accused of criminal conduct in the case. Until recently, another Hallmark executive, Greg Hurd, secured banking services for Lake Shore Asset Management, according to a document filed in a 2007 civil fraud suit brought against Lake Shore Asset Management by the U.S. Commodity Futures Trading Commission in federal court in Chicago. Baker and Lake Shore have denied wrongdoing in the Chicago cases, which are pending.

All of this raises a question: How many red flags does MasterCard need before severing ties with Hallmark Bank and its president?

MasterCard and its main rival, Visa—each a publicly traded company—say they monitor individual cards for misuse and avoid associating with questionable banks. The vast majority of banks that have alliances with Visa (V) and MasterCard boast solid reputations. But the card companies also do business with financial executives and institutions that have murky profiles.

Visa has sold a debit-card license to Global Bank of Commerce in Antigua. On its Web site, Global markets an "unembossed" Visa card on which the customer does not have to place her name. Other financial companies make similar anonymous card offers. A. Jack Fishman, a former IRS criminal investigator, says the come-ons appeal to people who use cards to evade taxes or transfer dirty money: "Why else on earth would you need an anonymous credit or debit card, unless you were trying to move illicit funds?" Global's president, Brian Stuart-Young, says the no-name cards aren't likely to be used illegally because the bank "holds detailed financial information for anyone who might get an unembossed card." The cards typically have low limits, he adds.


The card networks stress that they take special care when dealing with banks outside of the U.S. In an e-mailed statement, Visa, based in San Francisco, said it "reviews the owners and directors of each non-U.S. applicant [bank] against applicable government lists and commercial databases to ensure that there are no restrictions or reputational concerns associated with the applicant." A Visa spokesman declined to address the company's relationship with Global or to make Visa executives available for interviews.

Jodi Golinsky, MasterCard's vice-president for U.S. regulatory and public policy, says her company combs through banks' public records and conducts independent investigations. The roughly 23,000 banks currently approved by MasterCard are also subjected to ongoing monitoring, she adds. MasterCard requires each to have an active program to fight fraud and money-laundering. Banks based in countries or regions known to be tax havens receive extra attention.

So how is it that Hallmark has maintained a valuable 11-year relationship with MasterCard? Golinsky says the card company knows about the legal entanglements of Hallmark and its employees. Beyond that, she declines to comment.

Reached by phone, Hallmark employee Cara Saunders says the bank is in the midst of a move and no one can comment. Trowbridge, the president, responded via e-mail: "We cooperated with the IRS in the Hawaii matter, and no charges were ever made against Hallmark." He added: "Hallmark and I actively and fully support anti-money laundering activities. Nor do we engage in, or encourage, tax evasion." On Lake Shore, he said: "Hallmark provided registered offices for Lake Shore. We did not trade [its] accounts, solicit funds, or have contact with investors." Trowbridge added that Hurd is no longer an employee of Hallmark and that neither Hallmark nor Hurd ever provided financial services to Lake Shore or its president, Baker. Messages left at Lake Shore went unreturned. Baker is in custody in Chicago awaiting trial. His attorney didn't return messages.

Visa and MasterCard authorize tens of thousands of banks around the world to issue a total of more than 1 billion cards. On its Web site, Visa highlights its anti-fraud technology, saying its highest priority is "protecting merchants, cardholders, and financial institutions from payment card fraud." MasterCard, based in Purchase, N.Y., says on its site: "Consumers worldwide use MasterCard cards for more than 16 billion transactions a year, and all but a minute percentage of those transactions are fraud-free."

Still, credit-card misuse crops up not only at obscure Caribbean banks but at large mainstream ones as well. UBS (UBS), the Swiss titan, agreed in February 2009 to pay $780 million to avoid prosecution by the U.S. Justice Dept. for allegedly helping wealthy Americans evade taxes on roughly $20 billion. Most of the UBS accounts in question had credit cards attached to them, which allowed customers to gain access to the sheltered money, according to prosecutors. Jeffrey P. Chernick of New York, one of the first to be individually charged with evading taxes through a UBS account, pled guilty last July to hiding $8 million from U.S. tax authorities. In his plea agreement, Chernick admitted to using a credit card to avoid taxation. The brand of the card wasn't specified in court papers. Chernick received a reduced sentence of three months in jail in exchange for cooperating with authorities.

