How the Biggest Banks Sometimes Get Away with Fraud

It may not be great to think about, but sometimes the institutions that we trust with our money commit fraud. Not all banks are bad, however, there have been instances where a bank has committed fraud through deceptive practices. The following examples should be used as a warning to consumers, and as illustrations of what not to do for businesses.

Wells Fargo Fake Account Scandal

Wells Fargo, the 3rd largest bank in the US ruined their reputation with a huge scandal surrounding fake accounts. It really started when the top executives at Wells Fargo pushed their staff to meet aggressive sales targets in their financial products division such as mortgages, credit cards, loans, etc. Staff who met these targets would get bonuses, while staff that did not meet those targets would get cited or even terminated. This created an atmosphere of fear and unhealthy competition.

Since success in the banking industry oftentimes is measured by how many products each individual customer uses or buys into, employees began to realize they could create fake bank accounts for customers without their knowledge or consent. The employees would do everything in their power to prevent customers from finding out, even using their own contact info when signing up for additional accounts. Also in order to make the new accounts seem authentic, the employees would set the pin numbers to 0000 so they could effectively have full control and transfer money around.

Finally, the influx of complaints from customers who started to notice odd activity and strange fees finally triggered the alarm bells at the financial regulatory agencies who exposed the whole operation. Eventually, Wells Fargo ended up paying 2.7 billion dollars to various lawsuits, and the chief executive John Stumpf was forced to resign. Essentially they made short-term bonuses at the cost of their reputation.

Gold and Silver Marketing Rigging - JP Morgan

In 1974 the futures market began trading in gold and silver markets. After a little while, so many futures contracts were being traded at will, that the virtual supply of the metals far outpaced the actual amount being mined from the earth. Since the prices and amount of gold and silver being traded did not align with the actual supply, this situation was perfect for abuse and fraud.

By 2018 more imaginary gold was traded than was actually mined. To be more specific 34 tonnes of gold were actually delivered through futures contracts, while 260,000 tonnes of gold were traded daily. Leading to JP Morgan’s fraud, which occurred between 2008 and 2016 by manipulating the price through spoofing. This practice creates an illusion of demand when there is a lack of it. With the purpose of making the bank itself as much money as possible.

In 2013 whistleblower Andre Macguire exposed the whole operation by describing agents from JP Morgan who would trade virtual gold and silver anonymously after markets closed. They used computer algorithms to sell so many contracts that their profits were 3.6 billion dollars that year. Essentially this causes each ounce of gold to be owned by hundreds of people. The fraud is based on the assumption none of those futures investors will ever request the physical gold that they and all the other owners should be entitled to. The US regulators did fine JP Morgan when accusing them of criminal enterprise-level fraud, 920 million dollars. When JP Morgan’s profits from the rigging could be in the trillions, that fine is more of a slap on the wrist. The practice continues to this day.

LIBOR Rigging - Deutsche Bank, Barkleys, etc.

The LIBOR scandal is one of the biggest frauds by major banks that has flown under the radar. The traders were manipulating the LIBOR rate causing billions of assets to be misvalued globally. The LIBOR rate is the judge of how healthy the financial markets are and will lead banks and financial institutions to raise or lower interest rates accordingly. Essentially, they could borrow and lend at random rates and make profits off of the difference by lying to the regulators about following the LIBOR rate. By forming a cartel with other banks the practice could continue without triggering the regulators. They would organize and deflate or inflate their numbers to essentially cook their books. The following banks were involved in this fraud: Deutsche Bank, Barclays, UBS, Rabobank, and the Royal Bank of Scotland.

Sadly, unethical and illegal practices like this are used by the most powerful financial institutions in order to gain as much profit as possible at the expense of anyone and everyone else. As a compliance-oriented company, we help issuers verify investors according to Rule 506(c). Unfortunately committing fraud is often seen in the financial industry as a crowdfunding trend. Finding accredited investors and using an accredited investor verification service is a great way to avoid ending up in a sticky situation. Find out more about the finance industry on the VerifyInvestor.com blog.