Bank Of America Fined $225m For Bad Fraud Detection During Pandemic

July 18, 2022
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US agencies have found that Bank of America unlawfully froze unemployment benefits during the peak of the coronavirus pandemic as a result of a faulty fraud detection programme.

US agencies have found that Bank of America unlawfully froze unemployment benefits during the peak of the coronavirus pandemic as a result of a faulty fraud detection programme.

The Consumer Financial Protection Bureau (CFPB) has imposed a $100m penalty on the Bank of America after it automatically and unlawfully froze people’s accounts and gave them little recourse as part of its efforts to reduce fraud.

In a separate but coordinated case, the Office of the Comptroller of the Currency (OCC) handed out a further $125m fine to the bank for bad risk management and operational processes and controls, and deficiencies in how the bank handled consumer claims.

“The bank failed these prepaid cardholders by denying them access to their mandated unemployment funds during the height of the pandemic and leaving these vulnerable consumers without an effective way to remedy the situation,” said acting comptroller Michael Hsu.

“Banks must pay attention to the financial health of their customers and conduct their activities in accordance with all consumer protection laws,” he emphasised.

Soaring pandemic-related fraud

When the COVID-19 pandemic hit in early 2020, the unemployment rate surged and millions sought unemployment insurance benefits.

The benefits programme generated unprecedented levels of criminal activity, particularly in the form of eligibility and identity fraud. There were also a significant number of individuals who filed false error claims to access additional funds.

According to estimates from the Department of Labor, out of the total $872.5bn issued in pandemic unemployment benefits, at least $163bn could have been paid improperly, with a large portion being related to fraud.

Bank of America, which administered the unemployment benefits prepaid card programme on behalf of a dozen states, distributed more than $250bn in pandemic unemployment benefits to more than 14m people. The bank overall distributed more pandemic relief to Americans than any other bank.

In response to the heightened volume and the spike in fraud attempts, the bank changed its practices for investigating prepaid debit card fraud on unemployment insurance benefit accounts.

Between September 2020 and June 2021, it applied a fraud filter with a simple set of flags that automatically triggered an account freeze. This left many people without money "when they needed it the most", according to the CFPB.

Some consumers incurred late fees and interest charges on their other accounts as a result of the freeze, while others missed phone and utility bill payments, faced foreclosure, eviction, or car repossession.

The account freezes affected a large number of people in California, which raised serious concerns among state policymakers.

In 2021, Bank of America told Congress it faced challenges in all 12 states, but the scale of fraudulent activity in California “has been uniquely large”.

For instance, by December, Bank of America had identified more than 640,000 suspicious accounts and sent them to the California state unemployment department for validation.

This helped uncover 76,000 benefits cards that were sent to recipients in states that do not border California, hundreds of cards sent to a single mailing address and benefits issued to infants or children.

Commenting on the case, Bank of America told VIXIO: “This action arose despite the government’s own acknowledgement that the unemployment programme expansion during the pandemic created unprecedented criminal activity where illegal applicants were able to get states to approve tens of billions of dollars in payments."

“Bank of America partnered with our state clients to identify and fight fraud throughout the pandemic” and the bank “worked with California to identify hundreds of thousands of suspicious cards and assisted the state in protecting billions of dollars,” the spokesperson added.

'Passing the buck'

Federal agencies also found deficiencies in how Bank of America handled complaints related to the account freezes.

The bank made it very difficult for people to unfreeze their cards or to report fraud.

According to the CFPB, “people with unemployment insurance benefit prepaid debit cards could not make reports online, or in person at bank branches. People were on hold for hours every day for weeks trying to talk to someone at the bank.”

As Bank of America was the strongly preferred provider for California unemployment benefits, consumers were left without any choice to switch providers.

In addition, when consumers sought assistance, the bank often sent them back to the California state unemployment department for verification to regain access to their benefits, “passing the buck” to an overwhelmed state agency.

“But the bank knew the department was stretched and unable to provide services” and it “should have known it was essentially redirecting people into a black hole”, according to the CFPB.

Commenting on the case, CFPB director Rohit Chopra said: “Bank of America failed to live up to its legal obligations. And when it got overwhelmed, instead of stepping up, it stepped back.”

Bank of America previously argued that much of these frauds occurred during the enrollment process by criminals using stolen or fictitious identities. It is the state’s responsibility to review and approve applications, and Bank of America gets engaged at the end of the enrollment process once the state employment department validates and approves the payment.

The bank said it worked together with the California state department to establish the fraud prevention measures but ultimately the state department was responsible for eligibility determinations and for validating the identities of those whose accounts have been frozen in order to initiate the reactivation process.

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