wells - Blog - Global Risk Community2024-03-29T08:14:32Zhttps://globalriskcommunity.com/profiles/blogs/feed/tag/wellsWells Fargo’s Failures in Risk Management Cost $1 Billion Settlementhttps://globalriskcommunity.com/profiles/blogs/wells-fargo-s-failures-in-risk-management-cost-1-billion2018-04-23T17:48:29.000Z2018-04-23T17:48:29.000ZSteven Minskyhttps://globalriskcommunity.com/members/StevenMinsky<div><p><a href="{{#staticFileLink}}8028272083,original{{/staticFileLink}}"><img width="350" src="{{#staticFileLink}}8028272083,original{{/staticFileLink}}" class="align-right" alt="8028272083?profile=original" /></a>Wells Fargo has suffered the consequences of repeat scandals since 2016. This week, the bank agreed to a $1 billion settlement with federal regulators who have cited their lack of effective risk management practices as the root cause of their woes.</p><p>This settlement with the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency would be another blow to Wells Fargo in a long line of many.</p><p>Let’s look at a timeline of Wells Fargo’s risk management scandals:</p><ul><li>2009-2016 – Wells Fargo perpetrates a <a href="https://www.logicmanager.com/erm-software/2016/09/20/wells-fargo-scandal-risk-management/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">massive cross-selling scandal</a> in which millions of accounts were created without consumers’ consent</li><li>September 2016 – The CFPB levies a $185 million fine, the highest in their operational history</li><li>August 2017 – The bank accidentally leaks the PII for over <a href="https://www.logicmanager.com/erm-software/2017/08/09/wells-fargo-saga-continues-part-1/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">50,000 accounts</a></li><li>August 2017 – <a href="https://www.logicmanager.com/erm-software/2017/08/17/wells-fargo-auto-loan-scandal-saga-continues-part-2/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">Wells Fargo charges 800,000 customers for insurance</a> they did not need</li><li>October 2017 – The bank wrongly charges homebuyers with fees to lock in mortgage rates</li><li>March 2017 – The <a href="https://www.logicmanager.com/erm-software/2018/03/12/wells-fargo-sanctions-send-message-to-us-banks-boards-accountable-risk-management-failures/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">Federal Reserve imposes unprecedented sanctions on Wells Fargo</a> prohibiting them from growing beyond their holdings in 2017</li><li>April 2018 – Wells Fargo nears $1 billion settlement with its federal regulators</li></ul><p>This timeline makes good on a prediction I made after the bank’s original cross-selling scandal. In an interview with business journalist <a href="http://www.garp.org/#!/risk-intelligence/culture-governance/conduct-ethics/a1Z40000003PXEUEA4/Breakdown-and-Repair-The-Wells-Fargo-Reputational-Crisis-and-Its-Aftermath">L.A. Winokur</a> regarding the Wells Fargo cross-selling scandal, I predicted: “Once the dust of this scandal settles, perhaps in two or three years, Wells Fargo will remain vulnerable in other areas of its operations to risk management failures.”</p><p>I immediately recognized the cross-selling scandal as a failure in risk management back in 2016. Now, regulators and the general public are beginning to demand more of Wells Fargo, not just from their sales department, but from the enterprise as a whole.</p><p>I’ve studied scandals for about 13 years now, and no matter what industry, product, or service the company is involved in, three things tie all scandals together:</p><ol><li>Scandals are known by personnel, typically at the front line supervisory level, at least 6-12 months in advance.</li><li>Scandals are failures in risk management and are therefore 100% preventable.</li><li>Companies who do not recognize scandals as failures in risk management tend to suffer subsequent scandals in other departments.</li></ol><p>These three common characteristics have been seen in recent scandals like <a href="https://www.logicmanager.com/erm-software/2017/09/13/equifax-data-breach-point-of-no-return/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">Equifax</a>, <a href="https://www.logicmanager.com/erm-software/2018/01/18/chipotle-risk-management-rehab/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">Chipotle</a>, <a href="https://www.logicmanager.com/erm-software/2017/12/06/uber-hack-risk-management-rehab/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">Uber</a>, and of course, Wells Fargo. Let’s take a deeper look at how the Wells Fargo scandals leading up to this settlement to see how they signaled a need for better enterprise risk management.</p><p></p><h2><strong>How Are Wells Fargo’s Risk Management Scandals Related?