Court Reinstates Case Against Bank That Aided Senior Citizen Fraud

This week, the 3rd Circuit, U.S. Court of Appeals overturned a lower court decision that had denied class action status to victims of a scheme targeting senior citizens who were suing Zions Bank and its payment processor affiliates for aiding the fraudsters. U.S. regulators led by the Department of Justice have been fighting this and similar schemes, yet powerful special interests have managed to create a false narrative in Washington, DC that has been picked up by opponents of consumer protection laws. They falsely claim that the government's target is "legitimate" payday lenders and gun dealers. Wrong, the target is financial crimes against consumers, many consumers.

This week, the 3rd Circuit, U.S. Court of Appeals overturned a lower court decision that had denied class action status to victims of a scheme targeting seniors who were suing Zions Bank and its payment processor affiliates for aiding the fraudsters. The case had been reported on in 2013 by Jessica Silver-Greenberg in her New York Times story “Banks Seen as Aid in Fraud Against Older Consumers:

“Bruno Koch, 83, told the telemarketer on the line that, yes, of course he would like to update his health insurance card. Then Mr. Koch, of Newport News, Va., slipped up: he divulged his bank account information. What happened next is all too familiar. Money was withdrawn from Mr. Koch’s account for something that he now says he never authorized. The new health insurance card never arrived. What is less familiar — and what federal authorities say occurs with alarming frequency — is that a reputable bank played a crucial role in parting Mr. Koch from his money. The bank was the 140-year-old Zions Bank of Salt Lake City. Despite spotting suspicious activity, Zions served as a gateway between dubious Internet merchants and their marks — and made money for itself in the process, according to newly unsealed court documents reviewed by The New York Times.”

Zions, of course, is not the first bank that has failed to look for fraud. In fact, Charles Duhigg, again in the New York Times, back in 2007, had exposed Wachovia Bank (since acquired by Wells Fargo), along with Zions, in his story, “Bilking the Elderly, With a Corporate Assist.

Banks including Zion, Wachovia and many others have grown to like fee income from merchant banking services to fraudsters. They’ve ignored obvious signs of payments fraud that estimates put at tens of billions of dollars each year. The Duhigg story refers to Wachovia ignoring numerous fraud warning phone calls from other bankers demanding that their own customers be made whole. The Silver-Greenberg story refers to court documents stating that “more than half of the payments that one Internet merchant was routing through Zions were bounced back — roughly 40 times the industry standard.” That, dear readers, is a clue, one Zions chose to ignore.

Jessica Silver-Greenberg goes on to explain that in recognition of the pattern and practice of frauds being aided by banks, that DOJ began to take a closer look (as did officials at the regulators CFPB, FTC and FDIC):

“Officials at the Justice Department say they are taking aim at banks’ role in giving predatory lenders and fraudulent merchants access to the United States financial system. The department is considering civil and criminal actions against a number of banks for allowing tainted money to flow through branches, for failing to safeguard against suspicious merchants, and for originating transactions on behalf of businesses that they know make unauthorized withdrawals from customer accounts, according to people with direct knowledge of the matter. “You can’t close your eyes anymore to the fraud that you are allowing to happen,” said Michael Blume, the director of the consumer protection branch at the Justice Department. “Banks are in business to make a profit. Unfortunately, this is a moneymaking operation at consumers’ expense.”

Because the banks and payment processors were seen as a bottleneck or “choke point” — since the fraudsters needed online bank accounts to conduct their schemes and because banks have a variety of duties under law, to protect their customers’ deposits from fraud and prevent money laundering are a few — the strategy made a great deal of sense. Yet, somehow, opponents of consumer protection, acting in concert with some conservative web sites, have created a false narrative that the true targets of U.S. DOJ’s Operation Choke Point are “legitimate” gun dealers and  payday lenders, not thieves.

Our colleague Lauren Saunders of the National Consumer Law Center has done superhero work to correct the record, in guest columns and Congressional hearings.  As she told the House Judiciary Committee this spring on behalf of NCLC, U.S. PIRG, Americans for Financial Reform, the Center for Responsible Lending and the Consumer Federation of America:

  • Operation Choke Point stops fraud. Many fraudsters rely on banks and third party payment processors to enable them to take money from consumers’ accounts. Banks and payment processors can enable fraud, and often they can stop it.
  • The three cases that DOJ has brought through Operation Choke Point prove that DOJ is focusing only on banks that willfully ignore blatant signs of illegal activity. No one has defended the egregious conduct of any of the banks targeted.
  • Reports that banks have closed the accounts of legal businesses have little or nothing to do with Operation Choke Point. Complaints about account closures go back a decade, since passage of the 2001 Patriot Act with its anti-money laundering rules.
  • Bills such as H.R. 766 (Luetkemeyer), the Financial Institution Customer Protection Act of 2015; H.R. 1413 (Schweikert), the Firearms Manufacturers and Dealers Protection Act of 2015; and similar bills would make it harder for DOJ and other government agencies to protect the public.

It is disappointing that many on the hill have bought into the false narrative that somehow the U.S. DOJ, the FDIC, the FTC, and, of course, the CFPB (which the public supports but Wall Street and payday lenders oppose) are not doing their jobs but instead going after gun dealers. They aren’t going after gun dealers, they are going after fraudsters who target seniors. And, of course, the agencies are also going after fraudsters who target others, including students, military families and veterans and the rest of us.

Why are the agencies going after banks, not directly after fraudsters? The banks are breaking the law, too. As Lauren Saunders told Congress: The banks are violating their “know-your-customer (KYC) responsibilities under the Bank Secrecy Act (BSA) and the USA Patriot Act amendments.” Those laws help prevent drug and terrorism money laundering, as well as fraud. If the banks aren’t watching for fraudsters, they probably aren’t watching for terrorists, either.

This week’s court victory reinstating an effort to bring a class action against Zions is important. Private litigation helps enforce the laws and that helps hold wrongdoers accountable. Further, the longstanding right of consumers to band together as a class when they suffer the same harms has been under attack by the U.S. Chamber of Commerce and other powerful interests for years. The court has helped to reinforce and protect that right.

Now, it is also time for Congress to move on from attacking financial agencies simply trying to enforce the laws that protect consumers.


Ed Mierzwinski

Senior Director, Federal Consumer Program, PIRG

Ed oversees U.S. PIRG’s federal consumer program, helping to lead national efforts to improve consumer credit reporting laws, identity theft protections, product safety regulations and more. Ed is co-founder and continuing leader of the coalition, Americans For Financial Reform, which fought for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including as its centerpiece the Consumer Financial Protection Bureau. He was awarded the Consumer Federation of America's Esther Peterson Consumer Service Award in 2006, Privacy International's Brandeis Award in 2003, and numerous annual "Top Lobbyist" awards from The Hill and other outlets. Ed lives in Virginia, and on weekends he enjoys biking with friends on the many local bicycle trails.