Wells Fargo to pay $3 billion to DOJ, SEC to resolve criminal, civil charges tied to ‘fake accounts’ scandal

The Skinny:

  • Wells Fargo agrees to pay $3 billion in global civil and criminal settlement tied to fake accounts scandal.
  • Federal investigators and regulators say the bank pushed employees to meet unrealistic sales goals – and when they complained, top execs turned a blind eye.
  • The unrelenting pressure led thousands of employees to provide millions of accounts or products to customers under false pretenses or without consent.
  • Size of penalty is on par with largest ever AML penalties and has resulted in historic, hefty enforcement actions against top execs, risk, control officers.

By Brian Monroe
bmonroe@acfcs.org
February 21, 2020

One of the country’s largest banks will pay federal regulators and investigators $3 billion to settle a host of criminal and civil charges tied to creating millions of fake accounts for more than a decade – closing a dark chapter for an institution that led to executive bloodletting, historic penalties against individuals and congressional tongue lashing.  

Wells Fargo & Company and its subsidiary, Wells Fargo Bank, N.A., have agreed to pay $3 billion to the U.S. Department of Justice (DOJ), the Securities Exchange Commission (SEC) and other federal investigative and regulatory bodies to resolve illicit sales practices spanning from 2002 to 2016 in a three-year Deferred Prosecution Agreement (DPA).  

The hefty penalty against the bank for the toxic actions of insiders and tacit blessing by managers and executives has sent shockwaves through the broader industry’s financial crime compliance sector with a clear message that illicit internal actors are just as dangerous as external threats attempting to “game” anti-money laundering (AML) defenses.

As part of prior actions with federal regulators, the bank in 2018 unceremoniously jettisoned its top four risk management executives, stating they would retire, even though the group chiefly protected the bank criminals and their dirty dollars from getting into the bank – an irony not lost on current AML compliance professionals who feel extra pressure to police internal sales practices.

Investigators state that pressure was a near constant force when it came to sales.

Authorities stated that the bank was “pressuring employees to meet unrealistic sales goals that led thousands of employees to provide millions of accounts or products to customers under false pretenses or without consent, often by creating false records or misusing customers’ identities.”

What’s worse, investigators state that as early as 2002, top officials at the bank knew about the practice and turned a blind eye to a rising chorus of insiders stating the corrupt sales practices were not subsiding, but in fact, were growing.

As part of the settlement, Wells Fargo admitted that it collected millions of dollars in fees and interest to which it was “not entitled, harmed the credit ratings of certain customers, and unlawfully misused customers’ sensitive personal information, including customers’ means of identification.”

“When companies cheat to compete, they harm customers and other competitors,” said Deputy Assistant Attorney General Michael D. Granston of the Department of Justice’s Civil Division. 

“This settlement holds Wells Fargo accountable for tolerating fraudulent conduct that is remarkable both for its duration and scope, and for its blatant disregard of customer’s private information.” 

The penalty also evinces extensive failures in leadership and compliance controls.

“This case illustrates a complete failure of leadership at multiple levels within the Bank. Simply put, Wells Fargo traded its hard-earned reputation for short-term profits, and harmed untold numbers of customers along the way,” said U.S. Attorney Nick Hanna for the Central District of California.

The bank’s current chief is cognizant of these failures and is promising change.

“The conduct at the core of today’s settlements — and the past culture that gave rise to it — are reprehensible and wholly inconsistent with the values on which Wells Fargo was built,” said Charlie Scharf, the bank’s chief executive officer since October, in a statement.

Over the past three years, Wells has made “fundamental changes to our business model, compensation programs, leadership and governance,” he said, adding that the bank is “committing all necessary resources to ensure that nothing like this happens again, while also driving Wells Fargo forward.”

CEO stability, volatility

Scharf is likely hoping that his tenure is longer than his predecessors.

Over the past three years, as the bank has been mired in multiple overlapping scandals, the normally staid and stable CEO position has been fractious and volatile.

John Stumpf, who led the bank starting in 2007, was shown the door in 2016 after being the subject of high-profile Congressional vitriol in contentious hearings and, more recently, was hit with unprecedented individual penalties by a federal regulator.

Timothy Sloan took over until 2019, with C. Allen Park leading for a stint last year before Charles Scharf took over in October, a seasoned leader having held top positions at VISA and JPMorgan Chase.

Scharf’s marching orders were to change the bank’s culture of compliance, its acidic sales practices and negotiate a settlement for the fake accounts scandal that sullied the bank’s 167-year old name.

