Wells Fargo has agreed to pay $3 billion to resolve civil and criminal charges related to its practice between 2002 and 2016 of pressuring employees to meet unrealistic sales goals that led to millions of accounts being created under false pretenses or without consent, the U.S. Department of Justice announced Monday.
As part of the agreement with the department and the Securities and Exchange Commission, Wells Fargo admitted that it collected millions of dollars in fees and interest to which it wasn’t entitled, harmed the credit ratings of some customers, and unlawfully misused customers’ sensitive personal information, including customers’ identification.
“When companies cheat to compete, they harm customers and other competitors,” said Michael D. Granston, deputy assistant attorney general for the department’s Civil Division. “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 settlement
Under the terms of the settlement, Wells Fargo won’t be prosecuted for three-year for criminal charges related to false bank records and identity theft 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 based on Wells Fargo’s creation of false bank records.
In addition, Wells Fargo agreed to an SEC cease-and-desist proceeding finding violations the Exchange Act.
The $3 billion payment resolves all three issues, and includes a $500 million civil penalty to be distributed by the SEC to investors.
The misconduct
Over 15 years at Well Fargo’s Community Bank, which was then the largest part of Wells Fargo, generated more than half of the company’s revenue. In the settlement, 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.”
However, the Community Bank carried out 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 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 products 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 authorization.
- Creating PINs to activate unauthorized debit cards.
- Moving money from millions of customer accounts to unauthorized accounts in a practice known internally as “simulated funding.”
- Opening credit cards and bill pay products without authorization.
- Altering customers’ true contact information to prevent customers from learning of unauthorized accounts and prevent Wells Fargo employees from reaching customers to conduct customer satisfaction surveys.
- 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 high sales goals and pressure from management to meet them. One internal investigator in 2004 called the problem a “growing plague.”
The following year, another internal investigator said the problem was “spiraling out of control.” Even after senior managers in the Community Bank directly called into question 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 action to prevent and reduce these practices. Senior leadership of the Community Bank minimized the problems to Wells Fargo management and its board of directors by saying the problem was individual misconduct not the sales model. Community Bank senior leadership saw the sale of low-quality products and the loss of integrity as a necessary byproduct of the increased sales and as a cost of doing business.
