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In February 2017, we blogged about a whistleblower complaint filed against Bank of the Internet (“BofI”) by its former internal auditor. The blog post addressed what the whistleblower believed was BofI’s wrongdoing in relation to responding to a subpoena from the Securities and Exchange Commission (“SEC”), and when dealing with a certain loan customer in potential violation of the Anti-Money Laundering (“AML”) rules of the Bank Secrecy Act (“BSA”).

Less than two months after our blog post, three BofI stockholders brought a putative class action complaint against BofI seeking to represent a class of individuals who purchased BofI stock, in a case captioned Mandalevey v. BofI Holding, Inc. These plaintiffs alleged BofI violated the Securities Exchange Act through, among other alleged misrepresentations, falsely denying the company was under investigation for money laundering violations.  A federal court recently dismissed all claims against BofI.

This post focuses on that decision, the allegations relating to the federal investigation of BofI, and the Court’s interesting reasoning in dismissing these plaintiffs’ claims. Although the bank won this latest round, the saga involving BofI underscores how financial institutions face an increasing risk that alleged AML and Counter-Terrorism Financing (“CTF”) violations will lead to follow-on allegations of securities law violations – allegations brought not only by the government (see here), but also by investor class action suits (see here, here and here). Continue Reading When A Purported Money Laundering Investigation Turns Into a Class Action Complaint: The Latest Round in BofI’s Fight to Put Money Laundering Allegations in the Rearview Mirror

 

The U.S. Government Accountability Office (“GAO”) issued a statement earlier this week regarding testimony before the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit Committee on Financial Services regarding the potential perils of “derisking.”

As described by the GAO, “derisking is the practice of depository institutions limiting certain services or ending their relationships with customers to, among other things, avoid perceived regulatory concerns about facilitating money laundering or other criminal activity such as financing to terrorist groups.” Derisking is a significant ongoing issue in AML-related enforcement.  As we have blogged, the U.S. Treasury Department previously attempted to allay the fears driving the phenomenon of derisking by (i) suggesting that U.S. banks have overreacted to concerns over AML/BSA enforcement by unnecessarily terminating correspondent banking relationships with foreign banks; (ii) noting that these relationships are crucial to the global economy; and (iii) stating that reflexive derisking could destabilize or disrupt access to U.S. financing, hinder international trade, cross-border business, and charitable activities, and make claim remittances harder to effectuate.

It is difficult to distill clear and specific practical points from the recent GAO statement, entitled “Bank Secrecy Act – Further Actions Needed to Address Domestic and International Derisking Concerns” (“Derisking Statement”). This is partly because, during the course of listing various perceived concerns regarding the practice of derisking, the Derisking Statement merely comments somewhat vaguely that, “[w]ithout accessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, Treasury, the federal banking regulators, and Congress do not have the information needed to determine if BSA/AML regulations and their implementation can be made more effective or less burdensome.”

Bearing in mind the above limitations of the statement, the Derisking Statement summarizes itself as follows:

Why GAO Did This Study

In recent years, some Southwest border residents and businesses reported difficulty accessing banking services, including experiencing bank account terminations and bank branch closings in the region. In addition, the World Bank and others have reported that some money transmitters have been losing access to banking services with depository institutions.

This statement is based on findings from GAO’s February 2018 report on access to banking services along the Southwest border (GAO-18-263) and March 2018 report on the effects of derisking on remittance flows to fragile countries (GAO-18-313). GAO discusses (1) the extent to which banks are terminating accounts and closing branches in the Southwest border region, (2) the extent to which money transmitters serving selected fragile countries are facing banking access challenges, and (3) actions relevant U.S. agencies have taken to respond to these challenges. For those reports, GAO surveyed more than 400 banks, developed an econometric model on the drivers of branch closures, and conducted case studies on four countries to assess the effects of derisking on remittances flows.

