By Brian Monroe
bmonroe@acfcs.org
April 21, 2015
In this week’s Financial Crime Wave, FBME fights FinCEN over 311 designation, Fed dings CommerceWest on AML, Supreme Court rules against Iran in terror lawsuit, and more.
311 designations
It is sometimes said that the government never met an industry that it didn’t want to regulate. But it may be truer that the Financial Crimes Enforcement Network has never faced a bank like the Tanzania-based FBME, which refuses to cede to the demands of an overzealous U.S. regulator. In a recently reissued rule, Fincen once again blocked U.S. correspondent banking relationships with FBME. Just like the agency’s original rule labeling the family-owned bank a “primary money laundering concern,” the new one effectively means a death sentence for FBME. Yet the bank still refuses to go down without a fight. After winning a court injunction against the original ruling, FBME has pledged to challenge the new one as well. Based on the public record and federal agencies’ obligations under the Administrative Procedures Act, the bank still has a good case. On top of the fact that Fincen’s punishment was draconian, the glaring gaps in its administrative process and lack of substantiated claims in its pursuit of FBME suggest that Fincen sleepwalked toward a predetermined outcome of simply wanting the institution closed — undeterred by FBME’s cooperation, remedial actions or even outright facts. From court filings and public comments, it appears that Fincen may have violated the APA. Even more troubling, it also appears that Fincen’s targeting of the bank borders on unconstitutional. In the vast majority of situations, an action by a federal agency that results in the significant taking or deprivation of property interests is unconstitutional. Under Fincen’s Patriot Act authority to designate a foreign bank tied to U.S. correspondent banks as a money-laundering concern, the agency need not even issue a formal finding. The reputational damage of simply a proposed rule is sufficient to significantly damage a bank. Just look at the agency’s track record. Of the five banks which had the special rule imposed on them, Fincen rescinded the rule for three of them. That was not because the agency reconsidered its rulemaking. It was because the banks had gone out of business, (via American Banker).
The bigger picture: FinCEN has become a more powerful and prominent organization under leader Jennifer Shasky-Calvery, who took over in 2012. She improved its penalty section and bolstered its lawmaking division, capturing new industries and subjecting them to anti-money laundering rules. She also assessed what powers FinCEN had at its disposal that were being underutilized, including the use of geographic targeting orders (GTOs) and Section 311 designations. But I understand the care that needs to be taken with this power. My compliance sources at banks large and small tell me that all it takes for them to completely shut out an operation is even the hit of a 311 designation. But FinCEN also must balance being more transparent about these designations with not giving criminals a roadmap or tipping off illicit entities about ongoing investigations. This fight will be widely watched by both bank compliance teams and the US government.
HSBC
Two crusading US senators are urging an American crackdown on HSBC and other banks at the heart of the Panama Papers tax avoidance scandal. Senate banking committee members Sherrod Brown and Elizabeth Warren have written to US Treasury Secretary Jack Lew to ‘strongly urge’ action on revelations that the super-rich used Panamanian law firm Mossack Fonseca to hide money offshore. It could see the nation’s fearsome regulators step in with billion-pound fines or even criminal prosecutions for banks found to have acted wrongly. The move is particularly bad news for HSBC, which is mentioned in a letter to the Treasury secretary. If investigators find it guilty of wrongdoing, it risks losing its US licence. Brown and Warren have a long history with the British bank and have been some of its most fearsome critics. They clashed with bosses after HSBC was found by the Senate to have links with ‘drug kingpins and rogue nations’ in a 2012 Mexican money-laundering scandal. Authorities decided not to prosecute after that crisis, opting instead for a £1.2billion fine. If they had pressed criminal charges, it would almost certainly have led to a US ban. Warren railed against the decision, asking officials why ‘there was no hearing to consider shutting down HSBC’s actives in the US’. Last year, when the bank was in the spotlight once again over its support for wealthy tax avoiders in Switzerland, Brown demanded to know if the Government had allowed it to ‘escape accountability’ for promoting evasion of US tax laws. HSBC has emerged as a key Mossack client in the papers, which are the biggest leak in history. They show that the bank and its affiliates used the law firm to set up 2,300 shell companies on behalf of clients, (via This is Money).
