AML’s Year in Review

ACAMS moneylaundering.com

Record Settlements, Russian Tanks and Legal Weed: AML’s Year-in-Review
By Colby Adams, Kira Zalan and Irene Madongo

This time last December, one might reasonably have expected that 2014 would be a year of modest changes for the anti-money laundering and sanctions compliance sector. Then came JPMorgan Chase, BNP Paribas and a convoy of Russian tanks to quash that notion.

That the year would unfold differently than 2013, which saw a sharp drop in compliance outlays paid by banks, was signaled as early as Jan. 7, when the U.S. Justice Department and Office of the Comptroller of the Currency (OCC) disclosed a $2.05 billion settlement with JPMorgan Chase for its failure to report suspicious transactions linked to Bernard Madoff’s hedge fund.

The settlement, which also faulted the bank for not communicating its suspicions about Madoff across its affiliates, eclipsed a then-record $1.9 billion deal reached with HSBC in December 2012 for not vetting trillions of dollars in transactions potentially tied to drug traffickers. By the end of 2014, banks had paid more than fourfold of JPMorgan’s total and pleaded guilty to criminal wrongdoing.

“The BNP Paribas case was surprising because not only was it a stunning amount of money and it involved a guilty plea but also because, at the end of the day, it wasn’t viewed as that big of a deal in terms of this string of wire-stripping cases we’ve seen,” said Laura Billings, a white-collar criminal defense attorney with Miller & Chevalier in Washington, D.C.

The French bank pleaded guilty in June to a one-count information and agreed to pay a record $8.9 billion and suspend certain dollar-clearing services for knowingly allowing its clients to bypass U.S. sanctions targeting four nations. The settlement reflected the fact that the bank resisted negotiations and continued to obscure wire data after U.S. officials communicated their concerns, sources told ACAMS moneylaundering.com.

BNP Paribas wasn’t alone in pleading guilty. In May, Credit Suisse put ink to a $2.6 billion settlement with the United States for its role in helping wealthy Americans hide taxable assets abroad. One addendum to the deal: a one-count information conviction.

The penalties against JPMorgan Chase, Credit Suisse and BNP Paribas remain the largest ever levied against banks for violations of anti-money laundering (AML), tax evasion and sanctions violations, respectively.

Restrictions and recidivists

Banks that entered into compliance settlements in 2014 also agreed to a raft of restrictions not usually appended to such deals.

The prohibitions—controls on U.S. dollar-clearing services, restrictions on opening correspondent accounts and data-sharing requirements for cross-border wires—came as part of agreements with the Justice Department and New York State Department of Financial Services (NYSDFS), an agency that made waves in the industry over the course of the year.

But in standalone fines, NYSDFS made equally arduous demands, ordering Standard Chartered Bank (SCB) in August to cease U.S. dollar-clearing transactions and require its affiliate operations to obtain and share information on payees and payers of wires valued at $3,000 or more. The bank also paid $300 million for flaws in its transaction monitoring system.

In a $315 million settlement disclosed in November, NYSDFS ordered Bank of Tokyo Mitsubishi (BTMU) to relocate its U.S. AML and sanctions compliance teams to New York and follow the direction of an agency-appointed monitor for 18 months. The agency fined the institution for pressuring PricewaterhouseCoopers to amend a compliance report.

Notably, both settlements weren’t the first for the banks or the regulator. Ahead of SCB’s $327 million settlement with federal officials in December 2012 for banking high-risk clients, the financial institution paid New York $340 million the previous August. BTMU previously paid NYSDFS $250 million in June 2013 for sanctions violations.

Eye on the individual

While U.S. regulators have long issued the occasional disciplinary action against bankers and broker agents, and though the number of such penalties handed down in 2014 fell below the 2013 total, federal and state officials made individuals more accountable than ever for poor AML compliance controls.

For one, the Justice Department, Federal Reserve Board and NYSDFS named nearly a dozen individuals to be banned from certain positions or fired outright for their purported roles in compliance mismanagement at BNP Paribas, BTMU, Credit Suisse and Standard Chartered Bank. The unusual steps followed public warnings by regulatory officials earlier in the year.

The warnings, coupled with a $25,000 fine by the Financial Industry Regulatory Authority against former Brown Brothers Harriman compliance chief Harold Crawford in February, prompted others in the industry to question whether they should obtain insurance.

