This proposed class action lawsuit was triggered after a BSB customer, the Texas-based Intex Distributing Co., wrote a check dated for Jan. 6, 2023 in the amount of $16,575 payable to M&B Metal Products in Leeds, Ala.

However, the check was stolen in the mail.

On Jan. 4, a Navy Federal member opened a business account in the name of the payee on the business check. By Jan. 10, the member deposited the Intex Distributing Co. check into the business account. On that same day, and the funds were transferred, debited or withdrawn, the lawsuit claimed.

The bank also alleged that neither Navy Federal nor its members were entitled to honor the check because the endorsement on the check was not authorized. BSB notified Navy Federal of its error in allowing the fraudulent account to be created, claimed a forged endorsement and requested a credit be issued to the bank. On May 15, Navy Federal denied the bank’s credit request even though the credit union’s internal investigation determined that the account was fraudulent prior to the bank making its claim for reimbursement, according to the lawsuit.

Before filing its legal action, BSB said it deposed Navy Federal officials under Texas Rule of Civil Procedure 202, which allows individuals or entities to petition a court for authorization to conduct depositions before formally initiating a lawsuit.

Based on the information it gathered from the deposition, the bank claimed the credit union has “insufficient Know Your Customer (KYC) requirements,” which financial institutions are expected to use to verify their customer identities and to monitor transactions to help deter and detect activities related to fraud, money laundering and terrorism financing.

For example, business membership accounts are only opened through an online portal using a member’s personal Navy Federal credential. However, there is no requirement that a customer have an account with Navy Federal for any established amount of time. Rather, personal accounts can be created contemporaneously with business accounts, according to the lawsuit.

“Individuals who conduct bank fraud through NFCU (Navy Federal) often open fraudulent business accounts days or hours after committing business ID theft then within hours or days of creating the fraudulent account deposit and withdraw fraudulent checks,” the lawsuit alleged.
What’s more, even though Navy Federal’s business applications require the address of that business, the credit union allegedly does verify the address or require proof of the address. Business ID thieves often provide incorrect addresses, according to the lawsuit.

During the deposition, Navy Federal acknowledged that its policies, practices and procedures with respect to the creation of business accounts and check fraud are inadequate to stop the kind of fraud involved in this matter, according to BSB’s lawsuit.

In addition, the lawsuit claimed that Navy Federal’s business risk policy is to not review checks for fraud unless the check exceeds $25,000. That threshold was set because of Navy Federal resource management and not risk management.

READ MORE: Buckholts State Bank V. Navy Federal Credit Union