Compliance
The Wall Street Journal touches on everything from AML compliance confidence to a perceived change in tone from federal regulators, shifting to find more individual liability in program penalties and missteps. Some snapshots include: Crisis of Confidence: A survey of 812 anti-money laundering professionals by Dow Jones Risk and Compliance and the Association of Certified Anti-Money Laundering Specialists found 47% said too many false-positive alerts hurt their confidence in client-screening of data accuracy. Forty percent said their organization has exited a business line or segment in the last year due to regulatory risk. “Decision makers continue to cite data accuracy as the single most important factor in choosing AML data providers,” the survey report said. “Well-structured data, depth of content, customer service, conforming to international standards and company reputation are also very important for 60% or more of decision makers. Excessive false-positive alerts remain the key factor for hurting confidence in client-screening data providers.” Feeling The Heat: A survey of chief compliance officers by law firm DLA Piper found 80% said they are concerned with what they see as a change in tone from the federal government regarding the possibility compliance people will be held criminally accountable for their organization’s compliance failures as outlined in the U.S. Department of Justice’s Yates memo. Two-thirds said the change in tone would affect their decision to remain in compliance, (via the Wall Street Journal).
Corruption
Have you ever been sitting there at your desk, charting your financial crime compliance future, and just thought to yourself, “Self, I sure wish I had an easy, graphic way to follow all of those dad gum Foreign Corrupt Practice Act (FCPA) penalties. They are just all of the place, jiminy creepers, what, oh what, am I going to do?” Well, Thomson Reuters has an answer for you in a nice visual representation of FCPA enforcement actions and fines between 2005 and 2015, along with the targeted countries. It also compares the OECD signatory countries enforcement record and stats up until 2013. Some highlights: Nigeria has had the most enforcement actions, with 70, and China comes in at No. 2 with 62. While 2010 was the busiest year for enforcement actions, at 48 and 26 by the US Department of Justice and SEC respectively, it’s only in the last few years that penalties have surged to nearly $160 million, (via Thomson Reuters).
Cybersecurity
IBM has discovered a new piece of malware that has stolen $4 million from more than 24 American and Canadian banks in just a few days. The hackers combined code from two malware types, known as Nymaim and Gozi, to create GozNym, a Trojan both persistent and powerful. Numerous credit unions and popular e-commerce platforms were also said to have been targeted. Travis Smith, senior security research engineer at Tripwire: “Cyber criminals have specialties just like their white hat counterparts. By taking bits of code from different pieces of malware, they are able to create their malicious payload quicker than writing everything from scratch. This will reduce their time to exploit and increase potential profits from criminal activity. Data is the currency of the 21st century, however criminals are still interested in real currency as well. Banks and e-commerce sites face attacks from criminals seeking both sets of currency. Organizations should monitor critical systems for suspicious changes as well as limit network connectivity to prevent data leakage in the event of a breach,” (viaInformation Security Buzz).
Enforcement
CommerceWest Bank has violated U.S. money laundering laws and agreed to improve its board oversight and reporting of suspicious activity, the Federal Reserve said on Tuesday. The Irvine, California-based bank did not immediately return requests seeking comment. The bank, which serves businesses throughout southern California, has also agreed to fix deficient due diligence on customer accounts and review transactions from Sept. 1, 2014, to March 31, 2015, the Fed said in a statement. CommerceWest is required by U.S. and state regulators to show how it would comply with rules on reporting transactions of more than $10,000 by one person on one business day, the Fed said. CommerceWest had total assets of $528.74 million as of Dec. 31, according to the Federal Deposit Insurance Corp website (via Reuters).
