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You might think, if you had set up a system, owned it and urged your customers to use it, that you might be responsible for it in some meaningful way if those customers should they be defrauded through it. You might especially think that was the case if said system’s security protocols proved so easily defeated by the simple act of stealing a cell phone. The banks which set up, own and push Zelle, however, have a different opinion.

The banks are aware of the widespread fraud on Zelle…. Banks say that returning money to defrauded customers is not their responsibility, since the federal law covering electronic transfers — known in the industry as Regulation E — requires them to cover only “unauthorized” transactions, and the fairly common ["me-to-me"] scam that [Wells Fargo customer Justin] Faunce fell prey to tricks people into making the transfers themselves….

In late 2020, [Bruce] Barth was hospitalized with Covid-19 and his phone disappeared from his hospital room. A thief got access to his digital wallet and ran up charges on his credit card, took out cash at an A.T.M. and used Zelle to make three transfers totaling $2,500…. When he filed fraud reports, the bank quickly refunded his cash and credit card losses. But it denied his claims for the Zelle thefts, saying the transactions were validated by authentication codes sent to a phone that had been previously used for that account. Bank of America was essentially saying that the Zelle transactions were authorized — even if his phone was stolen.

That is, it said that until it got a call from The New York Times, which seems to be the only institution with the power to change banks’ minds.

Mr. Barth was livid. “I filed grievances with every agency I could get my hands on, locally and nationally,” he said. “Every response I got was useless.”

After The New York Times contacted Bank of America about Mr. Barth’s case, it refunded him….

Another Wells Fargo customer, Julia Gibson, lost $2,500 to a [“me-to-“me”] scam in October. After she reported the fraud to the bank, it gave her a provisional credit for the lost cash. But in January, the bank abruptly rescinded the credit, sending her balance to zero and incurring overdraft fees…. After The Times contacted the bank, it refunded Ms. Gibson.

The banks can get away with this because, of course, the rules are unclear. The Consumer Financial Protection Bureau seemed to clear the matter up last year, making the banks responsible for losses “initiated by a person other than the consumer without actual authority to initiate the transfer.” This scared the shit out of banks, but they quickly embraced the ambiguity of the word “initiate.” And so it goes.

Less ambiguous is who’s responsible when you defraud the government doing so precious little to protect its defrauded citizens. In that case, you go to jail, even if you know Magic Johnson.

The federal government alleges that Rafael Martinez, chief executive officer of MBE Capital Partners, used fraudulent financial statements to gain approval from the Small Business Administration to issue loans to small companies through the Paycheck Protection Program…. The Justice Department alleged that Mr. Martinez used the fees his company collected for processing the pandemic loans to buy a villa in the Dominican Republic and several luxury vehicles, including a 2018 Porsche 911 Turbo and a 2017 Ferrari 488 Spider.

I mean, most PPP money didn’t actually wind up in paychecks, but even under the program’s rather lax standards, that’s a pretty farfetched, albeit allegedly common, way to protect paychecks.

MBE Capital in 2020 received $100 million in capital from EquiTrust Life Insurance Co., which is majority owned by Magic Johnson Enterprises, to bolster the lender’s efforts to issue PPP loans targeted at small businesses owned by women and minorities.

Which, you know, in a roundabout way we suppose it (allegedly) did.

Fraud Is Flourishing on Zelle. The Banks Say It’s Not Their Problem. [WSJ]
A Magic Johnson Affiliate Funded a Small-Business Lender. That Lender’s CEO Now Faces Fraud Charges. [WSJ]

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