The Federal Reserve Board has issued an enforcement action against Evolve Bancorp and its subsidiary, Evolve Bank & Trust, for failing to adhere to essential anti-money-laundering (AML), risk management, and consumer compliance protocols. This Arkansas-based bank, renowned for providing “banking as a service” products to various fintech companies, now faces stringent regulatory scrutiny.

Evolve Bank Under Enforcement Plan

As part of the enforcement action, Evolve Bank & Trust must enhance its compliance measures with its existing partners. Notably, these include fintech firms like Affirm— a major player in the “buy now, pay later” sector, which recently announced a collaboration with Apple. Despite the significance of this partnership, Affirm has declined to comment on the enforcement action.

Earlier this year, Evolve encountered serious issues when customer funds linked to pig-butchering scams were seized. Furthermore, the bank provided services for Synapse Financial Technologies, which declared bankruptcy in May. Another prominent partner, Mercury, offers banking solutions tailored for startups.

Federal Reserve Board’s Statement

The Federal Reserve Board highlighted the need for Evolve to bolster its risk management practices to address potential compliance and fraud risks effectively. This involves implementing rigorous oversight and monitoring of their fintech relationships. The Board emphasised the importance of enhanced recordkeeping and consumer compliance programs as part of these strengthened measures.

Konrad Alt of Klaros Group, a regulatory advisory firm, noted that many major providers of banking as service products are under similar enforcement actions. He remarked, “Each of these orders contains a bit of regulatory innovation. Banks in this space will want to scrutinise the Evolve order closely to understand its implications.” According to S&P Global Market Intelligence, banking as a service institution accounted for 13.5% of severe enforcement actions by federal bank regulators in 2023.

Evolve’s Response to the Enforcement Action

In response to the enforcement action, an Evolve spokesperson acknowledged the receipt of a formal order from both the Federal Reserve Board and the Arkansas State Bank Department. The spokesperson outlined the bank’s commitment to “further bolster” its compliance oversight and risk management practices.

“We have made significant investments in technology and personnel within our enterprise risk management, compliance, and BSA/AML departments to strengthen oversight and enhance the risk framework,” the spokesperson wrote in an email to Fortune. “With the support of our senior management and board of directors, we are confident this order’s impact will result in a stronger Evolve.”

Examinations and Regulatory Review

The enforcement action stems from examinations conducted in 2023, which revealed Evolve’s inadequate risk management framework for its partnerships and overall risk management program. These findings were part of a routine regulatory review, not a formal investigation, as clarified by Evolve.

The bank downplayed the severity of the enforcement action, asserting that it was comparable to orders received by others in the banking as a service industry. Evolve assured stakeholders that the Federal Reserve’s order “does not affect our existing business, customers, or deposits. Evolve remains well-capitalised and continues to show strong growth across all business lines.”

Future Actions Required by Evolve

The Evolve board of directors has been given 90 days to submit a detailed plan to strengthen its oversight of the bank’s management and operations. This plan must ensure compliance with the Bank Secrecy Act and other anti-money-laundering regulations.

This enforcement action underscores the increasing regulatory scrutiny facing banks that provide services to fintech companies. As Evolve Bank & Trust navigate this challenging period, it remains to be seen how the implementation of these new compliance measures will impact its operations and partnerships.

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