Let the record show that Well Fargo CEO John Stupmf admits he is an idiot.
By, Bachir A. El Nakib, CAMS, ACFE, CFAP
One of the more difficult tasks for compliance officers is to question employee success, even if those achievements come against almost insurmountable odds. Last week’s disclosure that Wells Fargo employees, in order to meet sales targets, signed up more than 2 million of its customers for new accounts and credit cards without their knowledge, is an example of employee performance that should be questioned even though the impulse is often to look the other way.
As is typical in such cases, the company's managers are blaming the employees (5,300 of whom they have fired) while holding themselves, the managers, entirely blameless.
"Our entire culture is centered on doing what is right for our customers. However, at Wells Fargo, when we make mistakes, we are open about it, we take responsibility, and we take action. Today's agreements are consistent with these beliefs."
In other words, this was all part of Wells Fargo's master plan, like so:
Wells Fargo is all "hey, we fired the 5,300 bad apples... can change the subject now?" BStumpf
And why should he think otherwise? The financial sector has repeatedly proven over the past ten years that big banks and their CEOs can defraud the public and even destroy the economy and not be held accountable.
But just for the sake of argument let's assume that Stumpf didn't know that their sales model was resulting the massive defrauding of the bank's customers. If so, he's clueless about business.
Again, for the sake of argument, let's assume that Stumpf didn't actually know about the sales tactics. In that case, he's was asleep at the wheel because those sales tactics drove the profits of the company's consumer banking division.
So it's a binary situation. Either Stumpf created, encouraged and profited from fraud, or he's an empty suit who is clueless and incompetent.
Which brings us back to the Senate committee. If Stumpf does testify, here's the line of questioning that the Senators should use:
· Senator: So you claim that you didn't know this was happening?
· Stumpf: Correct.
· Senator: Well, if you didn't know then you're completely incompetent, right?
· Stumpf: What?!?
· Senator: It's got to be one or the other. Are you a criminal or an idiot?
· Stumpf (under his breath): An idiot.
· Senator: I can't hearrrrr youuuu...
· Stumpf (louder): An idiot.
· Senator (to colleagues): Let the record show that Well Fargo CEO John Stupmf admits he's an idiot.
"The key is that few people ever question good news," says Walt Pavlo, co-founder of Prisonology, a consulting firm that supports legal professionals and defendants. Pavlo, who has written widely on compliance issues, adds: "If the news is good it typically lowers our level of professional skepticism . . . and makes it difficult for compliance to challenge the news, even if they should."
On Tuesday Wells Fargo, the largest U.S. bank by market capitalization, said it would eliminate all product sales goals in retail banking, starting next year. The move comes days after the Consumer Financial Protection Bureau (CFPB) and two other regulators fined the bank $185 million over its abusive sales practices.
One of the other regulators, the Office of the Comptroller of the Currency, said in the agency’s consent order that the bank “lacked an enterprise-wide sales practices oversight program and thus failed to provide sufficient oversight to prevent and detect the unsafe or unsound sales practices . . . and failed to mitigate the risks that resulted from such sales practices.”
While such an oversight program clearly should have been in place, there are other facets to the Wells Fargo case that apply across the industry, particularly in an environment where many employees are under stress to meet performance goals that may actually be designed for failure. At root, the problem rests with behavior and accountability.
"I don’t think (bank behavior) has changed enough," said Federal Reserve governor Dan Tarullo in an interview with the CNBC network, citing the Wells Fargo case.
"There is a need for a focus on individuals as well the fines on institutions. In appropriate cases, I think that fines against individuals, prohibition orders, and ... Justice Department prosecutions are things that do need to be pursued," Tarullo said.
Employees under growing pressure to perform
While Wells Fargo illustrates what may still be lacking in the cultural reform of large banks, a contributing factor to the temptation by employees to cut corners is the workplace they are operating in. Among some of the largest U.S. financial institutions there has been a growing tendency to avoid mass redundancies amid an environment of shrinking margins and need to control costs. Instead, what some industry participants point to is a more selective process, where certain employees are continually forced to achieve ever higher performance goals, whether in sales or trading. The hope is, say some, that the frustration will build to such an extent that the employee will simply leave the firm.
"Nobody wants to let go of thousands (of employees) if they can avoid it," said one senior employment recruiter at a large New York firm. "What you tend to see more are small groups – two or three – leaving a firm, or individuals quietly giving up." By giving up the bank or firm can avoid severance packages, which are often quite expensive if the employee has numerous years of service.
"Especially in sales, a lot of people are put under massive pressure, to the point where what they are being asked to do simply can’t be done," said a senior fixed-income trader at a large New York investment bank.
In such a competitive environment, where one’s career is essentially on the line with few options of returning to the industry once you’re out the door, there is a risk that employees might resort to actions that are fraudulent in order to deliver their expected performance results, say experts.
"The great check on people’s ethical impulses is that you are going to be around for a while," said Donald Langevoort, law professor at Georgetown University. "The more short-term you think your time is the more you are able to rationalize little steps towards a bad line."
"Given the stresses, given the competition, you probably have to worry about this more than in any other industry," he added, noting that healthcare was another sector under similar regulatory and competitive strains.
The Governance, Risk and Compliance Role
The Wells Fargo case has the added, and somewhat astounding, feature of the number of individuals involved. The bank said it dismissed 5,300 staff who were involved in the fraudulent cross-selling of products. Such a high number suggests that senior management were well aware of what was going on, and perhaps even encouraged the activity, say observers, albeit they might have resorted to communications with staff that was not specific, but left enough leeway for interpretation.
"It's hard to fathom that senior people were unaware of what so many were doing," said a legal expert at a New York law firm. "In that sense, I think (Fed governor) Tarullo has a very valid point."
Yet from a compliance perspective, the Wells Fargo case also raises questions. What did compliance know about a business practice that was going on for years, according to regulators? Were compliance staff complicit as well, or did they lack the tools, as the OCC suggests, to effectively monitor the activities of the sales staff?
With technology surveillance capabilities now widespread across the industry, it would seem that many compliance functions need to focus on individuals who might be exhibiting stress and facing a high bar when it comes to performance objectives. Systems can also monitor all those new accounts that were established, and flag troubling patterns of low balances and inactivity.