Could Your Company Be On the Hook For Fraud Committed By a Customer or Vendor?

Ahhh... the ever changing face of corporate litigation. It seems that victims of fraud and abuse are always searching for the deep pockets to recover their losses. Sometimes that means suing anyone and everyone who might have known about a fraud and may have (inadvertently or not) contributed to it.

A lawsuit against Wachovia Bank highlights this issue. The bank is being sued for its role in a$00 million fraud perpetrated by Suntasia Marketing Inc. Suntasia was shut down by the Federal Trade Commission in July of last year. The FTC says Suntasia was running a scheme using telemarketers to offer "free" memberships to discount buying groups and travel clubs.In order to take advantage of this "free" trial offer, victims had to give up their banking information. Later, the con artists withdrew money from the victims' bank accounts without their authorization.

And Wachovia's role in all of it? Wachovia Bank provided the bank accounts that Suntasia used to pull money out of victim's accounts. As a customer of Wachovia, Suntasia was given the ability to make electronic withdrawals out of the accounts of victims. (With no banking relationship, Suntasia couldn't commit the fraud.)

Wachovia is being sued for playing an active role in the fraud by providing the banking services. Why? The victims have alleged that Wachovia knew of the fraud that was being committed but allowed it to go on because the bank received hefty fees each time a victim disputed one of these fraudulent transactions.

Wachovia Bank allegedly allowed the fraud to go on, even though several officials of the bank apparently had knowledge of the schemes. It would appear that they turned a blind eye to criminal activity in favor of the revenue generated by fraud scheme.

There are times when third-parties are blamed for fraud schemes, but they had no knowledge or involvement in them. It's not fair to blame these outsiders when their only real crime is doing business with a person or entity that was committing a fraud that they didn't know about.

But a situation like this seems quite a bit different. If the bank had an active knowledge of the ongoing fraud, they also had to know that the fraud couldn't be carried out without their banking services. This is a much more active role in the scheme, and I think Wachovia should bear some responsibility.

Be careful as you do business... If you become aware of a fraud or crime in progress, you would do well to distance yourself from the customer or vendor. Why risk your reputation and expensive legal costs in order to do business with questionable entities?