This week I am exploring the Wells Fargo Department of Justice (DOJ) and Securities and Exchange Commission (SEC) settlement of $3 billion. The case presents multiple lessons for the compliance professional and one very large lesson for the consuming public. Today, I want to consider the fraud schemes used and approved by Wells Fargo to create the fraudulent accounts. The system was so widespread at the bank that it had its own name – Gaming. The details in this blog post were laid out in the Statement of Facts referenced in the DOJ Press Release announcing the settlement.

While Wells Fargo management was telling its customers, the banking public, investors and regulators that its cross-selling program was a needs-based program, it was in reality something very different. It was fraudulent scheme that Wells Fargo foisted on its employees to sell via direct pressure of continued employment that “caused to sell large volumes of products to existing customers, often with little regard to actual customer need or expected use”. Community Bank head Carrie Tolstedt was noted to have “directly” approved pressurized employees to engage in fraudulent and even illegal conduct to meet her sales goals. Cross-selling the banks products were a “significant criterion by which the performance of employees, ranging from tellers and bankers to RBEs, was evaluated.” The cross-selling program led Wells Fargo employees to engage in both illegal and fraudulent conduct to meet their sales goals.

To meet these employment objectives and criteria, Wells Fargo employees developed a wide variety of tactics under the rubric “Gaming” which was known within the bank as “employees’ manipulation and/or misrepresentation of sales to meet sales goals, receive incentive compensation and/or avoid negative consequences, such as reprimands or termination.”  Gaming was accomplished in two general manners. First Wells Fargo employees would engage in illegal “conduct to attain sales through fraud, identity theft, and the falsification of bank records”. The second type of conduct was both fraudulent and unethical such as to “sell products of no or low value to the customer, while believing that the customer did not actually need the account and was not going to use the account.”

What were the Gaming schemes? One was to simply create false records by forging customers signatures in order to open accounts which were never authorized or where the customer was never even contacted. From there, Wells Fargo employees would use customers personal information to create PIN numbers to activate the unauthorized debit cards. This scheme also involved employees creating fake applications for debit cards and other banking services from personal information.

Bank employees would take great pains to hide these fraudulent accounts from the customers in whose names they had been illegally created. They would alter customer information such as phone numbers, email addresses and physical addresses to prevent customers from actually receiving the debit cards or activation of the fraudulent services.

Yet another Gaming scheme was a practice known as “simulated funding”. Under this fraud scheme, bank employees would fashion false records by opening unauthorized checking and savings accounts to meet the cross-selling goals. They would then fraudulently and without authority transfer funds to the unauthorized account to meet the funding criteria required to receive credit for “selling” the new account. In this clearly illegal conduct, Wells Fargo employees would then transfer funds from existing accounts of the customers without their consent. It was found that literally millions of Wells Fargo’s customer accounts reflected transfers of funds between two accounts that were equal in amount to the product-specific minimum amount for opening a new account, which, thereafter, had no further activity. It was so pervasive that Wells Fargo employees would use personal funds or other methods to simulate actual funding of accounts that they had opened without customer consent.

Wells Fargo also approved, countenanced and otherwise allowed customers who by no means needed eight banking products or services to have them foisted upon such customers. The bank’s employees “intentionally persuaded customers to open accounts and financial products that the customers authorized but which the employees knew the customers did not actually want, need, or intend to use.” There were multiple fraud schemes used by Wells Fargo employees to  convince customers to open these unnecessary accounts. Some of them included “opening accounts for friends and family members who did not want them and by encouraging customers to open unnecessary, duplicate checking or savings accounts or credit or debit cards. Millions of secondary accounts and products were opened from 2002 to 2016, and many of these were never used by customers.”

All of these examples show just how invidious Wells Fargo management was to countenance and promote such tactics. Wells Fargo management, literally right up to the top of the organization, did so by making it clear to employees that their jobs were on the line if they did not meet their cross-selling sales quotas. In the Office of Comptroller of the Currency (OCC), Order of Charges, it stated, “Community Bank [headed by Carrie Tolstedt] intimidated and badgered employees to meet unattainable sales goals year after year”. Further, Wells Fargo senior management, to whom Tolstedt and the Community Bank ELT reported tolerated these illegal and fraudulent sales practices “as an acceptable side effect of the Community Bank’s profitable sales model.” Wells Fargo senior management declined to implement effective internal controls and actively overrode what few controls existed and “turned a blind eye to illegal and improper conduct” in the Gaming Program.

How did Wells Fargo become a business that tolerated as a side effect illegal and unethical conduct to hit a self-created metric? Was it perverse incentives? Did the Community Bank leadership in the form of Carrie Tolstedt and her ELT have a single focus on making the cross-selling metric to the exclusion of all else? Were they simply evil people who wanted to cheat everyone and everything; including (but not limited to) customers, investors, regulators, the Board of Directors, employees, the banking public and everyone else? Tomorrow I will conclude with some final reflections and an exploration of some of these questions and perhaps others.

But I will leave you with one question that I will consider tomorrow, Why would anyone ever do business with Wells Fargo again

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2020

 

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