knew-all-alongYou know it is going to be a very bad day when, as a company’s Chief Executive Officer (CEO), you receive a letter asking the following, “Specifically, the committee should thoroughly examine this issue, including: How it is possible that more than 5,000 employees could bilk customers over the course of five years; the timing, extent and disposition of customer complaints; whether Wells Fargo’s sales and compensation structure incentivized employees to engage in deceptive and abusive practices; and what additional safeguards may be needed to prevent this type of behavior.”

That language came out of a letter from Senate Banking Committee Chairman, Richard Shelby, and was quoted in a New York Times (NYT) Dealb%k column by Andrew Ross Sorkin, entitled “The Brazen Sham No One Noticed”. To Senator Shelby’s questions, Sorkin added a rather obvious one “What, exactly does a risk manager at Wells Fargo do?” For myself, one of the most basic questions was simply how could some 2 million fraudulent accounts, involving both products and services, be opened and no one notice?

It turns out that the problem for Wells Fargo is not that no one noticed that sales representatives had been fraudulently cross-selling for years. The greater problem for the bank was that it was well known within the organization for years and it was never stopped. In a Wall Street Journal (WSJ) article by Emily Glazer, entitled “Wells Fargo Tripped By Its Sales Culture”, she noted, “Questionable sales tactics persisted, though, and were an open secret in Wells Fargo branches across the country.” She wrote that the bank began asking questions internally about “an uptick in bad behavior” as far back as 2009 when sales spiked during one month’s Jump into January sales program. She noted, “For five years, Wells Fargo conducted investigations into improper practices, hired consultants and tinkered with sales and compensation incentives.”

Surveys, Assessments and Internal Investigations

In 2010 “employee-satisfaction surveys done for Wells Fargo by research firm Q & A Research Inc. showed that some bank employees felt uncomfortable about what managers had asked them to do or when pushing customers to buy products.” In 2012, the “Wells Fargo’s community-banking unit assembled a special task force to look for suspicious patterns in sales practices and examine areas of the U.S. where customer complaints were prevalent, such as Southern California, according to current and former bank executives.”

There was an assessment in 2013 after some 200 Wells Fargo employees were fired for fraudulent practices around cross-selling. After some directors and executives wondered if the real problem was the bank’s cross-selling culture and not the terminated employees; it was determined that it was simply ‘rogue employees’. An anonymous source for the WSJ piece said, ““When we first started looking at it, we didn’t think it was anything other than rogue junior players and a few rogue managers””. Even with this finding, the bank’s risk management team “increased its oversight and audit capabilities” over the community banking unit.

In 2015, the bank hired Accenture and the venerable law firm Skadden, Arps, Slate, Meagher & Flom “to conduct an internal investigation”. The Board was regularly briefed on the investigation’s progress. As a direct result from this internal investigation “the bank lowered some sales goals and toughened new procedures to ensure that new accounts were legitimate.” After the Los Angeles District Attorney “alleged that Wells Fargo pressured retail employees to commit fraud”, the bank “hired consulting firm PricewaterhouseCoopers to do an in-depth analysis. About a dozen PwC employees worked on the project for about a year, discovering fraudulent sales practices that were prominent in Phoenix, Miami and Newark, N.J.”

Compliance and Ethics Training

Then there was compliance and ethics training. In another NYT Dealb%k column by Michael Corkery and Stacy Cowley, entitled “Warned About Excesses, Then Prodded to Sell”, they wrote, “The message to the dozens of Wells Fargo workers gathered for a two-day ethics workshop in San Diego in mid-2014 was loud and clear: Do not create fake bank accounts in the name of unsuspecting clients. Similar warnings were being relayed from corporate headquarters in San Francisco to regional bankers in Texas, as senior management learned that some Wells employees had been trying to meet exacting sales goals by creating sham bank accounts and credit cards instead of making legitimate sales.”

How seriously was the training taken? In her WSJ piece, Glazer reported the following, “At a sales meeting in Florida in 2014, Wells Fargo & Co. regional executives scolded lower-level managers about an obvious problem that kept cropping up at the bank. Managers were told that their employees should never open accounts for people who don’t exist, people familiar with the meeting recall. One manager in the room saw things differently. In an email peppered with exclamation points and capital letters, she urged her employees to ignore the bosses and get sales up at any cost, says someone who saw the email.”