“Individual liability—I think that issue really came about substantially” in 2014, said John Wagner, a former director of AML and Bank Secrecy Act compliance with the OCC who retired earlier this year. U.S. officials are “looking at this but they’re taking a measured approach because, obviously, going after an individual has an impact on that individual,” he said.

Those potential effects were perhaps most on display earlier this month, when the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) fined Thomas Haider, the former chief compliance officer of MoneyGram, $1 million for his alleged role in ignoring signs of fraud by employees and customers.

The lawsuit has “definitely had a chilling effect, certainly on people wanting to do compliance,” said Robert Rowe, a vice president with the American Bankers Association. “There’s just so much an individual can control within the organization, and being held liable for things you can’t control is causing a lot of compliance officers to get very nervous.”

De-risking takes center stage

In response to regulatory pressure, financial institutions in the United States and abroad further distanced themselves from high-risk clients in 2014—a trend that seemed to reach a breaking point of sorts. After years of asking banks to be more diligent, regulators asked them to take on more risk.

In July, the Federal Deposit Insurance Corp. rescinded a list of high-risk merchant customers that work with third-party payment processors after banks had used the list as a reason to turn away the businesses in the sector. In November, Treasury Department officials asked banks not to deny services to money services businesses outright.

The steps seemed to do little to mollify concerns that maintaining such relationships would be too costly and too risky for most financial institutions.

Broadly, “financial institutions are being forced to focus on the wrong thing,” said Stephen Barclay, a British member of parliament who previously headed AML and sanctions compliance for Barclays Bank.

“They are being forced to focus on regulatory compliance and spend millions of pounds on capturing the low-risk customer rather than targeting their resources and efforts on a much smaller number of high-risk, high-value individuals,” he said.

Lift and impose

For a year that was supposed to see an easing of sanctions against Iran, 2014 proved one of the most challenging in recent memory for banks charged with implementing economic embargoes. For one, there was Russia.

Following the country’s incursion into Ukraine’s Crimean Peninsula in February and its subsequent though oft-denied support of Ukrainian separatists, U.S. and EU officials imposed a series of sanctions measures targeting Russian President Vladimir Putin’s inner circle.

But the sanctions didn’t just follow the usual model of simply asking banks to identify and block related funds. They also proscribed certain energy-related projects and imposed restrictions on underwriting equity or long-term debt for Russian companies—variations that have proven difficult to implement and which likely hint at innovations to come.

The fall of the Ukrainian government in February, shortly before Russian troops arrived in Crimea, also kept U.S. officials busy looking for money looted by former Ukraine President Viktor Yanukovich, according to Deborah LaPrevotte, the program manager of the FBI’s kleptocracy program.

“We didn’t see that coming until Ukraine fell and 68 officials fled,” she said. “We [were] actually looking at Alexander Yanukovich, the son of the president, prior to his regime falling and so actually we [were] in a good position to already have a little bit of background knowledge when Viktor Yanukovich and his upper echelon fled the country.”

As world powers negotiated an ongoing and recently extended joint plan of action that could lead to a more permanent reduction in Iran sanctions, European financial institutions and other companies explored the possibility of doing business with the Islamic Republic. But Cuba sanctions may be the first to go, White House officials indicated this month.

Rules and warnings

In June, U.S. financial institutions got their first look at a potential customer due diligence rule that would require them to identify individuals holding a stake of 25 percent or more in corporate accounts. FinCEN’s proposed rule excluded language that would have tasked financial institutions with verifying the data as well.

The advancement of the so-called ‘beneficial ownership rule’ came in the context of efforts by the Financial Action Task Force (FATF) and European Union to shine a spotlight on corporate owners. The EU said this month that a plan to require member-states to create registers of corporate owners wouldn’t mandate that such data be widely available to the public.

In controversial guidance issued in February, FinCEN also outlined how it expects banks to treat accounts held on behalf of state-sanctioned marijuana businesses, calling on compliance officers to distinguish transactions on behalf of licensed businesses from those not approved under state laws.

The guidance drew criticism from bankers and lawmakers, who pointed out that the cannabis remains a controlled substance under federal laws. By the year’s end, bankers in Colorado said that conflicting state and federal laws on marijuana were creating compliance headaches.

