Wells Fargo pays USD3 billion to Resolve Criminal and Civil Investigations

Wells Fargo have agreed to pay USD3 billion to resolve their potential criminal and civil liability stemming from a practice between 2002 and 2016 of pressuring employees to meet unrealistic sales goals that led thousands of employees to provide millions of accounts or products to customers under false pretences or without consent, often by creating false records or misusing customers’ identities.

As part of the agreements with the United States Attorney’s Offices for the Central District of California and the Western District of North Carolina, the Commercial Litigation Branch of the Civil Division, and the Securities and Exchange Commission, Wells Fargo admitted that it collected millions of dollars in fees and interest to which the Company was not entitled, harmed the credit ratings of certain customers, and unlawfully misused customers’ sensitive personal information, including customers’ means of identification.

Michael D. Granston, Deputy Assistant Attorney General, Civil Division, Department of Justice, said “When companies cheat to compete, they harm customers and other competitors. 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 Civil Division will continue to use all available tools to protect the American public from fraud and abuse, including misconduct by or against their financial institutions.”

Andrew Murray, US Attorney for the Western District of North Carolina, said “When a reputable institution like Wells Fargo caves to the pernicious forces of greed, and puts its own interests ahead of those of the customers it claims to serve, my office will not sit idle. Today’s announcement 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.”

Nick Hanna, US Attorney for the Central District of California, said “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. We are hopeful that this USD3 billion penalty, along with the personnel and structural changes at the Bank, will ensure that such conduct will not reoccur.”

Mark Bialek, Inspector General of the Board of Governors of the Federal Reserve System and Bureau of Consumer Financial Protection, said “Our office is committed to bringing to justice those who deliberately falsify and fabricate bank records in order to deceive regulators and the public. I commend our agent and our law enforcement partners for their hard work and persistence that led to today’s announcement.”

Jay N. Lerner, Inspector General, Federal Deposit Insurance Corporation, said “Today’s multi-billion-dollar penalty holds Wells Fargo accountable for its unlawful sales practices and pressure tactics in which it deceived millions of clients, thus causing substantial hardship for the very individuals who placed their trust in the institution. The FDIC Office of Inspector General is committed to working with our law enforcement partners in order to investigate such financial crimes that harm customers and investors, and undermine the integrity of the banking sector.”

The criminal investigation into false bank records and identity theft is being resolved with a deferred prosecution agreement in which Wells Fargo will not be prosecuted during the three-year term of the agreement if it abides by certain conditions, including continuing to cooperate with further government investigations. Wells Fargo also entered a civil settlement agreement under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) based on Wells Fargo’s creation of false bank records. FIRREA authorises the federal government to seek civil penalties against financial institutions that violate various predicate criminal offenses, including false bank records.

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. The USD3 billion payment resolves all three matters, and includes a USD500 million civil penalty to be distributed by the SEC to investors.

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. The statement of facts outlines top Community Bank leaders’ knowledge of the conduct. As part of the statement of facts, Wells Fargo admitted the following:

Beginning in 1998, Wells Fargo increased its focus on sales volume and reliance on annual sales growth. A core part of this sales model was the “cross-sell strategy” to sell existing customers additional 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 statements and disclosures about needs-based selling, the Community Bank 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. 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.

Many of these practices were referred to within Wells Fargo as “gaming.” Gaming strategies varied widely, but 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 authorisation, creating PINs to activate unauthorised debit cards, moving money from millions of customer accounts to unauthorised accounts in a practice known internally as “simulated funding,” opening credit cards and bill pay products without authorisation, altering customers’ true contact information to prevent customers from learning of unauthorised accounts and prevent Wells Fargo employees from reaching customers to conduct customer satisfaction surveys, and encouraging customers to open accounts they neither wanted or needed.

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. One internal investigator in 2004 called the problem a “growing plague.” The following year, another internal investigator said the problem was “spiralling out of control.” Even after senior managers in the Community Bank directly called into question the implementation of the cross-sell strategy, Community Bank senior leadership refused to alter the sales model, which contained unrealistic sales goals and a focus on low-quality secondary accounts.

Despite knowledge of the illegal sales practices, Community Bank senior leadership failed to take sufficient action to prevent and reduce the incidence of such practices. Senior leadership of the Community Bank minimised 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 by-product of the increased sales and as merely the cost of doing business.

The government’s decision to enter into the deferred prosecution agreement and civil settlement took into account a number of factors, including Wells Fargo’s extensive cooperation and substantial assistance with the government’s investigations; Wells Fargo’s admission of wrongdoing; its continued cooperation in the investigations; its prior settlements in a series of regulatory and civil actions; and remedial actions, including significant changes in Wells Fargo’s management and its board of directors, an enhanced compliance program, and significant work to identify and compensate customers who may have been victims. The deferred prosecution agreement will be in effect for three years.