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In May 2015, Mike Feuer, the city attorney of Los Angeles filed a lawsuit against Wells Fargo and accused the bank of victimizing its customers by using illegal and malicious sales tactics to sell its financial and banking products. Read on to find out more about the financial scandal that rocked the banking world.

 

Note: For the ease of reading this article has been composed like a report.

 

Case Name

Country Where the Fraud Took Place

 

Wells Fargo Fake Account Scam

 

United States

Year of Fraud

2011-2016

What was the Case About?

Wells Fargo implemented an unlawful scheme and scam to increase their stock price. The employees of the firm were aggressively pushed to open new accounts so that the bank could increase its cross-sell number without putting any checks or barriers to make sure whether their accounts were illegally or fraudulently opened or not.

How Was the Fraud Committed? What was the Investigation About?

The fraud was perpetrated by the CEO of the bank, John Stumpf who wanted the customers of Wells Fargo to have an average of at least 8 accounts per person irrespective of whether or not the customer needed them. The scam was identically and efficiently perpetrated among all of its branches, and pushed to all Well Fargo banks across the nation.

This bottom down fraudulent scheme was orchestrated with the aim of squeezing the employees so that they will reach the breaking point, cheat the customers, after which the CEO would drive up the value of the company’s stock, padding his own pocket by hundreds of millions of dollars. If they were to be questioned any time during the process, their plan was to place the blame of the employees getting paid 12 dollars an hour with cross-sell quotas to meet.

The practices employed by Wells Fargo included:

  • Sandbagging – Wells Fargo stockpiled the customer applications and delayed the opening of new accounts till the beginning of a new sales reporting period. For example, New Year’s Day was one of the most common dates to open sandbagged accounts as the bank ran a program called ‘Jump into January’. Customers who inquired about the reason for the delay were given a bogus reason like a computer system failure or an oversight on the part of their employees.
  • Pinning – Anothercommon practice involved Wells Fargo obtaining debit card numbers and assigning it a pin without the permission of the customer to enroll him/her for an online banking account. The banker would receive a sales credit in return. To get around the computer prompts that request for the personal information of the customer, the bankers impersonated the customer online and entered generic and false email addresses to make sure that the transaction is completed. All this happened unbeknownst to the knowledge of the customer.
  • Bundling #Wells #Fargo also told its customers that some of their financial products were available only as packages. They included other products like annuities, retirement plans, additional accounts and insurance. For example, the suit claimed that the employees were asked by the managers to lie to their customers by telling that every checking account automatically comes with a credit card, savings account, and other products, like life insurance. The employees also told the customers that they would end up incurring monthly fees on their checking account till they opened a savings account and also claimed that the additional accounts did not have any monthly fees when they did.

How was the Fraud Discovered?

The CFPB discovered that close to 5,300 employees had been fired from the bank since 2011 for improper sales practices. It was discovered that over 2 million fraudulent accounts were opened by the employees of the bank, including 1.5 million deposit accounts and more than half a million credit card accounts. Ever since the illegal practices came to light, many of the employees who have worked for the bank at some point in the past have come forward to state that most of the fraudulent activities have been going on for much longer than has been acknowledged by the bank. A sales quality manual that was u

 

pdated in 2007, meant for the bank employees suggests that the compliance team in the bank was aware of the issues even way back then. The manual asks the employees to express the “express consent and agreement” (these words were in bold) of the customers for every line of credit opened.

Laws Violated 

The bank has been charged for “improper sales practices” that were designed to artificially shore up their stock price. It was a #systemic #problems  which is far worse than breaking any law. 

What Happened to the Case? 

Under the Consumer Protection Act and the Dodd-Frank Wall Street Reform, the CFPB has full authority to take an action against institutions that violate consumer financial laws, like engaging in deceptive, unfair or abusive practices. It ordered Wells Fargo to:

  • Refund its customers – Wells Fargo was instructed to refund all the affected customers the sum of monthly maintenance fees, overdraft charges, nonsufficient fund fees, and the other fees they had to pay for the unauthorized accounts. These refunds are expected to be around $2.5 million dollars. Consumers do not have to take any action on their part to get the funds to which they are entitled.
  • Ensure that their future sales practices are proper – Wells Fargo was required to hire an independent consultant to conduct a thorough review of all its procedures. Employees might be asked to undergo ethical training and the sales goals and performance measurements of the bank will be reviewed to make sure that they are free from improper sales practices.
  • Pay a $185 million fine – The bank will have to pay a $100 million dollar fine to the Civil Penalty Fund of the Consumer Financial Protection Bureau. This is the largest penalty that the CFPB has imposed on any organization till date. The bank has also been instructed to pay $50 million to the City and County of Los Angeles and $35 million to the Office of the Comptroller of the Currency.

Currently embroiled in multiple lawsuits, the bank has paid the fine and refunded the money to the customers for the unauthorized bank accounts. Six of the bank’s former employees have filed a class action lawsuit claiming that they were fired or demoted when they refused to be party to the bank’s illegal practices. Plaintiffs are seeking close to $7.2 billion in damages. While it can certainly be argued that a $185 million dollar fine was just a slap on the wrist for a bank that boasted a profit of $5.5 billion dollars in the first quarter of 2016 alone, they are currently under review and

future developments will decide what course of action would be taken against them.

Read about the history about Wells Fargo and then see what has happened today as a result of the cultural problem. All this points into one direction, that is, the ever-growing requirement for Ethics and Compliance function (See Volkov’s blog post)