Civil Liability to Private Parties

Second Post in a Two-Post Series

On March 19, 2020, Swedbank received its first sanction at the conclusion of parallel investigations by Swedish and Estonian authorities for its role in the seemingly non-stop Anti-Money Laundering (“AML”) debacle centered around Danske Bank and its now-notorious Estonian Branch. In the first of what will likely be multiple sanctions, Swedbank AB was ordered to pay a record 4 billion Swedish Krona ($38 million) and its subsidiary, Swedbank AS, has been ordered to improve its AML risk control systems to comply with applicable requirements.

In our first post, we discussed the various public AML-related investigations and enforcement actions plaguing Swedbank. In this post, we discuss the details and implication of the report of internal investigation regarding Swedbank’s alleged deficiencies in its AML processes performed by an outside law firm at the request of Swedbank, which has made the report publically available.

The Report is lengthy and detailed.  As we discuss, however, the Report highlights some basic, evergreen issues in AML compliance and enforcement: the need to implement adequate systems to manage high-risk customers; the need to identify beneficial ownership; the need for top management to understand and truly respect AML compliance; the need for transparency with regulators; and the need for transparency by financial institutions with investors and the public.


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Plaintiffs Failed to Sufficiently Allege Knowledge or Recklessness by Company Concerning AML Compliance Problems, Despite Admissions Made by Company When Responding to Major Government Enforcement Actions 

On February 25, 2020, the Tenth Circuit Court of Appeals upheld the dismissal of shareholders’ securities-fraud class action against the Western Union Company (“Western Union”) and several of its current and former executive officers based on the company’s alleged anti-money laundering (“AML”) compliance failings.

The suit was filed in February 2017 following the announcement of a deferred prosecution agreement (“DPA”) between Western Union and the U.S. Department of Justice. The DPA was based upon Western Union’s alleged willful failure to maintain an effective AML program and aiding and abetting of wire fraud between 2004 and 2012. The DPA, about which we have previously blogged, charged Western Union with filing Suspicious Activity Reports (“SARs”) regarding activity by its customers but failing to file SARs regarding the actions of its own agents who were likely complicit. The DPA and related civil enforcement actions from the Federal Trade Commission and FinCEN required Western Union to pay a combined penalty of $586 million.

As we also have blogged, shareholder derivative suits based on alleged AML failures are proliferating, for both U.S.-based and foreign-based financial institutions – as well as their executives. Primary examples include Danske Bank and some of its former executives, as well as Westpac, Australia’s second-largest retail bank, which currently face such lawsuits in the U.S. Such lawsuits now represent predictable collateral consequences flowing from AML-related scandals. Here, Western Union obtained dismissal because the plaintiffs failed to allege sufficient facts regarding the key issue of mental state – that is, facts that would support a strong inference of actual knowledge or reckless disregard that the public statements regarding Western Union’s actual state of AML compliance were false. The detailed Tenth Circuit opinion illuminates the practical contours of the scienter standard regarding AML compliance, or alleged lack thereof. Ultimately, plaintiffs’ arguments based upon a “fraud by hindsight” theory will fail.
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AML Scandals Seem to Inevitably Spawn Investor Lawsuits

As we recently blogged, Westpac, Australia’s second-largest retail bank, has been embroiled in a scandal arising from approximately 23 million alleged breaches of Australia’s anti-money laundering/countering terrorist financing (“AML/CTF”) laws and regulations involving nearly $12 billion in transactions. The scandal broke on November 20, 2019 when the Federal Court of Australia filed a Statement of Claim (“SOC”) detailing how Westpac allegedly failed to monitor transactions involving its correspondent banks that, in turn, facilitated child exploitation abroad.

In this post, we discus the Westpac scandal, its massive consequences and the details of follow-on private securities litigation, including in U.S. courts. As we further discuss, the same legal threats continue to bedevil Dankse Bank, the center of the world’s largest AML scandal.
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Town of Metula at the Israel-Lebanon border – the site of 2006 rocket attacks by Hizbollah

On September 25, 2019, the Southern District of New York dismissed a complaint brought by victims of rocket attacks in Israel perpetrated in 2006 by Hizbollah, operating in Lebanon. Kaplan v. Lebanese Canadian Bank, SAL, Civ. No. 08 Civ. 7253, 2019 U.S. Dist. LEXIS 162505 (S.D.N.Y. Sept. 20, 2019). The Complaint was brought under the Anti-Terrorism Act, 18 USC 2333 (“ATA”). In it, the Plaintiffs alleged that the Lebanese Canadian Bank, SAL (“LCB”) provided banking services to five members of Hizbollah (“Hizbollah affiliates”), and by doing so, they materially supported an act of international terrorism.

