Anti-Money Laundering

Transcription

1 Anti-Money Laundering JUNE 2004 Federal Bank Regulators Act Against Riggs Bank for BSA and AML Violations Last month, the Office of the Comptroller of the Currency (OCC), Federal Reserve Board (Fed), and Financial Crimes Enforcement Network, a bureau of the United States Department of the Treasury (FinCEN), all took regulatory actions against Riggs Bank N.A. together with its holding company and Edge Act subsidiary. The actions stemmed from violations of the Bank Secrecy Act (BSA) and related deficiencies in anti-money laundering (AML) program compliance. The regulators cited Riggs for its systemic failure to comply with its obligations under the Bank Secrecy Act. In particular, the regulators noted lax controls concerning accounts affiliated with the governments of Saudi Arabia and Equatorial Guinea. Among other requirements, the orders require Riggs to pay a fine of $25 million due to the failures of its AML compliance program. Since 1987, the OCC has required each bank it supervises to have a BSA compliance program. The USA Patriot Act extended that requirement, and by 2002, each bank needed to establish an AML program to combat money laundering and terrorist financing. Each bank, savings association, and operating subsidiary of a bank or savings association must have an effective AML compliance program. The OCC had noted issues in Riggs s BSA compliance program beginning in 1997, and by its January 2003 examination, the OCC found serious deficiencies. As a result, in July 2003, Riggs entered into a consent order with the OCC to improve its AML compliance program and its compliance with the BSA OCC ORDER The OCC determined that Riggs had not fulfilled the terms of the July 2003 consent order and that Riggs continued to have serious deficiencies in its AML program. As a result of those findings, Riggs and the OCC entered into two new consent orders on May 13, One order calls for the bank to pay a civil money penalty in the amount of $25 million. The order outlines the findings that are the basis of the imposition of the fine. Many of those findings necessitate the mandated corrections described below, including: n the bank s internal controls were, and continue to be, seriously deficient; n the internal controls did not identify or address the BSA-related risks at the bank that related to products or accounts that the bank should have viewed as high risk; n Riggs did not adequately implement its due diligence program related to high-risk areas; n the bank did not collect sufficient information about its foreign private banking customers; n due to the poor record keeping, Riggs omitted disclosure of several accounts in response to requests from government agencies; n audits did not review all the necessary areas, contained flawed testing, and did not uncover the severity of weaknesses in BSA compliance; Kirkpatrick & Lockhart LLP

2 n management ineffectiveness in overseeing compliance with the BSA; n an ineffective training program that did not comply with the July 2003 OCC order; n a failure to investigate suspicious activities; n a failure to file required suspicious activity reports (SARs); n a failure to monitor suspicious activity pertaining to the accounts of the Saudi Arabian embassy or the country of Equatorial Guinea; and n overall systemic deficiencies in bank policies and oversight. The OCC claims that these findings demonstrate that Riggs was deficient in all four required elements of an AML compliance program: internal controls, independent testing, appropriate training, and having a person responsible for overseeing implementation of the program. The second OCC order requires specific steps for Riggs to correct deficiencies in its internal controls. Specifically, the order requires Riggs to: n determine whether the skills of management and staff need improvement; n develop a methodology for verifying that the bank documents, files, and maintains all information that the BSA requires; n review the accuracy of all SARs and Currency Transaction Reports (CTRs) filed between January 1, 2001 and April 30, 2004; n verify and correct incomplete or inaccurate books and records; n review all bank accounts in the Embassy and International Private Banking areas that Riggs identifies as high risk; n adopt written, comprehensive internal control policies applicable to the bank s relationships; n prepare a written report on the staffing levels and skills required to fulfill the requirements of the order; n perform mandatory background checks on all relationship managers at least once every three years; n subject the ten largest deposit and loan relationships with the bank to greater scrutiny; n declare a dividend only with prior notice to the OCC; n implement an internal audit program sufficient in scope, testing, and documentation; and n require that its board of directors (or a committee thereof) ensure that the bank takes immediate actions to remedy deficiencies cited in audit reports. FINCEN ORDER The Department of the Treasury has the authority to implement the BSA by regulation. It works through FinCEN to do so. While each of the federal bank regulatory agencies examines for BSA compliance and enforces compliance with BSA and AML standards, FinCEN also has BSA enforcement authority over all financial institutions. In this case, when the OCC examined Riggs for compliance with all applicable laws, including the BSA, it found violations of the BSA, and the OCC referred those findings to FinCEN. FinCEN then took enforcement action against Riggs, in addition to the enforcement action taken by the OCC. On May 13, 2004, FinCEN also issued an order assessing a civil money penalty against Riggs in the amount of $25 million. This penalty is concurrent with the OCC s penalty, and Riggs will satisfy both penalties with one $25 million payment. FinCEN found willful violation of the AML program requirement. Before the July 2003 order, as discussed above, Riggs was deficient in implementing an AML program that would respond to the types of suspicious conduct that Riggs potentially faced. When the OCC entered into the consent order with Riggs in July 2003, it also referred the BSA violations to FinCEN for a determination by FinCEN of whether it should impose a civil money penalty for the BSA violations. FinCEN found that Riggs s failure to establish an adequate AML program that would allow it to meet its SAR and CTR reporting requirements, Kirkpatrick & Lockhart LLP 2