Internal Reporting of Illegal Activity

Instances where Wells Fargo employees attempted to speak up about unethical or even illegal behavior were met with indifference or outright hostility. Khalid Taha, a former employee was quoted “They warned us about this type of behavior and said, ‘You must report it’ but the reality was people had to meet their goals.” Another former employee, Ruth Landaverde was quoted in the WSJ piece as saying, “If somebody said: ‘This doesn’t make sense. Where are you getting these sales goals?’ then [the response] was: ‘No, you can do it’ or ‘You’re negative’ or ‘Oh, you’re not a team player’. She says she often got the same response whenever she said a customer didn’t need another credit card. “The answer was: ‘Yes, they do,’” she says. She quit after being warned she wasn’t reaching her sales goals, she says.”

It does appear that the CEO was made aware of the illegal conduct at Wells Fargo. One Wells Fargo employee reported the unethical conduct in an email directly to CEO Stumpf. As reported from the Senate Banking Committee hearing, in an exchange between Stumpf and Senator Robert Menendez, who read an email that he said was written in 2011 by a Wells Fargo employee reporting concerns about cross-selling pressure directly to the CEO. Mr. Stumpf said “I don’t remember that one.” Mr. Menendez replied: “Well, she was fired.” Yet, in his testimony CEO Stumpf said he was made aware of the problem in 2013 and the Board was informed in 2014.

External Reporting of Unethical Conduct

Of course, the real losers in all this illegal and unethical activity were the banks customers, who received the unwanted and, in some cases, unknown services and products. Yet these same customers also reported the actions to the bank and nothing came out of this information. Corkley and Cowley reported one former Wells Fargo employee who, “fielded complaints from customers about questionable accounts until shortly before he left the bank this summer. He said bank managers had grown weary of writing up reports on potentially improper sales.” He said that it was “like jaywalking,” and “hard to police.” Other customers interviewed for the piece spoke about the difficulties in cancelling credit and debit cards they “didn’t know about and didn’t want.”

Some questions not yet answered

If every customer was contacted to obtain or use up to eight product or services, one might wonder about credit risk? Sorkin did when he listed several questions posed to him by Richard Bove a research analyst. The questions included, “What does this indicate about the bank’s underwriting policies? Can anyone have a Wells credit card without any checks being made concerning that person’s ability to make payments for debt created using this card?” And what does this say about the information the company has reported to investors and regulators? The bank also apparently opened 1.5 million false transaction accounts? Does this mean that accounts can be opened with no balances? What does it say about the willingness of the bank to operate with accounts on which it makes no money? What policies and procedures at this bank allowed this to occur?””

So, in spite of all the investigations, auditing, assessments, internal and external reporting how could Wells Fargo have allowed this problem to grow? Perhaps the most concise answer came from Glazer who, in another WSJ piece, entitled “On the Way to ‘Great,’  Six Products Per Customer”, wrote that in the bank’s 2010 annual report, CEO Stumpf “said he often was asked why Wells Fargo had set a cross-selling goal of eight [products and services per customer]. The answer is, it rhymed with ‘great’ he wrote. “Perhaps our new cheer should be ‘Let’s go again, for ten!’”

 

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, 2016

7K0A0246Tone at the top is the single most ubiquitous phrase in compliance. However, I heard it phrased in a manner last week which not only made sense but explained why it is the most used phrase. It came from Vanessa Rossi, FCPA Due Diligence Compliance Counsel at Baker Hughes Inc. Rossi says the phrase which resonates with her is ‘tones at the tops’ because for every employee, the top is not the company Chief Executive Officer (CEO) but the supervisor immediately above them and it is this immediate ‘top’ which sets the company’s tone for the employee. It is also that supervisor who will set not only the true culture of an employee but will address any complaints that employee has about violations of the company’s self-professed culture. Finally, it may also mean there is more than one ‘tone’ in any organization. Rossi’s insight certainly explains quite a bit about the Wells Fargo scandal.

Today, I continue my exploration of the Consumer Financial Protection Bureau (CFPB) enforcement action against Wells Fargo. Yesterday, I wrote about how something as benign as the cross-selling of banking products and services can become a very high risk proposition if not managed properly. Today I want to consider the culture at Wells Fargo and how it contributed to the bank creating some 2 million false and fraudulent accounts which led to some 5,300 employees being fired and the CFPB (and others) fine of $185MM.

On its public website, Wells Fargo has a Code of Conduct available for inspection and download. The document is entitled Our Code of Ethics & Business Conduct – Living Our Vision & Values. In his cover letter introducing the document, CEO John Stumpf says the following, “We are all responsible for maintaining the highest possible ethical standards in how we conduct our business and serve customers. After all, our culture is centered on relationships, and those relationships are built on trust. Our customers have high expectations of us, and we have even higher expectations of ourselves.”

