WASHINGTON — The Office of the Comptroller of the Currency's $144 million enforcement order against Wachovia Corp. is likely to force banks to step up oversight of telemarketing customers, observers said Friday.
The order, the second-largest in the agency's history, was issued a day after the OCC put out guidance warning national banks of the dangers posed by such companies, and it signaled growing concerns among regulators about their relationships with banks.
"It's indicative of a new era in regulation, and consumer protection is hotter now than ever before, and what it means is bankers are responsible for safeguarding a lot more than the personal information of their customers," said Jean Veta, a partner at Covington & Burling LLP. "Essentially the regulators are moving from the banks' consumer customers to look at the customer's customers. They are translating some anti-money-laundering concepts into the consumer fraud area more generally."
Though Wachovia said it had dropped ties with telemarketing firms, lawyers stopped short of predicting the order and guidance would lead other banking companies to follow suit — as they have in the case of money-services businesses — saying it represented a bigger potential income stream. But they said bankers likely would heighten their risk-management practices of such businesses.
"I would think … [banks] would make sure that they have done diligence on the processors and they are comfortable with the processors," said Robert Serino, a former OCC anti-laundering officer and now a counsel at Buckley Kolar LLP. "It hopefully will weed out some bad telemarketers or processors, so it may limit them, but that's not a bad thing."
Data on the how much business banks do with payment processors and telemarketers is difficult to pinpoint, but sources said many large banking companies have such firms as customers. Several observers said the OCC would not have felt the need to issue guidance if it did not see it as a growing business.
"I don't believe they are the only bank doing business" with telemarketers and payment processors, said Jerry Cerasale, senior vice president for government affairs for the Direct Marketing Association, which represents payment processors. "If it's just Wachovia, the OCC would not put out that bulletin regarding payment processors."
On Friday, Wachovia agreed to pay as much as $144 million for its role in a telemarketing fraud scheme, the OCC said. The agency said the Charlotte company had entered into a settlement and agreed to reimburse up to $125 million to all consumers harmed by the fraud who have not already been reimbursed by the company.
Wachovia did not provide data on how many customers had already been reimbursed.
In addition to restitution payments, it agreed to contribute about $8.9 million to consumer education programs directed at the elderly and pay a $10 million civil money penalty to the Treasury Department.
The case stems from an 18-month OCC investigation of Wachovia's dealings with telemarketers and payment processors, which sometimes act as a conduit for telemarketers with banks. Plaintiffs in a class action involving as many as 500,000 customers claim that Wachovia failed to prevent a pattern of fraudulent activity by certain clients, despite knowledge of problems with their accounts. The case, which is still pending, relies heavily on internal e-mail evidence depicting Wachovia employees as grasping the possibility of systemic fraud but nonetheless being slow to respond.
The OCC said Wachovia engaged in "unsafe or unsound practices" during the course of its relationships with payment processors and telemarketers, along with unfair practices as defined by the Federal Trade Commission Act. In the case, telemarketers obtained bank account information over the phone by offering consumers — often elderly persons — a range of questionable products. Using that data, the telemarketers used a remotely created check, which did not require an account holder's signature, and deposited it at Wachovia, causing funds to be withdrawn from consumers' accounts. Though employees at Wachovia became aware of problems in customer accounts, the company "failed to take quick action to terminate these account relationships or otherwise correct the problem," the OCC said.
The agency said the other companies involved were Payment Processing Center LLC, FTN Promotions Inc. (doing business as Suntasia Inc.), Netchex Corp., and Your Money Access LLC.
Wachovia did not admit or deny the claims but said it takes the issue very seriously and is aggressively correcting the situation.
"We're confident that the changes we've implemented will help protect consumers," a Wachovia spokeswoman said. "At the time of this incident, we banked some telemarketing companies and companies who processed payments for the telemarketers. Today our policies are designed to ensure that we do not bank any of these companies."
Still, it may not be the end of the line for Wachovia. In its quarterly filing April 16, the company said it is subject to other investigations by governmental authorities in areas such as securities and mutual funds, money laundering, sales practices, record retention, and other laws involving customer accounts.
Stephen Kroll, a former Financial Crimes Enforcement Network official and Senate Banking Committee Democratic counsel who now lectures at American University, said the case highlights the increased attention bankers should put on their customers' actions. "It is a warning to banks that they have to be very careful in the way they allow nontraditional payment products to be used by third parties," Mr. Kroll said.
Mr. Cerasale said the case also would be likely to heighten bankers' scrutiny of remotely created checks. "It may slow down the ability of processors to use that technique, because banks will take time with due diligence."
Banking companies have been punished before for inadequate policing of their customers, but generally they have been hit with fines only in the anti-laundering area. Payment processors are not subject to Bank Secrecy Act or anti-laundering requirements, but the law notes that such businesses maybe vulnerable to money laundering and fraud.
The Patriot Act, however, explicitly required bankers to know their customers. "It's the old-fashioned KYP — know your processor," Mr. Serino said. "It's a risky business, and it's a high-risk customer."
The OCC guidance's urged banks to employ due diligence and underwriting controls and additional close monitoring of payment processors.
"Banks that do not have the appropriate controls to address the risks in these relationships may be viewed as facilitating a processor's or its merchant client's fraud or other unlawful activity," the OCC said in the guidance.
