The banking watchdog has refused to award compensation to a $100,000 scam victim, saying banks have no obligation to monitor customers’ transactions for fraud and can’t be forced to beef up security systems to detect references to known scams.

The victim, Auckland businessman Deepak Udhani, wrote the name of a company that had already been subject to an FMA scam warning as the intended payee when he sent two $50,000 money transfers through ASB last year.

In a preliminary decision declining reimbursement last week, Banking Ombudsman Nicola Sladden said she couldn’t compel banks to have specific fraud detection systems in place to protect customers.

“We therefore cannot find that ASB’s fraud detection system should have detected the transactions as being suspicious.”

However, Sladden said she had considerable sympathy for the “catastrophic” impacts the life-changing loss had had on Udhani and his family.

She recommended ASB pay him $500 after it took weeks to respond to an emailed complaint, causing additional stress and inconvenience “at an already stressful time”.

Udhani told the Herald he was shocked and deflated by the decision.

In his opinion, the banking sector was failing to protect customers and the Banking Ombudsman Scheme was not acting independently.

“It looks like they’re protecting the interests of the banks and not the consumers.”

Udhani thought he was investing in government-backed bonds with international finance giant BNP Paribas.

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Instead his money is alleged to have gone to the now frozen BNZ account of a respected South Auckland JP.

Police alleged the JP is part of an international scam syndicate which fleeced 10 Kiwi investors of close to $2 million. He is now facing 10 counts of money laundering and, if convicted, up to seven years in jail.

Udhani sent his money in two online transfers in June, writing “BNP Paribas” in the recipient payee filed on both transactions.

He later claimed ASB was negligent in failing to detect references to a known scam.

The FMA had issued a warning about a fake BNP Paribas bond scheme in September 2022 and the French financial company issued its own warning a week before he was duped.

Auckland businessman Deepak Udhani lost $100,000 in an elaborate investment scam. He says banks are failing to protect customers. Photo / Jason Oxenham

However, ASB declined liability, arguing he authorised the transactions. It also said the payee name fields were only for customers’ reference and “not used by our system when processing transactions”.

Udhani refused a $2000 “goodwill” payment offer, labelling it “a joke”, and instead filed a complaint with the Banking Ombudsman.

In a letter to Udhani last week, Sladden found in the bank’s favour.

The letter noted the devastating impacts of the scam, which had forced the abrupt closure of Udhani’s building consultancy company, while the financial strain had compromised his health.

“The stress and burden have also extended to your family, forcing your wife to return to work.”

Banking Ombudsman Nicola Sladden declined to award compensation to the Auckland victim for his $100,000 loss. Photo / NZME

And though Sladden’s office had considerable sympathy, she said the bank was not “on notice” Udhani was being scammed or in breach of any obligation when processing the two fraudulent payments.

Banks had a “strict duty” to follow customers’ payment instruction, but must act with reasonable care and not turn a blind eye to “red flags” of someone being defrauded, Sladden said.

“In the absence of such warning signs, however, a bank is not obliged to question any transaction to protect a customer from scams or fraud. In short, the customer, not the bank, is responsible for checking that the money is going to the intended recipient and that the recipient is legitimate.”

Unlike the UK, NZ banks had no obligation to reimburse fraud victims in cases of authorised payment scams, Sladden said.

And despite Udhani entering the name of a known scam, Sladden said she could not review rules governing banks’ fraud detection systems or whether those systems “should have been programmed to set off an alert”.

Banks set the “rules and parameters” of their fraud detection systems, taking into account the rate of “false positives” and potential inconvenience to customers.

Sladden said NZ banks currently had no obligation to verify a customer’s money was going to the intended recipient, as in the UK.

Nor could they be compelled to have certain fraud detection systems - such as monitoring payee fields for the names of known scams.

“Given all of the above, we cannot conclude ASB was on notice of a real possibility that you were being defrauded. We therefore cannot find that the bank breached any obligation to you in processing your transactions.”

Udhani told the Herald banks were enabling these scams through deficient customer protections.

“They don’t care because it’s not their money.

If the Banking Ombudsman couldn’t protect the interests of consumers, “who is going to do this job”?

Udhani said the Government needed to introduce comprehensive and mandatory codes of practice for banks, telecommunication companies and digital platforms governing their responsibilities and liabilities around scams, or more Kiwis would continue to be duped.

ASB said it empathised with Udhani’s situation, saying scam loss could be devastating for victims.

“We note the Banking Ombudsman’s recommendation we make a goodwill payment to Mr Udhani, and we will reach out to him directly.”

The case follows mounting criticism from scam victims about the regulatory regime governing the banking sector and alleged ineffectiveness of the Banking Ombudsman Scheme.

It’s estimated offshore criminals have exploited weaknesses in the country’s bank payment system to siphon $200m from Kiwi victims in the last year alone.

The Government last month put the banking sector on notice, warning it to bring customer protections into line with overseas jurisdictions or risk having changes forced upon it through regulation.

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.