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New York Announces Agreement to Resolve Alleged International Sanctions Violations
On June 20, New York announced a consent order with the New York branch of a foreign bank to resolve charges that the bank — over a five year period that ended more than five years ago — violated Bank Secrecy Act, Anti-Money Laundering and international sanctions rules by stripping from wire transfer messages information that could have been used to identify government and privately owned entities in Iran, Sudan, and Myanmar, and entities on the Specially Designated Nationals list issued by the OFAC and moving billions of dollars through New York on their behalf. The order requires the bank to pay a $250 million penalty, conduct a compliance review, and revise written compliance and management oversight plans. The compliance review must be conducted by an independent consultant that will be subject to the new DFS code of conduct for bank consultants described in a prior Byte. This is at least the second time in the last year that New York has taken a major action against a domestic branch of a foreign bank related to money laundering and international sanctions violations. In a previous instance, federal authorities followed with substantial civil and criminal penalties related to the same conduct.
Freddie Mac Announces Numerous Servicing Requirements
On June 14, Freddie Mac issued Bulletin 2013-10 to announce servicing policy changes with regard to Hurricane Sandy, foreclosure and alternatives to foreclosure, and other servicing issues. The Bulletin announces that servicers must submit any Hurricane Sandy exterior property inspection reimbursements by September 16, 2013, using a new template included in the Bulletin. Regarding foreclosures, the Bulletin, among other things, (i) sets the parameters under which servicers may utilize bulk trial foreclosures as an alternative foreclosure process in Florida, (ii) updates requirements for requests related to the preservation of deficiency rights, (iii) revises FICO score seasoning requirements for standard short sales and deeds-in-lieu of foreclosure (DILs), (iv) revises property inspection and closing requirements for DILs and adds a MLS requirement for short sales, and (v) removes, in most instances, the requirement that a servicer obtain a copy of a borrower’s tax transcript or most recent signed federal income tax return to be evaluated for HAMP. Among numerous other servicing policy updates, the Bulletin also (i) specifies that Freddie Mac does not reimburse for credit reports obtained in servicing activities, and (ii) requires servicers to notify Freddie Mac within 24 hours of blocking or rejecting a mortgage or mortgage transaction based on a valid match to the OFAC list of Specially Designated Nationals and Blocked Persons.
Federal Reserve Board, New York DFS Issue Joint Enforcement Action against U.S. Branch of Foreign Bank
On April 4, the Federal Reserve Board released a March 25, 2013 written agreement between the Federal Reserve Board, the New York Department of Financial Services, and a German bank and its U.S. branch regarding certain BSA/AML deficiencies at the U.S. branch. The agreement requires that the bank and the branch retain within 30 days an independent consultant to conduct a comprehensive review of the branch’s compliance with BSA/AML rules and state regulations, and subsequently prepare a report of the findings. The agreement further requires that within 60 days of the compliance report prepared by the consultant, the bank and the branch (i) submit a written enhanced BSA/AML compliance program for the branch, (ii) submit a written plan to improve and enhance management oversight of the branch’s compliance program, (iii) submit a written program to improve customer due diligence and a written program to ensure timely and accurate SAR reporting, and (iv) engage a different independent testing consultant to develop a risk-based BSA/AML audit program and conduct an independent compliance test. In addition, the agreement requires the bank and the branch to submit within 60 days of the agreement a written plan to enhance compliance with OFAC requirements.
Federal Reserve Board Announces BSA/AML Enforcement Action against Bank Holding Company
On March 26, the Federal Reserve Board released a recent enforcement action against a bank holding company related to deficiencies in certain of its bank subsidiaries’ Bank Secrecy Act and anti-money laundering (BSA/AML) compliance programs, as reflected in 2012 orders from the OCC and the FDIC requiring the subsidiary banks to remedy certain BSA/AML compliance deficiencies. Nearly a year later, the Federal Reserve Board order charges that the holding company lacked effective systems of governance and internal controls to adequately oversee the activities of the banks with respect to legal, compliance, and reputational risk related to the banks’ respective BSA/AML compliance programs. The order requires the holding company to (i) submit a plan to continue to improve the governance, structure, and operations of its BSA/AML and OFAC regulations compliance risk management program; and (ii) complete a review of the effectiveness of its firmwide BSA/AML compliance program and prepare a report. In addition, the company’s board must (i) submit a written plan to continue ongoing enhancements to its oversight of the company’s firmwide BSA/AML compliance risk management program; (ii) review the above-referenced BSA/AML compliance program report and submit a plan with specific actions the company will take to continue to strengthen the management and oversight of its firmwide compliance program; and (iii) submit quarterly progress reports. The Federal Reserve Board order does not include a civil money penalty.
