By Alan Zibel

WASHINGTON-- CommerceWest Bank of California agreed to pay $4.9 million and admit wrongdoing to settle a Justice Department probe into allegations the bank failed to prevent a payment-processing firm from improperly withdrawing money from accounts at other banks.

Under a deferred prosecution agreement, the bank admitted to one criminal count of "willfully failing to file" a report of suspicious activity by one of its business customers to the federal government.

In court papers filed Tuesday in U.S. District Court for the Central District of California, federal prosecutors said CommerceWest received letters and calls from several banks in 2012 and 2013 complaining of fraudulent withdrawals from customers' accounts by the payment-processing firm, V Internet Corp LLC. Despite other banks' suspicions of potential fraud, CommerceWest didn't file a report to the government, prosecutors said.

CommerceWest processed more than 1.3 million fraudulent bank account withdrawals on behalf of V Internet, the Justice Department said, earning more than $5 million in fees.

In a statement, the bank said it "recognizes that factors pointed to a problematic customer that deserved more scrutiny" than the bank provided. However, the bank said it "does not believe that any bank employee knowingly assisted with or willfully ignored signs of fraud."

Bank employees who managed the V Internet account relationship are no longer with the bank, said CommerceWest Chief Executive Ivo Tjan in a statement. The bank "has added to and improved its compliance team and systems," he said.

V Internet Corp couldn't be reached for comment. A Justice Department official declined to comment on whether the company is under investigation.

The government agreed to dismiss the criminal charge against CommerceWest in two years if the bank complies with the so-called deferred prosecution agreement's terms, including heightened scrutiny of merchants who do business with the bank. The bank also settled civil charges brought by the government, but didn't admit or deny those allegations.

The settlement marks the first time the U.S. has filed a criminal case against a bank stemming from Operation Choke Point, a federal probe launched in 2013 to examine fraudulent transactions processed through third-party firms that do business with banks.

In January 2014, the Justice Department reached a $1.2 million civil settlement with a small North Carolina bank, Four Oaks Fincorp Inc., over allegations the bank processed more than $2 billion in transactions for a payment processor that worked with allegedly fraudulent merchants. A federal judge approved the settlement in April 2014.

In the CommerceWest case, the Justice Department said the payment firm processed transactions for a fraudulent telemarketing company as well as a payday loan scheme that failed to actually make loans, the Justice Department alleged.

Bank of America Corp., Wells Fargo & Co. and Zions Bancorp complained to CommerceWest about the transactions, the Justice Department said, but instead of cutting off the payment processor entirely, CommerceWest and the payment-processing firm only blocked transactions at accounts held at banks whose customers had complained.

CommerceWest "ignored a parade of red flags indicating that a third-party payment processor was defrauding hundreds of thousands of thousands of innocent victims," said Benjamin Mizer, acting head of the Justice Department's civil division, in a prepared statement.

In addition, CommerceWest settled a civil fraud charge under a 1989 law that allows the U.S. to recover penalties for fraudulent behavior. Under the settlement, the bank will be required to enact new monitoring requirements to prevent fraud from occurring in the future, the Justice Department said.

Officials seized five airplanes, a firetruck, several tractors and all-terrain vehicles from the owner of the payment-processing firm, who wasn't named.

The case came on the same day that New York's top financial regulator, Benjamin Lawsky, reached a $2.1 million settlement over online lending industry practices.

Mr. Lawsky alleged that MoneyMutual, a company that sells information on consumers seeking online loans to lenders was violating New York laws barring high-interest rate loans.

Under the settlement, the company will stop marketing loans to New York consumers. Money Mutual's parent firm Selling Source LLC, didn't admit wrongdoing and said it wanted to "preclude what could have been costly and extended litigation."

Write to Alan Zibel at alan.zibel@wsj.com

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