The settlement is not the only way authorities have stated they are serious about such failings.

Last month, the U.S. Treasury’s Office of the Comptroller of the Currency (OCC), the regulator of the country’s largest and most complex institutions, sanctioned Stumpf and two other former executives, adding that the agency is also seeking penalties against five others.

Stumpf agreed to a lifetime ban from the banking industry related to the bank’s fake accounts scandal and related underlying toxic sales culture. The penalty against Stumpf, more than $17 million, was the largest individual fine the OCC had ever levied, even larger than those handed out in historic AML penalties.

Fake accounts, fictitious records

The SEC was forced to get involved in the global settlement because the fake records the bank created to hide the actions against its customers broke securities laws.

Wells Fargo also agreed to the SEC instituting a cease-and-desist proceeding finding violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Section 10(b) makes it illegal to “use or employ, in connection with the purchase or sale of any security” a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.”

The $3 billion payment resolves all three matters and includes a $500 million civil penalty to be distributed by the SEC to investors.

‘Cross-sell strategy’ crosses the line

The 16-page statement of facts accompanying the deferred prosecution agreement and civil settlement agreement outlines a course of conduct over 15 years at Well Fargo’s Community Bank, which was then the largest operating segment of Wells Fargo, consistently generating more than half of the company’s revenue.  

Wells Fargo admitted that beginning in 1998, the bank increased its focus on sales volume and reliance on annual sales growth.  

A critical part of this updated sales model was the “cross-sell strategy” to burden existing customers with additional and typically unneeded and undesired financial products.  

It was “the foundation of our business model,” according to Wells Fargo. In its 2012 Vision and Values statement, Wells Fargo stated: “We start with what the customer needs – not with what we want to sell them.”

But, in contrast to Wells Fargo’s public it “implemented a volume-based sales model in which employees were directed and pressured to sell large volumes of products to existing customers, often with little regard to actual customer need or expected use,” according to authorities.   

The Community Bank’s “onerous sales goals and accompanying management pressure led thousands of its employees to engage in unlawful conduct – including fraud, identity theft and the falsification of bank records – and unethical practices to sell product of no or little value to the customer.” 

These practices were referred to within Wells Fargo as “gaming,” according to investigators, and included using existing customers’ identities – without their consent – to open checking and savings, debit card, credit card, bill pay and global remittance accounts.

From 2002 to 2016, gaming practices included:

  • Forging customer signatures to open accounts without authorization.
  • Creating PINs to activate unauthorized debit cards.
  • moving money from millions of customer accounts to unauthorized accounts in a practice known internally as “simulated funding.”
  • Opening credit cards and bill pay products without authorization.
  • Altering customers’ true contact information to prevent customers from learning of unauthorized accounts.
  • Preventing Wells Fargo employees from reaching customers to conduct customer satisfaction surveys.
  • Encouraging customers to open accounts they neither wanted or needed.

A ‘growing plague’ of toxic sales practices

The top managers of the Community Bank were “aware of the unlawful and unethical gaming practices as early as 2002, and they knew that the conduct was increasing due to onerous sales goals and pressure from management to meet these goals,” according to the statement of facts.   

Beginning as early as 2002, when a group of employees was fired from a branch in Fort Collins, Colorado, for sales gaming, Community Bank senior leadership “became aware that employees were engaged in unlawful and unethical sales practices.”

In fact, they realized that gaming conduct was “increasing over time, and that these practices were the result of onerous sales goals and management pressure to meet those sales goals,” according to the 16-page statement of facts.

From internal investigators to other employees, the details about the abusive sales practices were reported to Community Bank senior leadership, including the unnamed “Executive A.”

Those channels included Wells Fargo’s internal investigations unit, the Community Bank’s own internal sales quality oversight unit, and managers leading the Community Bank’s geographic regions, as well as regular complaints by lower-level employees and Wells Fargo customers reporting serious sales practices violations, according to investigators.

At least some in the bank saw the seriousness of the problem.

For example, in a 2004 email, an internal investigations manager described his efforts to convey his concerns about increasing sales practice problems to Community Bank senior leadership, stating: “I just want [Executive A] to be constantly aware of this growing plague.”

Again, in 2005, a corporate investigations manager described the problem as “spiraling out of control.”

This reporting “continued through 2016, and generally emphasized increases in various forms of sales practices misconduct,” with employers bemoaning the increasing sales pressure and unrealistic expectations.