The Code itself has a section entitled Ethics, subtitled “Our ethics are the sum of all the decisions each of us makes every day”, the first sentence reads, “We have a responsibility to always act with honesty and integrity.” In the next section entitled What’s right for customers, subtitled “We want to be approachable and caring, exceed our customers’ expectations, and invest in relationships that last a lifetime”, the first three sentences read, “Our customers are always our priority. Our customer focus is one of the characteristics that distinguishes us from our competitors. We do what’s right for our customers”. The very next section, entitled Making the Right Choice, has a first sentence which reads, “If you’re faced with an ethical dilemma and you’re not sure what to do, ask these questions:

 

The section ends with the following, “If your answer to any of these questions is “No,” don’t do it.” So it appeared that Wells Fargo said the right things. Indeed, CEO Stumpf, in a Wall Street Journal (WSJ) article by Emily Glazer and Christina Rexrode, entitled “Wells Boss Says Staff at Fault for Scams”, says, “It was the employees’ fault” and “There was no incentive to do bad things.”

Wells Fargo did not have a ‘paper Code’ like Enron; sitting there for all to see but never trained upon. In a New York Times (NYT) article, entitled “Warned About Excesses, Then Prodded to Sell”, Michael Corkery and Stacy Crowley wrote, “The message to the dozens of Wells Fargo workers gathered for a two-day ethics workshop in San Diego in mid-2014 was loud and clear: Do not create fake bank accounts in the name of unsuspecting clients. Similar warnings were being relayed from corporate headquarters in San Francisco to regional bankers in Texas, as senior management learned that some Wells employees had been trying to meet exacting sales goals by creating sham bank accounts and credit cards instead of making legitimate sales.”

Yet, in spite of this training, statements made by Stumpf to the WSJ and the sections on ethics in the Wells Fargo Code of Conduct point to a clear disconnect between the values articulated in the corporate headquarters with those out in the field, in the branch offices selling consumer banking products across America. This points to a major disconnect between the corporate office and the field. What was important at the corporate office as a cultural value was not so important to those with their jobs on the line out in operations. The WSJ quoted one former Wells Fargo teller who was critical of this corporate message, who was quoted in the piece, said, “It was all management, their boss, then their boss, then their boss. They are putting pressure on employees and it’s sad. People need their jobs.”

The reason company employees continued to break the law is seemingly straightforward. The pressure put on employees was to cross-sell, cross-sell and then cross-sell. The NYT piece said, “Wells continued to push sales goals that caused employees to break the rules in the first place.” Moreover, “The biggest problem, the former employees say, has been Wells Fargo’s aggressive sales culture, which was nurtured and honed over decades at the bank’s highest levels.” The pressure to cross-sell was relentless. One former Wells Fargo employee, Sharif Kellogg, was cited stated, ““The branch managers were always asking, ‘How many solutions did you sell today?’ They wanted three to four a day. In my mind, that was crazy — that’s not how people’s financial lives work.””

Wells Fargo apparently noticed something was askance several years ago. The Los Angeles Times first reported on scam allegations coming out of Los Angeles branches back in 2013. The company knew it had a problem and hence the compliance and ethics training. But branch managers (the immediately tops above the consumer sales force) continued to push cross-selling. The NYT piece noted, “former Wells employees swapped grim stories about the dichotomy between their ethics training — where they were formally told not to do anything inappropriate — and the on-the-job reality of a relentless push to meet sales goals that many considered unrealistic.” Another former employee said, “During our training we go through SO much training about ethics and how you CANNOT do that. I got threatened to be fired as a teller with them because I wasn’t meeting my numbers. I told them I didn’t believe in trying to convince someone to spend money they don’t have, get what they don’t need.”

The bottom line was that Wells Fargo employees were hounded by the immediate managers to meet clearly unrealistic sales quotas. What was the pressure those branch managers were under? Going in another direction, one former Wells Fargo employee basically said the branch managers were getting rich off the back of their employees when they joked on a YouTube spoof video, ““If tellers and bankers make those sales numbers each day, at the end of the month everybody in the branch will get a $5 gift card to McDonald’s. The district manager will get a $10,000 cash bonus.””

Even with a robust and specific Code of Conduct, a CEO allegedly committed to doing business the right way and specific training the ‘tone’ of the organization came from the employees’ immediate bosses. If a branch manager wanted you to cross-sell products to customers who did not want them, did not need them, could not afford them or did even know they had been assigned the products; that is what the employees did. If not, they would be fired. In the corporate world, that is the clearest statement of culture a company can have.

