Last week, the Office of the Comptroller of the Currency (“OCC”) released its semiannual risk report (“Report”) highlighting credit, operational, and compliance risks to the federal banking system. The Report focuses on issues that pose threats to those financial institutions regulated by the OCC and is intended to be used as a resource to by those financial institutions to address the key concerns identified by the OCC. Specifically, the OCC places cybersecurity and Anti-Money Laundering (“AML”) among the top concerns highlighted in the Report. The Report further observes that the total number of enforcement actions by the OCC against banks — instituted for any kind of alleged violations — have declined steadily after peaking in 2009. Continue Reading OCC Report: Cybersecurity and Money Laundering Threats are the Key Risks Facing Banks
Last week, the Financial Action Task Force (“FATF”) issued a report concluding that Mexico needs to “step up efforts in pursuing money launderers.” The report, which summarized the FATF’s findings from its on-site assessment in early 2017, identified three particularly weak areas in Mexico’s AML regime: preventative measures; investigation and prosecution; and confiscation. This post summarizes the report’s findings, and observes that Mexico is not the only nation needing to “step up” its efforts. Further, given the strong financial and geographic ties between Mexico and the U.S., the AML challenges of Mexico can be the challenges of the U.S. Continue Reading Mexico’s AML Regime Evaluated by the FATF: Systemic Improvement, but Suspicious Transaction Reporting and Law Enforcement Efforts Continue to Struggle
We discuss two recent federal court opinions addressing two issues of increasing frequency and importance: (i) the potential civil liability of financial institutions to non-customers and other third-parties for alleged failures to implement an effective Anti-Money Laundering (“AML”) program; and (ii) the ability of private plaintiffs to sue foreign defendants who allegedly committed offenses against the plaintiffs abroad, and then laundered the proceeds of those offenses in the U.S. This second issue, of course, is relevant to U.S. government actions against foreign persons.
As we shall see, banks are not necessarily liable to anyone impacted by a bank’s alleged AML-related failures. Conversely, foreign defendants may be surprised by the ability of plaintiffs to haul them into U.S. court to redress alleged criminal offenses committed entirely abroad — if those foreign defendants sent the fruits of those offenses to the U.S. The case relevant to the latter point involves allegations of billions of dollars of theft and corruption committed in Kazakhstan as part of a complicated scheme to purchase high-end real estate in New York (a recurring theme in recent money laundering enforcement efforts, and in this blog) via European shell companies, using in part accounts held at the troubled foreign bank FBME, about which we have blogged before. Continue Reading The Courts Speak: Bank Liability for Alleged AML Failures Impacting Third Parties, and Hauling into U.S. Court Foreign Defendants Who Launder the Alleged Fruits of Foreign Crime
FinCEN recentlty announced entry of a $2 million assessment against Lone Star National Bank, a private bank operating out of Texas, for the bank’s allegedly willful violations of the Bank Secrecy Act (“BSA”) and inadequate Anti-Money Laundering (“AML”) monitoring programs. The primary violations relate to Lone Star’s alleged failure to comply with due diligence requirements imposed by Section 312 of the USA PATRIOT Act in establishing and conducting its correspondent banking relationship with a Mexican bank. As a result of Lone Star’s insufficient due diligence and AML program, the Mexican bank was “allowed to move hundreds of millions of U.S. dollars in suspicious cash shipments through the U.S. financial system in less than two years.” The FinCEN’s announcement warns that this “action underscores the dangers that institutions face when taking on international correspondence activities without properly equipping themselves” to manage the enhanced obligations that arise with such relationships.
This new FinCEN assessment underscores the continued regulatory interest in the AML risks presented by correspondent banking relationships. We therefore first will provide a brief overview of correspondent banking relationships and the enhanced regulatory attention often paid to them. Armed with this context, we then will analyze the findings and lessons learned from the Lone Star assessment, including the value touted by FinCEN of Lone Star’s efforts to cooperate with its own investigation. Further, this new assessment suggests that the U.S. government does not always present a consistent voice regarding correspondent banking relationships: although the U.S. Treasury has tried to encourage financial institutions in general to not “de-risk” and thereby terminate correspondent banking relationships, we see that enforcement agencies continue to penalize institutions in individual cases for not mitigating sufficiently the risks of correspondent banking. Continue Reading FinCEN Fines Texas Bank $2M for Alleged Failure to Vet and Monitor Mexican Correspondent Banking Relationship – But Touts Bank’s Cooperation
We previously have observed that financial institutions face an increasing risk that alleged Anti-Money Laundering (“AML”) and Counter-Terrorism Financing (“CTF”) violations will lead to follow-on allegations of securities law violations – allegations brought not only by the government, but also by investor class action suits (see here and here).
This phenomenon of AML law and securities law converging is not limited to the United States, as reflected by a recent class action lawsuit filed against one of the biggest banks in Australia – Commonwealth Bank – which arises out of claims by the Australian government that the bank failed to act adequately on indications that drug rings were using its network of “intelligent” deposit machines to launder tens of millions of dollars. Continue Reading Investor Class Action Lawsuit Targets Australian Bank for Alleged AML Failures and Use of “Intelligent” Machines for Anonymous Cash Deposits
In its Summer 2017 issue of Supervisory Insights, published last week, the Federal Deposit Insurance Corporation (“FDIC”) provides some insight into its examination process and outcomes for Bank Secrecy Act (“BSA”)/Anti-Money Laundering (“AML”) compliance in an article entitled The Bank Secrecy Act: A Supervisory Update (“Supervisory Update”). Although the Supervisory Update also summarizes the BSA and its history, we will focus here on the discussion of FDIC examinations. Continue Reading FDIC Provides Some Statistics on Violations Found During BSA/AML Exams: One Percent of Exams Lead to Formal Enforcement Actions
Two days after North Korea’s successful long-range ballistic missile test, the U.S. District Court for the District of Columbia unsealed a memorandum opinion which granted the Department of Justice “damming” warrants to seize all funds in bank accounts belonging to five Chinese companies which allegedly were used to hide transactions with North Korea using U.S. currency in violation of U.S. sanctions and money laundering laws. The underlying conduct allegedly resulted in over $700 million of prohibited transactions being processed by eight international banks. The opinion is noteworthy not only because it demonstrates the important relationship between money laundering laws and foreign policy, but also for the government’s use of anticipatory warrants to seize the assets upon arrival to the targeted accounts, and to prevent those assets from exiting.
