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Does the bank have to reimburse if I am a victim of fraud?

Posted by admin on March 9, 2009 in Investment Information, Misc.

Last Tuesday, my brokerage account made an unauthorized withdrawal from my bank account. I saw the transaction on-line Thursday morning and called my advisor to inform him of this fact. To his credit, he immediately responded and said that they had no record of my authorization to the withdrawal and they would reverse it. It appears that the withdrawal was not made by his office but by the processing center (the description on my bank account on this withdrawal is different than other pre-authorized withdrawals).

This situation only reiterates  the need to check your accounts constantly. Beside checking for obvious fraud (having been a victim of ATM fraud before), in an era of outsourced service provisions, simple clerical errors by financial institutions could mean unauthorized transfers, withdrawals or the wrong numbers being keyed in.

There are a lot of people pursuing the ostrich school of personal finance: stick your head in the sand and don’t look up. But, this only makes one susceptible to undetected fraud or errors. More to the point, check your accounts and take action promptly or your financial institution has no legal obligation to reimburse you- even in cases of fraud.

How? Look at the back of your monthly bank statements.  It should say something like this:

“Please notify your branch of any errors or irregularities on your statement within 30 days of the statement date. Otherwise you agree to accept this statement of our records as correct, except for any amount credited to your account in error” (emphasis is my own).

Then look at the agreement you signed when you opened your bank account. There should be a clause that says something like this:

“We will not hold you liable for transaction completed… where it can be shown you have been a victim of fraud, theft or coerced by trickery, force or intimidation provided you report the incident to us promptly and cooperate fully in any subsequent investigation.” (emphasis is my own).

In other words:

1. Any clerical errors not caught within 30 days by you will be deemed to be correct; and
2. Even if you are victim of fraud, if you don’t report it promptly or cooperate with their investigation, the bank has no obligation to reimburse you or to reimburse you fully.

Legally, you have most likely deemed to have acquiesced to the bank statements and, most likely, the bank has a duel defense of lack of mitigation (you did not do anything to minimize the damage) and contributory negligence (a reduction of any damages against the bank since the victim contributed to the harm suffered through their own negligence). Thus, even if push comes to shove, the bank can always argue that they do not have to reimburse you for the full amount.

Does this seem fair? As cold as it seems, I have to side with the banks on this one. No one should care more about your money than you.  Even though we live in a nanny society where believe our every need is supposed to be taken care of by someone else, no one should, or will, take care of your money better than you.

The time-lines in the agreements are not unreasonable and it should be our responsibility to balance our accounts and check for errors- especially in an electronic banking world where so much can go wrong.  Fraud of all types tends to rise during bad times, so please do be vigilant and aware.