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How Could This Happen?

By Blair Rugh 14 Sep 2016

Last week, Wells Fargo was fined $100,000,000 by the Consumer Financial Protection Bureau for illegal sales practices. This is the largest fine the CFPB has imposed. The Comptroller of the Currency piped in for an additional $35,000,000, and the City and County of Los Angeles got $50,000,000. In addition, the bank is going to have to pay millions of dollars in restitution to its customers.

Wells Fargo prided itself in its ability to cross sell its products to its customers. Apparently, its pride got a little out of hand.  The bank established cross sales goals for its employees with incentives if the goals were met and, in some cases, retribution if they were not. Apparently, the pressure to meet the sales goals was so intense that a lot of Wells Fargo employees not only broke, but emasculated the rules to meet the quotas. They opened over 1,500,000 deposit accounts for existing customers without the customers’ knowledge and transferred money to fund those accounts from the existing accounts that the customers had. This caused the customers to be charged insufficient fund charges and minimum balance charges in their actual accounts. They issued over 500,000 credit cards that customers did not request and were not even aware of such cards. Then, Wells Fargo charged the customers annual fees and late payment charges. They issued debit cards and created customer PINs that customers did not request. They created fake email addresses for customers so that they could sign them up for online banking.

Apparently, this all transpired between May 2011 and July 2015.  5,300 Wells Fargo employees have been fired because of their complicity in the scheme. How could something this wide spread go on without someone in a position of authority with a sense of honesty and decency saying, “Wait a minute. This is wrong.” It is unknown how high in the bank the knowledge of the corruption went, but it had to be pretty high.

The whole mess was first uncovered by the Los Angeles Times in a story that it published in 2013. The Los Angeles City and County attorneys filed suit in 2015. The CFPB and the OCC were actually late to the game. My question is: Didnʼt any of the Wells Fargo executives or board members read or hear about the Los Angeles Times article? The bank had to receive thousands if not hundreds of thousands of complaints from its customers. Didn’t anyone react to those complaints? Apparently not.

The bank also faces lawsuits from not only its customers but also from some former employees. The former employees say they weren’t paid for overtime hours they put in as they tried to meet unrealistic sales goals handed down by the bank’s higher-ups. What’s more, the employees say they were fired or forced to quit when they did not meet those sales goals and refused to create fake accounts or use other fraudulent means to do so. What kind of culture could exist in an organization for this type wide spread fraud to occur?

Unfortunately, Wells Fargo is not the Lone Ranger. A myriad of big banks have been fined billions of dollars recently for really egregious actions, mostly in the area of BSA and money laundering. The CFPB is proud of its fine; to Wells Fargo, it is almost insignificant. It is only 3.3% of the 5.6 billion dollars of net income that Wells Fargo made in the second quarter alone.

The problem is that no significant individual ever goes to jail or gets seriously punished. If the accounts are correct, what happened at Wells Fargo was among other things criminal fraud. The activities in the BSA cases were criminal. Corporations are inert; they do not commit crimes. People acting on behalf of the corporations do.  But unfortunately those people know that they are not going to suffer personally. In some of the BSA cases, there were some deferred prosecutions. That means if the folks clean up their acts and don’t do it again nothing will happen.

The bank regulators do not have the ability to bring criminal prosecutions. If they were serious about cleaning up the industry at the highest levels, they could sure put a lot of pressure on the Justice Department to do the right thing. Banks, credit unions, mortgage companies and their employees are not like other merchants; they are put in a position of trust by their customers. When the bad apples are not weeded out and thrown in the garbage pile, good apples will tend to go bad.

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