One of the largest banks in the world and the third largest bank in the US, Wells Fargo, has become embroiled in a scandal so enormous that even CNN called the scope of the scandal “shocking.” Last Thursday, the bank, which has over 70 million customers and is the country’s largest mortgage lender, was fined $185 million for defrauding customers of over $5 million. This includes a $100-million fine from the Consumer Financial Protection Bureau, the largest fine the organization has ever issued. According to federal regulators, Wells Fargo employees had been engaged since 2011 in pervasive fraud which included opening credit cards and other accounts without customer consent, causing the accumulation of late fees on accounts customers never knew they had, and creating fake email accounts to sign up customers for online banking services. Wells Fargo employees ultimately opened 1.5 million “ghost” bank accounts and “applied” for over 565,000 credits in the name’s of bank customers that did not authorize them.
In some cases, fraudulent PIN numbers were created and fake email addresses were used to enroll customer in banking services without their consent. In what had apparently become a “widespread practice” at the bank, employees then moved funds from customers’ existing accounts into the fake accounts without their consent. Many customers were charged for insufficient funds or overdraft fees because of the money illegally moved out of their original accounts. Some accounts incurred as much as $400,000 in fees. Numerous customers were also charged for annual fees and interest charges as well as other fees for credit cards taken out in their name without their knowledge by Wells Fargo employees.
Allegedly, the motivation behind the fraudulent activity were reward programs for employees who brought in new clients and created new accounts. The fraud, before it was discovered, allowed Wells Fargo employees to raise their sales figures and make more money. Several employees of the banking behemoth told regulators that their supervisors strongly pressured them to expand the number of new accounts at the bank. Wells Fargo claims to have fired over 5,300 workers with connections to the massive fraud, though the firings only represent 1% of its total workforce and occurred over a period of several years.
Regulators ultimately lamented serious flaws in the company culture at Wells Fargo as well as its lack of internal oversight. Regulators also promised to reimburse over $5 million to affected customers in full. In a statement, Wells Fargo claimed that “when we [make] mistakes, we are open about it, we take responsibility, and we take action.” However, no arrests will be made and the fine will likely fail to induce meaningful change in the private banking sector as the cost of the fine is easily paid by Wells Fargo, which is worth more than $250 billion.
Wells Fargo had been one of the few banks that has managed to produce consistent profit gains since the 2008 financial crisis. Yet, those gains, in retrospect, were likely due to the massive fraud taking place behind the scenes, calling into question the overall health of the US banking system, which has over $ exposure to derivatives compared to the $ in derivatives that precipitated the 2008 economic crisis.
During the crisis, Wells Fargo received $25 billion in taxpayer bail-outs, less than three years before it began to defraud millions of its customers. This crisis highlights the myth that your money is safer in the bank as fraudulent bank activity continues to proliferate worldwide, causing some to raise the alarm that several of the world’s top banks may again be insolvent. Could this scandal at Wells Fargo be just the tip of the iceberg for another large-scale banking crisis? If enough Wells Fargo customers decide to remove their money due to the scandal, a run on Wells Fargo and other “too big to fail” banks could make the rest of this year very eventful.
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