</strong></h2><p>When news of the Wells Fargo cross-selling scandal broke, many people cited a poor sales culture as the root cause. In the blog I wrote about this scandal, I pointed to the fact that the same employees who were tasked with reaching certain sales goals were the same employees who were issuing new accounts and cards. With proper <a href="https://www.logicmanager.com/erm-software/product/assess/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">risk assessments</a> and oversight, management would have identified the risk of employees meeting their sales goals by improperly, and they would have mitigated this risk by implementing separations of duties and access rights.</p><p>After an in-depth investigation into the scandal, the CFPB and the OCC alleged the bank “failed to establish an enterprise-wide sales practices oversight program to prevent and detect unsafe or unsound sales practices, or mitigate the risks resulting from such sales practices.”</p><p>While these regulators point to a failure in risk management in their allegations, the scope is too narrow. For organizations to truly protect themselves from the punitive damages and reputational consequences of scandals, they need to implement risk management and oversight practices across the enterprise, not just within select departments.</p><p>I predicted that Wells Fargo would fall victim to subsequent scandals because they focused too narrowly on their sales department without considering similar vulnerabilities in other areas of their business.</p><p>My prediction first came to fruition when the bank <a href="https://www.logicmanager.com/erm-software/2017/08/09/wells-fargo-saga-continues-part-1/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">leaked the PII of 50,000 accounts</a>, and again when Wells Fargo admitted to charging their <a href="https://www.logicmanager.com/erm-software/2017/08/17/wells-fargo-auto-loan-scandal-saga-continues-part-2/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">auto-loan customers for insurance they didn’t need</a>. Both of these scandals are tantalizingly similar to the bank’s original cross-selling scandal. To avoid the repeat scandals and headlines they’ve found themselves the center of, Wells Fargo needed to establish a robust enterprise risk management program and infrastructure, complete with risk assessments that extend across departments and levels</p><p>Under the Wells Fargo settlement, which is the largest ever imposed by the consumer bureau, Wells Fargo will reimburse harmed consumers and make improvements to its risk management and compliance programs. The string of punitive actions in addition to this latest settlement should be a warning to all risk managers, C-suite executives, and companies alike: scandals are failures in risk management, wrongdoings are preventable, and upper management will be held accountable for their failure to oversee operational activities.</p><p>This is a message I and LogicManager have expounded for many years, and now 18 months after Wells Fargo first topped news headlines, my <a href="https://www.logicmanager.com/erm-software/2016/09/20/wells-fargo-scandal-risk-management/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">prediction from September 20, 2016</a> has been accepted now by two federal regulators, and all major press will report how the Wells Fargo Scandal is now officially labeled a failure in risk management.</p><p></p><h2><strong>The Wells Fargo Risk Management Settlement Is a Result of the See-Through Economy</strong></h2><p>Why are regulators acting now and labeling Wells Fargo’s scandals failures in risk management? It comes back to my idea of the see-through economy: an age of transparency in which consumers, investors, and regulators can impact a company’s reputation. Today, new technology like social media and real-time, online news outlets leave companies with no where to hide when they fall short of expectations.</p><p>The <a href="https://www.logicmanager.com/erm-software/2018/03/20/2018-grc-market-report-emphasizes-new-risk-trends/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">see-through economy</a> is accelerating the need for risk management, especially as scandals continue to wreak havoc on market valuation:</p><p><a href="{{#staticFileLink}}8028271694,original{{/staticFileLink}}"><img width="750" src="{{#staticFileLink}}8028271694,original{{/staticFileLink}}" class="align-center" alt="8028271694?profile=original" /></a></p><p><a href="https://www.logicmanager.com/erm-software/product/risk-based-process/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic">Proactive, enterprise-wide risk management</a> programs and infrastructure is the only way companies can avoid the lessons-not-learned by these organizations and meet the rising demands and expectations of consumers, investors, and regulators.