FinCEN recentlty announced entry of a $2 million assessment against Lone Star National Bank, a private bank operating out of Texas, for the bank’s allegedly willful violations of the Bank Secrecy Act (“BSA”) and inadequate Anti-Money Laundering (“AML”) monitoring programs.  The primary violations relate to Lone Star’s alleged failure to comply with due diligence requirements imposed by Section 312 of the USA PATRIOT Act in establishing and conducting its correspondent banking relationship with a Mexican bank.  As a result of Lone Star’s insufficient due diligence and AML program, the Mexican bank was “allowed to move hundreds of millions of U.S. dollars in suspicious cash shipments through the U.S. financial system in less than two years.”  The FinCEN’s announcement warns that this “action underscores the dangers that institutions face when taking on international correspondence activities without properly equipping themselves” to manage the enhanced obligations that arise with such relationships.

This new FinCEN assessment underscores the continued regulatory interest in the AML risks presented by correspondent banking relationships. We therefore first will provide a brief overview of correspondent banking relationships and the enhanced regulatory attention often paid to them. Armed with this context, we then will analyze the findings and lessons learned from the Lone Star assessment, including the value touted by FinCEN of Lone Star’s efforts to cooperate with its own investigation. Further, this new assessment suggests that the U.S. government does not always present a consistent voice regarding correspondent banking relationships: although the U.S. Treasury has tried to encourage financial institutions in general to not “de-risk” and thereby terminate correspondent banking relationships, we see that enforcement agencies continue to penalize institutions in individual cases for not mitigating sufficiently the risks of correspondent banking.

Correspondent Banking Relationships

International financial transactions typically flow through two or more banks in multiple jurisdictions. Because the U.S. dollar is the primary currency for global trade, there is a tremendous movement of funds between non-U.S. institutions flowing through the U.S. even if neither party is based in the U.S. Funds going from Country A to Country B, if denominated in U.S. dollars, typically will flow through a U.S. bank as an intermediary bank. This international movement of funds is conducted through so-called “correspondent banking” relationships.

U.S.-regulated banks are expected to conduct due diligence on correspondent bank accounts at the opening of the account and periodically over the life of the relationship. If the correspondent bank account is classified as high risk, the U.S.-regulated bank is expected to conduct enhanced due diligence, both initially and periodically during the relationship.  A correspondent bank may be classified as high risk, for example, because it operates in a high risk jurisdiction. U.S. banks are expected to undertake greater monitoring of such accounts for suspicious activity.

Global and U.S. regulators have focused on correspondent banking relationships since 2001, when the U.S. correspondent bank relationships were identified by regulators as a high risk for facilitating money laundering. Since that time, and particularly with the passage of the USA PATRIOT Act, correspondent banking has been a focus of regulation, supervision, and enforcement activity. Indeed, Section 312 of the USA PATRIOT ACT, enacted at 31 U.S.C. § 5318(i), is titled “Special Due Diligence for Correspondent Accounts and Private Banking Accounts.” FinCEN published final rules regarding Section 312 for general due diligence and enhanced due diligence for correspondent accounts in 2006 and 2007, respectively. These FinCEN regulations have been incorporated into the Federal Financial Institutions Examination Council (“FFIEC”) BSA/AML examination manual, which has a particular section regarding foreign correspondent accounts.

The focus on addressing the risks from correspondent bank sometimes has been so acute that the international banking system is now dealing with the consequences of “de-risking.” Many banks in U.S. and European jurisdictions have terminated most correspondent bank relationships, leaving businesses in some countries with little if any access to the global financial system.  As we have blogged, the U.S. Department of the Treasury and four U.S. federal banking regulators have issued a “Joint Fact Sheet on Foreign Correspondent Banking” to clarify AML enforcement priorities, and highlight the importance of maintaining correspondent banking relationships with foreign financial institutions and the value of the free flow of monies within and across global economies. The Fact Sheet, in conjunction with a blog post by Treasury, attempted to allay concerns raised by industry and groups such as the International Monetary Fund about the trend of “de-risking” by U.S. banks as a result of fear of aggressive AML/BSA enforcement by U.S. regulators and law enforcement.  The Fact Sheet suggested that U.S. banks have overreacted to concerns over AML/BSA enforcement by unnecessarily terminating correspondent banking relationships with foreign banks. It noted that these relationships are crucial to the global economy and reflexive “de-risking” may destabilize or disrupt access to U.S. financing, hinder international trade, cross-border business, and charitable activities, and make claim remittances harder to effectuate.

