Wachovia has agreed to pay as much as $144 million to settle a federal probe into its relationship with telemarketers who preyed on senior citizens.
It's the second-biggest settlement ever for the Office of the Comptroller of the Currency (OCC), the agency that regulates national bank. Wachovia is also facing at least two class-action lawsuits over its relationship with the telemarketers who allegedly harmed between 350,000 and 500,000 consumers.
In 2000, Providian National Bank paid about $300 million to settle OCC charges that it used deceptive marketing practices to ensnare customers.
In an unrelated investigation, federal prosecutors are probing Wachovia as part of an investigation into money-laundering by Mexican and Colombian drug dealers, the Wall Street Journal reported.
In the telemarketing case, OCC investigations said that from June 2003 to December 2006, the bank worked with several telemarketers and payment processors that obtained bank-account information over the phone from thousands of elderly and poor consumers by offering to sell them identify-theft certificates, discount travel vouchers and other questionable products or services.
The payment processors and telemarketers involved were Payment Processing Center, LLC, FTN Promotions, Inc. dba Suntasia, Inc., Netchex Corp., and Your Money Access LLC, and related companies.
The practices cited by the OCC in the settlement involved the use of remotely created checks, or RCCs, by telemarketers and payment processors that maintained account relationships with the bank.
An RCC is a check that is not created by the accountholder and does not bear the accountholders signature. Instead, the signature block of the check includes text such as authorized by your depositor, no signature required.
The OCC believes that thousands of consumers, many of whom were elderly, were harmed in connection with the payment processors and telemarketers activities at the bank, and that the bank profited from these activities in the form of fees collected from and balances maintained at the bank by the payment processors and telemarketers.
Under the agreement, the bank will forfeit an amount equal to the fees it earned and donate the funds, plus an additional $5 million, to consumer education programs directed at the elderly.
The telemarketers obtained bank account information over the phone by offering consumers a range of questionable products and services such as grant-writing kits, identity theft certificates, medical discount plans and vouchers for discount travel and groceries.
With the account information obtained during the call, the telemarketer or payment processor would create an RCC and deposit the instrument into an account at Wachovia, causing funds to be withdrawn from consumers accounts.
The OCC said that as many as half of the transactions were disputed and Wachovia's risk management department was aware of the problem but did not take action to resolve the issue.
Besides the financial penalties levied against Wachovia, the OCC has issued updated guidance to national banks regarding the need for effective due diligence, underwriting, and monitoring of entities that process payments for telemarketers and other merchants.
Certain merchants, such as telemarketers, pose a higher risk than other merchants and require additional due diligence and close monitoring by national banks. The guidance notes that when a processor is interposed between the bank and the merchant, risks are heightened and appropriate controls must be implemented.