FinCEN also drew criticism in 2014 but for reasons unrelated to its mission: U.S. officials launched a probe into FinCEN’s hiring practices following complaints that the bureau may have violated federal rules on employing military veterans. On multiple occasions, Republican lawmaker called on FinCEN to fully respond to the allegations.

Taxes and terrorism

Global tax enforcement continued to be an issue for international banks. In October, 51 nations agreed to a plan by the Organisation for Economic Cooperation and Development to automatically exchange tax-related data—an initiative that will mean changes for bank due diligence procedures much as the passage of a deadline for the U.S. Foreign Account Tax Compliance Act did earlier this year.

Seven months after the Credit Suisse settlement, Bank Leumi le-Israel agreed to pay U.S. prosecutors and regulators $400 million for helping wealthy Americans evade taxes through the use of shell corporations and funds transfers disguised as business loans. The agreement barred bank divisions in Switzerland and Luxembourg from providing banking and investment services to American clients.

The IRS will “continue to track the funds that are flowing, we believe, outside of Switzerland,” said Richard Weber, the head of the agency’s Criminal Investigations division, who also noted that the agency had racked up the settlements despite working with a historically low budget.

“We’re at the lowest staffing that we’ve been since the 1970s, and if the trend continues [over the next few years] we’re going to have 36 percent fewer agents than we did 20 years ago, and that’s just not sustainable,” Weber said.

A U.S. court ruling in September reaffirmed that, as with tax evasion, banks can be held responsible for their clients actions abroad. A federal jury found Arab Bank civilly liable for deaths caused by terrorist groups that had purportedly raised money and offered rewards programs to the families of suicide bombers through its accounts.

The ruling is the highest-profile of its kind from a bevy of lawsuits attempting to penalize banks under the U.S. Anti-Terrorism Act.

Bitcoin’s rapid development

The year proved a mixed bag for the virtual currency platform Bitcoin and competitors. As the price of bitcoins declined over the year, U.S. and U.K. regulators signaled a willingness to accept the crypto-currency, albeit with strings.

In July, NYSDFS disclosed plans to license virtual currency businesses that verify the identities of their accountholders, maintain know-your-customer profiles, screen transactions against sanctions lists and report suspicious activity, among other steps. The regulator has since said it could modestly tweak the requirements.

In August, British officials said they would soon examine the promise and perils of alternative payment services, including digital currencies, as part of a governmental promotion of financial technology.

Law enforcement agents also took a closer look at the technology over the year, according to Bryan Smith, the unit chief of the FBI’s Financial Institution Fraud Unit.

“We are doing a lot of work in that arena, both on our cyber side as well as criminal,” said Smith. “We’ve seen a rapid development of that technology, bringing new intermediaries of, and variations of, virtual currency into the equation that we have to learn to understand potential impacts on funds movements.”

Global cooperation

Under the guidance of FATF, nations tightened their AML and counterterrorist financing controls in 2014 as the intergovernmental group launched its fourth round of mutual evaluations. FATF released the first results of those examinations, including its first-ever effectiveness score, in December.

Governments also worked better together on cross-border investigations, according to Daniel Levy, a principal with McKool Smith and a former senior trial counsel with the U.S. Attorney’s Office for the Southern District of New York.

“Not only are prosecutors’ offices coordinating with each other more, but they are picking up on similar conduct investigated and oftentimes resolved with another prosecutor,” said Levy. “For example, French authorities have initiated an investigation of UBS for tax-related conduct several years after UBS resolved similar issues with the U.S.”

Cooperation between Mexico and the United States also improved after a lull that followed the inauguration of Mexican President Enrique Peña Nieto, sources told ACAMS moneylaundering.com. But Mexico’s rollback of restrictions on U.S. dollar deposits More and the possibility that at least one U.S. bank in the Latin American country may have been infiltrated by cartel members worried AML professionals.

For Britain’s AML sector, efforts by FATF and the EU to clamp down on money laundering have coincided with political and legislative cycles to focus attention on fighting the crime, according to Matt Allen, the director of financial crime for the British Bankers Association.

“Perhaps more fundamentally, there has been a realization that financial crime has changed dramatically,” he said. “The types of criminal activities, the way financial services work has dramatically changed, and we need a legislative framework that is up to date and that is something that we support.”

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