The tale of a retired US submarine commander who sent US$3.6mil (RM16.16mil) to scammers in Asia, even as his bankers worried he was being conned, sparked so much outrage in Virginia that lawmakers raced to act.

But their flurry of legislation this year reached a familiar result. Before "Larry’s Law” passed, industry lobbyists deftly headed off a key clause: Banks must call police if they spot a crime.

It felt like a gut punch, said Julie Strandlie, a local attorney who took an interest in the new law and testified to the legislature after her mother fell prey to a scam. "This gives banks another free pass to do nothing,” she said.

Statehouses across the US are wrestling with how to contain an explosion of frauds costing elderly Americans an estimated US$28bil (RM125.70bil) a year. With consumer education failing to reach many would-be victims, lawmakers are exploring how to turn banks into a more formidable line of defense. Lenders already have robust systems to thwart credit-card fraud, in which they’re held liable. Why not use that technology to trip alarms when customers get tricked by con men?

The question is part of a broader debate over how to balance personal responsibility and the duty of banks to help customers safeguard their savings. It has taken on more urgency in recent years with retirees controlling a record stockpile of wealth.

So far, banks are defusing efforts to boost their liability.

In California, the state with the most elder fraud, Governor Gavin Newsom vetoed legislation in September that required banks to hold suspicious transactions for three days and opened them up to lawsuits if they don’t take certain actions. The Democrat told lawmakers that their bill could delay legitimate transactions and undermine seniors’ independence. He also predicted the rules would lead to expensive court battles with banks.

In Pennsylvania, a measure subjecting firms to penalties and potential culpability for losses fizzled last month after lobbyists warned that the legislation would drive up costs for customers and curb access to credit.

Even in states that require banks and credit unions to report potential crimes against the elderly, enforcement is lax or nonexistent.

In New Mexico, for example, banks can face US$10,000 (RM44,892) fines for failing to report suspected financial elder exploitation. But officials there haven’t imposed the penalty on banks or credit unions since adding them to the law in 2007, according to a spokesperson for the state’s department on aging.

With Congress in partisan deadlock, states have become a test kitchen for potential reforms. Policymakers have even floated having banks cover some losses if they ignore signs that vulnerable people are getting fleeced.

The industry generally argues that the best way to stop fraud is to educate the public. What firms say they need is a safe harbour for voluntarily sharing information with trusted family contacts or authorities.

Banks have been encouraging their staffers to talk with customers if it looks like they may be handing money to criminals, but such warnings are sometimes shrugged off by people already in the grip of cons. If that doesn’t work, firms usually submit confidential tips to adult protective services to have a social worker take a look.

That can be slow.

In August, Bloomberg profiled a woman who handed con artists US$1.4mil (RM6.28mil) from accounts at firms including JPMorgan Chase & Co, Wells Fargo & Co. and Bank of America Corp. After she started making large cash withdrawals and transfers, it took 279 days for social workers to contact her son.

Local agencies say part of the problem is that banks are flooding them with vague tips and that it can take days or weeks to establish whether their offices have jurisdiction over a potential victim.

That’s straining budgets. In Pennsylvania, for example, the Berks County Area Agency on Aging is curbing some services, such as personal-care aides, so it can keep up with banks’ referrals, according to its director, Jessica Jones.

When someone is tricked into wiring money to a criminal, authorities typically have about 72 hours to intervene before it disappears, according to officials at San Francisco’s adult protective services agency. If a bank notifies social workers, that window may close before they can enlist law enforcement.

"Prompt reporting to law enforcement would be most helpful,” said Akiles Ceron, the agency’s program director.

One police detective specialising in those investigations said the initial delays aren’t his only frustration. When he asks banks for more up-to-date information on a victim, they often take over a week to respond.

Legal advantages

The financial industry has a lot of legal advantages in resisting more onerous state laws. That includes the National Bank Act, which set up the modern financial system 161 years ago.

The act bars states from significantly interfering in nationally chartered banks, limiting them to those that are state-chartered. Roughly a fifth of the more than 4,000 banks in the US are nationally chartered, and they command the lion’s share of deposits.

That leaves state lawmakers facing a conundrum: If they force costly obligations on all banks, large lenders can challenge the rules in court and wriggle out. Smaller banks would be at a competitive disadvantage.

That prospect led to changes in California’s proposal, including the addition of a clause that would stop enforcement of penalties if a court found they couldn’t be applied to national banks.

Another regulatory regime cited by the industry is of the states’ own making: the Uniform Commercial Code. Rules adopted decades ago at the advent of the digital-banking age generally shield banks from liability when funds are tapped by customers. In practice, that means that if a client wires money to scammers, firms can’t be held liable.

