On August 29, 2005, Governor Arnold Schwarzenegger signed legislation holding California banks and other financial institutions liable if they fail to report suspicions of financial elder abuse, effective beginning January 1, 2007. The legislation is part of a nationwide trend to increase oversight of our country’s aging population by those who deal with elders.
A. California's Elder Abuse Protection Act
In 1982, California enacted the "Elder Abuse and Dependent Adult Civil Protection Act." The objective was to put into effect a statutory framework that would institutionalize reporting obligations for those who are in a position to see, and therefore possibly prevent, various types of abuse to the state’s growing population of elders. The Act, as amended, required "health care practitioners, care custodians, clergy members, and employees of county adult protective services agencies and local law enforcement agencies to report known or suspected cases of abuse of elders and dependent adults. . . ." (California Welfare and Institutions Code § 15601(a).) Abuse of an elder was defined to include physical abuse, neglect, abandonment or other conduct causing physical or mental suffering, as well as financial abuse. (W&I Code 15610.07(a).)
Financial abuse was defined to occur when a person or entity "takes, secretes, appropriates, or retains real or personal property of an elder or dependent adult to a wrongful use or with intent to defraud, or both," or assists any person in such conduct. (W&I Code § 15610.30(a)(1).)
B. What California's Recent Legislation Means For Banks
When the Financial Elder Abuse Reporting Act of 2005 was amended to include financial institutions as mandated reporters, it raised a number of issues for the banking industry. The Act provides that a financial institution’s officers or employees who suspect financial abuse of an elder, whether through direct contact with the elder or dependent adult or review of financial records and transactions, are required to report the suspected abuse immediately by telephone, or as soon as possible, and by written report within two days. (W&I Code § 15630.1(d)(1).)
In the case of persons not having direct contact with the elder, the reporter’s belief that financial abuse is taking place may be based "solely on the information before him or her at the time of reviewing or approving the document, record, or transaction." Further, the reporter’s suspicion is limited to concerns arising within the scope of the reporter’s employment or professional practice. The Act does not state that a reporter having direct contact with an elder has a duty to investigate. Whether a reporter with direct contact must ask questions, or may rely solely on information then available is unclear.
An allegation by an elder or dependent adult, or any other person, that financial abuse has occurred will not trigger the reporting requirement (1) if the mandated reporter is not aware of any corroborating evidence, and (2) if, in the reporter’s professional judgment, he or she reasonably believes that financial abuse has not occurred. (W&C Code § 15630.1(e).)
C. What Potential Liabilities Does The Legislation Create For Financial Institutions?
The statutory scheme provides that a failure to report financial abuse shall be subject to a civil penalty of up to $1,000. (W&I Code § 15630.1(f).) If the failure to report is willful, the penalty can range up to $5,000. The penalties are payable by the employer of the individual who failed to make the report. (W&I Code § 15630.1(f).) Civil penalties may be sought only by the attorney general, district attorney or county counsel. (W&I Code § 15630.1(g).) The statute in effect disclaims the notion of "private" attorneys general seeking to levy penalties.
The legislation provides absolute immunity to reporters both by express grant of immunity (W&I Code § 15634) and by reference to the judicial and official proceeding privilege set forth in Civil Code § 47(b) (W&I Code § 15630.1(i). The legislature recognized that reporters would be disinclined to contact agencies if they could be subject to civil liability to those people, be they elders, dependent adults or the persons allegedly committing financial abuse, who were the subjects of the report. In the event that a claim nevertheless is made against a reporter, he/she may apply for up to $50,000 reimbursement for attorneys’ fees incurred in defending against any such claim.
The legislation does not provide for a private civil action for damages: "Nothing in the Financial Elder Abuse Reporting Act of 2005 shall be construed to limit, expand, or otherwise modify any civil liability or remedy that may exist under this or any other law. (W&I Code § 15630.1(g)(2).) The legislation does not preclude suit based on other legal theories, however, and time will tell how California courts interpret the limitation on remedies in the Act.
D. What Is A Financial Institution To Do?
The banking industry must turn its attention to how best to deal with these new obligations. Training programs which sensitize officers and employees, most importantly those at the retail level, to signs of financial abuse are imperative. This includes making sure that employees know what to look for, and understand when and how to report, including the very short timeframes for making the required oral and written reports.
The statute provides little guidance: "’[s]uspected financial abuse of an elder or dependent adult occurs when a person who is required to report . . . observes or has knowledge of behavior or unusual circumstances or transactions, or a pattern of behavior or unusual circumstances or transactions, that would lend an individual with like training or experience, based on the same facts, to form a reasonable belief that an elder or dependent adult is the victim of financial abuse . . ." W&I Code § 15630.1(h). Transactions in unusual amounts or frequency, withdrawals or transfers by caregivers, and implausible explanations for transfers or payments are all potential red flags.
These reporting requirements move financial institutions closer to the "know your customer" requirements applicable to the securities industry. It is not enough for banks to execute transactions while looking for technical indicators of impropriety. Rather, they must now take a qualitative approach to those transactions, reflecting not only upon who is making withdrawals from accounts, but how frequently, in what amounts and for what purported purposes. Whether this assessment is done by enhanced across the board training at the retail and supervisory levels or by making "elder and dependent adult accounts" subject to the supervision of specially trained personnel is something for financial institutions to consider. However, banks are now their elders’ keepers and should take advantage of the twelve months remaining before the legislation becomes effective to determine how they will attempt to comply.
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