McNaught was commenting after the Payment Systems Regulator recently recommended making reimbursement of APP scam victims mandatory. The move would require legislative changes, but John Glen, economic secretary to the Treasury, has said the government is willing to “legislate to address any barriers to regulatory action at the earliest opportunity”.
Pinsent Masons’ David Crossan, an expert in APP fraud litigation, has warned that the move could create “a new type of APP fraud by the back door”. McNaught agreed, highlighting the potential for the new system to be ‘gamed’ by criminals.
McNaught said: “We know that there are legitimate victims of APP fraud, but we also know that there are ‘victims’ who are complicit in the scams. We know this because of the complex fraud systems we have in place. These people include ‘money mules’ who are directed by sophisticated criminals on how to move money around, including on cryptoasset exchanges, and who subsequently claim to be innocent victims of fraud. They seek ‘refunds’ whilst also sharing in the defrauded funds.”
“The perception may be that a new system of mandatory reimbursement would see banks pick up the bill in such cases but there would be many instances where they would look to reverse transfers of ‘defrauded’ funds to the destination bank. If those funds have gone to a collection account that has sufficient funds in it then they will be returned to the sender account and ultimately refunded to the victim, potentially without much incentive for banks to closely interrogate the circumstances of the case,” he said.
“For large organisations that operate client money accounts or customer accounts, from lawyers, accountants and estate agents, to e-money firms and cryptocurrency exchanges, this has potentially huge implications. It is a threat to any firm that dispatches goods to a customer. It would not take too many reversals for us to become insolvent and there would not be much we could do about it," McNaught said.
"The due process that currently exists for APP scam reversals is very, very poor and not transparent. We don’t get to see any of the evidence. If this continues under the proposed mandatory reimbursement scheme funds would be lifted from our client money account even if we suspect the customer is complicit in the fraud. There would be no way to disprove what the fraudster says. It would be our word against theirs. To my mind, this essentially creates a cottage industry for fraud,” he said.