Citi asks judge to toss NY AG's 'imaginative' wire-fraud lawsuit

Citigroup is asking a federal judge to toss a consumer fraud lawsuit that the New York state attorney general filed, saying it's premised on an "imaginative theory" of banks' liabilities to wire fraud victims. 

Congress long ago ensured banks weren't liable for reimbursing customers who got scammed through wire fraud schemes, Citigroup said in a court filing Tuesday, arguing that exemption remains in place despite the recent rise in online wire fraud.

"There is no denying that the problem is real," the bank wrote, but the New York state AG's lawsuit "defies longstanding, settled understandings" of banks' liability in those cases. 

Letitia James, the state's attorney general, sued Citibank in January for inadequate responses to "obvious red flags of identity theft and account takeover" cases. Unwarranted wire frauds occurred thereafter, including one customer who had $40,000 transferred out of her retirement savings. Citi denied her fraud case, according to the AG's lawsuit, which was filed in federal court in New York.

The battle over who's liable for wire frauds comes as the industry grapples with "phishing" scams that extract money from customers, either through wire transfers or newer avenues like peer-to-peer payments platforms. Big banks, such as JPMorgan Chase and PNC Financial Services, have also been engaged in lawsuits stemming from fraud losses at businesses.

The state AG argued the Electronic Fund Transfer Act — which limits customers' liability from fraudulent card purchases, ATM withdrawals and other online transactions — applies in cases where wire transfers are unauthorized. In those instances, the actual consumers are not involved, the lawsuit argued.

"It is the scammers, and not the consumers, who purport to electronically authorize Citi to debit consumers' bank accounts," the lawsuit said.

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But Citi countered the state AG's office is seeking to "artificially separate" steps in the transfers to make banks liable. Over decades' worth of debates and bank practices on the issue, there is "zero evidence" that the state AG's interpretation is correct, the bank wrote.

Congress made a "deliberate choice" to exclude consumer wire transfers from the EFTA, and subsequent regulatory interpretations have excluded them, the bank said in its response to the lawsuit. Lawmakers have debated revising that exemption and held a hearing on the issue in 2022, but the bank asserted that, "unless and until Congress acts," the current law stands.

"The solution to the problem of online wire fraud and scams is not a lawsuit, especially one that improperly seeks to rewrite a federal statute and that would abruptly and dramatically upset how banks have organized their policies and practices for decades," the bank wrote.

The state AG's interpretation "would bring about — via litigation, not legislation — a sea change in banking law," the bank added.

James' office did not respond to a request for comment.

In its response, Citi wrote that scammers have "increasingly sophisticated ways to fraudulently wire themselves money from consumers' bank accounts." The bank said it has "implemented robust countermeasures" to guard against them, but "no system will catch every scam every time."

Banks aren't responsible for customers' losses as long as they follow a "commercially reasonable 'security procedure'" to verify a customer's identity, Citi wrote. The bank has stopped "countless fraudulent transactions" through its security mechanisms, the bank wrote, rebutting the AG's contention that its protocols are inadequate.