HomoEconomus

As if there hasn't been enough news about loose banking controls -- from subprime lending to special investment vehicles to rogue traders -- the New York Times reports that high-ranking employees within Wachovia knew that several telemarketing companies were using accounts at the bank to steal hundreds of millions of dollars from thousands of individuals. Not only was the bank aware of the fraud, but, according to the Times, it continued to solicit the fraudsters' business:

Wachovia continued processing fraudulent transactions for that account and others, partly because the bank charged fraud artists a large fee every time a victim spotted a bogus transaction and demanded their money back. One company alone paid Wachovia about $1.5 million over 11 months, according to investigators.

“We are making a ton of money from them,” wrote Linda Pera, a Wachovia executive, in 2005 about a company that was later accused by federal prosecutors of helping steal up to $142 million.

Can you say, "Due diligence"? Know your customer? Money laundering? Sarbanes-Oxley?

This story demonstrates that there are very good economic reasons why some banks do not institute effective controls. Crime does pay... at least in this case. Controls that reveal profitable fraud can hurt the bottom line. The Sopranos begin to look like a bunch of Girl Scouts.

The scheme reported by the Times was related to unsigned checks for automatic payments. But it's fair to wonder whether similar economics might apply to credit-card fraud?

Take the example of a recent credit-card scam. Although numerous people have reported [see here and here] the bogus charges to their credit-card companies, the scam continues. Is this a case of an unscrupulous merchant paying enough transaction fees to make the banks turn a blind eye? Stay tuned. --GAHjr