</p><p></p><p>This article was originally posted on <a href="https://www.logicmanager.com/erm-software/2018/04/23/wells-fargo-failures-risk-management-cost-1-billion-settlement/?utm_source=GlobalRisk&utm_medium=Referral&utm_campaign=Referral%20Traffic" target="_blank">LogicManager.com</a></p></div>Wells Fargo Answers to a Higher Power Over Poor Risk Managementhttps://globalriskcommunity.com/profiles/blogs/wells-fargo-answers-to-a-higher-power-over-poor-risk-management2018-03-22T18:30:00.000Z2018-03-22T18:30:00.000ZMichael Joneshttps://globalriskcommunity.com/members/MichaelJones<div><p><a href="https://ncontracts.com/wp-content/uploads/2018/03/Nora-Nash-900x500.jpg" target="_blank"><img src="https://ncontracts.com/wp-content/uploads/2018/03/Nora-Nash-900x500.jpg?width=750" width="750" class="align-center" style="padding:20px;" alt="Nora-Nash-900x500.jpg?width=750" /></a></p><p>Forget the Federal Reserve and its prohibition against Wells Fargo’s further growth until its governance and risk management improve. Wells Fargo is now answering to Sister Nora Nash of the Sisters of St. Francis of Philadelphia.</p><p>The much-maligned bank has agreed to publish a business standards review to “investigate the root causes of systemic lapses in governance and risk management that have led to ongoing controversies, litigation and fines” in response to<span> </span><a href="http://www.onlineethicalinvestor.org/eidb/wc.dll?eidbproc~reso~13489" target="_blank">resolution</a><span> </span>filed for the 2018 proxy review by the Interfaith Center on Corporate Responsibility (ICCR), a 300-member organization comprised of faith communities, socially responsible asset managers, unions, pensions, NGOs, and other socially responsible investors with combined assets of over $400 billion.</p><p>Sister Nash led efforts of the 24 co-filers of the ICCR, which has engaged the top seven U.S. banks on controversies around risk, ethics and culture for several decades. Many of the 24 co-filers are communities of Catholic sisters.</p><p>“ICCR first requested this review in 2014 when Wells Fargo came in last in a benchmarking survey on risk management, responsible lending and other metrics,” the ICCR said in a<span> </span><a href="http://www.iccr.org/wells-fargo-agrees-investor-demands-report-detailing-root-causes-ethical-lapses" target="_blank">press release</a>. “With each new scandal and penalty as a result of aggressive cross-selling, car loan insurance issues, and mortgage fraud, we tried to impress upon management the need for a comprehensive review that will lead to systemic change. We are encouraged that they are finally agreeing to take this first step towards what we hope will be authentic reform.</p><p>The group is particularly concerned with Wells Fargo addressing the human components of risk management and would like to see the bank “make amends for the emotional and financial tolls their past practices and aggressive sales culture have taken on home owners, retail customers, employees and communities.”</p><p>The review will include six elements:</p><ol><li>Analysis of the impacts on the bank, its reputation, customers, and investors of the continuing scandals.</li><li>Identification of the systemic cultural and ethical root causes of recent scandals, including at the board level.</li><li>A framework to address the issues and embed systems throughout the company, including changes already implemented, establishment of grievance mechanisms, and plans to strengthen corporate culture and instill a commitment to high ethical standards at all employee levels.</li><li>Key performance indicators to evaluate the effectiveness of changes instituted over time.</li><li>A commitment to ongoing and regular disclosure of progress.</li><li>Description of how the identified issues will be factored into employee and executive incentive and compensation decisions.</li></ol><p><span>Image Source: Laura Pedrick for <a href="http://www.nytimes.com/2011/11/13/business/sisters-of-st-francis-the-quiet-shareholder-activists.html" target="_blank">The New York Times</a></span></p></div>Is There a Way to Protect Yourself From a Wells Fargo-Like Scandal?https://globalriskcommunity.com/profiles/blogs/is-there-a-way-to-protect-yourself-from-a-wells-fargo-like2016-10-13T17:58:56.000Z2016-10-13T17:58:56.000ZCassie Phillipshttps://globalriskcommunity.com/members/CassiePhillips<div><p align="center"><a href="{{#staticFileLink}}8028254499,original{{/staticFileLink}}"><img src="{{#staticFileLink}}8028254499,original{{/staticFileLink}}" width="620" class="align-full" alt="8028254499?profile=original" /></a></p><p>By now, the Wells Fargo scandal is already beginning to become a memory. While the public may forget their costly mistake in time, theirs is a lesson you should definitely commit to memory. Wells Fargo’s failure could easily be your own without taking proper steps to avoid <a href="http://globalriskcommunity.com/profiles/blogs/the-wells-fargo-scandal-is-a-failure-in-risk-management">mistakes made by management</a>.