Source/Bloomberg
Compilation/Ning
Shan-Hanesi felt desperate at this moment.
On the morning of July 5, Hanes, head of a small bank in Elkhart, Kansas, was meeting with one of his wealthiest depositors in his office when he made a slightly bizarre request.
The CEO of Heartland Tri-State Bank asked a client if he would lend him $12 million because he wanted to cash out from a cryptocurrency investment. In response to the transaction, Hanes promised to pay the money back in 10 days and provide the client with a high interest of $1 million.
Hanes said he had connected with someone to help him invest in cryptocurrencies, but there was a problem with the wire transfer, so more investment was needed, and some of the money had already been transferred to a physical institution in Hong Kong.
The client, a local farmer, asked if the money was the bank's own money and was assured it was personal money, not the bank's. But he was still suspicious, even though he had no reason not to trust his friend: Hanes, 52, is a well-respected figure in Elhart, a city of about 1,800 in southwestern Kansas. Not only is he a school board member, occasionally preaches at a local church and sometimes mows lawns for neighbors on weekends, but last year he was elected head of the Kansas Bankers Association.
Still, the unnamed client turned down the tempting loan, not trusting the deal amid scrutiny of bank failures across the country. He told Hanes the investment looked like a cryptocurrency scam. The farmer told Hanes that if he wanted his money back, he should leave for Hong Kong immediately.
About a week later, after learning from a bank employee that Hanes had remitted $12 million, the customer immediately found a member of the Heartland board of directors and informed the director of his meeting with Hanes, asking whether the bank might be at risk of liquidation. Bank representatives then contacted regulators, and on July 28, the Kansas Bank Commissioner's Office declared Heartland bankrupt and officially closed it.
Heartland Bank exterior, source: Bloomberg
The Federal Deposit Insurance Corporation, which was appointed as the receiver of the bank, said in a statement that it expected its insurance fund to spend $54 million to protect the interests of depositors, with the maximum compensation for a single depositor reaching $500,000. This also indirectly proves the seriousness of the matter - Heartland Bank's total assets are only $139 million, but now the institution has to pay nearly half of its assets for compensation, which shows that the actual amount of deficit should not be underestimated. A few days later, State Bank Commissioner David Herndon told the Financial Times that Heartland was declared bankrupt because of a crypto scam; Herndon said in an email that the agency's involvement ended after the Federal Deposit Insurance Corporation was appointed as the receiver.
The Federal Deposit Insurance Corporation (FDIC), which is conducting a review of all failed U.S. banks, declined to comment. Hanes, who has not been accused of wrongdoing, did not respond to detailed questions. This report is based on interviews with three people familiar with the events leading to the bank's closure, who spoke on the condition of anonymity because of the sensitivity of the matter.
Elkhart is a two-hour drive from Dodge City along Highway 56, located in the southwest corner of Kansas, where the state borders Colorado and Oklahoma. In the city's downtown, an elk statue greets visitors and symbolizes the residents' resilience and unity.
In the words of one local resident, this close-knit community was able to raise $10,000 for those in need just by selling chicken and noodles. And as one of only two banks in town, Heartland plays an important role in the community - from sponsoring the annual county fair dinner to providing a "friendship fund" for those who need medical expenses. Hanes' bank, which specializes in loans to agricultural producers, is the soul of the community. But now, the building that houses the bank has a new sign: Dream First Bank, the name of the institution that acquired Heartland Bank's assets in late July.
Elkhart is a small city where strangers wave as they drive by, but they’re also curious about who you are and what you do. In other words, gossip still travels fast in a small town. After the bank failed, cars from other states surrounded the bank, and there was no end of discussion. In recent weeks, FBI agents have brought community leaders with ties to the bank to the local courthouse for questioning. Elkhart residents know each other so well that they can tell who is being questioned by the cars parked outside. (An FBI spokesman said the agency could neither confirm nor deny the existence of an investigation.)
