Wells Fargo continues to tangle itself in scandal. Last week, the bank admitted it forced redundant car insurance on more than 800,000 car-loan borrowers, earning the company $73 million in ill-gotten gains while causing a quarter-million delinquencies and 25,000 wrongful auto repossessions. This comes as Wells tries to manage the fallout of its 2016 fake account scandal, where it generated 3.5 million unauthorized accounts to meet high sales goals. In the past month, Wells has also been accused of secretly changing the loan terms of mortgage borrowers in bankruptcy, falsifying records to charge mortgage applicants for its own delays in application processing, and stealing from mortgage bond investors to pay legal fees in lawsuits filed by those very same investors.
If Wells Fargo wanted to rehabilitate its image, it failed miserably. Senator Elizabeth Warren wants the board of directors removed. Congresswoman Maxine Waters says she’s writing a bill to break up big banks that abuse consumers. And there have been some real consequences for Wells over the past year, beyond threats: They lost tens of millions of dollars when cities and states curtailed business with them after the fake account scandal. Senior managers have been sacked, and even the CEO stepped down, a rarity in an age of fleeting corporate accountability.
None of this is good enough. We habitually allow giant corporations to harm customers, employees, and the economy with relative impunity. That’s despite the fact that we, the public, give corporations the ability to exist. Every legal corporation must obtain a corporate charter, a written contract detailing the company’s structure and objectives. And the same government that grants charters can take them away, and should, if the corporation repeatedly violates the law.
Though politicians of all stripes claim to support corporate accountability, and those on the left frequently campaign on the issue, calls for a corporate death penalty are extremely rare. But the modern enforcement regime makes a mockery of the law, as governments feign powerlessness against an entity they themselves created by granting it a charter. Simply put, if Wells Fargo keeps using its power as a bank to rip off customers, it shouldn’t be a bank anymore.
With the notable exception of banks, which have the option of being chartered at the state or federal level, chartering corporations is primarily the business of the states. In the early days of the republic, states routinely and aggressively revised, amended, and even revoked corporate charters. But states eventually recognized the lucrative incorporation fees they could yield. Today, over half of all corporations are chartered in Delaware, which attracts businesses seeking incorporation with famously loose standards.
That said, states retain the ability to revoke a corporate charter, either through the state attorney general or even, in the case of Alabama, from a filing by a private citizen. Delaware’s attorney general can revoke a charter for “abuse, misuse or nonuse of its corporate powers, privileges or franchises,” which has been interpreted to include criminal violations of law. But according to a research note from George Washington University law graduate Kyle Noonan, this power hasn’t been invoked in over 60 years.
Federal enforcement has gradually replaced states in policing corporate behavior, and the punishment is usually monetary and notoriously weak. The fines operate as a cost of doing business, a tiny dent to profits or a charge to pass on to customers and shareholders. Sometimes fines are accompanied by monitoring designed to alter corporate behavior. But all the Justice Department typically does in the face of corporate recidivism is merely increase the toothless fines.
Since the Gilded Age, corporations have built effective walls around their charters, protecting them from attack. States have incentives to not use their power, and federal enforcement simply hasn’t worked. This feeds the perception that corporations have been handed a blank check to prey upon society, and evade sanction for intolerable conduct—that, per today’s populist cry, the game is “rigged.” And the Trump administration, which has already rolled back an Obama-era policy that forced federal contractors to disclose labor law violations, cannot be expected to police corporations when they’re busy hiding the rap sheet.
But this feeling of helplessness need not overwhelm us. States should prevent the worst repeat offenders from doing business within their borders, whether the incorporation occurred inside their states or not.
In fact, we have a recent example. In May, when mortgage servicing corporation Ocwen Financial was found to have no ability to actually complete the tasks of mortgage servicing, Massachusetts barred the company from doing so in the state. Ocwen is fighting the order in court, arguing that it will “cause significant harm” to consumers. But Ocwen supplied the harm for years in Massachusetts by failing to process escrow payments, imposing unnecessary charges and fees, and forcing borrowers into delinquency and foreclosure. Massachusetts’ Division of Banks simply rejected the notion that the state was held hostage to a company that failed in its basic bargain to citizens.
The most frequent argument against the corporate death penalty is that the pain will come down on relatively innocent employees and shareholders, who did nothing to facilitate the mismanagement but will lose their jobs or their fortunes as a result. The business lobby always invokes the example of Arthur Andersen, the auditing firm that imploded after a series of accounting scandals involving Enron and WorldCom in the early 2000s.
But the work of auditing public companies didn’t disappear when Andersen went out of business, and the new auditors needed experienced professionals to manage those services. Many Andersen employees took those jobs. As for shareholders, the risk of a corporate death penalty should inspire active governance practices to protect their investments. If investors know they could lose everything if the company they’re funding violates the law, maybe they’ll hire board members who will actually watch over the business. That would serve everybody better.
Furthermore, the idea that collateral damage should govern whether criminals are convicted breaks with all concepts of justice in other contexts. We don’t send a murderer home because his family relies on his salary.
There’s a hitch to making Wells Fargo the lead example of banning corporate recidivists. Big banks that are members of the Federal Reserve System are chartered at the federal level. In 2003, California actually tried to revoke Wells’ licenses for mortgage lending, due to a dispute over charging excessive interest. But Wells argued that federal law trumped state law, and they could not be kicked out of any state due to that federal charter. In 2005, a federal appeals court agreed.
While this may inoculate Wells Fargo from losing state privileges, it doesn’t mean that blue states shouldn’t take up the effort. First of all, a new challenge could raise new issues and find legal success. Second, Wells Fargo and the agency that grants federal bank charters, the Office of the Comptroller of the Currency, should have to defend why the banks deserve the untrammeled right to screw over checking account customers, mortgage customers, and now auto-loan customers. And finally, we desperately need to expose the public to the reasonable concept that a serial corporate criminal should be barred from continued abuse.
Revealing the virtual shield over Wells Fargo could generate the public outcry necessary to alter how states grant charters, and build support for more corporate accountability. When the people hear that a company engaged in demonstrable, widespread theft is protected from justice, when they hear that a corporation using our roads, our electrical wires, and our publicly educated workers can illegally profit with effective impunity, perhaps then they will demand change. Forcing this conversation into the public sphere might be the only spur available to broadly re-think our relationship to corporations, and the need to protect the integrity of the law by putting bad ones out of business.