More Compliance Lessons from Wells Fargo-FOREX Trades

by Thomas Fox

At some point, you must ask just how corrupt is an organization? What does the tone from top which says to make your numbers at all cost, translate to in operationalization? Unfortunately, we have seen yet another dramatic example this week which make clear that when the tone at the top is to succeed at all cost, the results can be devastating. Perhaps not too surprisingly the examples continue to scurry out from Wells Fargo.

Wells Fargo continues to uncover cockroaches running throughout its organization when Emily Glazer, reported in the Wall Street Journal (WSJ) massive fraud of customers in its foreign-exchange (FOREX) operation. In an internal investigation, the company found that in a review of some 300 contracts, only 35 had the actual foreign exchange rate the company had offered to customers. Put another way, in almost 90% of the FOREX contracts reviewed, the customers were overcharged.

One of the reasons for this conduct was a culture that sought to maximize revenues, even at the expense of customers. Another was compensation structure for Wells Fargo bankers in the FOREX department who “got bonuses based solely on how much revenue they brought in, say more than a dozen current or former Wells Fargo employees. No other big bank in the U.S. calculated bonuses of currency traders in such a defined and individual way.” The bonuses were based on 10% of the amount of the exceeded revenue targets. One source explained to the WSJ “If a banker’s revenue target was $5 million and the person brought in $6 million, he or she would earn a $100,000 bonus, or 10% of the additional $1 million in revenue. Bankers typically received such bonuses twice a year in cash, rather than stock, as part of a signed contract”.

This direct tie of compensation to exceeding budget targets was coupled with not a failure of internal controls but rather a lack of controls around the process. FOREX bankers were allowed to set individual exchange rates, outside of industry standards, often on unwritten agreements and then seemingly change that rate at will. This has been remediated so there are approved margins for different volumes of FOREX trades. Wells Fargo set controls around oral agreements, specifying in a memo to foreign-exchange employees instructing employees them not to create informal or oral pricing agreements. Rather amazingly this same memo, also noted that bank employees “are “responsible for ensuring customers are not misled regarding” pricing.”

The bank consistently had customer complaints but FOREX bankers at “Wells Fargo relied on the fact that customers often didn’t bother to double-check how much they were charged, fee levels weren’t straightforward, and complaints could be batted away, the current and former employees say.” Another excuse articulated by a “former Wells Fargo manager says employees would tell customers who expressed surprise at the size of a trading fee that market prices were different at the moment when the transaction was executed and blame “time fluctuation” for any difference.”

Finally, there was the issue of internal reporting or more accurately, the lack thereof. When an employee complained about aspects of the FOREX team’s business approach, she was named and shamed internally. The employee, Cathy Witt “was summoned to a meeting in St. Louis [from her office in Chicago], told that her comments had been offensive and demoted on the spot, according to people familiar with the matter. She also was told to apologize to other managers for her unprofessional behavior, the people say. She later left the bank.”

All of this means there was a system susceptible to manipulation so that compensation could be paid directly into the pockets of those manipulating the system, without oversight or appropriate controls where the one employee who did step forward was retaliated in a manner designed to driver her out of the bank’s employment. All the while the leaders of the FOREX group were rewarded with internal promotions and financial bonuses. All of this sounds like one discrete teaching example of how a corporate failure can lead to a fraud perpetrated on an entity’s customer.

The problem in Wells Fargo’s FOREX operation are only one part of the bank’s well documented and ongoing troubles. The U.S. Attorney’s Office for the Northern District of California is investigating the FOREX trades and has subpoenaed information from Wells Fargo. Other potential issues are being examined by both the Federal Reserve and the Office of the Comptroller of the Currency.

What lessons can the compliance practitioner take away from only the most recent Wells Fargo revelations? It still all begins with culture. If you tell people the only thing that matters is exceeding your budgetary goals to make a bonus, they will figure out a way to do so. Obviously, this is tied to the compensation scheme but the bigger problem was cultural and the tone set by management. Consider the hop, skip and jumps that the Wells Fargo FOREX team engaged in with companies who did raise questions. Where do you think the tacit approval to lie to customers came from? The utter shaming of an employee who did raise questions internally is probably enough to deter even the most decided whistleblower, but of course that was the point in treating Ms. Witt in the manner the company did.

The lack of any (not simply effective) controls is stunning, to the point where handshake deals were the basis of large transactions. A contract exists so both sides know their obligations and rights. The lack of a standardized charge for services, with the specific amount left to the banker is a system ripe for abuse.

For the compliance practitioner Wells Fargo is the lesson which keeps giving. One might ask yet again when Wells Fargo is going to but a seasoned compliance professional on the Board of Directors?

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

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Thomas Fox

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