MasterCard's Golinsky says her company isn't working with authorities on any matters related to UBS or Chernick. She otherwise declines to comment on specific cases. MasterCard cooperates with government investigators in such situations, she says. Banks "are regulated entities and therefore governed by the appropriate authorities," she adds. Golinsky declines to disclose how many bank licenses MasterCard has revoked because of concerns about impropriety.

Sometimes, even after regulators sue a financial executive, the action doesn't seem to set off alarms with Visa or MasterCard. Johnny E. Johnson is the COO of Sun Investment Savings & Loan, which is registered in Sweden. On its Web site, Sun says that it issues MasterCard debit cards. In April 2009 the SEC accused Johnson of securities fraud in a civil suit filed in federal court in Los Angeles. The suit, which is pending, alleges that Johnson and other defendants operated a "multi-level marketing scheme" that defrauded individuals of some $9 million.

The Sun executive has a colorful career history. In 1999 regulators in Antigua placed into receivership the bank where he then worked as a managing director. That institution, known as Eurofed Bank, was linked to a Ukrainian money-laundering scandal, according to the Antiguan authorities. Johnson was not specifically accused of wrongdoing but was described by the Antiguan government as the bank's primary manager. John Benjamin, the chief financial regulator for the Antiguan Finance Ministry, declined to provide any more specifics.

Johnson later managed AvantGuard Bank & Trust in Grenada. In 2002, while he was running that bank, the Grenadan Finance Ministry opened an investigation into whether AvantGuard was compliant with the country's banking laws and maintaining sufficient capital. The bank voluntarily liquidated itself the same year. Before dissolving, AvantGuard had offered a MasterCard marketed as the Freedom Card. The card was licensed through a corporate affiliate of AvantGuard. Petra Charles-Joseph, a spokeswoman for Grenada's Finance Ministry, declined to provide additional details.

Asked about Johnson, MasterCard's Golinsky reiterates her employer's no-comment policy concerning specific banks or executives. "We require any [bank] customer to have its own policies and procedures in place to make sure that they have robust anti-money-laundering and compliance," she says. Johnson didn't return phone messages seeking comment. His attorney, Jonathan Schwartz, declined to comment.

David Rowe, a Fort Lauderdale attorney representing 22 investors, says that Hallmark Bank & Trust's tie to MasterCard contributed to his clients being misled. Rowe has filed five lawsuits alleging that Hallmark and an investment firm called Overseas Locket International jointly promised his clients 15% returns on currency trades. The defendants never invested the money, Rowe's clients allege, resulting in losses of $250 million.

Rowe argues that his clients were convinced of the legitimacy of the investment in part by Hallmark's association with MasterCard. In an interview, plaintiff Don Dowe says, "I figure that this is a major bank that is being endorsed by MasterCard." Promotional materials sent to investors by Overseas prominently displayed MasterCard's logo, Dowe says.

One of the five suits filed by Rowe was dismissed on Mar. 27 by a federal judge in Fort Lauderdale. The judge ruled that the case should have been filed in the Turks and Caicos, not in Florida. Rowe says he will attempt to revive the dismissed suit and continue to press the others. Hallmark has denied any impropriety. Carl W. Oberdier, a lawyer who has represented the bank in similar litigation in New York, says: "It's tragic what happened to the investors, but Hallmark's view is that Hallmark put a stop to the damages as soon as it could and vigorously worked with law enforcement in the Turks and Caicos."

MasterCard has been named as a defendant in four of the five Florida suits. In court filings, it has denied any wrongdoing. The company's Golinsky declines to comment on the litigation. She says a bank's being accused of wrongdoing could affect whether MasterCard continues to do business with it. Inquiries from law enforcement agencies "prompt a second review." Mastercard, she emphasizes, monitors its licensees vigorously.

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