The High Cost Banks Pay for Money Laundering

On: May 16, 2018

It’s a tough time to be a financial institution – big or small. In addition to the increasingly serious and sophisticated threats of cybercrime, and the tremendous financial and legal burden to mitigate those threats – banks and other financial services organizations are facing unprecedented regulatory pressure to adhere to Anti-Money Laundering (AML) laws and other compliance.  

In the past, banks had liberties to devote “best efforts” to their AML regime, today; however, banks don’t take AML compliance efforts seriously do so at a great risk. Federal regulators have recently fined major American and international banks hundreds of millions of dollars for being negligent in identifying and preventing money laundering.

In a previous blog, we discussed the history of money laundering, and the development of AML legislation. In this post, we’ll expose what recently happened to several banks that did not meet regulator expectations.

2018 Crimes and the Punishments

  • US Bank – $613 million fine

Authorities accused US Bank, the 5th-largest commercial bank in the United States, of having lax safeguards against illegal activity. Worse, the bank was actually charged with abetting illegal activity in one instance.

The US Department of Justice alleged that US Bank had seriously neglected AML regulations, and had willfully violated the program of the Bank Secrecy Act (BSA) and “reporting requirements by failing to establish and implement an adequate anti-money laundering program, failing to report suspicious activity, and failing to adequately report currency transactions.”

An agreement was reached with prosecutors to defer legal action, pending the bank’s willingness to demonstrate enhanced monitoring of customer transactions. US bank paid multiple fines and penalties that together added up to $613 million.

  • Rabobank – $368 million + $50 million fines

A California-based unit of Rabobank, the Dutch cooperative bank, agreed in early February this year to pay a total of $368 million in fines for facilitating money laundering and then conspiring to conceal it.

According to US Department of Justice investigators, bank employees allowed the deposit of hundreds of millions of dollars of untraceable cash, originating from Mexico and possibly linked to drug trafficking. Further, the bank enabled the transfer of these funds to other banks, without effectively monitoring and reporting as necessary under law.

In a separate action, the bank’s main US regulator, the US Office of the Comptroller of the Currency (OCC), imposed a $50 million fine on Rabobank. Investigators found significant and multiple failings of the bank’s BSA and AML compliance program.

  • Citibank – $70 million fine

The US Department of the Treasury’s Office of the Comptroller of the Currency (OCC) announced that it had levied a $70 million fine against Citibank for a recurring violation of BSA and AML regulations.

The fine was imposed due to Citibank’s failure to comply with a previous warning, which was issued by the same agency in 2012. Then, the OCC flagged the bank’s weak controls over correspondent banking, failings to file suspicious activity reports, deficiencies of its compliance program, and violations of specific BSA-mandated regulations. The agency revisited the warnings in late 2017, found that Citibank had insufficiently addressed them, and levied the fine in January 2018.

  • Taiwan’s Mega Bank – $29 million fine

In early January, the US Federal Reserve Board (“the Fed”) fined the Taiwan-based Mega International Commercial Bank $29 million for AML violations with demands that the bank significantly enhance its AML controls and oversight.

This latest penalty followed a previous 2016 fine of $180 million levied against the bank by the New York State Department of Financial Services for breaches of US money laundering and banking secrecy laws. Following the resolution of these charges, the Fed decided to conduct inspections of Mega’s branches in New York, Illinois and California, and discovered what it called “significant deficiencies” in the management of AML compliance and bank secrecy, issuing the new fine.

The Bottom Line

When it comes down to AML laws, complacency is no longer an option for financial institutions. The regulatory authorities are making it known that AML regimes are on their radar and those programs with slack efforts will face serious penalties.

Quinlan and Associates, a Hong Kong-based financial services consultancy, recently reported that since 2009, regulators in Europe and the US have imposed $342 billion in fines on banks for misconduct including AML violations. That number is expected to grow to $400 billion by 2020, the report concludes.

Further, the report estimates that for the top 50 global banks, “bad behavior” on the part of financial organizations and their employee misconduct has resulted in a collective profit loss of more than $850 billion.

Clearly, AML violations in this era of financial transparency and regulatory sensitivity is a costly crime. Banks need to take serious action when it comes to developing the proper risk framework, which includes choosing the most effective, accurate compliance tools and monitoring solutions.

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