What GAO Recommends

GAO made five recommendations in the two reports: to Treasury and the federal banking regulators to conduct a retrospective review of BSA/AML regulations and their implementation, and to Treasury to assess shifts in remittance flows to nonbanking channels. Banking regulators agreed with the recommendations. GAO requested comments from Treasury, but none were provided.

Ultimately, what is clear from the Derisking Statement is that the spectrum of financial services available to certain markets is shrinking due to concerns over AML/BSA enforcement, which the U.S. government somewhat perversely suggests are overblown.  What is not clear from the statement is whether U.S. regulators will tackle this issue, or how they should tackle this issue.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

Bank’s Alleged “Tick Box” Approach Failed to Attain Substantive AML Compliance

Late last week, the Financial Conduct Authority (“FCA”), the United Kingdom’s financial services regulator, imposed a $1.2 million (896,100 pound) fine on the UK division of India’s Canara Bank, an Indian state-owned bank, and ordered a moratorium on new deposits for nearly five months.  The cause—according to Reuters—was Canara’s systemic anti-money laundering (“AML”) failures.

A 44-page final notice published by the FCA explains the multi-year regulatory process that led to a finding of systemic failures and the imposition of penalties.  The FCA’s investigation began in late 2012 and early 2013 with assessments of Canara’s AML systems.  Upon inspection, the FCA “notified Canara of a number of serious weaknesses in its AML systems and controls.”  After promises of remedial action by Canara, an April 2015 visit revealed that the AML systems had not been fixed.  The investigation ended with a final report from a “skilled person,” an expert brought in by the FCA to assess Canara’s AML policies and procedures, completed in January 2016.  Settlement followed, resulting in sanctions and the FCA’s published final notice.

These three visits from the FCA generated a laundry list of Canara’s AML shortcomings.  This enforcement action reflects three main take-aways: (i) the potential risks faced by banks operating in foreign countries in which they have limited AML experience; (ii) the need for swift remedial action after the first examination finding AML deficiencies; and (iii) the need for a substantive AML policy implemented in a substantive way, rather than through a rote reliance on AML-related checklists. Continue Reading Canara Bank of India Fined $1.2 Million by UK Regulators for Systemic AML Failures

Commonwealth Bank of Australia (“CBA”), the largest bank in Australia, has agreed to a proposed civil settlement — subject to court approval — of historic proportions, involving a fine of approximately $700 million Australian dollars (roughly equivalent to $530 million U.S. dollars) regarding numerous alleged Anti-Money Laundering (“AML”) and Counter Terrorism Financing (“CTF”) violations.  The settlement is with the Australian Transaction Reports and Analysis Center (“AUSTRAC”) – a government financial intelligence agency whose counterpart in the U.S. would be the Financial Crimes Enforcement Network (“FinCEN”) — and represents the largest such enforcement action in the history of Australia.  Under the settlement, AUSTRAC also will recoup its legal costs of $2.5 million Australian dollars.

As we have blogged, AUSTRAC filed on August 3, 2017 a claim seeking civil monetary penalties against CBA for over 53,000 alleged violations of Australia’s AML/CTF law.  Although the case involves several types of alleged AML violations, it fundamentally rests on the bank’s use of so-called intelligent deposit machines (“IDMs”), a type of ATM which allowed customers to anonymously deposit and transfer cash.  Unfortunately, and perhaps not surprisingly, the IDMs also became an alleged favored conduit for money laundering by criminals involved in drug trafficking and illegal firearms. Continue Reading Australia’s Largest Bank Agrees to Historic AML Penalty

And a Tale of Four Countries: Singapore Fines a U.K. Bank, and the U.S. Imposes a Consent Order on a Chinese Bank

Less than a week apart, two major financial institutions (“FIs”) have been hit with penalties for failing to implement adequate anti-money laundering (“AML”) protections. But the penalties imposed by the involved regulators are different.  In this post, we report on the enforcement actions recently lodged against Standard Chartered PLC and the Industrial & Commercial Bank of China Ltd. by the Monetary Authority of Singapore and the United States Federal Reserve, respectively.  We also consider the approaches of these two regulators to the banks and the differing outcomes of the enforcement actions.

