As we noted before the August recess, Senate Democrats have pressed a new bill designed to make the CFPB Director’s wish the command of law: banks would be clearly accountable for many instances in which consumers fall prey to those impersonating bankers, FBI agents, the CIA, and anyone else they think will persuade a customer, often elderly, to part with a whole lot of cash. Nothing will come of this bill in this Congress, but it will surely be back in the next. With it will come measures also to create a federal framework for the patchwork of state laws holding banks accountable for elder fraud. This sounds good, but drafting here is devilishly difficult.
There is no question that elder fraud is a grievous concern. I saw it firsthand as my father slipped farther and farther from being able to discern that the “nice” people happy to talk to him for hours were not beguiled by his avuncular charm – they wanted his bank account number. Washington media is full of stories of the “gold-bar” fraud stealing millions from local retirees and this is, of course, just a tiny sample of a problem estimated to cost at least $3.4 billion a year.
Is there a need for federal preemption? Last week’s American Banker had a helpful run-down of various state approaches. In general, state laws or pending measures seek remedies such as notifications to adult protective services or law enforcement, mandatory holds on suspect transactions, or at the least better train employees. Unsurprisingly, California may go the farthest, with legislation pending to – yes – hold banks financially accountable for fraud they could or should have spotted.
Online payment and elder fraud pose the same underlying challenge for banks: it is very hard for a third party to know if a transaction that rings various warning bells (assuming one can design good ones) is suspect or just a customer cutting loose. Indeed, elder fraud is in some ways still harder to discern because older people also cut loose even if bankers or family members don’t think they should and are often even more defensive about any slip-ups than younger customers.
Is it fraud when a lonely widow starts sending money to a sweetheart or a “romance scam?” Is a sudden large payment to a political candidate or interest group a newfound cause or a carefully-designed scam?
Paternalistic measures strike me as particularly problematic, but then I’m of an age. How is the bank to know that, should I decide to do something uncharacteristic, it’s not because I’ve lost my judgment, but because I’ve got a sudden yen for real-estate investment or some similarly-expensive pursuit? It’s my right despite my age to take up something new and I will surely be infuriated if my banker calls politely asking if I can tell her where the hands on the clock are at ten of eleven. Maybe someday I won’t be able to do so, but now I can and I’ve as much of a right to make what some might consider bad financial decisions as anyone else. How can my bank tell the difference?
So, what is to be done about elder fraud? The heart of the problem with elder fraud is that it is an awful and often tragic crime. Life savings can disappear in a minute, a hardship less likely in the usual payment-fraud scenario. This is a grievous crime and law enforcement should stop it just as it should stop money laundering. But because law enforcement can’t, banks are told to step in as de facto arms of the state to do a job that costs them billions in terms of operational infrastructure, reputational risk, and customer ill will. Charging banks with law enforcement when it comes to elder fraud similarly requires banks to detect and, where possible, prevent crime that is not of their making or knowing facilitation.
Saying all this is of course irrefutable, but saying it also won’t make any of the demands that banks stand in the place of law enforcement go away. So, when Congress convenes next year, look for federal bills providing elder-fraud restitution along with that for authorized fraud. A federal framework might be helpful to banks in terms of legal clarity, but it might also be costly and, if ill-drafted, a barrier to privacy for people having more fun with their money than the bank believes behooves someone of their age.