The $180 billion Navy Federal Credit Union, one of the world’s largest CU is being sued by one of the smallest Texas banks, the $122 million Buckholts State Bank (BSB). The bank in a proposed class action lawsuit has claimed that the Navy Federal Credit Union has sloppy Know Your Customer (KYC) procedures resulting in business check frauds.
Last week BSB filed a lawsuit in the U.S. District Court in Austin, Texas. The bank alleged that the Vienna, Va.-based Navy Federal Credit Union has acknowledged the average single check fraud transaction amounting to $10,000. The CU are annually transacting around 19,200 fraudulent checks (worth an estimated $192M), which are affecting more than 100 downstream banks. As per the lawsuit, Navy Federal has been able to control its own losses of the total fraudulent accounts exposure to somewhere around 1%. During a deposition, allegedly stated that he was not “shocked by that number”.
On Wednesday, a Navy Federal spokesperson said, “Navy Federal has full confidence in our systems and established processes.” He added, “We look forward to answering the bank’s claims in court.”
The reason for this proposed class action lawsuit was, the Texas-based Intex Distributing Co., a BSB customer, wrote a check for January 6, 2023, amounting to $16,575 to be paid to M&B Metal Products in Leeds, Ala. The check however was stolen while in mail.
A business account was opened by a member of Navy Federal on January 4. This account was in the name of the payee on the business check. The member of the Navy Federal deposited the Intex Distributing Co. check by January 10, into the business account. As per the lawsuit, the funds were debited, transferred or withdrawn the same day.
BSB also alleged that the endorsement on the check was not authorized and both Navy Federal and its members were not entitled to honor it. Navy Federal was alerted by BSB of the error in getting the fraudulent account created. The bank claimed a forged endorsement and requested a credit be issued to BSB.
BSB’s credit request was declined on May 15, by Navy Federal. According to the lawsuit, this decline of credit request was even after Navy Federal CU’s internal investigation accepted that the account was fraudulent prior to BSB making the claim for reimbursement.
BSB conducted depositions of Navy Federal officials under Texas Rule of Civil Procedure 202, allowing any party to petition a court for approval to conduct depositions before formally initiating a legal action. The bank did this before filing its legal action or lawsuit.
As per BSB, the credit union has “insufficient Know Your Customer (KYC) requirements,” that are required to be used by financial institutions to verify all their customer identities and also to monitor transactions to identify any fraudulent activities, terrorism financing or money laundering. This was as per the information it collected from the deposition.
An example, for any business membership account to open, it needs to be via an online portal and that too using the personal credentials of any Navy Federal’s member. However, it is not necessary for a customer to have an account with Navy Federal for a certain period. As per the lawsuit, personal accounts can be created at the same time as business accounts.
The lawsuit also alleged that, “Individuals who conduct bank fraud through NFCU (Navy Federal) often open fraudulent business accounts days or hours after committing business ID theft then within hours or days of creating the fraudulent account deposit and withdraw fraudulent checks.”
Moreover, one of the requirements of Navy Federal’s business applications is the address of that business, the CU neither verifies the address nor asks for its proof. The lawsuit also added that the business identity thieves mostly give incorrect addresses.
Though Navy Federal did accept at the time of deposition that all its practices, procedures and policies are inadequate to stop any kind of fraud involved in terms of business accounts creation and check fraud This was as per the lawsuit filed by BSB.
As per the lawsuit by BSB, Navy Federal’s business risk policy does not review checks for fraud if amount less than $25,000. Though the threshold for the amount was fixed because of Navy Federal resource management and not due to risk management.
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