Wachovia Pays $125 Million to End Federal Investigation for Telemarketer Fraud!

May 1, 2008

The Wachovia Corporation, the banking giant, has agreed to pay an estimated $144 million to settle federal accusations that it failed to block telemarketers who took advantage of thousands of elderly bank customers.

The federal Office of the Comptroller of the Currency said Friday that Wachovia, which is based in Charlotte, N.C., had improper relationships with four telemarketers and payment processors who maintained their accounts at the bank. The marketers obtained customers’ bank account information while selling vouchers for discount travel and groceries and other products.

The bank has not admitted any wrongdoing, but will pay up to $125 million in claims, $8.9 million toward consumer education programs and a $10 million fine.

According to the Charlotte Bizjournal: “According to documents obtained by the newspaper, other banks alerted Charlotte-based Wachovia about the activities. However, the Times says, internal memos show Wachovia continued to provide services to companies that helped take as much as $400 million from unauthorized accounts.”

“This situation was unacceptable and we regret it happened, ” a Wachovia spokeswoman, Christy Phillips-Brown, said. “We will work diligently to provide restitution to consumers affected by the situation and to educate consumers.”

She said the settlement was not expected to impact the company’s financial condition.

The Wachovia case, the subject of an 18-month investigation by bank regulators, involved the use of “remotely created checks,” which do not require a customer’s signature.

Regulators said telemarketers would call Wachovia customers, offer them medical discount plans or other services, obtain customers’ bank account information, create a check and withdraw cash from customers’ accounts.

Since the telemarketers and payment processors were Wachovia customers, they could deposit those checks into their own Wachovia bank accounts, allowing money to be withdrawn quickly from consumers’ accounts.

The government said a large percentage” of customers complained, saying they never authorized the payments, or did not receive the products or services offered.

Though the bank became aware of the situation. it “failed to take quick action to terminate these account relationships or otherwise correct the problem,” the O.C.C. said in a statement.

In fact an article posted on domainb.com states: Wachovia executives, when quizzed about the lawsuits, pleaded ignorance about the thefts. However, newly released documents from the lawsuit have now established that Wachovia was quite aware about allegations of fraud, but had in effect, chosen to solicit business from companies it knew had been accused of telemarketing crimes.

Wachovia, however, continued processing fraudulent transactions for that account, along with others, as the bank charged fraud artists a fee each time a victim spotted a bogus transaction, and demanded their money back via chargebacks. Investigators indicate that one company alone paid Wachovia about $1.5 million over an 11 month period.

Linda Pera, an executive who left Wachovia in 2006, wrote, “We are making a ton of money from them,” while referring to a company that was later accused by federal prosecutors of abetting in stealing up to $142 million.

Ms. Phillips-Brown said the bank was not directly involved in the telemarketing activity or soliciting of account information from consumers.

The government said many affected consumers have already received reimbursement payments. It said the companies involved were: Payment Processing Center; FTN Promotions; the Netchex Corporation; and Your Money Access.

As of Dec. 31, Wachovia had assets of $782.9 billion and market capitalization of $75.3 billion. The company (NYSE:WB) has 3,400 retail financial centers in 21 states.

COMMENTS: Now, as a business ethics speaker, here’s an ethics question. Do I report on this issue about Wachovia’s settlement related to (their non admission of guilt) telemarketing fraud – and by doing so risk not being hired by Wachovia in the future?

Damn right I do. Ethics are ethics and companies should work hard to have a positive ethical footprint. In this case, while Wachovia did not admit guilt, the writing is on the wall. A profitable, but likely unethical, part of their business was uncovered and has cost them. Although paying $125 million for something that reported generated more than $400 million from unauthorized accounts might not have been so bad…considering the time value of money.

Now the question is…wonder which other banking organizations use their client list to offer other services to unsuspecting customers? Frankly, I can understand offering services to expand your business…that’s just makes good business sense. However, offering the services using in-house support may be more acceptable than farming it out to outside telemarketers. After all, once data is shared outside of the organization issues of privacy may be breached.


Meanwhile, Business Ethics Speaker – Chuck Gallagher – signing off…