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Catch of the Week: In hot water again, now for fleecing customers in foreign currency transactions, Wells Fargo pays $72m in fines and restitution

Posted  September 29, 2021

Earlier this week, the Department of Justice settled an important case in which Wells Fargo Bank agreed to pay over $70 million in penalties and restitution to defrauded bank customers. Wells Fargo admitted that it defrauded 771 customers, mostly small businesses, who used the bank’s foreign exchange services when they needed to send money overseas or receive money from abroad. Rather than charging standard fees for customers to buy and sell foreign currency, Wells Fargo grossly overcharged them, making tens of millions of dollars as a result.  (This, of course, is not Wells Fargo’s first brush with scamming its customers or violating the law.)

Typically, banks charge a small percentage, known as a “spread,” to convert U.S. dollars into foreign currency, or vice versa.  Wells Fargo entered into written agreements with its customers that stated the spread Wells Fargo would charge.  In reality, Wells Fargo routinely charged customers higher spreads than the contracts allowed.  Wells Fargo brazenly recorded this misconduct in its internal recordkeeping systems.

Further, where an agreement with a customer required Wells Fargo to calculate its fee based on the market rate at the time of the transaction for the currency pair the customer wanted to exchange, Wells Fargo instead cherry-picked the best price for the bank—and the worst price for the customer—from the range of market prices during that trading day.  Employees described this scheme as getting candy from a piñata.

The biggest trick up Wells Fargo’s sleeve, though, was to intentionally transpose digits in the price of customer transactions to increase Wells Fargo’s profits.  So if the price to buy a Euro was 1.0123 dollars, Wells Fargo would switch the price to 1.0213 dollars, taking nearly 1 percent more from the customer.  This was a practice, not a mistake—Wells Fargo’s insiders literally called this the “big figure trick.”  Prosecutors unearthed one email from a Wells Fargo employee who wrote to a co-worker that a customer “didn’t flinch at the big fig the other day. Want to take a bit more?”

If upset customers contacted Wells Fargo to ask about the high fees they paid, Wells Fargo gave them false explanations and falsified transaction data to conceal the overcharges.

One Wells Fargo employee advised colleagues that if a customer complained, “You can play the transposition error game if you get called out.”  Whoops, my mistake!

Why would Wells Fargo employees go to such lengths to scam their customers? Because Wells Fargo tied their bonuses exclusively to the amount of sales revenue they

generated for the bank from foreign-exchange transactions. And since Wells Fargo did not systematically maintain customer agreements or monitor the transactions the bank’s employees entered into to ensure they complied with customers’ agreements, employees were comfortable defrauding customers. Indeed, Wells Fargo employees would ring a bell on the trading floor to celebrate particularly profitable transactions that earned large sums at the expense of bank customers.

A former Wells Fargo employee exposed this fraud, and will receive a $1.6 million reward for the extraordinary information and assistance he provided to prosecutors.  That is the maximum amount a whistleblower can receive under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), the law the government charged Wells Fargo with violating.

FIRREA allows the government to sue federally insured banks and other financial institutions for a variety of wrongful acts, including wire and mail fraud, embezzlement, illegal gifts, bookkeeping violations, and false statements in loan applications.

FIRREA also allows the government to pay monetary rewards to whistleblowers who bring information about FIRREA violations to prosecutors or otherwise assist in successful investigations.  But unlike the extraordinary success of other whistleblower-reward programs run by agencies like the SEC and CFTC, whistleblowers most often steer clear of FIRREA.  Why? Because FIRREA rewards are capped at a low level. That means often highly-paid finance executives will not risk their livelihoods and careers to report fraud.

During the Obama Administration, then-Attorney General Eric Holder proposed to fix that by removing the cap to bring FIRREA’s whistleblower provision in line with other whistleblower-reward programs.  Unfortunately, that effort stalled.  (An unlikely supporter of the Attorney General’s idea?  Former Wells Fargo CEO John Stumpf, who told the Wall Street Journal that, while he hadn’t seen the details of Holder’s proposal, “As a fundamental view, I want to live in a law-abiding country and if there are wrongdoers they ought to be held accountable.”  Amen to that.)

However, hope remains for the Wells Fargo whistleblower.  If another financial-fraud regulator goes after Wells Fargo for this misconduct, which is a real possibility, the whistleblower receive a significantly higher award for his public service.  For example, if the CFTC, with which Wells Fargo is registered as a foreign-exchange dealer, finds that Wells Fargo manipulated currency prices in violation of the Commodity Exchange Act, the whistleblower may get up to 30 percent of the amounts Wells Fargo pays to settle the CFTC’s claims.

We don’t think this is the last you’ll hear about Wells Fargo’s misdeeds, so stay tuned.

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Tagged in: Catch of the Week, Financial and Investment Fraud, Financial Institution Fraud, FIRREA,