Big money, acquisitions and consequences

Entities will face fines and possible legal action if they lack adequate anti-money laundering programs. The authors describe cases in which companies ignored the warning signs and faced the consequences.

On Oct. 7, 2010, the U.S. Office of Comptroller of the Currency (OCC) issued a cease-and-desist order against HSBC Bank USA and levied potentially the largest fine in history estimated to be nearly $1 billion for violating the Bank Secrecy Act (BSA) and its underlying regulations. "The OCC found that the bank's BSA compliance program had deficiencies with respect to suspicious activity reporting, monitoring of bulk cash purchases and international funds transfers, customer due diligence concerning its foreign affiliates, and risk assessment with respect to politically-exposed persons and their associates," according to the OCC. "These findings resulted in violations by the bank of statutory and regulatory requirements to maintain an adequate BSA compliance program, file suspicious activity reports, and conduct appropriate due diligence on foreign correspondent accounts."

HSBC Bank USA failed to take action on, or knowingly ignored several key factors, related to its BSA/anti-money laundering (AML) policies and procedures as well as regulatory requirements, according to the OCC.

Big corporations are gobbling up smaller firms around the globe. This acquisition fever is leading to several U.S. regulatory agencies to clamp down on businesses who are growing a bit too fast and cutting corners.

These agencies, which monitor the U.S. financial markets, have the authority to conduct examinations, enforce the rules of their governing bodies, levy fines and fees, and present legal charges against member firms as well as individuals. The U.S. government is increasingly investigating Bank Secrecy Act (BSA)/anti-money laundering and Office of Foreign Assets Control (OFAC) regulatory cases, and it doesn't show any signs of letting up.

We'll look at a number of instances in which agencies took regulatory action against banks, broker dealers and individuals. We'll also address the regulatory bodies' reasoning behind their actions.

HSBC BANK USA: FAILURE TO ACT ON KNOWN ISSUES

In the opening case, the OCC found that HSBC exhibited deficiencies in its compliance program in these areas:

FIRST CLEARING LLC: INADEQUATE AML PROGRAM

According to a Dec. 2011 Reuters article, the Financial Industry Regulatory Authority (FINRA) reported that broker fines increased 53 percent in 2011, and enforcement actions were up 8 percent to 1,411 from 2010. (See "FINRA says broker fines jumped 53 pct in 2011.")  That's not to say that each of the fines or enforcement actions was directly related to BSA/AML deficiencies, but instances of AML-related issues were included in many of these cases. (According to FINRA, it's the largest independent regulator for all securities firms doing business in the U.S. It says that it oversees nearly 4,400 brokerage firms.)

Of the 1,411 enforcement actions in 2011, at least 16 were specifically related to AML deficiencies of the company and its principal officers. As a result, not only did FINRA levy fines against them, in many cases it barred and censored individuals from any FINRA-member firms or acting in any registered-person capacity indefinitely or for a specified period of time.

FINRA assessed a fine of $400,000 and censured First Clearing LLC because FINRA found its AML program to be inadequate in these key areas:

• Ineffective usage and disbursement of exception reports, potential suspicious securities transaction and money movement alerts.
• Lack of evidence of review of the firm's alerts and monitoring reports.
• Failure to establish and implement an adequate AML compliance program.
• Limited review of transactions in relation to the business activity.
• Failure to establish transaction monitoring.

JP MORGAN CHASE BANK, NATIONAL ASSOCIATION: OFAC SETTLEMENT

Sometimes a corporation, in the name of greater profits, will think it can ignore restrictions against doing business in verboten nations — in this case, Cuba and Iran. The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) and JP Morgan Chase Bank, National Association (JPMC) made a settlement agreement on Aug. 25, 2011, in which JPMC paid US$88.3 million.

