Wells Fargo: massive scheme led to massive fine

September 13, 2016

The fraudulent scheme was certainly stunning. As reported by CNN Money: “Wells Fargo employees opened over 1.5 million deposit accounts that may not have been authorised. The way it worked was that employees moved funds from customers’ existing accounts into newly-created ones without their knowledge or consent, regulators say. The CFPB [Consumer Finance Protection Board] described this practice as ‘widespread’. Customers were being charged for insufficient funds or overdraft fees – because there wasn’t enough money in their original accounts. Additionally, Wells Fargo employees also submitted applications for 565,443 credit card accounts without their customers’ knowledge or consent. Roughly 14,000 of those accounts incurred over US$400,000 in fees, including annual fees, interest charges and overdraft-protection fees.”

How and why could such an obviously fraudulent scheme occur at one of the world’s largest banks? The reason is simply … so that employees could hit their numbers. Yet it was these same employees who bore the brunt of the illegal conduct as 5,400 staff, which was fully two percent of the company’s employee base, were terminated as a result of this conduct.

The bank agreed to a penalty of US$185 million as assessed by the CFPB, which is the highest in the agency’s short history. Of this amount, US$100 million will go towards the CFPB’s civil penalty fund, US$35 million will go to the Office of the Comptroller of the Currency, and another US$50 million will be paid to the city and county of Los Angeles.

Yet there were questions about the apparent paltry size of the fine. David Vladeck, a Georgetown University law professor and former director of the Federal Trade Commission’s (FTC’s) Bureau of Consumer Protection, said: “One wonders whether (the CFPB) penalty of US$100 million is enough. It sounds like a big number, but for a bank the size of Wells Fargo, it isn’t really.”

The conduct also raises other internal issues at Wells Fargo, which every compliance practitioner should consider:

  • What type of incentive structure led to this fraud?
  • What type of culture allowed this process to be so widespread?
  • Did senior management know about the conduct or should they have been aware?
  • Did any employees come forward?
  • Where was the Board?
  • Where was internal audit?
  • Where was the company’s compliance function?

This matter may well resonate for some time. Every compliance practitioner should consider the pervasiveness of the conduct and test their own systems.

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