Personal Finance

Privacy doesn't trump financial abuse of elderly

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Fraudsters are masters at manipulating their victims—especially seniors. They can persuade someone to give them thousands of dollars for some bogus reason: whether it's to claim a sweepstakes prize, help a loved-one in distress or to strike it rich with a "guaranteed" investment opportunity.

An employee at the bank or credit union might suspect something is wrong when a customer makes an unusually large withdrawal, but they may not say anything because of privacy concerns.

"Privacy protections are important to everyone, but those privacy protections provide clear exceptions in the case of addressing fraud or other illegal misconduct," said Martin Gruenberg, chairman of the Federal Deposit Insurance Corp.

Eight federal regulatory agencies issued a joint document on Tuesday that clarifies privacy rights and responsibilities for employees of financial institutions. They provided this guidance because so many companies have expressed concern that the Gramm-Leach-Bliley Act puts privacy ahead of fraud prevention.

(Read more: Obamacare is coming, and so are the con artists)

The law, also known as the Financial Services Modernization Act of 1999, requires financial institutions to notify customers and give them the opportunity to opt out before providing nonpublic personal information to a third party. (That's why you get those privacy notices every year from you bank, credit union and investment firm.)

Richard Cordray, director of the Consumer Financial Protection Bureau, said "reporting suspected elder financial abuse to the appropriate authorities is typically the right thing to do and generally will not violate the Gramm-Leach-Bliley Act."

The new guidance also makes it clear that financial institutions can disclose nonpublic personal information to law enforcement agencies investigating suspected financial abuse of older adults.

A serious problem that is likely to get worse

No one knows for sure how much elderly Americans lose each year to financial fraud. A study done by MetLife estimated the loss at more than $2.9 billion in 2010.

And as the General Accounting Office pointed out in a recent report: "As the U.S. population ages, growing numbers of older adults could be at risk of financial exploitation, so its potential impact on society is likely to increase."

For many, the first line of defense is the teller at a bank or credit union or staff member at a financial services company. They may notice an uncharacteristically large withdrawal, question a wire transfer overseas that just doesn't seem right or see a customer accompanied by a stranger who's trying to pressure them into withdrawing money.

(Read more: How to complain about your bank)

Fraud experts say the ability to identify these and other warning signs and the willingness to report them are critical to reducing the problem.

"It will make a significant contribution to protecting elder Americans against financial fraud, which will help to provide great confidence in our financial system as a whole," said Comptroller of the Currency Thomas Curry.

More needs to be done

Often, when a senior has money stolen by a scammer or trusted family member, they are too embarrassed or frail to report the crime.That's why those in a position to spot a problem are vital to stopping this financial exploitation.

(Read more: Medical identity theft could cost you your life)

Stephanie Schneider, manager of Premier Members Federal Credit Union in Longmont, Colo., couldn't agree more. A few years ago, she suspected an 85-year-old member with diminished capacity was being exploited by his neighbor. She did some investigating, reported her suspicions and the situation was dealt with by the authorities.

"I think financial institutions need to take that extra step to protect their customers," Schneider said. "If I see that something's not right, then I need to be able to find out what's going on and try to fix it. It's just the morally right thing to do. No one should be able to take advantage of the elderly."

The eight federal agencies that issued guidance on privacy laws and reporting financial abuse of older Americans are: the Board of Governors of the Federal Reserve System, Commodity Futures Trading Commission, Consumer Financial Protection Bureau, Federal Deposit Insurance Corp., Federal Trade Commission, National Credit Union Administration, Office of the Comptroller of the Currency and the Securities and Exchange Commission.

—By CNBC contributor Herb Weisbaum. Follow him on Facebook and Twitter @TheConsumerman or visit The ConsumerMan website.