The action notes key deficiencies in customer risk ranking, customer risk assessments and automated monitoring procedures. The bank must also engage in a lookback between September 2014 to end of March 2015 to review for any missed suspicious activity reports that should have been filed. At the heart of the action, the bank must improve in several crucial areas of the financial crime compliance program, hitting on issues that have been pain points with regulators centering on compliance officer authority, resources, staffing and board involvement and oversight, including:
the actions that the board of directors will take to maintain effective control and oversight of Bank management’s compliance with the BSA/AML Requirements;
measures to ensure adherence to approved compliance policies, procedures, and standards;
clearly defined roles, responsibilities, accountability, and reporting lines regarding compliance with the BSA/AML Requirements for the management, compliance personnel, and internal audit staff;
adequate resources for the BSA/AML compliance officer, including sufficient staffing levels, and periodic re-evaluation of resources and staffing needs; and
measures to improve the information reported to the board of directors regarding compliance with the BSA/AML Requirements, (via the Federal Reserve).
The Philippine central bank will penalize any financial institution it finds to have broken rules in connection with the laundering of $81 million in stolen Bangladesh foreign reserves in early May, Deputy Governor Nestor Espenilla said. “If there really is a serious violation of rules, the bank can be punished,” Espenilla said in an interview late Saturday in Tagaytay, south of Manila. “They can be made to pay fines or made to stop or reduce certain businesses. People from board of directors to branch managers can also be sanctioned,” he said, declining to identify banks or individuals. Rizal Commercial Banking Corp., which received the $81 million of stolen money, has been at the center of a Senate investigation, with its president and branch manager being asked to testify at a hearing. The funds were wired from Rizal Bank to remittance company Philrem Service Corp. before being sent on to at least two casinos. Almost all of the money is still missing. The results of the central bank investigation will be referred to the anti-money laundering council for its own criminal investigation, Espenilla said. Bangko Sentral ng Pilipinas will need to decide how much of the investigation will be made public as it balances the disclosure with the necessity to ensure the stability of the banking industry, he said, (viaBloomberg).
Sanctions
Three months after a nuclear deal was implemented between Iran and western powers, the Islamic Republic has been unable to tap about $100 billion held abroad and is seeking access to the U.S. financial system to help pay its bills, Central Bank Governor Valiollah Seif said. While Iranian deposits held abroad are supposed to be accessible, Seif said Friday that European banks are worried about running afoul of U.S. regulations. He wants the U.S. Treasury’s Office of Foreign Assets Control to issue guidelines encouraging European banks to be more receptive to Iran. Seif met Treasury Secretary Jack Lew Thursday on the sidelines of the IMF-World Bank meetings in Washington to discuss his concerns. So far, Iran has gotten “almost nothing” from the accord, which was implemented on Jan. 16, Seif said in an interview with Bloomberg Television. “One of the needs that we definitely have goes back to converting currencies to pay our suppliers. It requires having access to the U.S. financial system,” (viaBloomberg).
Terror finance
ISIS’s monthly revenue has dropped by almost 30 percent in the last year, according to new analysis. Oil production is down to 21,000 barrels per day from 33,000. The loss of territory and population under ISIS control has shrunk the organization’s tax base. To compensate for declining income, ISIS has imposed new taxes on broken satellite dishes and fines for driving on wrong side of the road. ISIS’s monthly revenue has dropped by almost 30 percent in the last year, according to new analysis released today by IHS Inc., a leading global markets and business research firm. The latest report from the IHS team responsible for the IHS Conflict Monitor outlines the decline in primary revenue sources for ISIS. “In mid-2015, the Islamic State’s overall monthly revenue was around $80 million,” said Ludovico Carlino, senior analyst at IHS. “As of March 2016, the Islamic State’s monthly revenue dropped to $56 million.” Around 50 percent of the group’s revenue comes from taxation and confiscation, while around 43 percent comes from oil revenue. Drug smuggling, the sale of electricity and donations make up the remainder. IHS notes that ISIS collects the majority of its monthly revenue from taxation and confiscation. However, income from these activities has fallen by approximately 23 percent since summer 2015. The general decline in income for the group is also affecting other financial streams, such as the money generating from kidnapping, drug smuggling, and taxation on bank account holders and transactions, (via Homeland Security News Wire).