Hanes began his banking career in 1993 as an agricultural loan officer at First National Bank of Elkhart (the predecessor to Heartland). He led the purchase of the bank in 2011 and kept it locally owned, according to testimony he later provided to the Kansas Legislature. Hanes took every opportunity to make the trek from Elkhart to Washington, D.C., where he testified to Congress on the importance of community banks multiple times. As president of the Kansas Bankers Association, he once came face to face with Rohit Chopra, director of the Consumer Financial Protection Bureau. Kansas Republican Senator Roger Marshall described Hanes as "the pride of Elkhart" in 2019:
Hanes testified today before the House Agriculture Committee's Commodity Trading, Energy, and Credit Subcommittee to present the banking industry's perspective on farm credit issues in rural America. Great job!
https://t.co/kFazSelLZB pic.twitter.com/vviJvFU9i5
— Kansas Bankers Association (@KansasBankers) December 11, 2019
Most people in Elkhart were not affected by the bank's failure; their accounts were simply transferred to Dream First Bank. Shareholders, however, stand to lose all of their investment. The bank's stock is owned by holding company Elkhart Financial Corp., which is not covered by the FDIC. According to a 2021 Federal Reserve filing, Hanes and family members were among the bank's largest shareholders; Hanes held about 7% of the shares at the time.
Other shareholders include families who own local businesses, teachers, retirees and farmers. One shareholder, who asked not to be named, said she did not believe Hanes had any bad intentions. She added that in this situation, there would be no reward or feedback for being angry about the losses. But many farmers who are not shareholders were disappointed with Hanes and said those who faced the prospect of losing their retirement assets were undeservedly affected, so he had the right to be worried after the meeting. Two people familiar with the situation said that it was actually the bank's money that was involved in the cryptocurrency scam.
Heartland Bank was once known as the First National Bank of Elkhart. Its office has a plaque with the names of its past directors. Source: Blomberg
Still, the exact details of the scam are unclear. Herndon, the state’s banking commissioner, emailed Bloomberg News a link to a September alert from the U.S. Treasury Department’s Financial Crimes Enforcement Network, which works to protect the financial system and warns of so-called “pig-killing” schemes.
This model is similar to the domestic pig-killing scam, except that it occurs in the field of virtual currency investment. Scammers find victims by digging into dating apps and social media sites. Scammers create a fake profile to contact potential victims through social media, WhatsApp, Tinder or other dating sites, or even random text messages, pretending to be an incorrect number or old acquaintance. The goal is to have a cordial discussion with the victim and try to become their "new friend" or "lover."
After becoming friends with a certain level of trust, they will slowly convince the victim to invest in cryptocurrency by recommending a fake website or app that looks real but is controlled by the scammers. In the early stages of investment, victims generally make a small investment at the beginning, and the scammers will ensure that they will get a moderate return on their investment and even provide cash withdrawal operations to prove the compliance of the APP. Once the funds reach a certain amount, the scammers will take away all the funds and disappear, and the anonymity of the virtual currency account is difficult to trace.
In this operation, victims are tricked into providing more and more money - just like fattening pigs for slaughter. According to law enforcement data cited by the Treasury Department, victims of similar tactics and other virtual currency investment frauds have lost billions of dollars in the United States alone. And Hanes is very likely to be a victim of this.
Hanes understands the role he and his bank play in Elkhart. "Think about the impact on many rural communities without a local bank," he told Kansas lawmakers in 2021. "How many high school scoreboards, county fair donations, recreation team sponsorships, school kids' water bottles, scholarship donors, civic organization members, Santa Day sponsors and parade floats would be lost without the support of local community banks and their employees?"
Heartland First Bank is not exactly a local company. The company, which is based 72 miles away in Syracuse, Kansas, said its employees' jobs would not be affected by the change. The collapse of the small Heartland bank follows the collapse of four regional lenders this year, including Silicon Valley Bank and Silvergate.
As for Hanes, he is out of work. He resigned from the school board and from his position with the Kansas Bankers Association. Elkhart residents said they had seen him around town a few times. But he was mostly confined to his home as the investigation continued, residents said. His new ranch-style house -- American-style, with a basketball hoop and a large backyard -- is a short drive from the courthouse, where the FBI has offices.
