Fraud can be a dangerous plot to raise revenue

Can fraud be a coherent and sustainable strategy for revenue growth? The management over at Wells Fargo Bank would have an interesting time answering that question.

Wells Fargo is one of the “Big Four” banks in the United States of America. As at December 2017 it had 5,800 retail branches in the United States, operated in 35 countries and had over 70 million customers globally. In 2016 Wells Fargo was involved in a spectacular scandal of now ubiquitous gigantic American proportions.

On September 8 of that year, federal regulators revealed that the bank’s employees secretly created millions of unauthorised bank and credit card accounts without their customers knowing it.

This was all part of the pressure applied from the top echelons of the bank. Carrie Tolstedt who led the Community Banking Division where the frauds happened and CEO John Stumpf, were asked to leave, with the latter being given the dignity of going into early retirement.

On 28 September, within the same month, Wells Fargo was accused of illegally repossessing 413 military service members’ cars and agreed to pay $24 million to settle charges.

In April 2017, following an investigation demanded by the independent directors on the bank’s board, it was revealed that the sales abuses had been going on for a long time and that 5,300 employees had been fired between 2011 and 2016 for the same.

According to a CNN Money report, in 2004 (a good12 years before) an internal Wells Fargo investigation titled “gaming” warned that bankers felt they couldn’t “Make sales goals without gaming the system”. That investigation report was sent to the chief auditor and HR personnel but the predatory behaviour continued for several years thereafter it would seem.

Following the independent director investigation, the bank board clawed back about $66 million of past compensation from Carrie Tolstedt and $69 million from John Stumpf as retribution.

According to an article in the Fortune magazine website, the Wells Fargo board report described Tolstedt as “insular and defensive, resistant to change and inflexible” and found that she was “obsessed with control.”

She submitted reports to the board that were viewed by many as misleading, and the board accused Tolstedt of being callous and indifferent to the potential harm she was causing. The board report was apparently far gentler on Stumpf and called him “an optimistic executive who nonetheless moved too slowly to address the management issue”.

But the bank’s problems were not about to end. On July 27, 2017 the bank admitted that it charged at least 570,000 customers for auto insurance that they did not need and that about 20,000 customers may have defaulted on their car loans for related reasons.

On August 31, 2017, the bank admitted that they had discovered another 1.5 million fake accounts bringing the total number of fake accounts to 3.5 million. On October 3, 2017, the bank admitted that 110,000 mortgage holders were fined for missing a deadline even though the delays were the company’s fault.

Later that month regulators find that the bank sold dangerous investments that it didn’t understand and ordered the bank to pay back $3.4 million to customers because advisers recommended products that were highly likely to lose value over time. The following month the bank admitted that it illegally repossessed 450 more military service members’ cars.

READ: Selling vs business: What Wells Fargo scam teaches us

Let me stop there. It’s too depressing. It is predatory tactics like this that give banks a bad name.

Fraudulent practices were deeply institutionalised in this bank and despite firing over 5,300 over the course of five years for what they’ve called sales abuses, it was not enough and investigations later revealed that a number of employees were fired after using the company’s “confidential ethics hotline” to blow the whistle.

The independent directors of the board did the right thing by demanding an investigation into the abuses. But it was closing the stable door after the horse had bolted. The comment in their report about Tolstedt’s board reports being misleading displays the risk that board directors face in their role.

Having to put their nose in and fingers out to avoid becoming operational, directors have to hone their senses to smell nonsense when its noxious odor wafts insidiously through the board report. But flowery language and attractive revenue numbers often mask that smell to the unsuspecting director.

Consequently, setting up a credible, functioning and highly independent whistleblowing system is a critical pillar of board governance today.