Terror lawsuits
The Supreme Court on Wednesday cleared the way for victims of terrorist attacks to collect about $2 billion in frozen funds tied to Iran’s central bank. The court, in a 6-2 decision, ruled Congress acted within its powers when it passed legislation in 2012 that granted victims involved a court case the explicit right to collect the money. Justice Ruth Bader Ginsburg, writing for the majority, said the legislation was “designed to aid in the enforcement of federal-court judgments” and “does not offend separation of powers principles protecting the role of the independent judiciary.” The ruling was a victory for more than 1,000 victims and family members who sued to hold Iran liable for sponsoring terrorist attacks, including the 1983 Marine barracks bombing in Beirut and the 1996 Khobar Towers bombing in Saudi Arabia. Iran didn’t appear in court for those cases. The victims obtained judgments against the country that amounted to billions of dollars and then embarked on a years-long legal campaign to try to collect. One target was nearly $2 billion in frozen assets tied to Bank Markazi, Iran’s central bank. Bank Markazi said the funds were part of its foreign-currency reserves. The money was held in a Citibank account maintained by a Luxembourg financial intermediary doing business with an Italian bank that in turn did business with Markazi. The bank argued that Congress unlawfully changed the legal rules in a pending case. The victims argued Congress had the power to change the law, even to influence pending cases. Chief Justice John Roberts, joined by Justice Sonia Sotomayor, dissented from Wednesday’s ruling, saying lawmakers had intruded on the courts’ authority to decide cases, (via the Wall Street Journal).
Panama Papers
The Spanish minister of industry, energy and tourism resigned Friday morning after documents in the Panama Papers linked him to offshore investments in the Bahamas, and news reports then connected him to a company in the tax haven of Jersey. The minister, José Manuel Soria, a member of the acting government of Prime Minister Mariano Rajoy, is among the most high-profile figures to suffer politically since the release of the leaked papers, which identify companies and people suspected of using offshore bank accounts and shell companies to conceal their wealth or avoid taxes. Last week, Prime Minister Sigmundur David Gunnlaugsson of Iceland said he was temporarily stepping aside after documents showed that he and his wife had set up a company in the British Virgin Islands in 2007. Prime Minister David Cameron of Britain has also been the subject of scrutiny after acknowledging that he and his wife had owned shares in an offshore trust, inherited from his father, that were sold before he became prime minister in 2010. The resignation of Mr. Soria, who has not been charged with wrongdoing, comes at a time of turmoil in Spanish politics, after inconclusive elections in December. Mr. Rajoy’s Popular Party won the most votes but lost its majority in Parliament, making it likely that new elections will be held in late June, (via the New York Times).
Regulations
Bangko Sentral ng Pilipinas (BSP), Central Bank of the Philippines has revealed on Saturday penalizing any financial institution involved in laundering $81 million stolen. The fund has been stolen from Bangladesh Bank reserve kept with Federal Reserve Bank of New York in May. Meanwhile, the Philippine central bank has also decided strengthening its regulatory oversight for non-banking financial institutions. Such institutions have allegedly been contributing to the growth of shadow banking in the Philippines. BSP’s decisions in regulating transactions of banks and non-banking financial institutions have been narrated by Nestor Espenilla Jr., its Deputy Governor, according to a report published in The Manilla Times. He has been addressing at the Economic Journalists Association of the Philippines-San Miguel Corp. Business Journalism Seminar. Lack of transparency in deposit secrecy has made the local financial system attractive to bad money, cites the deputy governor. Admitting lapses in the existing anti-money laundering law (AML), he predicts that the regulators won’t waste the opportunity to reform concerned laws centering the crisis. Flaws in AML have partly led to the entry of $81 million in stolen money from Bangladesh Bank into Rizal Commercial Banking Corp. (RCBC) and casinos, reports Inquirer.net, whistleblower for the heist. RCBC has remained at the center of a Senate investigation while grilling its president and branch manager through a hearing. The funds have been wired from RCBC to remittance company Philrem Service Corp. before sending to at least two casinos. Still now, almost all of the money remains traceless, reports Bloomberg, (via the Lawyer Herald).