CUNA, NAFCU & Virginia League: 'Judge Got It Wrong' in Troubling Fraud Case

On Tuesday afternoon, three credit union organizations filed a legal brief as a way to support a credit union locked in a potentially troubling fraud case that could have wider implications for the credit union industry.

CUNA, NAFCU and the Virginia Credit Union League (VACUL) jointly filed an amicus brief or “friend of the court” document with the 4th Circuit Court of Appeals in a case involving the Yorktown, Va.-based 1st Advantage Federal Credit Union. The credit union is currently appealing a judge’s ruling that it must pay $1.1 million in compensatory damages and attorneys’ fees due to a lawsuit brought against the credit union by a manufacturing company based in New York.

The $950 million 1st Advantage filed its appeal earlier this year to reverse a judgement by U.S. District Court Judge Raymond A. Jackson in Norfolk, Va., which found the credit union liable for fraudulent fund transfers when it failed to act on anti-money laundering alerts and suspicious activity from a member’s account and payments made to that account from Studco Building Systems. The judge ordered the credit union to pay Studco Building Systems (SBS) compensatory damages of $558,868, plus $591,568 in attorney fees and $56,168 in expenses stemming from a business email compromise lawsuit. Based in Webster, N.Y., SBS manufactures steel framing systems.

In a joint statement about Tuesday’s court filing, NAFCU President/CEO Dan Berger, CUNA President/CEO Jim Nussle and VACUL President/CEO Carrie Hunt said, “Credit unions support their members but there must be a limit to liability for fraud that is out of the credit union’s control.”

Their statement continued, “We maintain that the judge got it wrong in this case. Financial institutions rely on automation to sort through billions of ACH transactions each year. For perspective, some 30 billion payments moved through the ACH network operators in 2022. While the ACH system is designed to flag transactions that warrant closer scrutiny, it is unrealistic to think any financial institution handling a significant volume of ACH transactions can manually monitor fraud. While fraud is on the rise and unfortunate, credit unions cannot be held accountable for events out of their control. Our financial system would collapse if that were the case.”

According to an analysis of the lawsuit by the three organizations, “There are critical policy questions at the heart of the case that warrant the attention of every credit union, including protecting the ability to rely on automation to make possible the processing of payments across a wide number of platforms. This case is further evidence of the growing legal threats to financial institutions, including frivolous lawsuits, issues arising from the expansion of the depth and breadth of regulation, and the challenges presented by technology and fraud.”

During a call with reporters on Monday, NAFCU Vice President of Regulatory Affairs Ann Petros explained one major reason the organizations were filing the brief: “We want to ensure that credit unions are not overly burdened, so a broad decision by the court in this case could lead to some greater regulatory burden and requirements by financial institutions, at least in the 4th Circuit – which includes Virginia.”

The event that led to this credit union lawsuit began on Aug. 9, 2018, when an eight-year member identified as L.T. opened a personal account. The member, identified as a merchant coordinator, told 1st Advantage the personal account would be used for real estate transactions.

On Oct. 1, 2018, SBS received a spoofed email from an unknown third-party purporting to be Olympic Steel, a client of SBS. The spoofed email fraudulently instructed SBS to change its banking remittance information to L.T.’s personal account.

From Oct. 1 to Nov. 13, 2018, SBS made four ACH deposits totaling $558,868 to L.T.’s account. By the end of November, the account balance was $11.12 following a series of in-branch cashier’s check withdrawals, several domestic wires and two attempted international wire transfers.

The international wires were cancelled by the credit union after it received an alert from the Office of Foreign Assets Control. Even though the credit union launched an investigation after getting that alert, the domestic wire transfers were not cancelled, according to court documents. When a 1st Advantage compliance manager questioned L.T. about the ACH transfers on Nov. 23, the member said it was part of a job with another person who was doing real estate transactions and that the member was conducting those ACH transactions based on that job, court documents showed.

It’s expected the Appeals Court will not render a decision in this case until next year.