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Too Big To Jail

By Blair Rugh 1 Feb 2017

Last month, I wrote about the Wells Fargo fiasco wherein the bank opened debit and credit accounts for customers without the customers even knowing about them. It then transferred customer money to those accounts, charged fees on the accounts, and generally created havoc with their customer relationships. What the bank did was not necessarily a violation of any consumer regulations, I guess you could say that the bank failed to give the appropriate disclosures for the secret accounts. But the real violation was a violation of the civil and criminal laws against fraud and theft. While a corporation can violate criminal laws, it cannot do so unless one or more employees of the corporation is equally guilty. A corporation is an inert passive being that can only act through its employees and other representatives. I have watched the news fairly closely and to my knowledge, no employee of Wells Fargo has been charged with any criminal violation.


Just this month, Citigroup has paid $36 million dollars in fines and restitution for overbilling 60,000 investment advisory clients. Apparently its contractual fee schedules were entered incorrectly into its automated billing systems.  


Morgan Stanley was fined $5.9 million for making false and misleading statements about a foreign exchange trading program that they were selling.


Citigroup was fined another $29 million for mortgage servicing violations.


Western Union was fined $750 million for AML violations and Western Union admitted to criminal violations of the BSA rules.


And all of that was just this month. While the fine to Western Union may have stung a little bit, the fines to Citigroup and Morgan Stanley are so insignificant to their earnings that they get lost in the rounding. It is like making a child go to bed without dinner, when the dinner is predominately broccoli. For several years we have seen large fines imposed on large financial institutions for really egregious activity, but that has not seemed to act as a deterrent. You almost cannot fine a mega financial institution enough to really make it hurt. When the executives and other employees are allowed to keep their jobs without retribution, you cannot expect much change in attitude. I realize that the President of Wells Fargo was required to resign, but that was because of an action by the bank, not by the regulators.


When criminal laws are broken, those laws should be enforced regardless of the position of the perpetrator. Depending on what your perspective is, you may think the marijuana dealer on the street is not doing nearly as much damage as the bank who is ignoring or purposely avoiding the anti-money laundering laws. Either way, the regulators themselves cannot generally bring criminal charges, but they can certainly refer them to the Justice Department.


I have gotten the opportunity to meet and know a lot of Presidents of community banks. Without exception, I have found them to be men and women of character that really care about their customers and doing the right thing. Occasionally, their banks have a compliance violation but almost always it was the result of an error or a regulation that was too complicated to understand. But when the big guys get caught, the fall out hits everyone. Because of Wells Fargo, every banks employee incentive program and cross sell programs are under scrutiny.


If the regulators really want to clean up the truly egregious activities in the financial services industry, we will see some high ranking executives of the mega banks in handcuffs. In my opinion, that is the only thing that will really cure the problem. In looking at the risk/reward ratio, you have to make the risk so high that it will always outweigh the reward.

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