Beware of debit order fraud

2014-05-04 08:00

When Jurie Pohl discovered fraudulent debit orders amounting to R12?000 had been deducted from his bank account over five years, he became the latest victim of a financial crime where syndicates use the debit order system to commit fraud.

Walter Volker, the head of the Payments Association of SA (Pasa) and author of Essential Guide to Payments, says there are rogue elements using the debit system to deduct money illegally, hoping customers won’t notice.

“We have found that in many instances, they are operating out of small call centres in the Durban area, selling airtime,” says Volker, who explains these syndicates illegally obtain a database of accounts and hit these accounts with small amounts.

The fact that so few people actually check their bank statements allows these crimes to go undetected for long periods. The syndicates also target lower-income earners who might not know their rights or how to raise a dispute – they simply close their bank account, forgoing the funds already withdrawn.

“If questioned, the true rogues quickly refund the customer, pretending it was an error, and then the customer is happy in believing it to be an honest mistake and they do not open a police case,” says Volker.

This lack of reporting is making it very difficult to prosecute these criminals.

The companies deducting money from Pohl had a similar modus operandi. “I was contacted by one of the fraudulent debiting companies to credit my account. They basically apologised and said it was an internal administrative fault.

“They are the second company to phone and apologise but the first one has not paid me back and that was two months ago. I did ask both companies how they got hold of my details and neither could answer.”

Pohl says he was told by an Absa employee his account details had been compromised by another staff member, but Absa disputes this. A spokesperson for the bank said: “Absa respectfully disclaims the allegations that client information was leaked internally.”

According to Volker, they are aware there are isolated instances where staff members working at the banks are responsible for selling the information.

But Volker says in by far the majority of cases, these debit order lists are sold or “made available” by employees of commercial companies, trade unions or even government departments who use the debit order system to make membership deductions and collect fees, among other things.

Volker says Pasa has put systems in place to try to stop these syndicates, and will also be reviewing the Non-Authenticated Early Debit Order (Naedo) system, which has been a perfect environment for syndicates to operate in (see box).

Since November last year, Pasa has taken 300 rogue users off the debit order system. “We are cleaning up through a bad user system. Once a company has processed a debit order without a valid contract, it is immediately removed from the system and we keep ID numbers of directors so they cannot operate in a new company,” says Volker.

According to him, even a single complaint from a customer can trigger a review process of a company. “We will ask the sponsoring bank to get the mandate from the beneficiary party. If they cannot provide a mandate, they are considered a bad user.”

According to Volker, apart from actual complaints, Pasa monitors the dispute ratios of all debit orders. If the ratio exceeds a certain level, Pasa will investigate.

Unfortunately, according to Volker, there is a certain level of debit order disputes in the system due to customers who have signed a mandate but then do not have the cash to cover the debit order. They dispute the debit order to prevent it from going through.

The problem is getting the banks to report this information to Pasa.

Volker says at branch level in some instances it has been found that tellers, and even managers, do not know the rules so it is important you know your rights and contact Pasa directly if you have a valid dispute and your bank is not forthcoming. It is also advisable to contact the Banking Ombudsman in the event a dispute between a customer and the bank remains unresolved.

The good news is that if you know your rights and are prepared to challenge the bank, the bank is 100% liable for any debit orders authorised without a valid mandate.

“Protection to the consumer is unlimited unless there is a valid signed mandate,” says Volker.


Your rights

Volker says a customer has an absolute right to demand the money back unless the bank can produce a valid mandate.

Dispute within 40 days:

If you report the dispute within 40 days of the debit order going off, the bank must refund you immediately. The bank will then send the dispute to the sponsoring bank (the bank the company banks with).

If the sponsoring bank can provide the valid mandate, they will reinstate the debit order. If not, the sponsoring bank has to repay your bank.

After 40 days:

If you dispute the debit order after 40 days, the bank has 30 days to respond. If they do not responded by then, all debit order deductions must be returned to the account holder.

If the company no longer exists, the sponsoring bank will have to carry the financial loss.

Preventing future debits:

This becomes slightly problematic for the bank. If a company does not have a valid mandate, the bank would stop all future debit orders on instruction from their customer. This is called a stop payment – which is not to be confused with a stop order.

The problem is that fraudsters can be very resourceful and exploit weaknesses in systems. Changing the details on debit orders, such as the amount, prevents the system from picking it up and the debit order might go through anyway. But the bank would have to refund it immediately.

On cancellation:

If you signed a debit order then cancelled it, you need to prove you have cancelled it. It becomes a legal dispute between you and the company – not the bank.

Absa says that according to the current EFT payment instructions and Naedo payment instructions clearing rules, clients can only dispute debit orders “at the branch of the homing participant” (the cardholder’s bank on which the debit was collected).

The customer cannot reverse the debit order online or telephonically, they have to be present in the branch to complete and sign a dispute form.

Flushing them out

What you can do

While banks are responsible for ensuring your money is safe, we need to be more proactive to assist them in flushing out the criminals:

.?Check your bank statement every month for unauthorised debit orders.

.?Sign up for your bank’s SMS notification service so you are immediately informed of any unauthorised debit order.

.?If a fraudulent debit order has gone through, notify your bank immediately as well as Pasa (

.?Take the time to report them to the police so Pasa can take legal action over and above removing them from the system. Your bank and/or Pasa can provide you with a standardised affidavit form, which has been approved by the SA Police Service for obtaining a case number.

.?As a consumer, you can insist the bank confirm all debit orders with you before they are processed.

.?Where possible, rather use a stop order to make payments – this puts you in control. You can set this up through internet banking.

.?Unresolved disputes with your bank can be referred to the Banking Ombudsman.

Processing Systems

Reform of Naedo

Naedo is an early processing debit order system used by insurance companies and lenders, including banks. These debit orders take priority so they go off in the early hours of the morning after your salary has been deposited.

By the time you wake up, those debit orders are off your account. Other debit orders are run in the late afternoon.

Unfortunately, this system is now being used by fraudsters, especially in the lower-income space, where victims are less likely to know their rights or how to raise a dispute.

As a result, the SA Reserve Bank requires all Naedo debits to move to “authenticated collections” from June next year. This means a firm cannot process an early debit order without notifying the consumer through cellphone contact – most likely an SMS notification.

The alternative to Naedo currently available and used by many companies is called the Authenticated Early Debit Order (Aedo) system, which requires authentication of the debit order by means of a card swipe and PIN entry prior to the mandates being authorised and logged on the system.

The Aedo system is less open to abuse because of the requirement for a positive and secure customer mandate for each agreement.


Does the law work?

While in theory the law is there to protect us against fraud, it can be an uphill battle to get resolution. Pohl has been refunded a portion of the money illegally debited from his account, however, he is still fighting for the rest.

There appears to be a misunderstanding by Absa of the Pasa rules, which stipulate the client must be refunded if a valid mandate is not produced within 30 days, irrespective of whether the funds are returned by the company.

This is an important protection for clients to maintain the integrity of the debit order system – if a bank allows a third party to access its clients’ money, they have to take responsibility. But as this experience shows, clients have to know their rights and fight to have their money refunded.

Pohl also laid a charge against World Trade ­Consortium for illegally debiting his account but that did not stop them from operating. In fact, he discovered someone had laid a charge already in 2010.

He says this is why he has not bothered laying charges against the other companies PayToza and Aimsgold.

Consumer website shows 20 complaints about PayToza processing illegal debit orders, 24 complaints about World Trade Consortium and one for Aimsgold. Yet all three continue to operate.

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