State Action Against ODFI in Telemarketing Fraud Case

Source: Iowa Attorney General's Office
Date: July 6, 2005
Link: http://www.iowaattorneygeneral.org/latest_news/releases/july_2005/First_Premier.html

The Iowa Attorney General recently issued a news release announcing a settlement with a "bank that processed electronic withdrawals from the bank accounts of Iowa victims of telemarketing schemes." The bank involved agreed to a series of remedial actions and agreed to pay $200,000.

This announcement is significant for several reasons:

It shows the willingness of a state law enforcement agency to pursue action against a financial institution, even though it does not regulate the financial institution's banking activities. Financial institutions should not assume they are immune from such scrutiny from non-regulators. NACHA has reason to believe that other state attorneys general offices are also looking at targeting financial institutions that processed payments on behalf of telemarketers that injured consumers in their states.

It shows that a bank that cleans up its act with respect to companies it originates for does not escape liability for injury caused by previous business activity. According to the news release, at least some of the fraudulent telemarketing occurred in 2001. The Iowa Attorney General action comes almost 4 years after the bank stopped processing for one of the fraudulent telemarketers.

The Attorney General held that the ODFI was responsible even though it was "not directly involved with any telemarketing misconduct and assisted the Federal Trade Commission in connection with its investigation and prosecution of the telemarketers." In the news release, the Attorney General said, "(T)he law requires banks NOT to assist any telemarketer when the bank knows or should have known that the telemarketer is engaged in fraudulent conduct."