Former fund manager and investment banker Janine Starks has accused New Zealand banks of negligence and failing to keep customers safe from fraud. Photo / Alex Burton
A financial expert has asked the Banking Ombudsman to launch a joint investigation into a cluster of international investment scam cases which have siphoned millions from Kiwi victims, citing what she believes are “corporate failure” and negligence by New Zealand banks.
Former fund manager and financial commentator Janine Starks says she believes there are “systemic failures” across New Zealand’s banking sector in fraud detection and consumer protection, leaving customers at heightened risk.
She claims the domestic banking industry has fallen well behind many of its OECD peers by failing to keep security systems up to date with emerging threats.
“We’ve got so far behind that it’s absolute negligence on the banks’ behalf and it’s an embarrassment internationally what they’re getting away with,” she said, in her opinion.
Starks said this had resulted in a raft of high-profile cases, revealed by the Herald, of victims losing their life savings through elaborate scams in which they thought they were investing money into term deposits with reputable financial companies.
She has been working pro bono with a group of victims whose banks have refused liability for their losses and who have now complained to the Banking Ombudsman.
The group includes North Shore real estate agent Carla O’Neil, Whangārei health worker Borja Ares and Whanganui health administrator Jo Hurley, who between them lost nearly $800,000 to a Citibank-branded ruse earlier this year.
They and other victims are also consulting a lawyer about a possible class action against the banks.
Starks believes the group have a strong legal case and says banks would be “foolish” to let the matter go to court.
“The banks are digging themselves a hole here and it would be careless of them not to settle.”
She has prepared a detailed 13-page submission on behalf of victims outlining the alleged security failures that led to customers being defrauded.
These allegedly include inadequate algorithms that failed to detect suspicious transactions or pick up references to known scams; poor staff training and knowledge of recent FMA scam warnings; and the lack of payment systems to match account names with recipient banks.
Starks has asked Banking Ombudsman Nicola Sladden to launch a joint investigation into the cases, which all involved local “mule” accounts being used to transfer stolen money offshore.
It’s estimated that foreign scam syndicates are draining up to $200m a year from New Zealand victims.
A joint investigation was needed to look beyond individual cases and assess the bigger picture, which involved systemic failures across the industry, she said.
“This cluster is now a trend and it tells a much bigger story about security.
“It’s not a one-off error by a single person. What we’ve got is a corporate failure by the banks,” she believed.
“I’ve worked in the financial services, banking and fund management all my life and I know the kind of power these people [banks] can throw at law firms and the tactics they use.
“These victims have got no chance if they’re left to their own devices and go one at a time to the Banking Ombudsman.”
Starks said, in her view, a clear pattern had emerged suggesting a widespread failure by New Zealand’s payment system to detect suspect transactions or create “friction” when processing large payments for retail customers.
Jurisdictions like the UK had introduced account matching technology to detect whether the receiving account name matched that recorded by the sender, helping reduce accidental losses and fraud.
They were also being forced to reimburse customers who lost money to scammers through “authorised” transactions such as investment scams.
No such systems were in place here.
Starks put the reluctance to invest in adequate systems down to one thing - “money”.
“They’re sitting here with no liability at the moment. Why would you do it to your shareholders? Why would you take on any liability at all when you can delay and deny for as long as possible? It’s standard tactics. Always protect your bottom line.”
Consumer NZ boss Jon Duffy said he believed our banking consumer protections were “out of step” with similar countries.
While a confirmation of payee system could make online transfers safer for customers, it was complicated to introduce and required collaboration between banks.
If banks refused to improve security voluntarily, the Government should force the industry through legalisation, he said.
“You can’t rely on them to do it themselves.”
New Zealand Banking Association chief executive Roger Beaumont said scam-related crime was increasingly sophisticated and evolving.
Banks were usually at the end of a chain of events that made up a scam.
“There’s no silver bullet for solving scams and what’s needed is a multi-pronged approach and the involvement and investment of all affected sectors, including government agencies, telcos, social media companies, and internet service providers.
“Banks already have significant sophisticated systems in place to help detect and prevent fraud. We’re working on what else banks can do to fight scams and further protect their customers, which we hope to announce soon.”
Sladden said she was concerned about the rise in scam complaints, which now accounted for a third of her office’s investigations.
“We are aware countries, like the UK, have stronger consumer protections from scams and consider it timely to review the consumer protections in New Zealand.
“We support the urgent introduction of account name and number matching technology.”
Asked whether she would jointly investigate the cluster, she said her office was probing a number of complaints but its powers were limited by the Banking Ombudsman Scheme’s terms of reference.
Payment NZ says it is “deeply interested” in protecting Kiwis from scams and developing a “next generation real-time payment” system with fraud controls and payer verification “being considered”.
Asked why an account matching system was yet to be introduced, what work had been completed and when a system would be rolled out, a spokesman they had “nothing further to add”.
A Horizon survey released this week found only one in three Kiwis think their bank is doing enough to protect them from fraud, and that people overwhelmingly support anti-fraud measures adopted across the Tasman - even if it means slower payment processing.
Some 10 per cent of respondents (equating to 385,000 New Zealanders) had experienced fraud, or theft involving a bank account.
The country’s biggest bank is testing state-of-the-art biometrics software that can detect if someone is impersonating a customer based on their digital behaviour.
The behavioural technology identifies patterns in the way customers access and use digital banking, including their keystroke movements and interaction with a webpage or device.
An ANZ spokesperson said it was an extra layer of security and fraud detection to protect customers, which could help identify when a device was being used by an imposter or fraudster.
“The software is being used by some banks globally and in Australia, we plan to have this operational in New Zealand next year.
“While this will help prevent a good portion of criminals who have tricked customers into giving access to their digital banking, it won’t stop customers being duped by investment or romance scams. These remain the biggest source of customer losses and is why customer education and awareness are also really important.”
ANZ said it had invested millions in new technology to identify and prevent scams and fraud, but the fight against cyber criminals had become an “arm’s race”.
“As soon as we close one avenue, another opens, and fraudsters use behavioural psychology techniques as a tool to open victims’ wallets.”
While only a small proportion of transactions were fraudulent (less than 0.07 per cent based on ANZ’s analysis), the company was focused on restricting customer harm.
In July it launched ANZ Fraud Check, which sends a text alert to customers about unusual card transactions, and was investing in other prevention technology.
Additional conversations were under way within the financial industry on other anti-scam measures that could be rolled out here, including an anti-scam centre based on the Singapore model.
Set up in 2019, it brings more than 80 industry stakeholders together to share intelligence and provides a “nerve centre” that investigates scams and tracks trends.
It had enhanced capability to freeze accounts and trace stolen money, identifying What’s App lines and online accounts used to perpetrate scams, disrupting criminal operations.
A Horizon survey released this week found only one in three Kiwis think their bank is doing enough to protect them from fraud, and that people overwhelmingly support anti-fraud measures adopted across the Tasman - even if it means slower payment processing.
Some 10 per cent of respondents (equating to 385,000 New Zealanders) had experienced fraud or theft involving a bank account.
Lane Nichols is a senior journalist and deputy head of news based in Auckland. Before joining the Herald in 2012, he spent a decade at Wellington’s Dominion Post and Nelson Mail.
OPINION: Economic and fiscal forecasts demand more aggressive reform.