Tiny Bulkholts State Bank has filed a class action lawsuit against Navy Federal Credit Union for systematic failures in fraud prevention saying that is is costing banks across the nation millions of dollars.
The lawsuit which was filed in Texas is bringing to light what many small banks have complained about for years: the lax account opening procedures at is costing them big time.
At the heart of the class action lawsuit is a single fraudulent check for $16,575.90 which the bank says point to Navy Fed’s negligence.
Its David Vs Goliath And The Stakes Are High
Bulkholts State Bank with 15 employees operating from just three locations in the small town of Bulkholts Texas stands in stark contrast from its opponent. Navy Federal Credit Union boasts 13.8 million customers, $177 billion in assets, and more than 24,500 employees worldwide.
The Missing Check And The Exploitation
Buckholt State Bank knows each of their customers personally so it was a surprise when check #071628 written by one of those customers, Intex Distributing Co, which was used to pay one of their vendors, M&B Metal Products, came up missing.
Their customer, Intex, had put the check in the mail, but it was stolen and deposited into a fraudulently opened business account at Navy Fed. M&B Metal Products was a victim of business identity theft.
According to the lawsuit, fraudsters had created a business account at NFCU impersonating the legitimate payee (M&B Metal Products) on January 4th 2023. Six days later, the check for $16,575.90 was deposited into the account and same day funds were made immediately available by Navy Fed to the fraudsters.
The Investigation Unravels
When Buckholt learned that the check had been stolen they contacted Navy Fed on May 15th 2023 to request reimbursement for the stolen check because the endorsement on the back of the check was forged. To their shock, Navy Fed rejected the claim.
When Buckholt pressed further they were even more shocked. Navy Fed had already determined through its own internal investigation that the account on their end was fraudulent and had closed it months earlier.
Navy Fed knew the entire account was fraudulent, yet they would not return the funds.
BuckHolt Says Hundreds Of Small Banks Paying The Price For Navy Fed’s Poor Fraud Controls
But the lawsuit is not about the check really. Buckholt State Bank says its about something far bigger.
They contend that Navy Fed’s woefully inadequate Know Your Customer (KYC) policies means that fraudsters can open fraudulent business accounts at the bank and pass millions of dollars in bad checks. Worse yet, even when fraudulent checks are submitted, the bank will release the funds the same day even when the account is brand new.
The negligence claim is boosted by a startling revelation: Navy Fed apparently knew about and even tracked the fraud pattern that impacted Intex, documenting approximately 19,200 fraudulent checks annually affecting over 100 downstream banks, yet they implemented no meaningful preventive measures.
BuckHolt Says Navy Fed’s Strategy Is To Set Extraordinarly High Review Limits And Then Deny Claims
According to court documents and internal revelations, Navy Feds fraud detection system only triggers manual review when checks exceed $25,000 – a policy designed to manage operational resources.
When questioned why the limits were so high, Navy Fed responded that it would mean fraud analyst would have to review thousands and thousands of more checks if they lowered the limits. The $25,000 limit is ineffective because the average fraudulent check amount is $10,000.
Buckholt says Navy Fed’s poor fraud strategy and process of denying fraud claims leads to a vicious cycle.
- Fraudsters write a check for $25,000
- Check clears
- Navy Fed closes the account after the fact
- Navy Fed denies the claim when the other bank makes a claim
Buckholt says while this keeps Navy Feds operational cost down, it also passes all the losses to the downstream banks. In fact they say 99% of Navy Feds check losses are passed on to other banks.
Read The Whole Complaint
You can read the whole complaint here