Financial institutions that handled the Navy commander’s millions invoked that shield while successfully defeating a lawsuit filed by his estate.

Wired to Thailand

Larry Cook’s tragic story resonated with Virginians. Far less known is how the law bearing his name got watered down.

The 76-year-old was found dead in his home in 2021 with paperwork nearby suggesting he was preparing to wire US$49,500 (RM222,247) to a bank account in Thailand, according to his niece, Janine Williamson.

He had spent 24 years with the Navy before retiring in 1992. He then worked as a government contractor until a debilitating stroke in 2019. With no spouse or children, he lived alone in Fairfax County, far from his extended family.

As Williamson handled his estate, she learned about dozens of wire transactions from his account at Navy Federal Credit Union to overseas accounts at Standard Chartered Plc and Bangkok Bank. Williamson suspects the scam began when her uncle responded to an email claiming to be from Amazon.com. The con artists even managed to drain funds that belonged to the estate of her grandmother, who had previously died and made Cook the executor.

"They are brilliant,” Williamson said of the scammers. "They moved her trust money into a joint checking account, then that joint checking account of my grandmother’s money went to Thailand.”

Williamson also learned that Navy Federal suspected something was wrong and, after 28 wires, reported him to adult protective services – yet the credit union kept processing transactions, according to his estate’s lawsuit. By the time he died, Cook had completed more than 70 international wires in six months, totaling more than US$3.6mil.

Cook’s estate sued Navy Federal and Wells Fargo, which acted as the correspondent bank in moving money to Thailand. The banks prevailed.

"We take the privacy and security of our member’s financial information extremely seriously,” Navy Federal said in a statement. "We actively partner with adult protective services and law enforcement to address any issues that arise and regularly work to educate members on how to avoid scams and fraudulent transactions.”

Law with ‘teeth’

Cook’s estate also hired a publicist. Stories on the scam appeared on TV in Washington, DC, and outlets including USA Today. Virginia Delegate Michelle Maldonado, a Democrat, went public with her view that banks should have a duty to alert law enforcement if they suspect customers’ money is being targeted by thieves. She vowed to work on legislation.

The Virginia Bankers Association reacted, too. It worked on a bill that would let financial institutions ask customers to list a trusted contact for staff to call if they ever saw a scam unfolding. The law would also shield banks from claims if they used that information.

For months, Maldonado and the association discussed their interest in legislation, she said. But their talks faded.

Shortly after winning election in late 2023, freshman delegate Michael Feggans said he was approached by Matt Bruning of the Virginia Bankers Association. Feggans, an Air Force veteran who represents the military-heavy Virginia Beach district, said Bruning explained that one of his organisation’s priorities was preventing fraud and working with state legislators to protect seniors. Feggans agreed to carry a bill for the group.

"I was glad to,” the Democrat said in an interview, noting that he had his own experience with fraud when someone took out student loans in his name while he was serving overseas. He didn’t know Maldonado was developing her own bill, which he later learned "was going to have more teeth.”

Feggans and a state senator offered identical bills on Jan 10 – the same day Maldonado unveiled hers. Maldonado’s contained trusted-contact proposals but went further by requiring firms to train employees and "promptly report” any suspected scams to the FBI, law enforcement and social services.

‘First step’

Maldonado eventually realised her bill had no chance of advancing with those "mandatories” for banks. So she removed them and adopted most of the language in her junior colleague’s industry-designed bill. Larry’s Law passed and was signed in April.

"I don’t want people to think Larry’s Law didn’t work,” Maldonado said, describing it as a good first step. Among other provisions, it sets statewide guidelines for training bankers to spot fraud.

Bruning, who oversees government relations for the banker’s group, said it was focused on pushing through the trusted-contacts provision.

"We have concerns over liability and putting the onus on front-line” staff at banks, he said. "We’re in a tight spot. That’s not the main purpose of a bank, but it’s a role we take seriously and are doing everything in our power to address it.”

The new law will help, Bruning said. "In the end we got a good product that is workable and hopefully prevents Virginia’s elderly population from being exploited.”

‘Got to adjust’

Cook’s relatives are still trying to recoup the lost fortune. Williamson said she regularly communicates with Secret Service agents trying to track the money. The lawsuit’s dismissal is being appealed.

She’s also urging Congress to change wire laws so that banks can be held liable if they let scams continue. Throughout history, banks evolved to meet new challenges – and this is one of those moments, she said.

"We’ve got to adjust,” she said. "There’s a reason why we don’t use stagecoaches and gold anymore.” – Bloomberg