Banks Have Incentives to Facilitate Telemarketing Fraud“Keep in mind historically, telemarketing is an easy way to money launder and commit fraud. To knowingly bank a customer who is perpetrating fraud places the bank at great exposure,” wrote that [Wachovia] executive, Tim Brady, according to documents that are part of the lawsuit.
This raises an excellent point, one that I’m attempting to develop and articulate here at the Samuelson Clinic: we know that some business models are routinely employed for fraud. Shouldn’t consumer protection law and enforcement efforts routinely scrutinize these business models to reduce the incidence and severity of frauds against consumers? One reason why we’re failing to quickly address these problems is that businesses can profit by facilitating others’ frauds. As explained by Charles Duhigg, reporting in today’s New York Times, Wachovia knew that fraudulent telemarketers were using account at the bank to steal money from others, and that it was good for business at Wachovia: But newly released documents…show that Wachovia had long known about allegations of fraud and that the bank, in fact, solicited business from companies it knew had been accused of telemarketing crimes.
Internal Wachovia e-mail, for example, show that high-ranking employees at the nation’s fourth-largest bank frequently warned colleagues about telemarketing frauds routed through its accounts. Documents also show that Wachovia was alerted by other banks and federal agencies about ongoing deceptions, but that it continued to provide banking services to multiple companies that helped steal as much as $400 million from unsuspecting victims. “YIKES!!!!” wrote one Wachovia executive in 2005, warning colleagues that an account used by telemarketers had drawn 4,500 complaints in just two months. “DOUBLE YIKES!!!!” she added. “There is more, but nothing more that I want to put into a note.” However, Wachovia continued processing fraudulent transactions for that account and others, partly because the bank charged fraud artists a large fee every time a victim spotted a bogus transaction and demanded their money back. One company alone paid Wachovia about $1.5 million over 11 months, according to investigators. “We are making a ton of money from them,” wrote Linda Pera, a Wachovia executive, in 2005 about a company that was later accused by federal prosecutors of helping steal up to $142 million. We all know that telemarketing is a major vector for fraud. Yet, major banks have allowed them to operate on the network in such a way that they can withdraw money from accounts without authorization. For instance: In 2005, a Wachovia fraud investigator wrote to colleagues that 79 percent of the checks submitted by one Wachovia client, Suntasia, had been returned in August because of unauthorized withdrawals and other problems. Regulators say return rates in excess of 2.5 percent is evidence of potential fraud.
“I have good reason to believe that all of the deposited items are unauthorized drafts,” wrote the fraud investigator, Bill McCann in a 2005 e-mail message. But Wachovia continued doing business with Suntasia until last year, when the company was shut down by a court order, according to the lawsuit. These frauds are predictable and preventable. They lack novelty and complexity. But they still occur, in part because the incentive structure rewards processing these transactions. |
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