Choosing against performing proper due diligence with respect to regulatory standards can cost you as a financial institution, and one American bank is learning this the hard way. For decades, the largest financial firms in America have been able to take regulatory fines and penalties in stride. Going back in recent history, there has been no shortage of examples of banks that have faced the severe consequences of overlooking today’s complex landscape of regulatory and sanctions guidelines: Fines, remediation mandates, even complete shutdowns. Yet even so, these firms have been able to keep their doors open without much issue, with many questioning whether these penalties are making any kind of true impact. While institutions large and small across the United States have done a fairly good job of implementing and maintaining appropriate anti-money laundering (AML) and counter-terrorism financing (CFT) programs to avoid these repercussions, the highly publicized pitfalls that have engulfed multinational financial services staple Wells Fargo are proof that even the largest institutions cannot simply look the other way when it comes to compliance.

            Since 2016, Wells Fargo has been bombarded with fines and penalties stemming from their inadequate regulatory compliance and risk assessment processes, with several ongoing investigations dating back as far the time of enactment of the USA Patriot Act. All told, Wells Fargo & Co. has agreed to pay more than $4 billion dollars in collective penalties and settlements over this relatively short period of time. Some of their more recent scandals include the sales of toxic mortgage-backed securities (which helped to contribute to the 2008 housing collapse and financial crisis) leading to a $2.1 billion payment to the Department of Justice, another $1 billion to the Cosumer Financial Protection Bureau (CFPB) for improper mortgage practices and auto-loan charges, $575 million to all 50 states and the District of Columbia in 2018 stemming from a fake retail banking account scandal and additional auto-loan and mortgage improprieties, and several other high-profile issues. A more recent string of scandals for Wells Fargo involved millions of fake bank accounts being opened, unbeknownst to their own customers. Even more egregiously, they were caught forcing auto insurance onto customers that did not need it. At the time the incident was uncovered, the New York Times wrote that “the expense of the unneeded insurance, which covered collision damage” and “pushed roughly 274,000 Wells Fargo customers into delinquency and resulted in almost 25,000 wrongful vehicle repossessions.”² Furthermore, the Justice Department and Securities Exchange Commission (SEC) have both confirmed that Wells Fargo is still under their direct investigation with respect to alleged infractions with the bank’s wealth-management and foreign exchange business.

            In spite of all of these transgressions and the increased pressure on the bank to do right by its counterparts and clientele however, the fines continue to rain down on the firm for previous shortcomings. Just last week, Wells Fargo was fined over $22 million by the U.S. Labor Department for allegedly firing a senior manager in its commercial banking unit after the employee reported concerns about misconduct to company management.³ The employee, who remains unnamed at this time, reportedly was directed by management to falsify customer information, while also voicing concerns that he was being mired in interest-rate collusion schemes within the company before ultimately being terminated by the firm (without reason) in 2019.³ The employee later  filed a complaint with the Labor Department’s Occupational Safety and Health Administration (OSHA) over what he viewed as “whistleblower retaliation”, through which he was protected under provisions of the Sarbanes-Oxley Act. The bank was subsequently ordered to pay their ex-manager a series of damages that included lost wages, interest, benefits and additional compensatory payments. The bank has since appealed the ruling. Nevertheless, in today’s world where maintaining financial security and limiting the prevalence of fraud, corruption, and data breaches has become paramount for financial institutions across the globe in ensuring the integrity of the local and national economies and their clientele’s personal and financial data, whistleblowers have evolved into one of the most important – albeit underrated – aspects of today’s anti-money laundering (AML) and counter-terrorism financing (CTF) movements. The United States government has taken a step forward in protecting the rights of whistleblowers while placing great value on exposing potentially suspicious and/or unethical activity emerging from the inner-workings of various financial service providers. Under the compensatory portion of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, whistleblowers are eligible to receive a substantial monetary reward by voluntarily providing the body with credible information that leads to successful enforcement actions.

            Also stifling the bank is the fact that they have effectively been barred from additional growth after an unprecedented move by the Federal Reserve to cap their assets at or below $1.95 trillion. Calling the banks risk management and regulatory failures “widespread and pervasive”, Federal Reserve Chairman Jerome Powell touched on the reasoning behind imposition of the cap in an open letter back in November 2018. Powell stated: “What happened at Wells Fargo was outrageous. The underlying problem at the firm was a strategy that prioritized growth without ensuring that risks were managed, and as a result the firm harmed many of its customers.”¹ Powell emphasized that the Federal Reserve would not give in on this issue either, saying, “We do not intend to lift the asset cap until remedies to these issues have been adopted and implemented to our satisfaction.”¹

            In the past, the big banks could get away with compliance infractions of this variety without batting an eyelash. The U.S. government now understands that when an institution creates as much revenue as Wells Fargo, they can accept large-scale fines rather than actually putting in the effort and funding to restructure and strengthen their compliance departments and mend other issues that may have contributed to the fines being levied in the first place. This new strategy by the Federal Reserve appears to be the beginning of the end of that however, as keeping consent orders in place will require banks in the wrong to notify the Federal Reserve of remediation plans, show proof of their adoption and implementation, and require full-length reviews by an independent 3^rd party before being lifted. In all fairness, Wells Fargo has at least made some steps in the right direction recently by agreeing to pay reparations and trying to move forward. Embattled CEO Timothy Sloan made a statement in reference to the latest payment of $575 million saying, “This agreement underscores our serious commitment to making things right in regard to past issues as we work to build a better bank.” Unfortunately for Sloan, changing one’s reputation in the eyes of regulators, as well as the general public, is a long road when you have a lengthy history of regulatory compliance slip-ups and unethical activities arising in many major branches.

Citations

1. Haggerty, Neil. “Fed Won’t Lift Wells’ Growth Cap until Deficiencies Are Fixed: Powell.” American Banker, American Banker, 10 Dec. 2018. 
2. Morgenson, Gretchen. “Wells Fargo Forced Unwanted Auto Insurance on Borrowers.” The New York Times, The New York Times, 28 July 2017. 
3. Smagalla, David. “Wells Fargo Fined $22 Million for Alleged Whistleblower Retaliation.” The Wall Street Journal, Dow Jones & Company, 2 Sept. 2022.