Continue Reading A Tale of Two Enforcement Actions

Second Part in a Two-Part Series

The Tale of an AML BSA Exam Gone Wrong

As we have blogged, the Ninth Circuit Court of Appeals recently upheld the decision of the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) to issue a cease and desist order against California Pacific Bank (the “Bank”) for the Bank’s alleged failure to comply with Bank Secrecy Act (“BSA”) regulations or have a sufficient plan and program in place to do so.

In our first post, we described how the Ninth Circuit rejected the Bank’s constitutional challenge to the relevant regulation, and accorded broad deference to the FDIC in its interpretations of its own regulations, expressed in the form of the Federal Financial Institutions Examination Council Manual (“FFIEC Manual”).  This post discusses the Court’s review of the Bank’s challenge under the Administrative Procedures Act to the FDIC’s factual findings of AML program failings.

The California Pacific opinion provides a significant piece of guidance for banks questioning the adequacy of its BSA compliance program: consult and abide the FFIEC Manual.  Furthermore, it demonstrates that no shortcuts are permitted when it comes to establishing and maintaining a BSA compliance program.  The BSA and the FDIC’s regulations contain firm guidelines and the FFIEC Manual puts banks of all sizes on notice of what compliance is expected of them.  The independence of both the AML compliance officer and of testing; adequate risk assessments of customer accounts; and the correction of prior regulator findings of AML deficiencies are key. Continue Reading Ninth Circuit Court of Appeals Outlines BSA Compliance Obligations and How One Small Bank Failed to Meet Them

Court Defers Heavily to the FDIC and the FFIEC Manual

First Part in a Two-Part Series

The Ninth Circuit Court of Appeals recently upheld the decision of the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) to issue a cease and desist order against California Pacific Bank (the “Bank”) for the Bank’s alleged failure to comply with Bank Secrecy Act (“BSA”) regulations or have a sufficient plan and program in place to do so.

This decision, California Pacific Bank v. FDIC, provides a nearly step-by-step analysis of what is required of banks under the BSA and a vivid illustration of an Anti-Money Laundering (“AML”) program that did not pass muster in the eyes of a regulator.  It highlights the general rules that banks of all sizes, but particularly smaller community banks, must keep in mind concerning their compliance programs – size does not matter and you are on notice of what compliance entails.

Importantly, and before upholding the FDIC’s factual findings regarding the Bank’s violations, the Ninth Circuit first rejected the Bank’s claim that the regulation at issue (which required the Bank to implement an AML compliance program which complied with the “four pillars” of such a program) was unconstitutionally vague. Moreover, the Ninth Circuit found that the FDIC has broad discretion when interpreting this regulation, described by the Court as “ambiguous.”

This post will summarize the case and the key role played by the Federal Financial Institutions Examination Council Manual (“FFIEC Manual”) in both the Court’s rejection of the constitutional challenge and the broad deference which the Court accorded to the FDIC and its interpretation of its own regulations.  The second post will turn to the Bank’s alleged AML program failings and the Bank’s challenges to the FDIC’s many factual findings. Continue Reading Ninth Circuit Court of Appeals Rejects Constitutional Challenge to AML Compliance Program Regulation

But Bank Customer’s Foreign Tax Evasion Scheme Still May Merit a SAR FilingThe Financial Crimes Enforcement Network (“FinCEN”) recently advised that a financial institution is not required to file a Suspicious Activity Report (“SAR”) based solely upon a customer’s inquiry into or participation in a foreign tax regularization program.  FinCEN issued this statement on February 21, 2018 in response to Florida International Banker’s Association’s request for guidance (“FIBA Request”) in 2016, which initiated the request because a number of its members expressed an interest in tax regularization programs and sought clarification on the AML implications of such programs.

