Anti-Money Laundering (AML)

As we have blogged (here and here), the United States – despite its self-perception as a global financial cop and “good guy” – is often regarded by the world as a haven for money laundering and tax evasion. The U.S. just took another black eye in the arena of global perception: the European Commission (“EC”) has placed the U.S. Virgin Islands, Puerto Rico, Guam and American Samoa on a list of 23 high-risk jurisdictions which it says are “posing significant threats” to the European Union’s financial system as a result of deficiencies in their Anti-Money Laundering (“AML”) and Countering the Financing of Terror (“CFT”) systems. Specifically, the EC perceives these jurisdictions as being attractive to money laundering and tax crimes. The listed United States’ territories and Commonwealths are not alone; they dubiously share space on the EC’s blacklist with Saudia Arabia and Panama.

Not surprisingly, the U.S. reaction was swift and angry: the U.S. Department of Treasury released a statement declaring that the list was flawed; the list was created without any meaningful input from the United States; and that the list contradicted the more careful analysis conducted by the Financial Action Task Force. Further, the Treasury Department stated that U.S. financial institutions should ignore this blacklisting, and did not need to apply any greater scrutiny to implicated transactions. Continue Reading Europe Increasingly Views United States as Faltering in Fight Against Money Laundering

As we have blogged, courts have held that financial institutions generally do not owe a duty of care to a noncustomer and that no special duty of care arises from the duties and obligations set forth in the Bank Secrecy Act (“BSA”), absent a special relationship or contractual relationship. Moreover, there is no private right of action stemming from the BSA. Nor does the BSA define a financial institution’s standard of care for the purposes of a negligence claim.  A majority panel of the Eighth Circuit (“the Court”) very recently confirmed these principles in a detailed opinion which affirmed summary judgment in favor of a bank which had provided services to the alleged perpetrators of a $193 million Ponzi scheme, thereby rejecting claims brought by a Receiver on behalf of defrauded investors that the bank had aided and abetted fraud, breach of fiduciary duty, and other claims.

After dissecting the record in detail, the Court determined in Zayed v. Associated Bank, N.A. — over a vigorous dissent — that the Receiver failed to present direct or circumstantial evidence that the bank actually knew about the Ponzi scheme being perpetrated by its former customers, much less that it substantially assisted the scheme. The Court emphasized the fact that evidence of possible “sloppy banking” and the existence of potential red flags fell short of the high bar required to sustain a claim for aiding and abetting a fraud against the third party non-customers.

Although the Zayed opinion is one of many cases rejecting AML-inspired tort claims by defrauded investors against a financial institution which had done business with a fraudster, it is notable for its methodical treatment of the facts — many of which appear in one form or another in other cases — regarding the various red flags which the Receiver claimed that the bank had missed, or the alleged misconduct which the Receiver claimed that bank personnel had perpetrated.  The list of alleged compliance failures discussed and found insufficient to establish potential liability in Zayed demonstrates that, however rigorous AML/BSA obligations and programs may be for financial institutions, their alleged violations often fail to pave a path to recovery for civil plaintiffs. Continue Reading Alleged BSA Violations Do Not Support Civil Negligence/Fraud Claims – Again

On December 7 and 10, 2018, the Financial Action Task Force (“FATF”) released two reports evaluating the United Kingdom’s (“UK”) and Israel’s anti-money laundering (“AML”) and counter-terror financing (“CTF”) programs and welcomed Israel as the 38th member of the task force. The FATF is an inter-governmental policymaking body dedicated to creating AML standards and promoting effective measures to combat money laundering (“ML”) and terrorist financing (“TF”). When releasing both reports, the FATF described the UK and Israel as key leaders and innovators in the fight against ML/TF and provided several recommendations on how both programs can be strengthened.

