About half of the settlement ($35.3 million) will be paid directly to the 771 customers affected by the fraud, and approximately $37.3 million will be paid to the United States as civil penalties for violating financial regulations, according to the U.S. Attorney’s Office for the Southern District of New York.
“We all put trust in our banking institutions to deal with us honestly, fairly and transparently when we are their customers. For the better part of a decade, Wells Fargo abused this trust, using tricks, false information and other deceptive practices to fraudulently overcharge customers who used the Bank’s foreign exchange service,” U.S. Attorney Audrey Strauss said in a news release.
How did Wells Fargo overcharge customers?
Wells Fargo offered foreign exchange services to commercial customers, many of which were small and medium-sized businesses. These services included converting foreign currency to U.S. dollars and vice versa.
To make money, Wells Fargo would buy the currency for a cheap price from one party and sell the currency to the other party for a more expensive price. The profit it earned was referred to internally as a "spread" or "sales margin."
The "spread" it charged was much higher than the rates it cited to customers, and Wells Fargo secretly pocketed tens of millions of dollars.
One tactic was labeled the "Big Figure Trick." Wells Fargo sales employees would pretend to accidentally switch two digits in transaction prices to charge customers more money. For example, if the price to purchase a euro was $1.0123, a Wells Fargo salesperson would use the big figure trick to switch the price to 1.0213 dollars, according to the Department of Justice.
When customers called them on it, the employees claimed it was a typo, a mistake in entering digits. Wells Fargo sales specialists targeted less financially savvy businesses in the hopes that those customers wouldn't catch them making these adjustments.
"Wells Fargo created an atmosphere in which employees openly joked about and celebrated taking advantage of the Bank’s customers," said a news release from the Department of Justice.
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How did Wells Fargo mislead customers?
"Wells Fargo FX (foreign exchange) sales specialists used a variety of misrepresentations and deceptive practices to defraud customers," the SDNY news release recounted. "For example, instead of applying agreed-upon fixed spreads to customers’ outgoing wires, FX sales specialists would charge inflated spreads that were as large as the FX sales specialists thought they could get away with."
When customers contacted the bank to inquire about the higher spreads, sales specialists gave them false or misleading explanations. In a few cases, sales specialists falsified data to make it look like the final numbers lined up with the negotiated rate.
Wells Fargo lacked proper oversight for foreign exchange spreads, the Department of Justice found. Sales specialists weren't given clear guidance on how to track or legally execute trades, and the company's percentage-based bonus structure incentivized the fraud.
In response to a request for comment from USA TODAY, Wells Fargo wrote, "This past behavior was unacceptable. Since that time, Wells Fargo has paid approximately $35 million to fully remediate affected clients and extensively reviewed our FX (foreign exchange) pricing practices and procedures. We have significantly improved our business policies, procedures and oversight related to the management and pricing of FX transactions."
Last year, the bank paid a $3 billion settlement for violating anti-fraud rules with the Securities and Exchange Commission after it was discovered that from 2002 to 2016, salespeople opened millions of fraudulent accounts on behalf of investment bank customers and pressured them to buy products they didn't need in order to make product-based sales quotas.
Michelle Shen is a Money & Tech Digital Reporter for USATODAY. You can reach her @michelle_shen10 on Twitter.
This article originally appeared on USA TODAY: Wells Fargo settles $72.6 million fraud lawsuit for misleading clients