Fraud Prevention in Financial Institutions: Overcoming New Challenges

Author: Debra McManigle

Fraud prevention in financial institutions requires a careful balance between protecting customers from increasingly sophisticated scams and honoring their right to access their own funds. Banks are responsible for safeguarding customer assets while also executing legitimate transactions, even when customers proceed against staff advice. This balance becomes especially complex when red flags suggest the customer may be the target of a scam.

At HUB Financial Services, we receive questions on this topic frequently. Below is a practical look at how banks can navigate these situations, what tools and protections may be available, and how institutions can document decisions while reducing potential liability.

Fraud Prevention in Financial Institutions: A Growing Challenge

Banks regularly encounter situations where a customer, often an older adult, requests a wire transfer or large cash withdrawal but shows indicators of possible fraud. Even after staff explain the risks and urge caution, the customer may acknowledge the warning and still choose to continue.

The bank is then left with two questions: how do we protect the customer, and how do we protect the institution if the customer later experiences a loss? Many states have implemented protections that give banks more authority and clearer legal guardrails when elder financial exploitation is suspected.

While there is no federal equivalent, the trend across states is consistent: institutions receive a “safe harbor” when they act in good faith to prevent scams.

Example: Wisconsin’s Elder Fraud Protection Law

Wisconsin Act 132, enacted in March 2024, is an example of how states are empowering financial institutions to intervene.

Key provisions include:

• the authority to delay or refuse a transaction when financial exploitation is suspected,
• allowing customers to designate trusted individuals who can be contacted if concerns arise,
• permitting reporting to law enforcement or adult protective services, and
• providing liability protection when institutions act in good faith and with reasonable care.

These protections are specifically aimed at elder financial exploitation, but the principles can inform bank policies for all customer segments.

Documentation: Can Banks Use an Acknowledgment or Indemnity Form?

For customers who are not covered under elder-specific statutes, many institutions use some form of customer acknowledgment or indemnity agreement.

This document confirms that the customer was informed of the risks, that the bank expressed concern that the transaction could be fraudulent, that the customer elected to proceed anyway, and that they accept responsibility for the outcome.

While this documentation does not eliminate the possibility of a lawsuit, it strengthens the bank’s position by demonstrating responsible action.

In many claims, there is no evidence the bank warned the customer; a signed acknowledgment provides clear proof of that conversation.

Real-World Example: When a Customer Insists on Withdrawing $40,000

A recent case involved a customer, described as elderly, who drove up to the bank’s drive-through requesting $40,000 in cash while speaking on the phone with an unknown individual.

Staff acted appropriately by asking the customer to come inside, using the opportunity to better assess the situation. They attempted to discuss concerns about possible fraud, but the customer insisted the transaction was legitimate.

Despite these efforts, the customer later sued, alleging the bank “failed to do enough to stop the fraud.” This scenario underscores the importance of strong policies and thorough documentation.

When Banks May Refuse a Transaction

Banks retain the authority to decline or delay transactions when circumstances warrant additional investigation, particularly when:

• the customer cannot provide a credible explanation,
• the transaction is unusually large or inconsistent with prior behavior,
• the recipient is unfamiliar, or
• when clear indicators of coercion exist.

In one example, a customer attempted to wire $40,000 to a “friend.” Staff escalated internally, and when legitimacy could not be verified, the bank declined the transaction, prioritizing customer safety. When supported by documented red flags, this type of decision may reduce liability if the customer later experiences a loss.

Where Banks Face Liability Risk

Banks may still face exposure if they ignore red flags, fail to follow internal protocols related to fraud detection, lack adequate employee training, or overlook responsibilities under state laws that require investigative steps. Fraud evolves rapidly, and institutions must ensure their procedures evolve with it.

Best Practices: Protecting Customers and the Institution

Effective safeguards include comprehensive staff training to recognize signs of exploitation; customer education through workshops, digital resources, and alerts; outreach programs for caregivers; encouraging customers, especially older adults, to designate trusted contacts; and leveraging proactive technology, such as real-time monitoring, automated alerts, and age-friendly withdrawal limits. Here are resources to consider:

Staff Training and Customer Education

• Staff training: Train employees to recognize red flags of financial exploitation, such as abrupt changes in account activity, new people asking to be added to accounts, or changes of address.
• Customer education: Provide educational resources through in-branch workshops, online content, and other materials to help customers recognize common scams like imposter, grandparent, or tech support scams.
• Caregiver Education: Offer educational programs for caregivers and the public to help prevent fraud.
• Elderly: Banks can protect the elderly from scams by training employees, implementing technology to monitor for fraud, and educating customers on how to recognize and avoid scams. They can also refuse or delay suspicious transactions under certain laws and establish policies for using trusted contacts to help verify a customer’s activity. If exploitation is suspected, banks can also report the activity to authorities like Adult Protective Services and law enforcement.

Collaboration and Reporting

• Work with law enforcement: Partner with law enforcement and Adult Protective Services to facilitate timely responses to reports.
• Report to authorities: Report suspected elder financial exploitation to the appropriate federal, state, and local authorities and file a Suspicious Activity Report (SAR) with FinCEN.
• Participate in networks: Engage with elder fraud prevention networks to share information and coordinate efforts with other institutions, government agencies, and service providers.

Reactive measures

• Delay or refuse transactions: Hold or delay suspicious transactions to investigate further. Many states have “hold laws” that allow banks to do this without immediate liability.
• Contact trusted contacts: Use the designated trusted contact person to verify the legitimacy of the transaction.
• Report to authorities: Report suspected financial exploitation to law enforcement and/or Adult Protective Services (APS).
• File a Suspicious Activity Report (SAR): File a SAR with FinCEN to report the suspected activity.

The Bottom Line

Effective fraud prevention in financial institutions depends on strong internal policies, thorough documentation, staff training, and clear communication with customers. As scams continue to evolve, institutions must strengthen both proactive and reactive strategies to reduce risk and maintain customer trust.

When handled responsibly, these steps protect both the customer and the institution and help strengthen trust at a time when fraud risks are at an all-time high. If you have questions about implementing these practices or need state-specific guidance, HUB Financial Services is here to help.

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