</p><p>Besides not keeping track of employees as they should have, Wells Fargo made the tragic mistake of incentivizing sales over the interests of their customers. Rather than reward employees for providing the services customers need (and thus earning the trust and loyalty of customers), they rewarded employees exclusively for numbers.</p><p>In the short term, customers bore the brunt of the damages. Their accounts were breached not from without but from within. However, the predatory practices of the employees only became a major issue because of the company’s greedy policies to begin with. In this case, I’m referring to the fees and charges for the dummy accounts created by the Wells Fargo employees.</p><p><b>Predatory Fees Are Problematic for All Parties</b></p><p>For Wells Fargo, it seemed like a good idea to charge customers for not having “enough” money in their bank accounts. On top of that, overdraft fees piled additional fees onto customer accounts, effectively draining their funds. From their company’s bottom line, that probably seemed like a good and fair way to generate revenue.</p><p>What those kinds of policies really create is customer dissatisfaction. To begin with, punishing your customers is already bad practice; it creates headaches on both ends of the spectrum and costs man hours to maintain. In this case, fees actually allowed employees to perpetrate criminal activity.</p><p>Creating policies that exist exclusively to profit the company at the cost of your customers is a mistake. Customer needs should always be put first; placing your company’s interests above those of your customers demonstrates a lack of understanding that your customers’ interests are <i>your</i> interests.</p><p><b>The Blame Game</b></p><p>Nothing helps to build a case against a company than lack of accountability, and that’s exactly what happened with Wells Fargo. Following the countless examples dating back through history, Wells Fargo’s CEO and other top executives tried to pass the buck by claiming they didn’t have oversight and therefore weren’t responsible.</p><p>Unfortunately, even when that succeeds in placing the blame elsewhere, customers and potential customers always get the same message: this company’s management doesn’t take responsibility for its employees or the actions of the company at large.</p><p>Any good manager will tell you that being the boss frequently means taking the blame. Where would we be in the world if it were okay for our leaders simply to shrug and claim it’s “not their problem”? Scandals can be heavily mitigated if company execs take responsibility from the very beginning.</p><p><b><a href="{{#staticFileLink}}8028255090,original{{/staticFileLink}}"><img src="{{#staticFileLink}}8028255090,original{{/staticFileLink}}" width="620" class="align-center" alt="8028255090?profile=original" /></a></b></p><p><b>Avoiding Similar Scandals</b></p><p>Wells Fargo may be the most recent scandal, but it certainly wasn’t the first, and it definitely won’t be the last. Corporate scandals happen far too frequently, and the reasons vary every time. While mismanagement is often the problem, there are other instances of corporate loss that occur because of ignorance.</p><p>Take the number of data breaches in past few years. In these cases, consumers are frequently the victims of identity theft because stolen information tends to be billing information such as credit card and billing address information. But where do these breaches come from?</p><p>All too often it’s because employees fall victim to scams and malware. At times it’s from lack of education, and other times it can be from a lack of property security software being installed. Firewalls and anti-malware software are known to both companies and individuals, but both parties frequently miss out on encryption techniques such as those employed by <a href="https://securethoughts.com/vpn-review/">Virtual Private Networks</a>.</p><p>Other problems occur when companies try to smooth over an issue without actually fixing the problem. Recent news about the Galaxy Note 7 may be a good example of this as just recently a <a href="http://www.theverge.com/2016/10/5/13175000/samsung-galaxy-note-7-fire-replacement-plane-battery-southwest">replacement device caught fire on an airplane</a>. This is an indication that Samsung didn’t necessarily fix the real problem but rather fooled customers into believing it did—at least temporarily.</p><p>The message is strong enough here. If you say you’re fixing a problem, you <i>actually</i> need to fix it. The truth will come out sooner or later, and the blowback is not likely to be pretty.