According to the agreement, a number of incidents violating OFAC requirements occurred between December 2005 and November 2010, including:

• Violation of the prohibition against dealing in property in which Cuba or a Cuban national has an interest. This included the processing of 1,711 electronic funds transfers in which the government of Cuba or a Cuban national had an interest, in the aggregate amount of US$178,530,954.27.
• Violation of the prohibition against the direct or indirect exportation from the U.S. or by a U.S. person of any services to Iran or the government of Iran. This included the processing of a 32,000-ounce transfer of gold bullion worth approximately US$20,560,000 for the benefit of the government of Iran.
• Violation of the prohibition against dealing in property and interests of persons designated pursuant to Executive Order 13348 (against sanctioned persons). This included the processing of an electronic funds transfer in the amount of US$88,036.96 or the benefit of a person designated pursuant to the Executive Order. JPMC voluntarily self-disclosed this violation.

PRINCIPAL OFFICERS: INDIVIDUAL CONSEQUENCES

Sometimes agencies don't just penalize giant corporate entities for deficient AML programs; they also put the screws on individuals.

According to a December 2010 FINRA Report, Mark E. Diemer was a registered principal officer for a St. Louis-based introducing brokerage and the anti-money laundering compliance officer. FINRA's examination found that Diemer "failed to implement policies and procedures that would detect and cause the reporting of suspicious transactions" and "failed to detect, investigate and/or file SARs [Suspicious Activity Reports] as appropriate when ‘Red Flags' of suspicious activity were present." 

Diemer never appeared for his hearing and an FINRA on-the-record interview. FINRA ultimately barred him from associating with any FINRA member in any capacity.

FINRA suspended Stanley M. Kobin, a registered principal for a Hicksville, N.Y., firm, from associating with any FINRA member in any principal capacity for nine months. FINRA also required him to take 16 hours of AML training and retake the Series 24 Principals Exam — for obtaining a securities license entitling the holder to supervise and manage branch activities — before he could be registered or associated with any member firm again. The enforcement stemmed from Kobin's "failure to identify red flags in connection with suspicious account activity." He "did not timely investigate or review the red flags, and caused his firm's failure to timely report the suspicious activity." FINRA also stated that Kobin failed to fulfill his responsibility to access the Financial Crimes Enforcement Network (FinCEN) to "review requests for information, under Section 314(A) of the USA Patriot Act, relating to possible money laundering or terrorist activity," and he "failed to search firm records to determine whether the firm maintained, or had maintained, any account for, or had engaged in any transactions with, any individual, entity or organization named in FinCEN's requests."

RELEASING SAR INFORMATION: INDIVIDUAL CONSEQUENCES

On Jan. 10, 2011, Frank E. Mendoza, a "loss mitigation specialist" for JP Morgan Chase Bank, was convicted of unlawfully disclosing the filing of a SAR to a subject. He also was convicted of soliciting US$25,000 from the same subject to "help the borrower deal with a possible criminal investigation" in relation to the SAR he previously filed in November of 2008.

FinCEN said that this is the first time a U.S. banking official has been convicted of criminal charges for revealing the filing of a SAR.

NO COMPLIANCE = LOTS OF PROBLEMS

People and businesses are hurt when they don't have adequate AML programs. Businesses can forfeit not just money, but good reputations and lost business opportunities. Individuals could lose their jobs or careers.

Although there are countless numbers of enterprising individuals and entities trying to find ways to launder money, government agencies don't enforce laws because they've detected money laundering activities; rather these cases begin with entities' inadequate AML compliance programs. They compound their programs with shoddy corporate cultures that don't value the importance of AML compliance, thus ignoring warning signs in exchange for financial gain.

According to the ABA, there are no signs of decreasing enforcement actions for the rest of 2012 and 2013. Annual compliance exam ratings have been declining, and regulators have acknowledged they're increasingly scrutinizing key areas such as "unfair or deceptive acts or practices," the connection between compliance and operational risk and the risk management consequences from insufficient compliance resources.

Don't wait for the knock on the door. Make sure you're compliant now.

Aaron Kahler, CFE, CAMS, is director of anti-money laundering and FATCA compliance at Capgemini in New York City.

Loren Grant is a senior consultant for LG Consulting, Inc., in Irvine, Calif. 

Sidebar: U.S. government loves acronyms

Here are just some of the acronyms for U.S. regulatory agencies that monitor financial institutions: