Wachovia Settles One Suit, Confronts Money Laundering Charges

Wachovia Corporation, the rising Charlotte North Carolina banking star is having a very bad April.

On April 14 the bank announced it had lost $350 million or $0.20 per share during the first quarter of 2008. The losses, which were much higher than had been expected, were due primarily, or course, to problems in the mortgage markets.

Then this past Friday Wachovia got hit with a double whammy.

In the morning it was announced that Wachovia Corp. had agreed to a settlement with The Office of the Comptroller of the Currency (OCC) of as much a $144 million to end an 18 month investigation into its role in a telemarketing scheme that allegedly affected between 350,000 and 500,000 Wachovia customers, many of them elderly.

The OCC was investigating claims that the bank, over an approximate period of June 2003 to December 2006, had relationships with several telemarketers and payment processing companies that had marketed identity-theft certificates, discount travel vouchers, and other products or services, targeting a largely elderly and/or low-income clientele. The telemarketers obtained bank account information from respondents and used it to draw up a "remotely created check" which doesn't require a signature. These remotely created checks would then be deposited into the telemarketing companies' Wachovia accounts and Wachovia would withdraw the funds from the consumers' bank accounts. Consumers frequently complained that they did not authorize the withdrawals or did not receive the services/merchandise ordered.

The OCC alleged that some Wachovia officials were aware of the telemarketing practices but failed to take quick action to resolve the problem but instead profited from the relationship because of fees collected and balances maintained in the telemarketers' and payment processors' Wachovia accounts.

Two class action suits have also been filed against Wachovia in the matter.

The settlement, a record for the OCC, includes as much as $125 in restitution to consumers harmed in the telemarketing schemes and $8.9 million toward consumer education for the elderly. There will also be a $10 fine.

The settlement is the kind of thing that corporate public relations departments dread, but the news was out and the spin had begun ("This situation was unacceptable and we regret it happened." "We will work diligently to provide restitution to consumers affected by the situation and to educate consumers.") when late Friday The Wall Street Journal (on-line) published a story headlined "Wachovia Is Under Scrutiny In Latin Drug-Money Probe."

According to the Journal story, federal prosecutors are investigating the bank as part of "a broad probe of alleged laundering of drug proceeds by Mexican and Colombian money-transfer companies."

The investigation is focusing on money-exchange houses (casas de cambio) which are set up along the U.S.-Mexico border to assist cross-border transfers of money which can include legitimate transactions such as workers' remittances. These transfers are estimated to amount to more than $50 billion from the U.S. to Latin America every year and there is much money to be made from the high fees that are charged. While, as stated, most of the remittances are from aliens, both resident and illegal, sending wages home to family members, it is also a superhighway for narcotics traffickers to move the proceeds of U.S. drug sales to Latin America.

Wachovia hoped to use casas de cambio as an entr�e� to the legitimate Hispanic market. It held the foreign-exchange houses' deposits and provided back-office services. In 2005, it introduced the Dinero Directo card to facilitate cross-border remittances.

Wachovia was apparently warned by the law enforcement community that the casas de cambio were sometimes used to launder drug money and, as early as the mid-1990s, U.S. regulators and drug investigators were warning U.S. banks that Mexican casas de cambio presented a significant money-laundering risk.

However, if the current allegations are true, this would not be Wachovia's first brush with money laundering problems. The Journal states that internal emails and documents filed in federal courts in Miami, Chicago and New York describe former ties between Wachovia and money-changing firms. "In a case in U.S. court in Miami, federal agents seized more than $11 million in 23 Wachovia accounts belonging to Casa de Cambio Puebla, a Mexican chain. U.S. and Mexican prosecutors said they believed the money was being laundered, according to legal papers filed by Puebla. Mexican police raided Puebla offices last fall, alleging relationships with a major drug cartel." An attorney for the owners of Puebla, said the money seized belongs to legitimate clients.

An official of Wachovia told WSJ it is cooperating in the probe. Wachovia and some other U.S. banks severed relationships with Mexican foreign-exchange firms late in 2007 as the investigation began. Some institutions have struck agreements with the government to improve their efforts to fight money laundering, avoiding prosecution.