Specifically, the Complaint alleged, among other things, that LCB failed to take certain due diligence measures, including reviewing public sources, and as a result continued to bank with members of Hizbollah. According to the Complaint, the bank’s customers’ afficilation with Hizbollah was “notorious public knowledge” due to news articles, reports, and Hizbollah’s own media sources. The Plaintiffs alleged that, even if the bank did not have actual knowledge, the bank at least should have known because it had a duty to perform due diligence on its customers, monitor and report suspicious or illegal banking activities, and not provide banking services to terrorist organizations.

Although the Kaplan case arises in the context of international terrorism and potential liability under the ATA, its analysis and conclusions can apply to more mundane state law tort claims against financial institutions by investors or consumers defrauded by the institution’s (former) customers. These claims often attempt to bootstrap allegations that a bank knew should have known about the customer’s fraud scheme due to the bank’s anti-money laundering (AML) monitoring and reporting obligations under the Bank Secrecy Act (“BSA”). As we have blogged, courts hold that evidence of an imperfect AML program and potential red flags about a customer fall short of the high bar required to sustain a claim for aiding and abetting a fraud or other tort against third party non-customers.


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The United States continues to be plagued by mass shootings, which appear to be increasing in both frequency and lethality.  Certain businesses have reacted by adjusting their business models, such as the recent decision by mega-retailer WalMart to stop selling some — but not all — types of ammunition.  Likewise, some financial institutions

As we previously blogged, the District of Massachusetts held in AER Advisors Inc. v. Fidelity Brokerage Services, LLC, that the safe harbor provision of the Bank Secrecy Act (BSA) provides unqualified protection to financial institutions and their employees from civil liability for filing a Suspicious Activity Report, or SAR. An update: the First Circuit recently upheld this ruling in an opinion which, consistent with the holdings of most other federal courts, clearly found that the safe harbor protections for SAR filings are absolute.
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More Allegations of Nordic Malfeasance Surface as Private Party Lawsuits Beset Danske Bank and SwedBank Gets Sucked into Unfolding Scandal

“Something was indeed rotten in the state of Denmark.” – Olav Haazen

In what is perhaps the least surprising development in the sprawling, continuously unfolding Danske Bank (“Danske”) money laundering scandal, investor groups have filed private securities fraud actions against the Denmark-based bank and its top executives: first in the United States District Court for the Southern District of New York then, most recently, in Copenhagen City Court in Denmark. These suits coincide with an announcement from the Securities and Exchange Commission (“SEC”) that it, too, was opening its own probe of potential securities and Anti-Money Laundering (“AML”) violations at Danske that could result in significant financial penalties on top of what could be the enormous private judgments. More significantly, the Danske shareholder suits and SEC investigation illustrate a second front of enormous exposure from a securities fraud standpoint for banks involved in their own money laundering scandals and a rock-solid guaranteed template for future investors similarly damaged by such scandals.

As we have blogged here, here and here, the Danske scandal – the largest alleged money laundering scandal in history – has yielded criminal and administrative investigations in Estonia, Denmark, France and the United Kingdom and by the United States Department of Justice. Those investigations have focused primarily on Danske’s compliance with applicable AML regulations, as well as the implementation and effectiveness of those regulations. The SEC and civil plaintiffs now have opened a new line of inquiry focusing less on the institutional and regulatory failures that yielded the scandal and responsibility for them and more on the damage those failures have caused Danske investors.

Meanwhile, banking stalwart Swedbank is reacting, with mixed success at best, to allegations that suspicious transactions involving billions of Euros passed from Danske’s Estonian branch through Swedbank’s own Baltic branches — allegations which have produced a controversial internal investigation report, a law enforcement raid, the loss of the bank’s CEO, and plunging stock value.

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The Danske Bank money laundering scandal continues to reveal its many permutations and confirm its status as the largest money laundering case in history. We summarize here certain events since November 2018, since we last have blogged about the case (see here, here, and here). Proving that no one is immune from the potential taint, notable events include an investigation announced by the Estonian financial regulator; an investigation into that same Estonian regulator itself; the commencement of the inevitable investor lawsuit; and scrutiny of what some have described as the “cleanest” bank in the world, Swedbank, one of the most important banks in Northern Europe.
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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.
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Congress enacted the safe harbor provision of the Bank Secrecy Act (BSA), codified at 31 U.S.C. §5318(g)(3)(A), to shield financial institutions, their officers and employees from civil liability for reporting known or suspected criminal offenses or suspicious activity by filing a Suspicious Activity Report, or SAR. More particularly, the safe harbor provides immunity to