WFC Wells Fargo and Company

By Emily Glazer 

As Wells Fargo & Co.'s sales-tactics scandal unfolded, investors, regulators and politicians asked how improper practices could have persisted for so long. One possible reason: bank branches were given a heads up before Wells Fargo's internal monitors landed for inspections.

Managers and employees at the bank's roughly 6,000 branches across the U.S. typically had at least 24 hours' warning about annual reviews conducted by risk employees, current and former Wells Fargo employees and executives said. That gave many employees time to cover up improper practices, such as opening accounts or signing customers up for products without their knowledge.

More than a dozen current and former employees of the bank across California, Arizona and New Jersey, for instance, said they forged or saw colleagues forge signatures on documents or shred papers that could have indicated accounts were opened without authorization.

Often, managers would call for all hands on deck at a branch to stay late into the evening -- or sometimes all night -- to shred documents or forge signatures if they weren't there, some current and former managers said.

For instance, they would go through desks to find signature cards that hadn't been approved, make sure wire forms had been filled out properly and that documents in a "control binder" like cash or teller audits were filled out, said Ivan Rodriguez, a former branch banker at Wells Fargo for about six years until 2013.

Some branches that opened accounts for customers without the customer present would cut and paste a signature the bank had on file for the customer and add it to the required signature card, Mr. Rodriguez said.

"You became numb to it," he added. "It became pretty normal."

A Wells Fargo spokeswoman said the bank has boosted oversight, monitoring and accountability so unethical practices don't happen again. That includes investing millions in staffing, mystery shops by a third party, unannounced branch inspections on employee sales behavior and an increase in branch visits by its internal auditors.

The bank has been under fire since September when it entered a $185 million settlement and enforcement action with regulators and a city official over opening as many as 2.1 million accounts using fictitious or unauthorized information. Wells Fargo still faces a spate of state and federal investigations, including from the Justice Department and the Securities and Exchange Commission.

In the scandal's wake, Wells Fargo has been changing procedures and trying to tighten internal checks, said Vic Albrecht, who has led risk management for the retail bank since September. Last fall, it piloted a surprise sales-practices inspection that previously didn't exist to ensure there isn't undue sales pressure and customers get appropriate products, among other checks, he said.

Around 100 of these "Conduct Risk Reviews" have been completed based on possible risks or complaints. Top retail-banking executives who typically oversee hundreds of branches, risk executives and company lawyers are aware of the results, Mr. Albrecht said.

But the other system, now known as "Branch Control Review," still gives a 24-hour notice so branch managers can staff appropriately and it doesn't interrupt customer service, he said, though advance notice and other parts of the review could change in the future. It measures "operational integrity," according to an internal bank document reviewed by The Wall Street Journal. That system, alongside the bank's "Quality of Sales Report Card" that checks signatures, procedures and funding, are part of a new branch "risk score." This will be factored into employees' compensation under a new plan rolled out to staff this month, according to plan documents.

Bank-branch audits are common in the industry, especially to try to spot risks related to large transactions, paperwork logs and cash shipments. Other big banks, such as Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co. typically have surprise branch audits, or checks, at least once a year, said people familiar with the banks, who added that branches didn't get notice ahead of time.

"They need to audit business as usual, not to see somebody put on their Sunday best clothes," said Jeffrey Sonnenfeld, professor and associate dean for leadership studies at Yale School of Management. "Mystery shoppers...don't give advance notice to the stores that they're coming."

Banks are expected to have three lines of defense to spot irregularities or problems: its business executives, risk-management professionals and internal auditors. The board of directors is supposed to add another layer for checks and balances. It appears some of these were lacking at Wells Fargo, according to regulators.

"Had these structure elements been functioning properly, they would have prevented the type of abuses we have witnessed at Wells Fargo," Thomas Curry, head of the Office of the Comptroller of the Currency, said at one of two congressional hearings about the bank's sales practices.

At Wells Fargo, retail-bank risk executives -- some branch employees called them auditors -- typically traveled district by district to check on branches, some current and former employees said. But retail-bank executives would usually receive anywhere from 24 to 72 hours' notice of the inspections, and branch managers typically got one day's heads up, these people said.

Some of those bank managers would meet with operations staff in their districts to discuss issues auditors were finding so they could fix those in advance of another audit, one of these people said.

Internally, the advance notice -- known to some within the bank as an open-book test -- was considered standard, these people said. Only in recent years did much of the operational-control checks move to electronic forms auditors would gather in advance, making it harder for branch employees to fake records.

The inspectors would examine, for instance, how many accounts were funded, whether signature cards existed for accounts opened in the last 90 days, and if employees knew the opening and closing procedures of the branch, among other checks, these people said.

"The volume of business you did was humongous, so the dotting of Is and the crossing of Ts was not that great," one of these people said. "Growing the business was primary: the more successful you were, the higher the goals were. So you had to keep up."

Write to Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

January 24, 2017 05:44 ET (10:44 GMT)

Wells Fargo (NYSE:WFC)
Historical Stock Chart
From Mar 2024 to Apr 2024

Wells Fargo (NYSE:WFC)
Historical Stock Chart
From Apr 2023 to Apr 2024