Regulators Let Bank Off Easy, U.S. Says

Times Staff Writer

Wells Fargo & Co.'s safeguards for detecting illicit banking activities by terrorists, drug smugglers and other criminals were so weak that federal regulators should have publicly reprimanded the San Francisco-based bank, according to a Treasury Department report released Wednesday.

Instead, senior banking regulators met with Wells Fargo Chief Executive Richard Kovacevich, then overruled their own staff by letting Wells off with an informal enforcement action -- sparing Wells the scrutiny and embarrassment suffered by other banks that have been forced to disclose that regulators faulted their oversight systems.

The Bank Secrecy Act requires financial institutions to tip off authorities to any suspicious activity, such as large cash deposits. Aggressive enforcement of the act has been a high priority for the Bush administration since the Sept. 11, 2001, terrorist attacks on the World Trade Center and the Pentagon.

Responding to the report Wednesday, Wells Fargo said in a statement that it had "always taken Bank Secrecy Act regulations, policies and compliance very seriously."

"We recently improved our suspicious activity detection and reporting systems," the bank added.

The report from the Treasury's inspector general criticized not only Wells Fargo's failure to comply with requirements of the act but also the decision by the Treasury's Office of the Comptroller of the Currency to keep its criticisms and demands for change private. The report said bank examiners found "numerous and recurring deficiencies" in Wells' Bank Secrecy Act compliance program from 1999 through 2004.

Although details were largely deleted from the version released publicly, the report identified problem areas including weak internal controls, inadequate independent testing of business lines, lack of Bank Secrecy Act oversight and failure to file suspicious-activity reports as required.

"We believe that [the Office of the Comptroller of the Currency] should have acted more quickly and forcefully to require Wells to strengthen its 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 the Bank Secrecy Act, the inspector general's report said.

According to the report, the comptroller's staff recommended Feb. 4, 2005, that a formal cease-and-desist order be issued to Wells Fargo. Such a public reprimand and demand for changes would have sent a powerful enforcement message to the nation's banks, since Wells is generally regarded as one of the best-run banks in the country.

Kovacevich met five days later with top OCC officials, including Acting Comptroller of the Currency Julie Williams, who was then running the agency. After that meeting, the OCC pulled the recommended action from consideration by its top supervisory review committee, according to the report. On April 12, 2005, a new memo was issued recommending that the agency take informal action.

The about-face came to light in June 2005 after a whistle-blower leaked internal OCC documents to Congress. Members of a House subcommittee then asked Treasury's inspector general to investigate.

At a confirmation hearing a month later for comptroller of the currency nominee John C. Dugan, Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) raised the issue of the anonymous whistle-blower's allegation that the OCC caved in to pressure from Kovacevich.

Critics have long charged that federal banking regulators are too cozy with the banks they oversee. Wells Fargo declined to comment on its relationship with regulators Wednesday but said it had "substantial investments" in its oversight programs and had modified them "as the regulatory environment has changed."

"We made several organizational changes to coordinate [Bank Secrecy Act] compliance activities across the company," Wells Fargo's statement said. "We believe the changes we implemented meet the OCC's expectations."

Kevin Mukri, a spokesman for the OCC, said the agency already had tightened its supervisory policies in response to recommendations in the report.

Mukri noted that Dugan, who was confirmed by the Senate as comptroller of the currency, pledged at his confirmation hearing in July 2005 to conduct a top-down review of the agency's anti-money-laundering enforcement actions and make any necessary changes.

Mukri also said the decision to override the staff recommendation for a public rebuke was not unusual.

"At most organizations, staff recommendations are expected to be reviewed by senior leaders, and sometimes changed," he said.

The 14-page letter that was then sent to Wells Fargo had the same effect in forcing changes that a public cease-and-desist order would have had, Mukri said: "The OCC took a significant enforcement action of a nonpublic nature," he said.

Other banks, however, have endured public reprimands. UnionBanCal Corp. of San Francisco disclosed in 2004 and 2005 that it had signed agreements with banking regulators to beef up its compliance with money-laundering laws, and Beverly Hills-based City National Corp. paid a $750,000 fine last year to settle a federal investigation of its Bank Secrecy Act compliance.

American Banker first reported in June 2005 on the whistle-blower's allegations, including that Wells Fargo failed to monitor accounts for suspicious activity and to adequately investigate money-services business customers. The trade journal cited such embarrassing violations as Wells opening an account for a customer who deposited 2,000 $100 bills without asking about the source of the funds or filing a suspicious-activity report.

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