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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.
New York Signals Crackdown on Bank Consultants with Substantial Fine, Temporary Ban
On June 18, New York announced an agreement with a bank consulting firm in connection with the firm’s work for a state-regulated bank alleged to have engaged in deceptive and fraudulent misconduct on behalf of client Iranian financial institutions in violation of anti-money laundering and sanctions rules. An investigation conducted by the New York Department of Financial Services (DFS) found that the consultant (i) failed to demonstrate autonomy and removed a recommendation aimed at rooting out money laundering from a written final report submitted to the DFS, and (ii) violated New York Banking Law § 36.10 by disclosing confidential information of other consulting firm clients to the bank. To resolve that investigation, the consulting firm agreed to (i) a voluntary one-year suspension from consulting work at any DFS-regulated institution, (ii) pay a $10 million penalty, and (iii) adopt a new code of conduct. The DFS intends for the code of conduct to serve as “a new model that will govern independent consulting firms that seek to be retained or approved by DFS.” The code of conduct states, among other things: (i) the financial institution and consultant must disclose all prior work by the consultant for the institution in the previous three years, (ii) the engagement letter must require that the ultimate conclusions and judgments will be that of the consultant based upon the exercise of its own judgment, (iii) the consultant and institution must submit a work plan for the engagement and timeline for completion of work, (iv) the DFS and the consultant must have ongoing communication, including outside the presence of the institution, and (v) the consultant must implement numerous record keeping, training, reporting, and other policies and procedures.
Federal Reserve Board Requires AML Enhancements Prior to Bank Merger
On June 18, the Federal Reserve Board announced the execution of a written agreement with a bank and its bank and non-bank subsidiaries to resolve alleged shortcomings in the institutions’ BSA/AML compliance programs. The bank previously announced that its planned merger with another institution was delayed due to the Federal Reserve Board’s concerns. The bank retained a consultant to assist with compliance enhancements, which under the written agreement include, among other things: (i) a revised firm-wide written BSA/AML compliance program, (ii) a revised written customer due diligence program, (iii) a written suspicious activity monitoring and reporting program, and (iv) a six month suspicious activity look-back review.
OCC Issues Semiannual Risk Report, Highlights Cyber Security and Anti-Money Laundering Risk
On June 18, the OCC released its Semiannual Risk Perspective, which assesses risks facing national banks and federal savings associations with regard to: (i) the operating environment, (ii) condition and performance of the banking system, (iii) funding, liquidity, and interest rate risk, and (iv) regulatory actions. Among the many issues reviewed in the report, the OCC noted that cyber threats continue to grow in sophistication and require heightened awareness and appropriate resources to identify and mitigate the associated risks. It also stated that BSA/AML threats are increasing as a result of changing methods of money laundering and an increase in the volume and sophistication of electronic banking fraud, while compliance programs are failing to evolve or incorporate appropriate controls into new products and services.
Federal Authorities Announce Major Money Laundering Action Against Virtual Currency Service
On May 28, the DOJ announced the unsealing of an indictment against a global virtual currency service and seven of its principals and employees, alleging that the firm and its employees knowingly facilitated money laundering and operated an unlicensed money transmitting business. According to the DOJ, since 2001, the digital currency service allegedly facilitated an anonymous payment and value storage system that allowed more than one million users, including 200,000 Americans, to launder and store more than $6 billion in criminal proceeds and to facilitate approximately 55 million illicit transactions. The funds processed and stored by the system allegedly related to underlying criminal acts including identity theft, computer hacking, and child pornography. Federal law enforcement authorities also seized several Internet domain names involved in the scheme and effectively blocked access to any funds in the system. Concurrently, the Treasury Department for the first time exercised its powers under Section 311 of the USA Patriot Act against a virtual currency provider, declaring the provider to be a “prime money laundering concern,” which will prohibit covered U.S. financial institutions from opening or maintaining correspondent or payable-through accounts for foreign banks that are being used to process transactions through the virtual currency service.
Federal Reserve Board, Illinois Regulator Issue Joint Enforcement Action Against U.S. Subsidiaries of Foreign Bank, OCC Issues Parallel Action
On May 17, the Federal Reserve Board released an April 29, 2013 written agreement between the Federal Reserve Board, an Illinois state regulator, a foreign bank, and its U.S. bank holding company subsidiary (the Holding Company) regarding certain Bank Secrecy Act/Anti-Money Laundering (BSA/AML) deficiencies at the foreign bank’s Chicago branch (the Branch) and an OCC regulated subsidiary of the Holding Company. The OCC took parallel action on the same date against the Holding Company’s Chicago bank subsidiary. The Federal Reserve Board agreement requires that the Holding Company conduct a comprehensive review of its BSA/AML compliance program within 60 days, and within 90 days submit a report of its findings and recommendations, a written enhanced program, and a written plan to strengthen board oversight. Also within 90 days, the Branch must submit a written plan to improve its BSA/AML compliance, and the foreign bank, the Holding Company, and the Branch must submit an enhanced customer due diligence program. The OCC agreement requires that the Chicago bank’s board establish a compliance committee and within 90 days submit a compliance action plan. Within 30 days, the bank’s board must review its current engagement with an independent consultant, and within 90 days (i) develop a staffing plan for its internal BSA compliance department, (ii) conduct an MIS assessment, (iii) develop customer due diligence controls, and (iv) develop written suspicious activity policies and procedures. Both agreements require quarterly reporting, and neither includes a monetary penalty.