Part Two of a Three-Part Series
In the second part of this series, we explore the practical effects of the FinCEN and DOJ guidance documents on industries attempting to serve marijuana related business (“MRBs”). On June 27, 2017, the Tenth Circuit issued an interesting and divided opinion showing us how difficult it can be to square the prohibitions in the federal Controlled Substances Act (“CSA”) and money laundering statutes with state legislation legalizing certain MRB activity and the seemingly permissive nature of the FinCEN and DOJ guidance documents. Continue Reading Continued and Unexpected Roadblocks to Serving the Marijuana Industry: Fourth Corner Credit Union v. Federal Reserve Bank
Part One of a Three-Part Series
We begin this week with a three-part series on banking and the marijuana industry. States continue to pass medical and recreational use marijuana legislation despite that the fact that the substance remains classified as a Schedule I drug subject to the federal Controlled Substances Act. Thus, the medical and recreational marijuana industries continue to struggle with access to banking and credit, and those who attempt to serve these industries find themselves subject to the Bank Secrecy Act (“BSA”) and the criminal money laundering provisions. As we will detail this week, the struggle for financial institutions attempting to service the marijuana industry comes not only from the BSA and AML provisions, but in other forms. We start this week with an overview of the guidance documents issued by the federal government which identify the enforcement priorities and also potential windows for financial institutions to service the marijuana industry. We will follow up with a discussion of a recent federal court decision illustrating the practical difficulties of squaring the prohibitions of the federal drug laws with permissive state laws and the federal guidance documents. We will conclude with an exploration of how federal agencies beyond the Department of Justice (“DOJ”) and the Financial Crimes Enforcement Network (“FinCEN”), such as the Securities and Exchange Commission (“SEC”), can further muddy these waters by staking out their own regulatory and enforcement priorities. –Priya Roy Continue Reading Banking and the Marijuana Industry
Financial institutions face an increasing risk that alleged violations of the Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) requirements will lead to follow-on allegations of securities law violations. We have blogged about investor class action suits against financial institutions based on alleged violations of BSA/AML rules. We also have blogged about recent enforcement actions by the SEC alleging violations of the securities laws due to underlying violations of the BSA by broker dealers. This post briefly notes the latest chapter in what seems to be a growing book regarding the convergence of AML/BSA and securities law.
In a complaint, later amended, filed in the Middle District of Tennessee against BancorpSouth Inc., investor plaintiffs alleged that the bank and its CEO, CFO and COO made misleading statements and omissions in SEC filings regarding (1) the bank’s compliance with BSA/AML regulations and the bank’s fair lending practices, and (2) the closing of two pending mergers/acquisitions. Plaintiffs allege that defendants knew at the relevant time that the bank was not in compliance with the AML/BSA regulations, due to a pending “target review” by the FDIC – which later resulted in a consent order between the FDIC and the bank regarding its AML obligations – but nonetheless stated that (1) the bank was in compliance with all banking laws and regulations; (2) they expected the two planned mergers to close in the second quarter of 2014; and (3) they expected to receive regulatory approval for those mergers. The plaintiffs allege that defendants thereby violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 by making statements which misrepresented or omitted material facts. According to the plaintiffs, when the AML/BSA problems eventually came to light, these problems allegedly delayed the anticipated mergers, and the bank’s stock value fell significantly, which thereby harmed investors.
As noted, the plaintiffs sued not only the bank itself, but also members of senior management. This approach is consistent with the recent focus on individual liability in AML/BSA matters. Specifically, the plaintiffs alleged that the individual executive defendants:
. . . . were ultimately responsible for ensuring that the Bank maintained an effective BSA/AML compliance program and that the Company’s program complied with the “4 Pillars” of BSA/AML compliance. In fact, federal regulations specifically require that the Company’s BSA/AML compliance program must be in writing, approved by the Board of Directors . . . , and noted in the board minutes. Defendants were also responsible for creating a “culture of compliance” to ensure Company-wide adherence to the Bank’s BSA/AML policies, procedures and processes, but failed to do so, instead prioritizing . . . cost-cutting measures.
On Monday, the district court granted, for the second time (after having been initially reversed by the Court of Appeals for the Sixth Circuit), class certification to the plaintiffs against the bank. The class certification decision involved a review the requirements imposed by Rule 23(a) and Rule 23(b) of the Federal Rules of Civil Procedure and will not be analyzed here. The point for the purposes of this blog is that it has become clear that, in regards to AML/BSA compliance, publically-traded financial institutions are compelled to wage a multi-front war. Regardless of the actual merits of the complaint against BanccorpSouth, its mere existence reflects that financial institutions must concern themselves not only with FinCEN, the Department of Justice, and the relevant examiner, but also with putative investor plaintiffs and the SEC – thereby increasing the stakes regarding decisions over the disclosure in SEC filings of possible violations of AML/BSA requirements.
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.