New York Attorney General Sues Zelle Operator Over $1 Billion Fraud Allegations

In a bold legal move, the New York Attorney General has filed a lawsuit against Early Warning Services (EWS), the entity responsible for operating Zelle, over allegations of inadequate fraud protection. The suit claims that Zelle’s electronic money-transfer service has been vulnerable to significant fraud, with scammers successfully stealing over $1 billion from users.

The lawsuit, filed in New York State Supreme Court, accuses EWS of being aware of the service’s vulnerabilities but failing to implement adequate safety measures. The consortium of large US banks that own EWS includes JPMorgan Chase, Bank of America, Capital One, and Wells Fargo.

The lawsuit follows the Consumer Financial Protection Bureau (CFPB) dropping a similar case against some Zelle backers in March, part of a broader retreat in enforcement under the previous administration. In response to the lawsuit, a Zelle spokesperson described it as a “political stunt designed to generate press.”

The spokesperson argued that more than 99.95% of all Zelle transactions are completed without any report of scam or fraud, and that the company has taken steps to address security concerns. They stated that the Attorney General should focus on factual investigations, stopping criminal activity, and adhering to the law instead of overreach and baseless claims.

Zelle launched in 2017 as a competitor to popular payment apps like Venmo and Cash App. By 2024, Zelle’s payment network had grown to include 151 million users.

The lawsuit alleges that in its rush to acquire new customers, Zelle neglected essential safety precautions. The suit claims that scammers were able to register for Zelle using a quick process lacking verification steps, posing as businesses and government entities, deceiving unsuspecting users into transferring funds under false pretenses.

The irreversible nature of Zelle transfers meant that many consumers could not recover their money after realizing they had been scammed. One example cited in the lawsuit involves a New York resident who was tricked by a scammer into believing his electricity would be cut off unless he sent money to Con Edison through Zelle. After discovering the fraud, his bank, JPMorgan Chase, informed him that they could not refund his money.

The lawsuit alleges that EWS and its partner banks have been aware of the fraud problem for years but have failed to take meaningful action to rectify it. The suit also accuses EWS of failing to remove fraudsters from the Zelle network after receiving complaints, and not requiring banks to reimburse customers for certain scams.

The lawsuit claims that EWS began adopting basic network safeguards in 2023, several years after they were first proposed, significantly reducing fraud on the platform. In December, the CFPB sued EWS and three of its owner banks over allegations of allowing fraud to persist. However, earlier this year, the CFPB dropped its suit against EWS, along with several other cases against companies accused of harming consumers.

The NY AG’s lawsuit seeks restitution and damages for New Yorkers affected by fraud on Zelle’s platform, as well as a court order mandating that Zelle implement anti-fraud measures.