Because both reports total over 250 pages, this blog post focuses on only the key findings in each report.  The FATF Evaluation of the United Kingdom (the “UK Report”) concluded that, although the UK has effective and robust AML policies addressing both current and future threats, it needs to improve its AML oversight by increasing the resources dedicated to its financial intelligence unit. Meanwhile, the Joint FATF/MONEYVAL Evaluation of Israel (the “Israel Report”) praised the country’s effective use of financial intelligence but found that Israel needs to strengthen its preventative measures to address future ML/TF risks.

Continue Reading FATF Evaluates the UK’s and Israel’s AML/CTF Programs and Welcomes Israel as its 38th Member

Happy New Year! But while 2018 is still (just barely) with us, let’s take a look back.

2018 has been a very busy year in the world of money laundering and AML/BSA. We are highlighting 12 of our most-read blog posts, which address many of the key issues we’ve examined this year.

This was the second year of Money Laundering Watch.  We want to thank our many readers around the world who continue to make this blog such a success. The feedback we receive from financial industry professionals, compliance officers, in-house and external lawyers, AML/BSA consultants, government personnel, journalists, and others interested in this field is invaluable, and we hope you will continue to share your perspectives with us.  We pride ourselves on providing in-depth discussions of the important developments in this ever-evolving area.

We also would like to thank the other platforms that host our blog: Digital Currency & Ledger Defense Coalition, Money Laundering Bulletin, and Federal Tax Crimes.

We look forward to continuing to keep you informed in 2019.  If you would like to subscribe to Money Laundering Watch, please click here. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

We are pleased to offer the latest episode in Ballard Spahr’s Consumer Financial Monitor Podcast series — a weekly podcast focusing on the consumer finance issues that matter most, from new product development and emerging technologies to regulatory compliance and enforcement and the ramifications of private litigation.  Our podcast discusses the conduct for which financial institutions have been faulted in recent Anti-Money Laundering (“AML”) enforcement actions, flags other AML-related missteps that can trigger regulatory scrutiny, and offers practical tips for avoiding regulatory criticism and reducing enforcement risk. This podcast follows up on two related blog posts, in which we provided some practical tips for financial institutions to increase the chances that their AML programs will withstand regulators’ scrutiny, and then discussed the consequences of potentially failing to heed these practical tips in a specific case: the New York Department of Financial Services’ (DFS) recent enforcement action against Mashreqbank.

We hope that you enjoy the podcast, moderated by our partner Alan Kaplinksy, and find it useful.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.  To visit Ballard Spahr’s award-winning Consumer Financial Monitor blog, please click here.

Second Post in a Two-Part Series

NYDFS Action Highlights the Need for Good Monitoring – and Good Consultants

In part one of this two-part post, we provided some practical tips for financial institutions to increase the chances that their Anti-Money Laundering (“AML”) programs will withstand regulators’ scrutiny, including: (1) promoting a culture of AML/Bank Secrecy Act (“BSA”) compliance; (2) focusing on transaction monitoring; (3) improving information sharing; (4) identifying and handling high-risk accounts appropriately; and (5) knowing your risks and continually improving your AML program to control those risks.

In this post we’ll discuss the consequences of potentially failing to heed these practical tips in a specific case: the New York Department of Financial Services’ (DFS) recent enforcement action against Mashreqbank. Further, we look forward to discussing all of these issues in an upcoming podcast in Ballard Spahr’s Consumer Financial Monitor Podcast series. So please continue to stay tuned.

Mashreqbank is the oldest and largest private bank in the United Arab Emirates. Its New York branch is Mashreqbank’s only location in the United States. It offers correspondent banking and trade finance services and provides U.S. dollar clearing services to clients located in Southeast Asia, the Middle East and Northern Africa. In 2016, the branch cleared more than 1.2 million USD transactions with an aggregate value of over $367 billion. In 2017, the branch cleared more than one million USD transactions with an aggregate value of over $350 billion.