</p><p>What are you doing to prevent scandals in your company? Have you already devised a strategy? Tell us how you plan to do it in the comments.</p></div>The Wells Fargo Scandal is a Failure in Risk Managementhttps://globalriskcommunity.com/profiles/blogs/the-wells-fargo-scandal-is-a-failure-in-risk-management2016-09-23T17:00:00.000Z2016-09-23T17:00:00.000ZSteven Minskyhttps://globalriskcommunity.com/members/StevenMinsky<div><p><span style="text-decoration:underline;"><a href="{{#staticFileLink}}8028253099,original{{/staticFileLink}}"><img width="300" src="{{#staticFileLink}}8028253099,original{{/staticFileLink}}" class="align-right" alt="8028253099?profile=original" /></a><a href="http://money.cnn.com/2016/09/09/investing/wells-fargo-ceo-john-stumpf-scandal-berkshire-hathaway-warren-buffett/index.html">Wells Fargo recently paid $185 million in penalties</a></span> – the highest fine levied by the <span style="text-decoration:underline;"><a href="http://www.consumerfinance.gov/">Consumer Financial Protection Bureau</a></span> (CFPB) since it began operations in 2011 – for inappropriate sales practices. Millions of accounts were set up without customer consent, in many instances generating overdraft charges and other fees. The CFPB referred to the Wells Fargo activities as “widespread,” and 5,300 employees have been fired.</p><p>The Wells Fargo scandal is on the level of those at <span style="text-decoration:underline;"><a href="http://www.logicmanager.com/erm-software/2015/10/05/volkswagen-enterprise-risk-management-accountability/">Volkswagen</a></span>,<span style="text-decoration:underline;"><a href="http://www.logicmanager.com/erm-software/2016/07/28/wendys-data-breach/">Wendy’s</a></span>, <span style="text-decoration:underline;"><a href="http://www.logicmanager.com/erm-software/2016/02/09/chipotle-case-study-risk-management/">Chipotle</a></span>, and <span style="text-decoration:underline;"><a href="http://www.logicmanager.com/erm-software/2016/06/02/risk-management-negligence-accident/">Plains All American Pipeline</a></span>. Wells Fargo CEO John Stumpf has been asked to testify in Washington to account for his company’s practices, this after he “defended the firm and the efforts it had taken to stop the behavior” and <span style="text-decoration:underline;"><a href="http://www.wsj.com/articles/wells-fargo-ceo-defends-bank-culture-lays-blame-with-bad-employees-1473784452">claimed</a></span> he had no knowledge of employee activities.</p><p>Stumpf’s comments indicate a failure in risk management for a few reasons:</p><ul><li>As the CEO of Wells Fargo, he is responsible for the risk management processes in place. How could activities on this scale go unnoticed to management for 5 years? “Not knowing” isn’t a valid excuse. It’s negligence.</li><li>Employees were incentivized by unrealistic sales quotas. Why was there no compensation oversight for these practices?</li><li>Where were the risk assessments on these processes? What about internal audits of both the risk management process and governance oversight?</li></ul><p>News broke yesterday that the <span style="text-decoration:underline;"><a href="http://money.cnn.com/2016/09/19/investing/wells-fargo-scandal-risk-officer/">chief risk officer, Claudia Russ Anderson, has been replaced</a></span>. It is a warning to all risk executives: they will also be held accountable for risk management negligence, as it is their fiduciary duty to get the board the information it needs through adequate risk management systems and processes. Even though Claudia Russ Anderson did not directly propagate the activities, she is being held accountable because they occurred on her watch.</p><p> </p><h3><strong><span class="font-size-4">Wells Fargo Scandal: A Direct Result of Risk Management Negligence</span></strong></h3><p> </p><p>Starting in 2010, the SEC’s <span style="text-decoration:underline;"><a href="https://www.sec.gov/news/press/2009/2009-268.htm">Proxy Disclosure Enhancements</a></span>, by establishing an ERM mandate for corporations, made boards responsible for disclosing various risk management requirements. Notable obligations include:</p><ul><li>The disclosure of risk management effectiveness and systems used to manage risk</li><li>The board’s role in risk oversight and knowledge of the company’s material risks down to the front line</li><li>Analysis of its compensation policies for <em>all</em> employees. Simply put, corporations cannot put employees in the risk/reward tradeoff position, which forces them to choose between customer wellbeing and their own careers.