Sunday May 31

Everybody's Business: The Ambivalent Crackdown on Wells Fargo

It took three years but federal prosecutors and bank regulators finally took action in one of the most egregious corporate scandals in recent years: the scheme by which Wells Fargo created millions of bogus accounts to extract millions of dollars of illicit fees from its customers.

The approaches taken by different agencies illustrate the uncertainty within the federal government on how to deal with major corporate wrongdoers.

On the encouraging side, the Office of the Comptroller of the Currency, an arm of the Treasury Department not known for aggressive action, got relatively tough with the former chief executive of Wells by personally fining him $17.5 million – the largest penalty OCC has ever imposed on an individual – and banning him for life from the banking industry. The agency also penalized two other former senior officials at Wells Fargo and charged five others. Among those five was the former head of retail banking at Wells, against whom OCC proposed a penalty of $25 million.

OCC’s severity may have something to do with the fact that the agency’s posture toward Wells had become the subject of an investigation by the Treasury inspector general. That inquiry was expected to address the failure of the agency to pursue complaints it had received about abusive practices at Wells long before the sham-account scandal erupted in 2016. The agency admitted this lapse in an unflattering report about its conduct released in 2017.

Along with the announcement of its actions against former Wells executives, OCC released a 100-page Notice which reads like an indictment. It argues that for more than a decade the bank maintained a business model that pressured employees to engage in “serious misconduct” by imposing “intentionally unreasonable sales goals” and “fostered an atmosphere that perpetuated improper and illegal conduct.”

The document relates in detail how that pressure worked to the detriment both of the customers who were being defrauded and the bank’s lower level employees. Those employees were turned into accomplices in a corrupt scheme described by the document as “immense” in magnitude.

That depiction was echoed a few weeks later when the Justice Department announced the resolution of its investigation of Wells. DOJ’s press release was accompanied by a 16-page summary of the bank’s abuses, including the adoption of “onerous sales goals” that led thousands of its employees to engage in “unlawful conduct to attain sales through fraud, identity theft, and the falsification of bank records.”

Despite these allegations, DOJ decided not to file criminal charges against any senior executives at the bank. Instead, it resolved both criminal and civil allegations with a monetary penalty of $3 billion, which was not insignificant but was not too much of a burden for a bank whose profits in 2019 exceeded $19 billion.

Moreover, the impact of the criminal portion of the case was diminished by the inclusion of a deferred prosecution agreement (DPA) rather than the filing of any actual charges. This overused gimmick (like its evil twin, the non-prosecution agreement) allows DOJ to give the impression it is being tough with corporate bad actors while actually failing to do so.

In its press release on the Wells case, DOJ tried to justify the use of the DPA by noting factors such as the bank’s cooperation with the investigation. Yet it also cited “prior settlements in a series of regulatory and civil actions.”

How are the bank’s prior bad acts, which according to Violation Tracker have resulted in more than $17 billion in penalties, an argument for leniency? If anything, they militate against the use of a DPA, which was originally meant to provide an incentive for a company caught up in a single case of misconduct to return to the straight and narrow.

Wells Fargo, in fact, was the recipient, via its acquisition Wachovia, of a previous DPA in 2010 for anti-money-laundering deficiencies as well as a 2011 non-prosecution agreement in connection with municipal bond bid-rigging. Those deals do not appear to have had much of a beneficial effect on the ethical climate at the bank.

Behavior of the kind exhibited by Wells calls for tougher penalties. In 2018 the Federal Reserve took a step in that direction by barring Wells from growing any larger until it cleaned up its business practices. The agency also announced that the bank had been pressured to replace four members of its board of directors.

Meanwhile, the Justice Department continues to rely on prosecutorial approaches that have done little to stem the ongoing wave of corporate criminality.

PHILIP MATTERA heads the Corporate Research Project in Washington, DC, and writes the blog Dirt Diggers Digest.

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