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The Feds Do NOT Insure Against BANK FRAUD

The “D” stands for “deposit” — as in your checking or savings account — and that’s where the FDIC’s protection STOPS.

When victims of bank fraud or checking fraud reach out to me, they’re often flummoxed when they find out the Federal Deposit Insurance Corporation (FDIC), an independent agency created by Congress to insure the banks that hold their accounts, can’t help them.

That’s because the FDIC was created for bank failure, not fraud.

“Contrary to what many people believe, the FDIC doesn’t reimburse banks for fraud perpetrated against accounts,” wrote Robert K. Knake in his 2015 blog for the Council on Foreign Relations. “The FDIC only insures your account against the failure and collapse of the bank.”

“Our deposit insurance protection does not apply in the case of theft or fraud. Generally speaking, banks have insurance to protect against theft, either physical or cyber,” the FDIC wrote in a letter to Yahoo! Finance for its story about the FBI’s 2014 investigation of a cyber attack on accounts at JP Morgan.

Knake said the federal Electronic Funds Transfer Act of 1978 puts the burden on banks for fraud losses. That’s why they carry insurance, sometimes called cyber-insurance. But banks are either getting nickel-and-dimed on claims, or the insurance companies are catching financial institutions in the act of misrepresenting the very products or services they’re paying to insure.

Drayton Mayers, cybersecurity expert and owner of #WiseChoice TeamLogic IT Memphis, cited a recent court case between Travelers Property Casualty Co. of America and a company it was cyber-insuring, International Control Services, Inc. According to the case records, Traveler’s “…denied a claim following a ransomware attack (on International Control Services, Inc.) on the basis that the organization had misrepresented its use of multi-factor authentication (multiple methods of authenticating logins and passwords).”

The record stated, “…an investigation…found that multi-factor authentication had only protected remote network access and not other digital assets, such as servers and other network infrastructure.” The court nullified the policy and, in turn, its protections for the company and its clients.

“This decision cost International Control Services, Inc., millions,” said Mayers, all because the institution wasn’t upfront with the insurer.

But let’s be honest: insurers — cyber, bank fraud or otherwise — aren’t known for their cooperation on claims. “Remember, insurance companies never want to pay on claims. It’s their nature,” Mayers said.

So once again, it’s my nature to tell you: YOU are your best advocate when there is funny business with your bank accounts.

Alex Cook of said these are the steps you should take to prevent or dispute fraudulent activity on your accounts:

  1. Monitor statements for fraudulent charges. Sometimes fraud goes under the radar, so be proactive and regularly check your debit or credit statements to see if there were any unusual purchases.
  2. Lock access to your card. As soon as you notice you’ve lost your card or have had it stolen, pause transactions or cancel the card so nobody can use it. You can always order a replacement, sometimes for free.
  3. Contact your bank as soon as possible. The longer you wait to report unauthorized purchases, the more liable you are for the costs. You limit your liability if you contact the bank within two business days.
  4. Follow up with a written letter. If you think you’re entitled to a reimbursement, you should write a letter to your financial institution. Include detailed information about your account, the unauthorized charges and when you originally reported the fraud.
  5. Submit a complaint to the CFPB, if necessary. If you’ve sent a letter and still haven’t recovered your money, you can contact the federal Consumer Financial Protection Bureau (CFPB) to submit a complaint about financial products or services.

It’s the CFPB, not the FDIC, that can help you with bank fraud. But don’t start with the alphabet soup of the feds.

Start with your bank. That’s where your funds are.

Or were…

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