A long running battle between consumers and Zions First National Bank came one step closer to resolution this week. The bank and two of its subsidiaries agreed to pay $37.5 million to settle a lawsuit brought under the Racketeer Influenced and Corrupt Organizations Act (RICO). The suit claimed that the defendants provided payment processing services to phony telemarketing companies that illegally debited customer accounts. An estimated 500,000 consumers may be affected.
The case was originally filed in January of 2010 by Reynaldo Reyes of Maple Shade, NJ. Reyes claims that a consortium of fraudulent telemarketers were using Zions First National Bank and two of its payment processing subsidiaries as their correspondent bank.
Fraudulent telemarketers will often dupe consumers with false promises and exaggerated product promises. Their hope is to get consumers to disclose their banking information so that the scammers can access the consumers’ accounts. These telemarketers can’t directly access a bank account, however. For that, they need the services of a correspondent bank. That bank processes the transaction and transfers the funds from the customer’s bank account into the telemarketer’s account.
Banks like Zions First National obviously receive a fee for each transaction they process. Telemarketers can be a big source of profits for banks.
According to the Federal Trade Commission, 85% of the victims of telemarketing scams are senior citizens. These folk are also often reluctant to report the fraud for fear of embarrassment. Billions of dollars are lost each year to these scams.
The telemarketers are responsible for their actions. Many of them are offshore and are hard to catch. The government knows this and relies on banks that process their transactions to help shut down these fraudsters. Without the banks, these fraudsters would quickly go out of business.
Not all telemarketers are fraudsters. Many offer valuable products and services. One way of separating the good from the bad is by measuring the number of transactions that must be reversed because the customer claims they were defrauded. Banks and regulators keep track of fund transfers that must be reversed because of fraud.
When a customer calls to report that a debit from their account or transfer wasn’t authorized, that information is required to be recorded. According to a bank industry trade group, telemarketers have an average “return rate” of approximately approximately 0.4%. In other words, for every 200 bank transfers, approximately one customer complains that the transfer wasn’t authorized.
The return rate isn’t the percentage of transfers that are reversed because a customer cancels a service or returns a product. Rather the return rate measures when a financial transaction must be reversed because it was not authorized.
If you know where this story is headed, you are probably right. Many of these phony telemarketers doing business with Zions First National had a return rate that was 20 times the national average. One company had a return rate that was 69 times higher. According to Reyes, Zions Bank knew this yet ignored the obvious red flags.
Since the early 1970’s, banks have had an obligation to know their customers. Federal anti-money laundering rules require banks to monitor their larger customers. Those rules are even more stringent today since the passage of the Patriot Act. The Office of the Comptroller of the Currency requires banks to “understand all facets of the customer’s intended relationship with the institution and realistically determine when transactions are suspicious or potentially illegal.
Did the bank do that? According to Reyes, no! He says that the Better Business Bureau, the FTC and many state attorneys general had thick files of complaints on these scam artists… files and information that were readily available had the bank bothered to do any due diligence as required by law.
Some of the companies (or their owners) had been charged with telemarketing fraud or were under injunctions to cease and desist operations. Did Zions First National Bank stop them from using their bank to process transactions? No.
Zions First National Bank Prosecuted for RICO Fraud
RICO is one of the most powerful anti-fraud statutes on the books. It allows victims of fraud to hold responsible anyone who participated in the conspiracy or “enterprise.” This is important because in our experience, many of these telemarketing companies are nothing but shell companies operating out of a post office box. In this complaint, several of them were not even located in the United States. That leaves the bank as the “deep pocket.”
To successfully prosecute a RICO case, the victim must show that each of the defendants were involved and participated in the illegal enterprise. Because RICO provides victims with a civil remedy (monetary damages) for what is essentially a criminal act, the complaint must show two or more criminal acts were done in furtherance of the conspiracy.
In this case, Reyes claimed that each phony debit transaction was essentially wire fraud.
Reyes brought the case on his own behalf as well as all other victims of these telemarketers. These group cases are called “class actions.” Before one can bring a class case, the court must find some commonality among members of the class. In this case, that was easy. Each victim lost money when money was improperly taken from his or her account.
Reyes claims that he became a victim when he received a call from a telemarketer telling him that he was eligible for a government grant. The caller told him his bank account number was needed so that the money could be deposited into his account. Instead of getting a deposit, however, Reyes soon learned that the telemarketer debited his account for $29.95 and later for $299.95. When he went to complain, he found it difficult to get anyone to answer the phone.
To make matters worse, the two unlawful debits caused his account to be overdrawn thereby causing him to bounce checks and incur overdraft charges.
He wasn’t the only victim. One woman said she spoke to a telemarketer representative claiming to be from the Social Security Administration and wanting her account information because she was entitled to a rebate. Instead, her account was debited for $29.95, $19.95 and $29.95.
Certainly the telemarketers belong in jail for their shameless actions. That doesn’t make the victims whole, however. RICO allows the victims to collect damages from anyone responsible for the fraud including the bank.
And what are those damages? Under RICO, a victim’s actual damages can be tripled. The wrongdoers can also be forced to pay the victim’s legal fees and court costs.
These triple damage and legal fee provisions make RICO a powerful remedy for those that were abused by banks.
While this case dealt with 100’s of thousands of consumers, RICO is also a great remedy for businesses with fraud claims against banks.
MahanyLaw / Judge Lang & Katers – Lender Liability Lawyers
There are very few lawyers who will sue banks. A few mortgage defense lawyers have limited experience suing banks but very few have ever sued a bank for RICO fraud. The lawyers that do sue banks usually work for larger firms (and charge big firm rates) and defend banks.
The lawyers at Judge, Lang & Katers and MahanyLaw are different. We are two national boutique law firms that have joined forces to take on the largest and most powerful of banks, mortgage companies, fiduciaries, loan servicers and other financial institutions. Attorney Brian Mahany was one of the lead counsels in the historic $16.65 billion prosecution in 2014 against Bank of America.
If you need someone strong, experienced and committed to suing banks, call us. For more information, contact attorney Chris Katers at [hidden email] or by telephone at (414) 777-0778. The author of this post, attorney Brian Mahany can be reached [hidden email].
MahanyLaw and Judge, Lang and Katers – We Sue Banks!
[Before you call, we do have minimum size limits on the cases we handle. Visit our home or contact pages for a description of what we do and do not do.]