The seemingly encouraging message of the Fact Sheet issued by Treasury perhaps can be compared to the particular outcome in the Lone Star case, discussed below. One consequence of de-risking is that potentially riskier customers, shut out by large financial institutions, often turn to smaller banks, who may be hungry for increased business in an increasingly competitive industry. In its press release, FinCEN declared that “[s]maller banks, just like the bigger ones, need to fully understand and follow the 312 due diligence requirements if they open up accounts for foreign banks.  The risks can indeed be managed, but not if they are ignored.”

The Lone Star Assessment  

Through the consent to assessment of civil money penalty published last week, Lone Star admitted to numerous alleged failures in conduct. Lone Star established a correspondent relationship with a Mexican bank, which included processing bulk deposits of U.S. currency without properly assessing the money laundering risk. Although the bulk exchanging and depositing of U.S. currency from foreign financial institutions is a sanctioned process – the U.S. Federal Reserve receives the imported U.S. currency from the foreign bank for further deposit into the U.S. correspondent bank account(s) – the assessment states that Lone Star’s receipt of bulk cash shipments “began just three months before the Mexican government imposed regulations restricting Mexican bank transactions in U.S. currency,” and the shipments “dramatically increased after the regulations became effective.”

According to FinCEN, when opening the account, Lone Star failed to identify well known and public information regarding the owner of the Mexican bank, who previously had paid civil penalties to the SEC to resolve allegations of securities fraud. Further, Lone Star failed to verify the correspondent bank’s description of the source of the funds, purpose, and expected activity. Lone Star was informed by the foreign bank that the U.S. bulk currency was derived from extensive foreign exchange operations from the U.S./Mexico border.  However, the flow of currency through the account was incompatible with this description, and Lone Star did not investigate the discrepancies.  Further, Lone Star allegedly failed to investigate increasing cash deposits and unusual wire activities.  Over an 18-month period, the foreign bank deposited $260 million through 63 bulk cash deposits of U.S. currency, followed by 73 outgoing wire transfers. This activity was $100 million over the anticipated amount of the transfers.  Lone Star eventually terminated its banking relationship after the OCC raised serious concerns over the relationship.

FinCEN also has alleged that Lone Star further failed to institute a sufficient AML monitoring program. Specifically, Lone Star failed to implement an effective process for filing Suspicious Activity Reports (“SARs”), as required by the BSA, in regards to certain high-risk accounts and customers. Lone Star allegedly failed to collect and analyze information necessary to assess many customers’ true risk profile during account opening and therefore did not correctly identify or thereafter monitor the high-risk accounts that posed an elevated risk of money laundering. After the OCC identified Lone Star’s inadequate SAR reporting, Lone Star – at OCC’s direction – completed a comprehensive suspicious activity review of 1,827 customer accounts for a two-year period. As a result of this look-back, Lone Star filed an additional 161 SARs, representing $131 million in previously unreported suspicious activities.

Nonetheless, FinCEN stressed Lone Star’s significant cooperation and remedial actions as relevant factors considered in the assessment. FinCEN noted that Lone Star addressed the BSA/AML deficiencies by expanding its overall BSA compliance staff and establishing new training initiatives; expending additional resources to enhance independent testing through an outside consultant; improving customer due diligence programs; updating its AML program; and establishing senior management and board-level committees to ensure an appropriate BSA compliance program. Lone Star was penalized $2 million, but FinCEN found that this was partially satisfied by a $1 million penalty already imposed by OCC on March 31, 2015.

Finally, the Lone Star assessment is notable for its considerable restrictions on public statements. Lone Star agreed to a full page of restrictions against public statements, including that it would not make “any public statement contradicting either its acceptance of responsibility” of the consent “or any fact” in the determinations section of the consent.  FinCEN was provided sole discretion to determine whether a statement is contradictory or violates the consent.  Lone Star has a 48 hour window in which to repudiate any statement that contradicts the consent.  Similar public statement provisions were included in two prior assessments of civil money penalty, including one with Western Union, about which we blogged here, and one with Merchants Bank.  These enhanced restrictions on a settling violator’s future statements regarding the public factual determinations appear to be the new standard for FinCEN consent assessments.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.