This issue, perhaps seemingly esoteric, involves a basic question of increasing practical importance, particularly in light of the Panama Papers related international scandals, and global criticism of the U.S. as a potential haven for foreign tax cheats and money launderers: does the possibility of foreign tax evasion by a bank client necessarily trigger the need to file a SAR? Foreign tax evasion can represent potential violations of U.S. law, such as the federal mail or wire fraud statutes, which in turn may support a prosecution theory that related financial transactions involving foreign tax evasion and the U.S. financial system represent potential U.S. money laundering violations (for a detailed article on this issue, please see here). Continue Reading FINCEN Advises That Participation in a Foreign Tax Regularization Program By Itself Does Not Trigger SAR Filing Obligation

Alleged Illicit Activity Included Transactions Promoting North Korea’s Missile Program and an Institutional Commitment to Laundering Money

On February 13, 2018, FinCEN announced that it had proposed a special measure naming ABLV Bank, AS (“ABLV”) an institution of primary money laundering concern pursuant to Section 311 of the USA Patriot Act.  We previously have blogged about FinCEN’s powers pursuant to Section 311 of the U.S. Patriot Act to designate institution “of primary money laundering concern” and impose a special measure which effectively cuts off the bank’s access to the U.S. financial system by requiring U.S. institutions as well as foreign institutions that create an indirect link between the foreign institution and the U.S. to sever ties with the designated bank.

Finding that ABLV was a foreign financial institution of primary money laundering concern, FinCEN proposed a prohibition under the fifth special measure restricting domestic financial institutions from opening or maintaining correspondent accounts with or on behalf of ABLV. FinCEN stated that ABLV executives, shareholders, and employees have institutionalized money laundering as a pillar of the bank’s business practices by orchestrating money laundering schemes, soliciting high-risk shell company activity that enables the bank and its customers to launder funds, maintaining inadequate controls over high-risk shell company accounts, and seeking to obstruct enforcement of Latvian anti-money laundering and combating the financing of terrorism (AML/CFT) rules in order to protect these business practices.  Indeed, included in the illicit financial activity were transactions for parties connected to the U.S. and U.N.-designated entities, some of which are involved in North Korea’s procurement or export of ballistic missiles.

ABLV shot back last Thursday stating that the allegations were based “on assumptions and information that is currently unavailable to the bank,” but that they were “continuing check into these allegations” and were open to cooperation with U.S. authorities.  As a result of FinCEN’s finding, Monday morning, the European Central Bank (“ECB”) halted all payments by ABLV pending further investigation into the allegations set forth in FinCEN’s Notice of Proposed Rulemaking (“NPRM”). Continue Reading FinCEN Imposes Section 311 Fifth Special Measure on Latvian Bank ABLV

Second Post in a Two-Part Series

As we blogged earlier this week, Congress is considering a new draft bill, the Counter Terrorism and Illicit Finance Act (“CTIFA”), in committee in the Senate.  The CTIFA proposes the most substantial overhaul to the Bank Secrecy Act (“BSA”) since the PATRIOT Act.

We previously discussed CTIFA’s proposed requirement for legal entities to submit to FinCEN a list their beneficial owners (“BOs”) and the creation of a central directory of these BOs. Today, we discuss CTIFA’s many other major proposed revisions to the BSA. These include:

  • Raising the minimum monetary thresholds for filing Currency Transaction Reports (“CTRs”) and Suspicious Activity Reports (“SARs”), and requiring a review of how those filing requirements could be streamlined;
  • Expanding the prohibition against disclosing SAR-related information to third parties, including in private litigation;
  • Codifying absolute civil immunity for SAR filing;
  • Expanding the scope of voluntary information sharing among financial institutions;
  • Allowing FinCEN to issue no-action letters; and
  • A grab-bag of other proposals, including a safe harbor for AML-related technological innovation; requiring a review of whether FinCEN should assume a greater role in AML/BSA examinations of financial institutions; requiring a review of the costs to the private sector for AML/BSA compliance; and requiring an annual report to the Secretary of the Treasury (“the Secretary”) regarding the usefulness of BSA reporting to law enforcement.

Continue Reading Congress Contemplates Broad AML/BSA Reform