The DFS enforcement action asserted that Mashreqbank’s AML/BSA program was deficient in a number of respects and that the New York branch had failed to remediate identified compliance issues. The enforcement action began with a DFS safety and soundness examine in 2016. In 2017, DFS and the Federal Reserve Bank of New York (FRBNY) conducted a joint safety and soundness examination. DFS provided a report of its findings to which Mashreqbank submitted a response.

In a consent order signed on October 10, 2018, Mashreqbank admitted violations of New York laws and accepted a significant monetary penalty and increased oversight for deficiencies in its AML/BSA and Office of Foreign Assets Control (OFAC) programs. Regulators pursued the enforcement action despite the New York branch’s strong cooperation and demonstrated commitment to building an effective and sustainable compliance program. Among other things, Mashreqbank agreed to pay a $40 million fine; to hire a third-party compliance consultant to oversee and address deficiencies in the branch’s compliance function including compliance with AML/BSA requirements; and to develop written revised AML/BSA and OFAC compliance programs acceptable to DFS.

The DFS and FRBNY examination findings demonstrate Mashreqbank’s failure to follow the practical tips identified in part one of this post. Specifically, the regulators found that Mashreqbank failed to: (1) have appropriate transition monitoring; (2) identify and handle high-risk accounts appropriately; and (3) know its risk and improve its AML program to control those risks.

Further, and as our discussion will reflect, the Mashreqbank enforcement action is also notable in two other respects. First, the alleged AML failures pertain entirely to process and the general adequacy of the bank’s AML program – whereas the vast majority of other AML/BSA enforcement actions likewise discuss system failures, they usually also point to specific substantive violations, such as the failure to file Suspicious Activity Reports (“SARs”) regarding a particular customer or set of transactions. Second, although the use of external consultants usually represents a mitigating factor or even a potential reliance defense to financial institution defendants, the DFS turned what is typically a defense shield into a government sword and instead criticized Mashreqbank for using outside consultants who, according to DFS, were just not very rigorous. This alleged use of consultants performing superficial analysis became part of the allegations of affirmative violations against the bank, thereby underscoring how financial institutions must ensure that their AML/BSA auditors or other consultants are experienced, competent, and performing meaningful testing, particularly when addressing issues previously identified by regulators. Continue Reading Practical Tips in Action: The Mashreqbank AML Enforcement Action

First Post in a Two-Part Series

How do financial institutions get in trouble with their regulators? Recent AML enforcement actions suggest that the following two failures are at the heart of most of these actions: (1) inadequately identifying, monitoring and/or reporting suspicious activity; and (2) failing to implement adequate internal controls. And these same issues crop up year after year.

In this post, we’ll discuss these failures and their root causes and provide practical tips for ensuring that your AML program will withstand the scrutiny of regulators. In our next post, we will discuss how these practical tips apply in a specific AML enforcement action: the recent consent order between the New York Department of Financial Services and Mashreqbank.  Further, we look forward to discussing all of these issues in an upcoming podcast in Ballard Spahr’s Consumer Financial Monitor Podcast series.  So please stay tuned.

The U.S. financial institutions that recently found themselves in the government’s crosshairs allegedly engaged in the following behavior:

  • Failing to investigate alerts on high-risk accounts where those accounts had been investigated previously, even when the new suspicious activity to which the bank had been alerted differed from the activity that it previously had investigated.
  • Having a policy of not investigating or filing SARs on cash withdrawals from branches near the Mexican border if the customer said they were withdrawing cash in the U.S., rather than carrying cash into the U.S. from Mexico, in order to avoid having to file a Report of International Transportation of Currency or Monetary Instruments (CMIR).
  • Capping the number of alerts from its transaction monitoring systems based on the number of staff available to review the alerts rather than on the risks posed by the transactions (and lying to regulators about it).
  • Failing to report the suspicious activities of a longtime customer despite having been warned that the customer was laundering the proceeds of an illegal and fraudulent scheme through accounts at the bank.
  • Failing to conduct necessary due diligence on foreign correspondent accounts.
  • A brokerage company failing to file SARs on transactions that showed signs of market manipulation.
  • A MSB’s failing to implement proper controls and discipline crooked agents because those agents were so profitable for the MSB, thereby enabling illegal schemes such as money laundering.