</li></ul><p>When Wells Fargo designed its sales incentive program, why didn’t risk assessments reveal how unrealistic those sales goals were? Were there mitigation activities to protect against customer account manipulation? If so, where were the risk monitoring activities that would have picked up on the appearance of two million accounts over a five-year period?</p><p> </p><h3><strong><span class="font-size-4">ERM Enforcement: The Wells Fargo Scandal Will Follow the Same Trajectory as Risk Management Failures Since 2010</span></strong></h3><p> </p><p>We have all seen <span style="text-decoration:underline;"><a href="http://www.logicmanager.com/erm-software/2012/10/25/erm-compliance-and-enforcement/">ERM enforcements</a></span> before, whether we realize it or not. Wells Fargo is but the most recent iteration of the same trend: risk management failures lead to a crisis event, which leads to penalties, which lead to class-action lawsuits, which recently resulted in criminal charges and jail time.</p><p>The Yates Memo (2015) by the Department of Justice (DOJ) clearly spells out consequences for failed risk management: Americans should never assume that negligence or fraud will go unpunished simply because they were committed on behalf of a corporation rather than an individual.</p><p>Consider the parallel of the risk management failures at Volkswagen:</p><ol><li>Regulatory penalties</li><li>Punitive damages</li><li>Class action lawsuits (risk management negligence – management and the board)</li><li>Criminal charges & individual liability</li></ol><p>In both cases, the CEOs (and other executives) made similar claims: <em>I’m not responsible for this incident because I didn’t have direct oversight; it’s not my fault</em>. This is the basis for negligence; they are directly accountable for their risk management processes and systems. Both Wells Fargo and <span style="text-decoration:underline;"><a href="http://www.logicmanager.com/erm-software/2015/10/05/volkswagen-enterprise-risk-management-accountability/">Volkswagen</a></span> (not to mention <span style="text-decoration:underline;"><a href="http://www.logicmanager.com/erm-software/2016/07/28/wendys-data-breach/">Wendy’s</a></span>, <span style="text-decoration:underline;"><a href="http://www.logicmanager.com/erm-software/2016/06/02/risk-management-negligence-accident/">Plains All American</a></span>, and <span style="text-decoration:underline;"><a href="http://www.logicmanager.com/erm-software/2016/04/13/risk-management-negligence/">Dwolla</a></span>) were found negligent in risk management and are suffering the consequences accordingly.</p><p>We’re currently witnessing Wells Fargo in the beginning stages of this process; it’s already been slapped with penalties, and the “I didn’t know” excuse – this time in the form of “it’s the employees’ fault, not management’s” – will to provide no shelter against coming accusations.</p><p>The lesson: boards and senior management are absolutely responsible for the risk management effectiveness of their companies. It is their obligation, as outlined in SEC rule 33-9089, to ensure that robust risk management programs and software systems are in place so that scandals like these are avoided.</p><p>The good news is that it doesn’t have to be this way. Corporations that can provide evidence of an effective risk management program are largely <span style="text-decoration:underline;"><a href="http://www.banknews.com/blog/a-new-era-in-enterprise-risk-management/">exempt from punitive damages, class-action lawsuits, and DOJ jail time for management</a></span>. Many organizations have been successful in similar situations; ERM systems prevent scandals and associated costs, litigation, and jail time.</p><p> </p><p><strong><em>To learn what makes strong risk management programs effective – and capable of preventing issues like those that led to the Wells Fargo debacle – download our free eBook, </em><span style="text-decoration:underline;"><a href="http://www.logicmanager.com/best-practice-erm-programs-ebook/">5 Characteristics of the Best ERM Programs</a></span>.</strong></p><p></p></div>Effects and Lessons from Wells Fargohttps://globalriskcommunity.com/profiles/blogs/effects-and-lessons-from-wells-fargo2016-09-15T06:00:00.000Z2016-09-15T06:00:00.000ZFX Empirehttps://globalriskcommunity.com/members/FXEmpire<div><p><span style="font-family:verdana, geneva;" class="font-size-3"><a href="https://www.wellsfargo.com/" target="_blank">Wells Fargo</a>, till recently, had earned itself a good reputation as a financial institution mainly due to the fact that it escaped from the Recession largely unscathed. That has come under huge scrutiny with the latest scandal that has hit the bank. It has been accused of creating 2 million fake account in the form of bank account and credit cards in the name of existing customers. This was mainly done to increase the commissions that the employees would earn for bringing in new accounts and meeting targets.