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In February 2017, we blogged about a whistleblower complaint filed against Bank of the Internet (“BofI”) by its former internal auditor. The blog post addressed what the whistleblower believed was BofI’s wrongdoing in relation to responding to a subpoena from the Securities and Exchange Commission (“SEC”), and when dealing with a certain loan customer in potential violation of the Anti-Money Laundering (“AML”) rules of the Bank Secrecy Act (“BSA”).

Less than two months after our blog post, three BofI stockholders brought a putative class action complaint against BofI seeking to represent a class of individuals who purchased BofI stock, in a case captioned Mandalevey v. BofI Holding, Inc. These plaintiffs alleged BofI violated the Securities Exchange Act through, among other alleged misrepresentations, falsely denying the company was under investigation for money laundering violations.  A federal court recently dismissed all claims against BofI.

This post focuses on that decision, the allegations relating to the federal investigation of BofI, and the Court’s interesting reasoning in dismissing these plaintiffs’ claims. Although the bank won this latest round, the saga involving BofI underscores how financial institutions face an increasing risk that alleged AML and Counter-Terrorism Financing (“CTF”) violations will lead to follow-on allegations of securities law violations – allegations brought not only by the government (see here), but also by investor class action suits (see here, here and here). Continue Reading When A Purported Money Laundering Investigation Turns Into a Class Action Complaint: The Latest Round in BofI’s Fight to Put Money Laundering Allegations in the Rearview Mirror

We are very pleased to be presenting on the topic of SEC enforcement against broker-dealers and mutual funds relating to alleged underlying Anti-Money Laundering and Bank Secrecy Act violations, and associated private class action lawsuits, at the upcoming meeting of the Securities Regulation Committee of the New York State Bar Association on this Wednesday, December 13, 2017.  This is a topic of increasing importance on which we have blogged repeatedly (see here, here, here and here); FinCEN also has proposed similar AML regulations for investment advisors.  We also will discuss the hot topic of potential SEC enforcement involving digital currency and Initial Coin Offerings, or ICOs, and the general role of AML in the digital currency industry. The program will begin at 7:00 p.m. and is hosted at the New York City offices of Skadden, Arps, Slate, Meagher & Flom LLP.  Thanks again to the Committee for this invitation; we look forward to it.

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

We previously have observed that financial institutions face an increasing risk that alleged Anti-Money Laundering (“AML”) and Counter-Terrorism Financing (“CTF”) violations will lead to follow-on allegations of securities law violations – allegations brought not only by the government, but also by investor class action suits (see here and here).

This phenomenon of AML law and securities law converging is not limited to the United States, as reflected by a recent class action lawsuit filed against one of the biggest banks in Australia – Commonwealth Bank – which arises out of claims by the Australian government that the bank failed to act adequately on indications that drug rings were using its network of “intelligent” deposit machines to launder tens of millions of dollars. Continue Reading Investor Class Action Lawsuit Targets Australian Bank for Alleged AML Failures and Use of “Intelligent” Machines for Anonymous Cash Deposits

Financial institutions face an increasing risk that alleged violations of the Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) requirements will lead to follow-on allegations of securities law violations. We have blogged about investor class action suits against financial institutions based on alleged violations of BSA/AML rules.  We also have blogged about recent enforcement actions by the SEC alleging violations of the securities laws due to underlying violations of the BSA by broker dealers.  This post briefly notes the latest chapter in what seems to be a growing book regarding the convergence of AML/BSA and securities law.

In a complaint, later amended, filed in the Middle District of Tennessee against BancorpSouth Inc., investor plaintiffs alleged that the bank and its CEO, CFO and COO made misleading statements and omissions in SEC filings regarding (1) the bank’s compliance with BSA/AML regulations and the bank’s fair lending practices, and (2) the closing of two pending mergers/acquisitions. Plaintiffs allege that defendants knew at the relevant time that the bank was not in compliance with the AML/BSA regulations, due to a pending “target review” by the FDIC – which later resulted in a consent order between the FDIC and the bank regarding its AML obligations – but nonetheless stated that (1) the bank was in compliance with all banking laws and regulations; (2) they expected the two planned mergers to close in the second quarter of 2014; and (3) they expected to receive regulatory approval for those mergers. The plaintiffs allege that defendants thereby violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 by making statements which misrepresented or omitted material facts.  According to the plaintiffs, when the AML/BSA problems eventually came to light, these problems allegedly delayed the anticipated mergers, and the bank’s stock value fell significantly, which thereby harmed investors.

As noted, the plaintiffs sued not only the bank itself, but also members of senior management. This approach is consistent with the recent focus on individual liability in AML/BSA matters.  Specifically, the plaintiffs alleged that the individual executive defendants:

. . . . were ultimately responsible for ensuring that the Bank maintained an effective BSA/AML compliance program and that the Company’s program complied with the “4 Pillars” of BSA/AML compliance. In fact, federal regulations specifically require that the Company’s BSA/AML compliance program must be in writing, approved by the Board of Directors . . . , and noted in the board minutes.  Defendants were also responsible for creating a “culture of compliance” to ensure Company-wide adherence to the Bank’s BSA/AML policies, procedures and processes, but failed to do so, instead prioritizing . . . cost-cutting measures.

On Monday, the district court granted, for the second time (after having been initially reversed by the Court of Appeals for the Sixth Circuit), class certification to the plaintiffs against the bank.  The class certification decision involved a review the requirements imposed by Rule 23(a) and Rule 23(b) of the Federal Rules of Civil Procedure and  will not be analyzed here. The point for the purposes of this blog is that it has become clear that, in regards to AML/BSA compliance, publically-traded financial institutions are compelled to wage a multi-front war.  Regardless of the actual merits of the complaint against BanccorpSouth, its mere existence reflects that financial institutions must concern themselves not only with FinCEN, the Department of Justice, and the relevant examiner, but also with putative investor plaintiffs and the SEC – thereby increasing the stakes regarding decisions over the disclosure in SEC filings of possible violations of AML/BSA requirements.

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

 

Neon sign depicting money transfer.

On January 19, 2017, the Western Union Company (“Western Union” or the “Company”) entered into a deferred prosecution agreement (“DPA”) with the Department of Justice (“DOJ”), in which Western Union admitted to willful failures to maintain an effective AML program as well as aiding and abetting of wire fraud schemes.  Western Union agreed to a $586 million monetary penalty which will resolve criminal and civil allegations brought by the DOJ and the Federal Trade Commission against the Company, as well as a related Assessment of Civil Money Penalty by FinCEN against a subsidiary of Western Union.  However, Western Union now faces additional costs and litigation for its admittedly insufficient AML program in the form of shareholder suits brought in federal court following the announcement of this sizeable settlement.  Shareholder derivative suits based on alleged AML failures are becoming increasingly common, and this recent action fits squarely into the apparent trend. Continue Reading Investor Suits Follow in the Wake of Western Union Settlement of Money Laundering and Fraud Claims