[Vision2020] Whores At It Again

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

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June 10, 2013
Banks Seen as Aid in Fraud Against Older Consumers By JESSICA
SILVER-GREENBERG<http://topics.nytimes.com/top/reference/timestopics/people/s/jessica_silvergreenberg/index.html>

The pitch arrived, as so many do, with a friendly cold call.

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 Money was withdrawn from Mr.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.

The Times reviewed hundreds of filings in connection with civil lawsuits
brought by federal authorities and a consumer law firm against Zions and
another regional bank that has drawn even more scrutiny, First Bank of
Delaware. Last November, First Delaware reached a $15 million settlement
with the Justice Department after the bank was accused of allowing
merchants to illegally debit accounts more than two million times and
siphon more than $100 million.

The documents, as well as interviews with state and federal officials,
paint a troubling picture. They outline how banks profit handsomely by
collecting fees while ignoring warnings of potential fraud and, in some
instances, enabling dubious merchants to prey on consumers.

Anyone, young or old, can be targeted by unscrupulous marketers. But for
several reasons — financial worries, age, loneliness — older people are
particularly vulnerable to what is known as mass market fraud, deceptive
pitches that arrive by telephone, mail and the Internet.

The problems at Zions and First Delaware, where the banks became financial
conduits and quiet enablers for questionable businesses, extend well beyond
those two institutions, federal authorities say. Indeed, banks across the
country, from some of the largest to smaller regional players, help
facilitate billions of dollars of fraud each year, according to interviews
with consumer lawyers and state and federal prosecutors.

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.”

Zions did not interact directly with the company that called Mr. Koch,
National Health Net Online. What the bank did was establish a banking
relationship with an intermediary, Modern Payments, that handled payments
for National Health. Mr. Koch’s account at a small Virginia bank was
debited by National Health, which in turn paid Modern Payments for
processing the transaction. Modern Payments gave its bank, Zions, a cut of
its fee.

In all, Zions in effect let roughly $39 million be withdrawn from hundreds
of thousands of accounts from 2007 to 2009. Much of that money was
ultimately transferred to bank accounts in Canada, India and the Caribbean,
according to a Times review of court records. Many of the Internet
merchants’ customers were older people and others on shaky financial
footing. But that, too, worked in banks’ favor: the withdrawals set off a
cascade of insufficient fund fees — more than $20 million in all, court
records show.

“Zions takes seriously the need to prevent the banking system being used
for fraudulent purposes; however, it is our general policy not to comment
on pending legal matters,” said James R. Abbott, director of investor
relations for Zions. “There is another side to this story, other than that
told by the plaintiff. Our side of the story will be told at the
appropriate time through the legal system.”

A spokesman for First Delaware declined to comment. Neither National Health
Net Online nor Modern Payments responded to e-mails and telephone messages.

Mr. Koch, a retired teacher, said that he was usually skeptical of
telemarketers. But when his phone rang one afternoon in November 2007, he
recalled, he listened as the caller identified himself as a
Medicare<http://topics.nytimes.com/top/news/health/diseasesconditionsandhealthtopics/medicare/index.html?inline=nyt-classifier>official
and suggested that Mr. Koch update his health insurance card. Mr.
Koch, as requested, supplied his bank information.

But instead of a new insurance card he received notice that he had been
enrolled in National Health Net Online’s discount health plan. The company
had withdrawn $299.95 from his bank account as payment, according to
records reviewed by The Times.

National Health, a unit of NHS Systems Inc. of Collegeville, Pa., has a
troubled history. In April, the Federal Trade Commission permanently banned
the company from telemarketing and ordered it to pay a $6.9 million fine
after accusing NHS Systems of defrauding consumers. NHS Systems did not
return multiple telephone calls seeking comment.

“I was so angry,” Mr. Koch recalled. He demanded a refund from NHS Systems
but was not reimbursed.

Between 2007 and 2009, tens of thousands of Americans, many of them over
age 65, lodged complaints with state attorneys general, banking regulators
and the F.T.C., requesting refunds for bank charges that they say were
unauthorized, according to court records.