OFAC Issues Advisory on Efforts to Evade Iran Sanctions
On January 10, the Office of Foreign Assets Control (OFAC) issued an advisory to highlight practices being used to evade sanctions on Iran, including the use of third-country exchange houses or trading companies that are acting as money transmitters to process funds transfers through the United States in support of unauthorized business with Iran. According to the advisory, the transactions at issue omit references to Iranian addresses and omit the names of Iranian persons or entities in the originator or beneficiary fields. Funds are then transmitted from an exchange house or trading company located in a third country to or through the United States on behalf of an individual or company located in Iran or on behalf of a U.S.-designated person without referencing the involvement of Iran or the designated persons. OFAC urged U.S. financial institutions to (i) monitor payments involving the third-country exchange house or trading company that may be processing commercial transactions related to Iran, and requesting additional information from correspondents on the nature of such transactions and the parties involved, (ii) conduct account and/or transaction reviews for individual exchange houses or trading companies that have repeatedly violated or attempted to violate U.S. sanctions against Iran, and (iii) contact their correspondents that maintain accounts for, or facilitate transactions on behalf of, a third-country exchange house or trading company that engages in any of the practices identified in the advisory.
U.S. Law Enforcement Authorities and Regulators Resolve Significant Money Laundering and Sanctions Investigations
On December 11, a major international bank holding company announced agreements with U.S. law enforcement authorities and federal bank regulators to end investigations into alleged inadequate compliance with anti-money laundering and sanctions laws by the holding company and its U.S. subsidiaries (collectively the banks). Under these agreements, the banks will make payments totaling $1.92 billion, will continue to cooperate fully with regulatory and law enforcement authorities, and will take further action to strengthen its compliance policies and procedures. As part of the resolution, the bank entered into a deferred prosecution agreement (DPA) with the DOJ pursuant to which the banks will forfeit $1.256 billion, $375 million of which satisfies a settlement with the Office of Foreign Assets Control (OFAC). The four-count criminal information filed in conjunction with the DPA charges that the banks violated the Bank Secrecy Act by failing to maintain an effective anti-money laundering program and to conduct appropriate due diligence on its foreign correspondent account holders. The DOJ also alleged that the banks violated the International Emergency Economic Powers Act and the Trading with the Enemy Act by illegally conducting transactions on behalf of customers in certain countries that were subject to sanctions enforced by OFAC. The banks agreed to pay a single $500 million civil penalty to satisfy separate assessments by the OCC and FinCEN related to the same alleged conduct, as well as a $165 million penalty to the Federal Reserve Board. The banks already have undertaken numerous voluntary remedial actions, including to (i) substantially increase AML compliance spending and staffing, (ii) revamp their Know Your Customer program, (iii) exit 109 correspondent relationships for risk reasons, and (iv) claw back bonuses for a number of senior officers. The banks also have undertaken a comprehensive overhaul of their structure, controls, and procedures, including to (i) simplify the control structure, (ii) create new compliance positions and elevate their roles, (iii) adopt a set of guidelines limiting business in those countries that pose a high financial crime risk, and (iv) implement a single global standard shaped by the highest or most effective anti-money laundering standards available in any location where the banks operates. Pursuant to the DPA, an independent monitor will evaluate the banks’ continued implementation of these and other enhanced compliance measures.
In a separate matter, on December 10, Manhattan District Attorney Cyrus R. Vance, Jr. and the DOJ announced the resolution of a joint investigation into a British bank’s alleged movement of more than $200 million through the U.S. financial system primarily on behalf of Iranian and Sudanese clients by removing information that would have revealed the payments as originating with a sanctioned country or entity, and thereby avoiding OFAC scrutiny. To resolve the matter, the bank was required to pay $227 million in penalties and forfeiture, and to enter into a DPA and corresponding Statement of Facts. Through the DPA, the bank admitted that it violated New York State law by falsifying the records of New York financial institutions and by submitting false statements to its state and federal regulators about its business conduct, and agreed to certain enhanced compliance practices and procedures. The payment also satisfies a settlement with OFAC over the same practices, while the Federal Reserve Board required an additional $100 million penalty to resolve its parallel investigation. The settlement follows an earlier settlement between this British bank and the New York Superintendent of Financial Services regarding the same alleged conduct.
Senate Subcommittee Explores Money Laundering Vulnerabilities at Global Institutions
On July 17, the Senate Homeland Security and Government Affairs Committee, Permanent Subcommittee on Investigations, held a hearing to review money laundering and terrorist financing vulnerabilities that can emerge from certain international banking activities. In connection with the hearing, the Subcommittee released a report about its investigation into past money laundering and terrorist financing compliance failures at one multinational financial institution. The report notes that despite congressional efforts to strengthen anti-money laundering laws (AML), and financial institutions’ diligence in bolstering AML controls, money laundering risks associated with correspondent banking persist. Using the investigation and its findings as a case study, the report reiterates that effective AML compliance programs at U.S. banks should include written standards, sufficient and knowledgeable staff, effective training, and a positive compliance culture. With regard to specific issues that U.S. banks might face with regard to correspondent banking, the report recommends that U.S. banks implement programs that effectively (i) screen high-risk affiliates, (ii) prevent circumvention of OFAC prohibitions, (iii) avoid providing U.S. correspondent services to banks with links to terrorism, (iv) ensure traveler check controls restrict acceptance of suspicious bulk travelers checks, and (v) eliminate bearer share accounts. The report also identifies regulatory gaps and recommends that the OCC (i) treat AML deficiencies as a safety and soundness matter, (ii) develop a policy to coordinate internal divisions conducting AML examinations, (iii) consider the use of formal or informal enforcement actions to address mounting AML failures, and (iv) strengthen AML examinations by citing violations and focusing on specific business units and a bank’s AML program as a whole.