Allegations of fraudulent use of credit cards which were processed through Bermuda-based company First Atlantic Commerce has reportedly left the Bank of Bermuda out by close to $5 million.

The multi-million dollar loss is in addition to the Bank taking a nearly $26 million hit in the last two years with investments in two start-ups, First Ecom and Measurisk.

The losses relating to credit card fraud reportedly occurred in 2000 but details of which were only released this year in the Bank's 2001 annual report.

As a result of agreements with certain online merchants First Atlantic Commerce (FAC) was the processor of credit card transactions that were then passed on to the Bank of Bermuda for settlement.

There are no allegations of fraud in Bermuda but in accordance with credit card procedures, the card processors have been liable for the fraudulent credit card charges.

The loss was initially estimated at $7 million but income/(loss) adjustments of $2.3 million show the Bank to be out in the end by $4.7 million.

"At 31 December 2000, we had provided or written off, a total of $7 million to cover the estimated cost of uncollectable amounts loaned or invested in First Atlantic," the Bank said. The Bank further reported that as the card processor for payment services provided by First Atlantic, $1.3 million was set aside as of December 31, 2000, by the Bank as provisional funds for future credit card charge-backs.

By December 31, 2001 total reported credit card charge-backs were unchanged from a year earlier which has led the Bank to cancel out the $1.3 million provision.

In addition a $1 million insurance recovery was made against the loss.

Further in the report, the Bank showed how the loss added up. In late 1999, it said a client of the bank's e-commerce division - which the Bank of Bermuda yesterday confirmed as First Atlantic Commerce (FAC) - entered into business with "certain online merchants" and began processing credit card transactions with these merchants, which were passed on to the bank for settlement.

It went on to say: "Some of these merchants were allegedly involved in the fraudulent use of certain credit card numbers resulting in customer charge-backs and losses to the client."

And it said that in accordance with the procedures of Visa and Master Card, the Bank, as the card processor, was ultimately responsible for the charge-backs if the payment gateway, which was FAC, was unable to meet them.

The bank reports that FAC was unable to meet the cost and they were funded through an overdraft facility at the bank.

At June 2000, the amount of the banks exposure to this fraud was estimated to be $3 million, a figure based on information provided to the bank about the extent of the total internet sales from merchants and cardholders who had been charged for unknown items.

Further charges were reported in the second part of 2000, and the bank said that the outstanding overdraft facility was converted to an equity investment of $4 million in the client an additional loan of $1.7 million was granted.

At 31 December 2000, the total of fraudulent claims, or charge backs, relating to FAC, was $5.7 million and the bank had a specific allowance against the loan of $1.7 million. The annual report also states that the equity investment was "written down to nil, due to its impairment".

The Bank concluded: "There remains the possibility of a recovery of funds from third party bank accounts used by the perpetrators of the alleged fraud, although the amounts of any potential recoveries are currently not known. No accrual has been made for such recoveries at this time."