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, 2016

Roman Numbers 1-10.2I.     Training

The communication of your anti-corruption compliance program is something that must be done on a regular basis to ensure its effectiveness. The FCPA Guidance explains, “Compliance policies cannot work unless effectively communicated throughout a company. Accordingly, DOJ and SEC will evaluate whether a company has taken steps to ensure that relevant policies and procedures have been com­municated throughout the organization, including through periodic training and certification for all directors, officers, relevant employees, and, where appropriate, agents and business partners.”

“Conducting effective training programs” is listed in the 2011 US Sentencing Guidelines as one of the factors the DOJ will take into account when a company accused of a FCPA violation is being evaluated for a sentence reduction. The US Sentencing Guidelines mandate, “(4) (A) The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals referred to in subdivision (B) by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.”

While most people tend to overlook the issue of attendance at training, it is an issue that should also be considered. You should determine that all senior management and company Board members have attended FCPA compliance training. You should review the documentation of attendance and confirm this attendance. Make your department, or group leaders, accountable for the attendance of their direct reports and so on down the chain. Evidence of training is important to create an audit trail for any internal or external assessment or audit of your training program.

One of the key goals of any FCPA compliance program is to train company employees in awareness and understanding of the FCPA; your specific company compliance program; and to create and foster a culture of compliance. Up until recently, we had not heard anything from the DOJ around the testing the effectiveness of compliance training, however, beginning in the fall of 2015 through the announcement of the FCPA enforcement Pilot Program, they to talk about whether you have determined the effectiveness of your training.

You can begin with a baseline measurement of employees who participated in your compliance training through a general assessment of those trained on the FCPA and your company’s compliance program is a starting point. Some questions to use for the assessment of the effectiveness of your FCPA compliance training could include the following:

  1. What does the FCPA prevent?
  2. Does your company allow facilitation payments?
  3. How do you report compliance violations at your company?
  4. What types of improper compliance conduct should you report?
  5. What is the name of your company’s Chief Compliance Officer?

For high-risk employees, you can have a more focused evaluation. You can give some circumstances an employee might face when traveling or doing business abroad. As always, you need to document the training, attendance at the training and then the post-training testing. 

II.     Communication

Ethical leadership is absolutely mandatory to have a successful compliance program, whether it is based upon the FCPA or the UK Bribery Act. Senior management must not only be committed to doing business in compliance with these laws but they must communicate these commitments down to the organization. But leadership is not limited only to senior management within an organization. Tone at the Top begets Tone in the Middle; which begets Tone at the Bottom. At each rung there is the need for compliance leadership. Yet these communications can come in many forms. Consider the Morgan Stanley declination that specifically mentioned the ongoing compliance reminders as one of the reasons the company received a declination.

All of this leads me to consider the message of compliance inside of a corporation and how it is distributed. In a compliance program, a large portion of your consumers/customers are your employees. Social media presents some excellent mechanisms to communicate the message of compliance going forward. Many of the applications that we use in our personal communication are free or available at very low cost. So why not take advantage of them and use those same communication tools in your internal compliance marketing efforts going forward.

Another key issue seems to be that problem that companies do not write the way they speak, and do not speak the language of their employee base. In many ways, compliance is a brand and that compliance brand needs to make sure that the message of compliance will resonate with your audience, whether that be your employee base, third parties working for your company, even senior management or the Board. This is where social media can help you and the compliance function to hone your message through social media. Part of this is based on experimenting on what message to send and how to send it throughout your organization.

This means that you will need to work to groom your message but also continue to plug away to send that message out. I think the Morgan Stanley declination will always be instructional as one of the stated reasons the DOJ did not prosecute the company as they sent out 35 compliance reminders to its workforce, over 7 years. Social media can be used in the same cost effective way, to not only get the message of compliance out but also to receive information and communications back from your customer base, the company employees.

The key to training and communication is that they be done effectively. Whether you utilize one of the myriad of compliance training professionals, online training companies or another mechanism, the bottom line is that you need to risk rank your training attendees and follow up by measuring training effectiveness. If you can neither think of anything else nor have the budget for professional consultants, you can always start with the FCPA Guidance and use the hypotheticals as your training materials. I still maintain that in communications you are only limited by your own imagination. By keeping the communications fun, fresh and relevant, you can help keep the eye on compliance in your organization.

For more information on this Hallmark, check out my book Doing Compliance: Design, Create and Implement an Effective Anti-Corruption Compliance Program, which is available through Compliance Week by clicking here.

To listen to my podcast on this Hallmark, click here.

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, 2016