FINRA Fines Three Broker-Dealers Over AML Compliance Failures, Suspends Executives
On May 8, FINRA announced that it fined three firms a combined $900,000 and suspended four executives for allegedly failing to establish and implement adequate anti-money laundering programs. Specifically, FINRA claims that investigations into the three firms revealed that (i) one firm failed to identify suspicious account activity or did not adequately investigate numerous AML "red flags" and that certain of the firm’s customers' accounts engaged in a pattern of activity consisting of moving millions of dollars through the accounts while conducting minimal-to-no securities transactions, (ii) a second firm that specialized in online trading and catered to the Chinese community failed to implement an AML program adequate to detect and report suspicious transactions, including potential manipulative trading, and (iii) a third firm failed to create and enforce a supervisory system and written procedures to monitor for unlawful transactions in unregistered penny stocks and failed to establish a program reasonably designed to monitor for and report suspicious activity. The suspended executives included two chief compliance officers who failed to fulfill obligations to monitor in accordance with AML requirements, and two owners. The suspensions range from three to nine months. The firms and the executives did not admit to the allegations, but agreed to pay the fines to resolve the investigation.
OCC Seeks Reconsideration of Order Requiring Disclosure of Non-Public Documents related to Bank's AML/CTF Compliance
On April 24, the U.S. District Court for the Southern District of New York stayed an order that would have required a bank to disclose non-public supervisory information subject to the bank examination privilege. Wultz v. Bank of China, No. 11-1266 (S.D.N.Y. Apr. 24, 2013). The case was brought by the family of victims of a suicide bombing attack who claim that failures in the bank’s anti-money laundering and counter-terrorism financing compliance program aided and abetted international terrorism. On April 9, 2013, the court compelled the bank and the OCC to produce various investigative files and regulatory communications over their objection that the bank examination privilege protected such production. The court relied in part on a recent and unrelated Senate investigative report’s description of the OCC oversight process. The court reasoned that the OCC’s ideal supervision process, on which it based its claim of privilege, diverges from the actual process described in the Senate report, and that the actual process undermines assumptions on which other courts have relied about the likely effects of overriding the bank examination privilege. The court added that “the OCC’s supervisory mission might in some cases be helped as much as hindered by the intervention of private litigants.” In support of its motion to reconsider, the OCC argued that the court failed to properly weigh long-standing principles and that its decision “will be construed as an erosion of the bank examination privilege that ultimately will undermine the bank supervisory process.” The OCC also asserted that it never waived the privilege and appropriately and in good faith relied upon the procedures set forth under its Touhy regulation, which is designed to provide the OCC with the opportunity to review non-public OCC information in the possession of regulated entities prior to production. The OCC asked the court to vacate its prior order and order the plaintiffs to submit a Touhy request for all materials withheld on the groups of bank examination privilege. The court agreed to stay its prior order and established a briefing schedule on the motion for reconsideration, which will be completed by May 10, 2013.
Supreme Court Narrows Application of Alien Tort Statute
The Supreme Court recently sharply narrowed the potential application of the Alien Tort Statute (ATS), which allows foreign plaintiffs to bring civil actions in U.S. district courts for torts committed in violation of the law of nations or a treaty of the United States. Kiobel v. Royal Dutch Petroleum Co., No. 10-1491, 2013 WL 1628935 (Apr. 17, 2013). Foreign plaintiffs traditionally have sought to use the ATS to hold firms liable for alleged human rights abuse committed by foreign governments. Here, a district court dismissed several claims brought by Nigerian nationals who alleged that several non-U.S. oil companies had aided and abetted the Nigerian government in committing human rights violations. On interlocutory appeal, the Second Circuit dismissed the entire complaint, reasoning that the law of nations does not recognize corporate liability. The Supreme Court unanimously affirmed on different grounds, focusing on when courts can recognize a cause of action under the ATS for violation of the law of nations occurring in a non-U.S. sovereign territory. The Court held that the presumption against extraterritorial jurisdiction applied to claims under the ATS, and nothing in the statute rebutted that presumption; even where claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application, which requires more than mere corporate presence. The Court’s ruling further limits the risk that foreign plaintiffs might expand ATS claims into new industries, including by bringing claims against financial institutions for global financial crime such as fraud and money laundering, or for financing projects during which alleged human rights abuses are committed.
FinCEN Issues Guidance on Syria
On April 15, FinCEN issued Advisory FIN-2013-A002, which advises financial institutions to review regulations that require U.S. financial institutions to perform money laundering or other suspicious activity due diligence or enhanced due diligence for correspondent accounts and private banking accounts established, maintained, administered, or managed in the U.S. for foreign financial institutions or non-U.S. persons. The advisory states that as part of those requirements, covered institutions should be vigilant against transactions involving persons specifically designated for sanctions relating to Syria, as well as proxies acting on behalf of such persons. FinCEN advises institutions to (i) take reasonable risk-based steps with respect to the potential movement of assets that may be related to the current unrest in Syria, (ii) consider whether they have any financial contact with persons or entities (foreign or otherwise) that may be acting directly or indirectly for or on behalf of any senior foreign political figures of the Government of Syria, and (iii) file Suspicious Activity Reports when appropriate.