Bank pays $217,000 for failing to act on warning signs of investment scam

Categories:
Common scams targeting bank customers,
Summary:
In May 2023, Gerald was looking for somewhere to invest $330,000 from a property sale and found a website offering competitive rates on investments. He completed a form and received a call from someone purporting to be from an overseas bank who told him about a bond promising an annual interest rate of 13.5 per cent that was backed by the bank. Gerald was keen to take up the offer. He searched online for details about the caller and found an individual matching that name who worked at the bank. The caller, however, was a scammer impersonating the employee.
Published:
June 2024

Several days later, Gerald called his bank to increase his transaction limit so he could make a transfer of $165,000. He told the staff member it was going to the overseas bank via a New Zealand bank account set up in his name. Later in the conversation, he confirmed the money was for an investment with the overseas bank. The following day, he called the bank to say he again needed to temporarily raise his transaction limit to permit a second transfer of $165,000. The staff member said she could see from the notes in the bank’s system that he had increased the limit the previous day so he could make an investment with the overseas bank. The bank agreed to the request and he made a second transfer.

A few weeks later, Gerald rang his bank to say he believed he had been scammed. The bank was able to recover just $20,000 of his $330,000.

Gerald wanted the bank to reimburse the $310,000 he had lost. He said the bank should not have allowed the transactions to proceed because the Financial Markets Authority had issued a warning about an investment scam involving impersonation of the overseas bank, and numerous media reports had been circulating about the scam as well. In addition, he had made explicit references to the overseas bank during his two phone calls. These references, he said, should have aroused the bank’s suspicions and prompted it to make inquiries before agreeing to raise his transaction limit and process the payments.

Gerald also said he subsequently learned the overseas bank did not offer retail investments to New Zealanders, and his bank should have known this, which would have further prompted the bank to view the transfers with suspicion.

A further complaint was that the bank should have checked that the account name and number matched. Such a check would have uncovered the discrepancy and alerted the bank to the scam. Lastly, he complained the bank that received his money was also liable for his loss because it allowed fraudulent payments to go through one of its accounts.

Our investigation

We examined whether anything about the transactions should have alerted the bank to a real risk that Gerald was being defrauded. If a bank detects such a “red flag”, it is obliged to make inquiries about the transaction and, if warranted, warn the customer.

We found such a warning sign in the fact Gerald passed on enough information during the two phone calls that the bank’s suspicions should have been aroused. The bank should have been aware of – and indeed was aware of – the prevalence and hallmarks of certain investment scams and that the overseas bank was being impersonated by scammers. The Financial Markets Authority issued a warning about the impersonation scam and media had also reported on the scam. The bank had also previously investigated two complaints from customers who had been similarly scammed by fraudsters purporting to be from the same overseas bank.

Gerald said during his calls that he was transferring funds to another New Zealand bank, and the overseas bank being the ultimate destination of the funds. His comments to the bank staff member during the call were also confused and inconsistent about whether the account was itself in his name, or whether it was an account controlled by the overseas bank.

The bank said it was unrealistic to expect frontline staff to know about all scams active at any given time. We accept that – but we expect them to know about scam hallmarks that are widespread and well known, as this one was. Staff should be trained to detect the hallmarks of scams without necessarily knowing the individual features of every scam that emerges.

Taken together, these factors were sufficient to put the bank on notice of a real possibility Gerald was being defrauded. It therefore had an obligation to warn him the transactions had the hallmarks of a scam. In failing to do this, it was in breach of its obligation to identify and act on red flags. We were satisfied that had Gerald been so warned, it was more likely than not that he would have uncovered the scam and not made the transfers. We considered it was fair to apportion the loss between Gerald and the bank because Gerald shared some responsibility for the loss. As the customer, he had the prime responsibility for ensuring the legitimacy of the intended recipient of his funds. Information was readily available via internet searches about the overseas bank, including the Financial Markets Authority warning and media stories about scammers impersonating the bank. He could also have checked the overseas bank’s New Zealand webpage, which at that time contained a warning about scammers and about how it did not offer investments to retail customers in New Zealand. Furthermore, the fact he was being offered a return of 13.5 per cent – when returns at the time were generally less than half of that amount – should have raised his suspicions. Contacting the overseas bank directly would also in all likelihood have uncovered the scam. Accordingly, we found the bank was responsible for 70 per cent of the loss, and Gerald 30 per cent.

As for his complaint that the bank did not check that the account name and number matched, the bank was not obliged to carry out such a check. The bank’s terms and conditions explicitly warned customers that it used only the account number to identify the recipient of the payment.

We were unable to look at Gerald’s final complaint – that the bank receiving his funds was also liable for his loss by allowing a fraudulent payment to go through one of its accounts – because we lacked the power to do so. Our rules stipulate that we can consider complaints only about a bank from whom the complainant received a financial service. Gerald received no direct financial service from this bank.

Outcome

The bank reimbursed Gerald $217,000.

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