Suspicious Activity Report (SAR)

A recent court opinion emphasizes the sensitive issues involved in terminating potentially difficult employees — or, from the employee’s or perhaps the government’s perspective, in terminating whistleblowers who were retaliated against for being willing to point out compliance failures. Although this competing dynamic applies across all industries, a recent opinion from the U.S. Federal District Court for the Eastern District of Louisiana, Kell v. Iberville Bank, addressed such a situation in the Anti-Money Laundering (“AML”)/Bank Secrecy Act (“BSA”) context, in which a bank’s former compliance officer sued her former employer for allegedly terminating her in retaliation for raising uncomfortable issues about claimed insider abuse and the alleged failure to file a Suspicious Activity Report (“SAR”).
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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.
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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.
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The Treasury Inspector General for Tax Administration, or TIGTA, issued last month a Report, entitled The Internal Revenue Service’s Bank Secrecy Act Program Has Minimal Impact on Compliance, which sets forth a decidedly dim view of the utility and effectiveness of the current Bank Secrecy Act (“BSA”) compliance efforts by the Internal Revenue Service (“IRS”).  The primary conclusions of the detailed Report are that (i) referrals by the IRS to the Financial Crimes Enforcement Network (“FinCEN”) for potential Title 31 penalty cases suffer lengthy delays and have little impact on BSA compliance; (ii) the IRS BSA Program spent approximately $97 million to assess approximately $39 million in penalties for Fiscal Years (FYs) 2014 to 2016; and (iii) although referrals regarding BSA violations were made to IRS Criminal Investigation (“IRS CI”), most investigations were declined and very few ultimately were accepted by the Department of Justice for prosecution.

Arguably, the most striking claim by the Report is that “Title 31 compliance reviews [by the IRS] have minimal impact on Bank Secrecy Act compliance because negligent violation penalties are not assessed.”

A primary take-away from the Report is that an examination program lacking actual enforcement power is, unsurprisingly, not very effective.  The Report also highlights some potential problems which beset the IRS BSA Program, which include lack of staffing, lack of planning and coordination, and delay. Although the Report’s findings clearly suggest that what the IRS BSA Program really needs are resources and enhanced enforcement power, the repeated allusions in the Report to a certain purposelessness of the current BSA examination regime nonetheless might help fuel the current debate regarding possible AML/BSA reform, with an eye towards curbing regulatory burden.

The Report made five specific recommendations to the IRS for remedial steps. We will focus on four of those recommendations, and the findings upon which they rest:

  • Coordinate with FINCEN on the authority to assert Title 31 penalties, or reprioritize BSA Program resources to more productive work;
  • Leverage the BSA Program’s Title 31 authority and annual examination planning in the development of the IRS’s virtual currency strategy;
  • Evaluate the effectiveness of the newly implemented review procedures for FinCEN referrals; and
  • Improve the process for referrals to IRS CI.


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Charges Represent First Criminal Case Based Solely on Alleged Unauthorized SAR Disclosure

On October 17, the U.S. Attorney for the Southern District of New York (“SDNY”) announced the arrest of a senior employee at the Financial Crimes Enforcement Network (“FinCEN”). That employee, Natalie Mayflower Sours Edwards, has been charged with unlawfully disclosing Suspicious Activity Reports

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.
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According to the Financial Flow from Human Trafficking report recently published by the Financial Action Task Force (“FATF”) and the Asia/Pacific Group on Money Laundering, human trafficking is estimated to generate $150.2 billion per year. Human trafficking remains one of the fastest growing and most profitable forms of international crime affecting nearly every country in the world. The FATF report examines the financial flow associated with human trafficking for the purpose of forced labor, sexual exploitation, and the removal of organs, and the common and unique ways that the proceeds from these types of exploitation are laundered.

The FATF report identifies issues related to designing better efforts to detect money laundering related to human trafficking. First, the more exposure the offender and/or the victim have to the formal financial sector or government, the greater the opportunities for identifying signs of money laundering. Second, no single indicator alone is likely to confirm money laundering from human trafficking. Third, wider contextual information can prove useful in identifying signs of trafficking. Fourth, human trafficking may be easiest to identify at the victim level or at the lowest level of a criminal organization; at higher levels of criminal organizations, the indicators may be more opaque and suggest a variety of crimes.
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In the wake of this week’s revelations of years-long and significant alleged money laundering failures involving ING Bank and Danske Bank, European regulators have circulated a confidential “reflection paper” warning national governments and the European Parliament about shortcomings in the European Union’s (“EU”) anti-money laundering (“AML”) efforts and providing recommendations to strengthen these efforts.  The reflection paper recommends centralizing the enforcement of AML rules through a powerful new EU authority to ensure that banks implement background checks and other AML measures, and setting a deadline for the European Central Bank to reach agreement with national authorities to allow for the sharing of sensitive data.

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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

Director Blanco Emphasizes Investigatory Leads and Insights Into Illicit Activity Trends Culled from Nationwide BSA Data

As we just blogged, Financial Crimes Enforcement Network (“FinCEN”) Director Kenneth Blanco recently touted the value of Suspicious Activity Reports (“SARs”) in the context of discussing anti-money laundering (“AML”) enforcement and regulatory  activity involving digital currency.  Shortly thereafter, Director Blanco again stressed the value of SARs, this time during remarks before the 11th Annual Las Vegas Anti-Money Laundering Conference and Expo, which caters to the AML concerns of the gaming industry.

It is difficult to shake the impression that Director Blanco is repeatedly and publically emphasizing the value of SARs, at least in part, in order to provide a counter-narrative to a growing reform movement — both in the United States and abroad — which: (i) questions the investigatory utility to governments and the mounting costs to the financial industry of the current SAR reporting regime, and (ii) has resulted in proposed U.S. legislation which would raise the minimum monetary thresholds for filing SARs and Currency Transaction Reports (“CTRs”), and require a review of how those filing requirements could be streamlined.
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