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Internet mule scam – money laundering – transactions not payments by mistake – funds received in good faith – part recovery not inequitable
Mr L was a fairly recent migrant to New Zealand. While his English was adequate for everyday purposes, he felt most comfortable with Chinese, his first language. He spent a good deal of time using the internet, where he met a Russian, who he knew only as Sergei, in a chat room.
Sergei offered Mr L employment as an “account manager” for a software company. He explained that the company had New Zealand customers who preferred to make payments directly into a New Zealand bank account. Mr L would receive payment into his account, would deduct a 5% commission, and would remit the balance to Russia by Western Union transfer. Sergei said that there were tax advantages in conducting business in this way, and that it would also be quicker than transferring funds directly into a Russian bank account.
Mr L asked Sergei for his phone number, and followed up with a personal telephone call. This helped to convince Mr L that the job was genuine, and he agreed to accept transfers into his account.
After several transactions had been made over a period of ten days, Sergei asked Mr L to accept higher value transfers. When Mr L explained that there was a daily limit on the amount he could transfer out of his New Zealand account, Sergei advised him to recruit a friend to help him out. However, the friend’s first transaction was identified by the bank as possibly fraudulent, and enquiries were made which led to Mr L.
Although some of Mr L’s most recent transactions could be reversed, eight were irretrievable. The bank closed Mr L’s account and reversed all the transfers into his account, leaving him with an overdraft of more than $18,000. Its fraud department told him that he had been involved in illegal activity, and described him as an accomplice of the criminals. Mr L considered this to be untrue and was very distressed.
Mr L felt that he had been the victim of fraudulent practices as much as the account-holders from whose accounts the funds had been transferred, but that he alone was expected to carry all the loss. He questioned the bank’s security measures, and also complained about the handling of the case by the bank’s fraud department.
My early investigation focussed on the measures taken by the bank to identify and prevent money laundering. I was concerned about the number of relatively major transactions that had passed through a previously inactive account without arousing suspicion. I also had concerns when I found that the bank considered that some of its customers’ home computers had been infected by a Trojan virus which had logged keystrokes and made such information available to Sergei and his colleagues. This suggested that the customers could have contributed to their losses by having failed to install appropriate protective software on their computers, but the bank did not expect them to carry any of the loss.
At this point I made some general suggestions for banks’ future handling of such cases:
- they should give consideration to placing a hold on suspected mule accounts, instead of immediately reversing suspect transactions;
- their staff should not make assumptions about the guilt or innocence of mules, who should be threatened with prosecution only if a clear prima facie case has been established of their deliberate involvement in criminal activity; and
- they should establish in each case how the funds have been transferred to the mule account, and whether a reasonable standard of care on the part of the original account-holder could have prevented the transfer.
When I was on the point of forming an opinion on the merits of Mr L’s complaint, I learned of several similar complaints from other bank customers who had also been caught up in the scam. Given the importance of establishing a consistent approach to such cases, I commissioned an independent legal opinion on the principles that should apply.
The legal opinion found that mule transactions should be treated as payments made by mistake. That is, it should be assumed that the bank had processed the transfers in the mistaken belief that it was acting on valid instructions from its customers. It was therefore necessary to consider the application of section 94B of the Judicature Act 1908 governing the recoverability of payments by mistake. In essence, a payment is deemed not recoverable if:
- it has been received in good faith; and
- the recipient has altered his/her position in reliance on the validity of the payment; and
- it would be inequitable to require recovery.
I concluded that, while Mr L may have acted foolishly, he had been neither fraudulent nor reckless. He had therefore received the transferred funds in good faith. He had clearly altered his position in reliance on the validity of the payment, as the funds became irrecoverable as soon as they were sent overseas.
I was not, however, satisfied that it would be inequitable to require recovery of the funds. Two aspects of Mr L’s behaviour concerned me: he had made no attempt to independently verify the credentials of his new employer; and he was prepared to profit from business activities which, as he knew, might be structured to avoid tax.
On the other hand, while Mr L had not exercised a proper degree of care in entering into the transactions, the following considerations weighted the scales in his favour:
- English was not his first language. I did not think he could be expected to detect all the warning signs that might have been apparent to someone who was completely at home with English. He was also less likely to have been able to read and understand any information supplied by the bank or any other agency about scams of this kind;
- he had taken the trouble to call Sergei, and found him absolutely convincing. Indeed, he was initially reluctant to believe that Sergei was knowingly involved in fraudulent activity, and suggested that Sergei could have been deceived into taking part in the scam; and
- the fraudulent transfer by parties outside New Zealand of funds from one New Zealand account to another by electronic means was a recent phenomenon at that time. One could not reasonably expect bank customers to be on their guard about such transactions. The funds were designated as cleared, and could be immediately withdrawn. There was no apparent risk of reversal.
When I concluded my investigation I had formed the view that the loss arising from the transactions should be shared equally by the bank and Mr L. I noted that the bank was, of course, free to seek recovery of part of its loss from the customer from whose accounts the funds were transferred, if that was deemed appropriate. I also concluded that bank staff had, whether intentionally or otherwise, led Mr L to believe he was being considered guilty of a crime before the facts of the matter had been clearly established.
On this basis I recommended that the bank reimburse Mr L one half of the total of the fraudulent transactions – an amount of $7,195. I also recommended that it should pay him compensation of $300 for inconvenience, and write off any interest or charges attributable to the overdraft created by the reversal of the fraudulent transactions.
Both the bank and Mr L accepted my recommendations.