</span></p><p><span style="font-family:verdana, geneva;" class="font-size-3">It has been estimated that a total of around 5900 employees have been fired from Wells Fargo in the past few years over this fraud. It has also been fined more than $185 million. More than the fines, it is the loss of reputation and trust that the management should be worried about. Also, a fraud of such massive scale happening over a relatively long period of time should have required the involvement of some senior people in the management and this would add further indignation to the public and the customers who believe that they have been used by the employees to generate handsome commissions for themselves. It also places serious doubts over the risk management practices that were being followed in the bank. Critics also blame the large size of the bank and the different levels of employees and they believe that the number of levels was too much and too big for them to manage the lower level employees effectively. The fraud was stretched to the extent of charging customers for services that they never took and their new accounts being funded with their other accounts.</span></p><p><span style="font-family:verdana, geneva;" class="font-size-3">At the center of the storm is the leader of the unit in which this fraud was committed, Carrie Tolstedt, who is also the Executive VP at Wells Fargo. The level of her involvement and her knowledge of the fraud and the timelines aren’t very clear as yet but all said, she walks away with a cool settlement for $125 million when she formally retires at the end of the year. This is a settlement that she has earned over the years and has been a part of her package but the timing and the ethics behind this large settlement when the bank and her division, in particular, has been accused of fraud hasn’t gone down well with the critics.</span></p><p><span style="font-family:verdana, geneva;" class="font-size-3">This may or may not be a topic of discussion when the Senator Elizabeth Warren grills the CEO of Wells Fargo in the Senate hearing that is scheduled for September 20. Like many critics, Mrs Warren is also not convinced that this fraud could have happened without the notice of some senior employees of Wells Fargo and the CEO would have some tough questions to answer with regard to the timing, the risk management procedures that were followed etc. More skeletons could tumble out of the closet when the hearing happens and it could give an insight into the working of the behemoth bank and how safe it is for the customers. It could affect the markets as a whole and will surely affect the banking stocks in the US.</span></p><p><span style="font-family:verdana, geneva;" class="font-size-3">One of the persons hard hit by this fraud is the biggest investor that the world has ever known, Warren Buffett who owns a large number of shares in Wells Fargo. The surfacing of this fraud has led to the drop in the share price of the bank and this coupled with the general loss in the stock indexes has caused a loss of around $1.4 billion for the worlds richest investor. The drop was reflected in the shares of his holding company as well, Berkshire Hathaway Inc. This underlines the importance of risk management for large and small investors alike. If an investor of the acumen and size of Buffett could get it wrong, it just shows that anyone else could also get it wrong. But the fact that Buffett has seen and survived through several such falls just shows how good his risk management skills are and there lies a lesson for every investor.</span></p><p></p><p><span style="font-family:verdana, geneva;" class="font-size-3">The question is -</span> <span style="font-family:verdana, geneva;" class="font-size-3">What could have Wells Fargo done better with regards to its Risk Management to prevent such issue? Your comments are highly appreciated.<span style="color:#222222;font-size:12.8px;font-style:normal;font-weight:normal;letter-spacing:normal;line-height:normal;text-indent:0px;text-transform:none;white-space:normal;word-spacing:0px;display:inline;float:none;background-color:#ffffff;"><br /></span></span></p><p><span style="font-family:verdana, geneva;" class="font-size-3"> </span></p><p><span style="font-family:verdana, geneva;" class="font-size-3"><strong>About the Author:</strong> <span style="text-decoration:underline;"><a href="http://www.fxempire.com/">FX Empire</a></span> is a financial portal offering news and analyses to professional traders, novice and expert alike, available in 15 languages. Our goal is to provide traders with all necessary trading tools – technical & fundamental trading strategy, opinions from experts in the field, charts, tools, and streaming news of the financial markets.</span></p></div>