Lawyers at Langer, Grogan & Diver sued Zions, representing several hundred
thousand consumers who said that NHS Systems and other telemarketers took
money from their accounts without authorization. The lawsuit, which is
pending in a federal court in Pennsylvania, claims that Zions effectively
gave “fraudulent marketers direct access to every bank account in the
United States.”

According to internal e-mails and other documents filed in connection with
that suit, Zions bankers recognized something was amiss early on. An
outsize number of customers were disputing payments to certain processors.
The rates of return — that is, the percentage of payments that are returned
for insufficient funds and lack of authorization — stood out. “WOW,” one
Zions officer wrote in an e-mail after seeing the numbers.

Others inside Zions raised alarms, too. Zions executives told colleagues
that the high return rates were a troubling sign. In January 2007, one
warned that the rates were “staggering.” In 2007, more than half of the
payments that one Internet merchant was routing through Zions were bounced
back — roughly 40 times the industry standard.

Reviewing complaints about one Internet merchant, a Zions vice president
wrote, “Every red flag possible went off in my head.”

And yet the bank kept handling the transactions, court records show. Why?
One payment processor executive suggested an answer: the business was a
gold mine.

“Turning them off and sending them somewhere else is not an option,” this
executive told Zions in an e-mail in September 2007.

Officials at the F.T.C., the Justice Department, the Consumer Financial
Protection Bureau<http://topics.nytimes.com/top/reference/timestopics/organizations/c/consumer_financial_protection_bureau/index.html?inline=nyt-org>and
the Federal Deposit Insurance Corporation say this is just the tip of
the iceberg, according to people with knowledge of the matter.

In a move that prosecutors say is a harbinger, the United States attorney
in Philadelphia sued the First Bank of Delaware in November, claiming the
bank effectively abetted “fraudulent Internet and telemarketer merchants,”
court records show. The bank, the lawsuit claims, stayed “willfully blind”
to the fact that the merchants were illegally taking money from customers,
including a disproportionate number of seniors, through “fraud, trickery
and deceit.”

Like Zions, First Delaware dealt with intermediaries rather than directly
with the merchants.

But as Zane David Memeger, the United States attorney in Philadelphia, said
in the lawsuit against First Delaware, bad actors “must access the banking
system to gain access to the consumer’s money.”

At First Delaware, return rates for some merchants exceeded 80 percent. Yet
the more questionable the merchant, the more fees a bank stands to collect,
prosecutors say. Every time victims flag an unauthorized charge and demand
money back, banks collect fees to process the return. Those fees are far
larger, according to banking documents, than the ones charged for
processing the original transactions.

First Bank of Delaware anticipated that revenue from its processing
business would swell by more than 1,300 percent, from $150,000 in 2010 to
roughly $2 million a year later, court records show.

Bradly D. Swartz, of Meshoppen, Pa., learned firsthand how much such
practices can cost consumers. Mr. Swartz, 59, was trying to stretch his
retirement savings when a telemarketer called in 2007 with what sounded
like good news: Mr. Swartz had won a prize. All he had to do to collect was
fill out a money order.

Then, starting in 2007, Mr. Swartz said, a subsidiary of NHS Systems — the
same company that Mr. Koch had dealt with — started withdrawing $19.95 a
month from his checking account. After emptying the account, National
Health referred him to a debt collector, Mr. Swartz said.

Mr. Swartz said his credit was ruined. He now works part time at Walmart to
supplement his savings.

“I have to work until the day I die, and these greedy banks just profit,”
he said.

Federal officials say banks not only must know their customers, but also
their customers’ customers in order to ensure that consumers in general,
and older Americans in particular, are not at risk. The First Delaware
case, they say, is a warning to the industry.

“Nothing sharpens the focus for banks like an enforcement action,” said
Michael Bresnick, the director of President Obama’s Financial Fraud
Enforcement unit.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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