WASHINGTON - The Office of the Comptroller of the Currency should have slapped Wells Fargo & Co. with a public cease-and-desist order last year for repeated and severe problems in its anti-laundering program, a government investigation found.
Instead, senior OCC officials - after meeting with Wells chief executive Richard Kovacevich - inexplicably overturned the recommendations of the agency's examiners and let the San Francisco banking company off with an informal enforcement action, according to a report the Treasury Department Office of Inspector General released Wednesday.
In doing so, the report said, the OCC violated its internal procedures for such problems, failed to inform the Financial Crimes Enforcement Network of Wells' deficiencies, undermined the nation's anti-laundering system, and set a bad precedent for the financial services industry.
"We believe that OCC should have acted more quickly and forcefully to require Wells to strengthen its [Bank Secrecy Act] compliance and that OCC's failure to take formal enforcement action against Wells sent the wrong message to the banking industry about OCC's resolve to ensure that banks comply with BSA," the office said.
The report was sparked by an anonymous OCC employee who accused the agency of bowing to pressure from Mr. Kovacevich and provided lawmakers with internal agency memos showing the OCC had uncovered several deficiencies in Wells' anti-laundering program.
The first memo, written in February 2005, recommended the agency take a public enforcement action against Wells. But after a Feb. 9 meeting with Mr. Kovacevich and Julie Williams, then the acting comptroller, the memo was redrafted in April of that year to recommend a less severe informal enforcement action.
Both memos detailed "weak internal controls over the program, inadequate independent testing of business lines, lack of BSA oversight, and failure to file suspicious-activity reports in accordance with regulations and program requirements," according to the inspector general.
(The report redacted several pages in which it detailed anti-laundering problems at Wells.)
The report said that all senior agency officials, including Ms. Williams and Dan Stipano, the acting chief counsel, initially agreed with the examiners' recommendation to take a public enforcement action.
"The bank's response is not very convincing and evidences a denial/lack of understanding of the depth of the problem that is pretty alarming. Need to move ahead with the enforcement process," Mr. Stipano wrote in a January 2005 e-mail to the examiner-in-charge at Wells.
The inspector general also faulted Wells' defense.
"Additional information provided by the bank as to why OCC should not impose a cease-and-desist order was, in the words of one OCC official, 'overly argumentative, repetitive, and not very persuasive.' We agree," the report said.
But the meeting with Mr. Kovacevich "appeared to be the turning point in moving OCC from a formal to an informal enforcement action," the inspector general said. "While OCC senior officials in headquarters initially supported the examiners' recommendation, the officials changed their minds and proceeded with a lesser enforcement action, but could not offer a compelling reason for overruling the examiners."
OCC officials kept "no written record" of the meeting, the report said. Officials interviewed by the inspector general said Mr. Kovacevich complained that his company was not being afforded due process. As a result, the agency reviewed its handling of Wells and concluded it had received "mixed messages."
But the inspector general disagreed, saying the OCC had consistently told the company about anti-laundering program problems dating back to 1999. Though the report said that the ultimate decision was a judgment call, the inspector general said the OCC should have taken harsher action.
"We identified seven occasions from 1999 to 2004 on which OCC communicated BSA/AML deficiencies to Wells," the report said. "Moreover, we believe that even without prior-year deficiencies, the breadth and depth of deficiencies identified in the 2004 examination alone would have warranted citation of a violation and issuance of a cease-and-desist order."
The report said that OCC officials failed to justify their decision.
"OCC officials never documented their basis for not issuing a cease-and-desist order against Wells, saying, in the end, that it came down to a 'judgment call' and that they believed the deficiencies did not rise to the level of a program violation," the report said. "We did not see evidence that the accuracy of the examiners findings were in question."
The report also said the agency did not follow its own procedures in handling the case and left Fincen out of the loop entirely. The OCC brought the case before its Washington Supervision Review Committee, which was created to review such decisions, but ultimately presented the informal action as a done deal.
"WSRC input was not sought, and the WSRC was effectively removed from the customary enforcement process," the report said.
Fincen officials were informed of deficiencies at Wells in December 2004 but did not learn of the OCC's decision until June 2005, when American Banker reported the anonymous employee's accusations and obtained the internal memos provided to Congress.
A former government source said that Fincen and Treasury officials were furious at the OCC for failing to follow a memorandum of understanding that pledged federal regulators would provide critical data to Fincen regarding anti-laundering deficiencies.
Ultimately, Fincen warned Wells that it might take its own action against the company, the inspector general said.
"In April 2006, Fincen issued the bank a warning letter stating that Fincen planned to monitor Wells's progress in improving its BSA program," the report said. "The letter also stated that nothing precludes Fincen from seeking further action if Wells fails to implement corrections."
The report also noted that the OCC made a similar mistake in its handling of deficiencies at Riggs Bank.
A Senate subcommittee said in July 2004 that the agency "was too tolerant of Riggs Bank's anti-money-laundering program deficiencies over several years and failed to take strong enforcement action to require improvements."
Kevin Mukri, a spokesman for the OCC, said that it has already taken steps to improve its anti-laundering oversight, and that it is following the recommendations of the inspector general's report. The recommendations included closely monitoring Wells' implementation of its BSA compliance plan, taking prompt enforcement action for noncompliance, keeping Fincen fully informed of the company's progress, and documenting the review committee's deliberation on enforcement actions.
But Mr. Mukri defended his agency's decision to give Wells a nonpublic enforcement action.
"The decision was between a public nature or a nonpublic nature," he said. "People made the decision in good faith and based on their experiences … to take a strong enforcement action of a nonpublic nature, and the IG report acknowledges that it was a strong enforcement action."
Julia Tunis, a spokeswoman for Wells, would not discuss the key findings of the report, but she said her company recently improved its suspicious-activity detection and reporting systems and made several organizational changes to coordinate anti-laundering compliance activities.
"We believe the changes we implemented meet the OCC's expectations and the regulatory requirements," she said.
The report has already generated interest from lawmakers, and sources said it could be the subject of a Senate Banking Committee hearing soon.
Rep. Sue Kelly, R-N.Y., said in a press release, "This latest OCC blunder once again raises questions of whether Fincen has sufficient powers to ensure that the OCC and other regulators are enforcing our financial defenses against crime and terrorism."
Ultimately, the inspector general concluded that, "in addition to weakening the BSA program and the nation's ability to fight money laundering and terrorist financing, OCC's failure to act forcefully and in accordance with the law" may create other problems.
The agency's action could "lead other banks that are dealt with more forcefully to believe that they are being treated inequitably, encourage other banks to resist enforcement action, and create morale problems among examination staff, who may believe that their recommendations for forceful action may be overruled outside of OCC's normal deliberative process," the report said.
