Wells Fargo Scandal: How to Avoid the Fraud Pyramid and Its Costly Effects

A colleague told me a story about fraud at a retail chain where she worked after college. The company was having a problem with cash theft in one particular store, so the district manager scheduled polygraph tests for the cashiers to find the culprit or culprits.

I was amazed to learn that employees almost always told the polygraph examiner what they had done. Why?

As the examiner spoke to the employees, he would ask them if they had ever stolen from the company. The employees would say, “No,” and the machine would indicate they were telling the truth. Then he would ask, “Have you ever taken money, intending to put it back later?”  The employees would often say, “Yes,” admitting to the theft.

The scheme had all the aspects of what we call the “fraud pyramid” – rationalization, opportunity and pressure. The guilty employees rationalized their actions; they didn’t think what they had done was theft because they had “borrowed” the money. They intended to put it back as soon as they could before the store realized what had happened. They had the opportunity when they were working at the cash register during their shifts, and the pressure often came from a need to make ends meet.

This is an example of the fraud pyramid on a fairly small scale, but this can apply to companies of all sizes. Recently, Wells Fargo made headlines because employees fraudulently opened an estimated 1.5 million accounts and applied for approximately 565,000 unauthorized credit card accounts. After the accounts were active, the Wells Fargo employees transferred money without customer authorization to temporarily fund the new accounts. Their actions allowed them to meet difficult sales quotas and earn extra compensation.

Wells Fargo employees were incentivized to commit fraud by earning extra compensation, and they rationalized their actions because they needed to meet quotas. They had access to customer information that allowed them the opportunity to open accounts and transfer funds. It’s apparent that the bank had little to no controls in place to prevent this sort of dishonest culture. As a result, Wells Fargo is on the hook for a large fine related to these fraudulent accounts.

How can you protect your organization from making such a costly mistake? Here are two lessons you can learn from the fraud pyramid examples above.

Lesson One: Ethics training should be required for every employee, including all levels of management, on a regular basis. Employees should be given the tools and the environment to recognize and report misdeeds. Adding an anonymous hotline for employees to call would allow them to feel empowered to report suspicious activity without punishment.

Lesson Two: Senior management, including the C-suite, should actively take part in displaying a culture of honesty and integrity. They should lead by example to create an environment that enables anyone to report problems or issues, including potentially fraudulent actions. If the internal audit department finds something unusual in their testing, they should feel comfortable enough with the company’s culture to report it.

The Wells Fargo fraud was exposed because a single branch employee called the business desk at Los Angeles Times, triggering an investigation into the country’s largest bank. The damage to Wells Fargo is hard to measure, but is sure to be substantial. Don’t leave your company open to a similar situation – work with your senior management, internal audit team, and employees to ensure that the culture of your company is one of honesty and trust.

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