Although the behavior of these financial institutions may differ, the root causes of their failures do not. They include the following:

  • An inadequate, ineffective or non-existent risk assessment.
  • Elevating the business line over the compliance function.
  • Offering products or using new technologies without adequate controls in place.
  • Compliance programs that are not commensurate with the risks, often due to under investment in AML technology or other resources and/or lack of awareness of AML risks or controls.
  • Corporate silos, both human and technological, that prevent or hinder information sharing.
  • Insufficient screening of parties and relationships and lack of effective processes and controls around EDD.

So how can you ensure that your AML program is adequate? Here are some practical tips. Continue Reading Practical Tips for Ensuring Your AML Program Withstands the Scrutiny of Regulators

Denmark Suffers Greatest Increase in Annual Risk Rating

The Basel Institute on Governance (“Basel Institute”) recently announced that the associated Basel Centre for Asset Recovery has released its seventh annual Basel Anti-Money Laundering Index (“AML Index”) for 2018, described by the Basel Institute as “an independent, research-based ranking that assesses countries’ risk exposure to money laundering and terrorist financing.”  The risk scores for each country in the AML Index “are based on 14 publicly available indicators of anti-money laundering and countering the financing of terrorism (AML/CFT) frameworks, corruption risk, financial transparency and standards, and public transparency and accountability.” The Basel Institute, which is associated with the University of Basel, describes itself as “an independent not-for-profit competence centre working around the world with the public and private sectors to counter corruption and other financial crimes and to improve the quality of governance.”

The public AML Index, which pertains to 129 countries, is here; an “expert edition” containing a full list of scores and sub-indicators for all 203 countries — available for cost to private persons or industry, or for free to academic, public, supervisory and non-profit organizations — is here.  A summary of the public AML Index is here.

As we will discuss, the AML Index bemoans a lack of progress in the global fight against corruption, and in particular cites lack of enforcement of existing laws and declining press freedom across the globe. The AML Index also underscores how countries with seeming low risk in fact have lurking problems. Continue Reading 2018 Basel AML Index Measures Risk and Cites Lack of Effective Enforcement and Declining Global Press Freedom

Estonian “Non-Resident Portfolio” Produces Colossal Money Laundering Scandal

This week Danske Bank released a report detailing the results of its much anticipated internal investigation into allegations of money laundering perpetrated in its Estonian branch. The results of the investigation dwarfed even the boldest predictions. The report found between 2007 and 2015 the Estonian branch processed a staggering 200 billion Euros, or $234 billion, in suspicious transactions by thousands of non-resident costumers. The report finds the AML procedures at the Estonian branch were “manifestly insufficient and inadequate,” resulting in numerous breaches of legal obligations by the Estonian branch. The report details a numerous red flags that allegedly should have alerted the parent Danske Bank Group (“Group”) to the issues.

However, the report also concludes that the Group’s Board of Directors, Chairman, Audit Committee, or Chief Executive Officer did not violate any legal obligations in failing to detect or stop the suspicious transactions. Despite this finding, the CEO, Thomas Borgan, resigned the same day the report was released. Borgan stated, “Even though I was personally cleared from a legal point of view, I hold the ultimate responsibility. There is no doubt that we as an organization have failed in this situation and did not live up to expectations.” The consequences of this colossal money laundering scandal are unlikely to stop with Brogan’s resignation.

This blog post will summarize the scope of the report, findings of suspicious activity, the causes and red flags of potential money laundering violations, and outline the known and anticipated consequences of this scandal for Danske Bank. Continue Reading Danske Bank CEO Resigns on Heels of Report Detailing an Astounding $234 Billion in Suspicious Transactions in Money Laundering Scandal