The complaints by Wells Fargo salespersons “specifically articulated that the sales goals were too high and incented Community Bank employees to sell a significant number of low quality or valueless duplicate products, sometimes through misconduct.”

Senior leadership of the Community Bank minimized the problems to Wells Fargo management and its board of directors, by casting the problem as “driven by individual misconduct instead of the sales model itself.”  

Community Bank senior leadership viewed “negative sales quality and integrity as a necessary byproduct of the increased sales and as merely the cost of doing business,” according to investigators.

Are top-level executive, compliance changes enough?

But the cost of doing business has jumped considerably, along with the added expenses of remediating the compliance failures that led to the action.

The bank stated it has made a bevy of improvements in operations, compliance and controls to remediate the issues that allowed the fake accounts scandal to explode and prevent it from happening again.

Since 2016, Wells Fargo has made fundamental changes to its leadership, governance, processes, controls and culture to ensure the misconduct that is the subject of today’s actions can never recur.

These changes include:

  • A new CEO and majority of new members on the Operating Committee, Wells Fargo’s senior-most management committee.
  • Significant management changes at all levels of the Community Bank, including senior executives.
  • Reconstitution of a majority of the Board’s independent directors (8 new independent directors), including the majority of Board Committee Chairs.
  • Elimination of all product-based sales goals that led to this conduct.
  • Implementation of a new incentive compensation structure for retail bankers that rewards them based on customer outcomes and requires risk accountability at all levels.
  • Enhancement of the Community Bank’s processes for customer consent and stronger oversight and controls.
  • Investment of more than 800,000 hours in learning and development for retail bank employees to support cultural, process and policy changes, with training ongoing.
  • Reorganization and centralization of key Company functions, including Risk, Human Resources, Finance, Technology, and Data.
  • Even before today’s establishment of the Fair Fund, agreement to pay more than $500 million to customers and investors as remediation for harm that resulted from the historical Community Bank sales practices.

Will $3 billion penalty ‘make a dent?’

The penalty, while on par with some of the largest AML and sanctions penalties ever handed down – $1.9 billion for HSBC in 2012 and $9 billion for BNP Paribas in 2014 – it’s unlikely the bank’s financials will stumble as a result of the action.  

The bank has more than $2 trillion in assets and only needed two quarters to set aside the billions needed for the settlement.

As well, over the last decade, with the illicit sales practice in full swing, the bank has seen revenues soar. In 2008, the bank recorded $51.6 billion in revenues, jumping dramatically to $98.6 billion in 2009 on the strength of its acquisition of Wachovia, and in 2019 rising to $103.9 billion.  

Overall since 2000, Wells Fargo has paid nearly $17 billion in 136 penalty actions, not counting the latest $3 billion fine, with just more than $163 million of that total tied to AML infractions, according to Violation Tracker.

Some in Congress, however, are still not assuaged by the settlement, according to media reports.

The penalty “sends a clear message to Wall Street banks: you can defraud Americans, abuse your employees, and walk away with a slap on the wrist,” said Senator Sherrod Brown, the top Democrat on the Senate Banking Committee, in a statement.

The same day as the settlement, several disgruntled Democrats in Congress announced plans to turn up the heat on the San Francisco-based bank, which has its most sizeable workforce in Charlotte.

Rep. Maxine Waters, chair of the House Financial Services Committee, announced three hearings on Wells Fargo on March 10, 11 and 25. She also stated the fine barely “makes a dent” in the bank’s profits.

Freshly-minted CEO Scharf will get his first major test as he is called to testify at one of the hearings, and the next day Wells Fargo board members will testify, including the board chair, former Wachovia executive Elizabeth Duke.

A third hearing will focus on the still-rumbling aftershocks of the bank’s past high-pressure sales culture on employees.

The size of the penalty, though tethered to critics in Congress, was meant to be a statement-making action that would act as a deterrent for other institutions engaged in similar practices.

“Our settlement with Wells Fargo, and the $3 billion monetary penalty imposed on the bank, go far beyond ‘the cost of doing business,’” said U.S. Attorney Andrew Murray for the Western District of North Carolina.

The fine is “appropriate given the staggering size, scope and duration of Wells Fargo’s illicit conduct, which spanned well over a decade,” he said in a statement, adding that it should “serve as a stark reminder that no institution is too big, too powerful, or too well-known to be held accountable and face enforcement action for its wrongdoings.”