BNZ ordered to pay $217K to scam victim after failures to identify warning signs

Friday, 2 February 2024

The Banking Ombudsman has issued preliminary decisions indicating she will order Bank of New Zealand to repay two victims money they lost in investment scams.

Banking Ombudsman Nicola Sladden has sent several victims Borja Ares and Carla O’Neil, preliminary decisions in which she concluded BNZ should have identified warning signs they were being scammed.

The ombudsman issues preliminary decisions to give complainants and banks the opportunity to make comments before final decisions that are binding on the banks are issued.

Ares fell victim to the Citibank investment fraud in May, with BNZ staff helping him transfer just over $310,000 from a property sale to scammers who had set up a fake term deposit scam.

The bank should have been aware of the Citibank scam, and trained its staff to recognise it, the ombudsman said in her preliminary decision sent to Ares.

“At the time you were defrauded in May 2023, BNZ should have been aware of – and indeed was aware of – the prevalence and hallmarks of certain investment scams and that Citibank’s name was being impersonated by scammers,” the ombudsman told Ares.

“It monitored media reports and regulatory updates which specifically mentioned the Citibank investment scam, and it had previous experience of such scams. In July 2022, the Financial Markets Authority issued a warning about the Citibank scam. Media reports on Citibank scams appeared on 11 June 2022 and 31 July 2022.,” she said.

“The bank had also investigated a Citibank investment scam complaint reported in July 2022 and another reported in March 2023, both of which involved a customer advising the bank of their intention to invest with Citibank and instructing it to pay the funds into an account in their name at another bank,” she said.

Citibank did not offer term deposits in New Zealand, the ombudsman said.

BNZ said it was reviewing the preliminary decisions.

While BNZ told the ombudsman its fraud detection processes were “sufficient” at the time, the ombudsman did not accept that.

“The bank was on notice of a real possibility you were being defrauded,” she told Ares. “It therefore had an obligation to warn you the transactions had the hallmarks of a scam involving the impersonation of Citibank.

“In failing to do this, it was in breach of its obligation to identify and act on red flags. Had you been so warned, it is more likely than not that you would have uncovered the scam and not made the transfers.”

However, the Ombudsman only ordered BNZ pay 70% of Ares’ losses, telling him he was partly to blame for his losses.

If the ombudsman’s preliminary decision remains, that will require BNZ to pay Ares just over $217,000.

O’Neill was also a victim of the Citibank scammers, and was conned into sending $100,000 to them in February last year, thinking she was investing in a term deposit.

Just $21,431 was recovered, so the ombudsman said BNZ should pay her just under $59,000 for failing to spot red flags indicating a fraud, including that O’Neill was sending money to an account she named as Citibank, when the Citibank fraud had been publicised.

BNZ argued staff could not be expected to know about all active scams, but the ombudsman said staff should be trained to recognise the hallmarks of scams.

Ares said the preliminary decision sent a message to banks that they had a duty to identify and protect their customers, or face having to pay compensation.

“I believe this is quite historic,” Ares said.

But he also expressed a deep sense of sadness that while he and one other scam victim had succeeded in their complaints against BNZ, others had failed in their complaints against their banks.

However scam victims, who have formed into a network to support each other, have been angered by two parts of the two preliminary decisions.

The first is that ASB, which was the bank receiving the money, had no responsibility under the ombudsman scheme for allowing a fraudulent payment to go through to its account.

The second was that while the ombudsman found banks’ human staff had an obligation to identify red flags, banks’ automated systems were not held to the same standard, said banking expert Janine Starks, who has helped victims take cases to the ombudsman.

“If a customer did the payment via a branch or call centre and spoke to a human and told them it was a Citi bank investment, or HSBC/Suncorp etc, then the bank are on the hook and liable. Electronic payments have got zero back,” Starks said.

“For some reason they are holding a human to account but not an electronic system which can have a simple algorithm inserted to spot the same red-flag the human should have spotted,” Starks said.

She said people making large transfers for an investment should now be on notice to make those transfers in person with bank staff, and always tell their bank what they are investing in.

She called on politicians to review the Banking Ombudsman scheme, calling that distinction “ludicrous”.

“If you choose the wrong method and use an electronic payment, you have no chance of getting your money back, in a fraud. The decision is flawed,” Starks said.

That was illustrated by the case of Aucklander Rodney Mathers, who complained about Westpac to the ombudsman after losing $100,000 in a similar investment scam, was among the people who received a preliminary decision that did not award him any compensation.

In October 2022, scammers conned him into believing he was investing the money in a term deposit with Suncorp, an Australian insurer which owns Vero in New Zealand, but does not off offer term investments in New Zealand.

He complained to the ombudsman about Westpac’s failure to invest in a system that checked that account names and numbers matched before allowing an electronic transfer to go ahead.

Banks have now pledged to catch up with countries overseas and implement a confirmation of payee system, but have not set a deadline for doing so.

Mathers said Westpac’s system asked him to put in both an account name and number, giving him the misleading impression that it checked they matched.

The account name he gave included the word Suncorp, but the account number was not for a Suncorp account.

Mathers said Westpac’s failure to invest in a confirmation of payee system meant its banking services were not fit for purpose under the Consumer Guarantees Act.

But the ombudsman found because no other New Zealand bank had a comnfirmation of payee system either, Westpac had not fallen below New Zealand banking’s standard of reasonable care and skill.

“The standard of reasonable skill and care, in the context of a bank carrying out services, is that the bank acts as a reasonable bank in New Zealand would act in the same circumstances,” the ombudsman said.

“We are aware that account name matching is available in other jurisdictions. However, in New Zealand, account name matching is not available,” the ombudsman said.

She did, however, acknowledge the public did not realise this.

“While we acknowledge that there is a common misconception that account names are used for processing payments, we cannot find that the bank [Westpac] has caused or contributed to this,” she said.

The ombudsman could not comment on the preliminary cases, but she has been campaigning for better fraud protections, and told O’Neil in her preliminary decision: “We continue to support a review of the rules governing fraud reimbursement”.