3 despite knowing the requirements to do so in law and in the previous consent order, demonstrated a reckless disregard of its obligations under the BSA. Because Riggs failed to correct its deficiencies and allowed additional violations of the BSA to occur after the July 2003 consent order, FinCEN assessed the civil money penalty. Other FinCEN findings that support its imposition of the monetary penalty include: n deficient designing of an AML program based on the risks of Riggs s business; n inadequate internal controls to ensure ongoing compliance; n similar risk matrices in different divisions that did not recognize the risks associated with particular lines of business; n weak and improperly implemented customer due diligence program; n failure to employ account opening and customer information collection procedures; n missing customer due diligence information; n improper handling of government subpoenas and requests regarding account holders to ensure that the bank investigated potential suspicious activity; n lack of internal controls in its largest banking relationship; n failure to implement an adequate system for independent testing; n audit scope that did not include (i) areas with money laundering vulnerabilities, (ii) BSA compliance, or (iii) the suspicious activity reporting process; n failure by the person with overall responsibility for BSA compliance to monitor and report suspicious activity; n weak training; n failure to file or delinquent filing of 33 SARs representing $98 million in suspicious transactions; n not providing accurate information on six CTRs; and n failure to correct deficiencies identified by the previous consent order with the OCC. FEDERAL RESERVE BOARD ORDER Although the Fed does not have jurisdiction over Riggs, the Fed regulates Riggs National Corporation, Riggs s holding company, and Riggs International Banking Corporation, an Edge Act corporation that is a wholly-owned subsidiary of Riggs (RIBC). The Federal Reserve Bank of Atlanta had previously advised RIBC of deficiencies in its compliance with AML obligations and the Currency and Foreign Transactions Reporting Act. Although Riggs has decided to close RIBC, until its operations cease, RIBC and Riggs National agreed with the Fed that the consolidated organization should be operated in a safe and sound manner. To ensure its safe and sound operation, on May 14, 2004, Riggs National and RIBC consented to the issuance of a Cease and Desist Order by the Fed (Order) to address the AML program deficiencies. Among the principal parts of that Order were Fed requirements that Riggs National and RIBC strengthen board of directors oversight, improve risk management practices, upgrade RIBC s system of internal controls, develop a customer due diligence program for RIBC, draft a program to ensure compliance with OFAC regulations, and not declare or pay any dividends without Fed approval. CONCLUSION In a press release announcing the agreements with the banking regulators, Riggs affirmed its intent to work closely with its regulators to complete and maintain an appropriate comprehensive compliance infrastructure. Separately, Riggs noted that it has been fully cooperative with all law enforcement agencies in the post-september 11 environment and recognized the need to also meet all of the expectations of [its] regulators. In part based on the Riggs situation, the House and Senate have held hearings this month on the effectiveness of money laundering regulation. Top committee members of both parties expressed concern about BSA enforcement by regulators. While congressmen recognized that the regulators Kirkpatrick & Lockhart LLP 3

4 have increased enforcement since September 11, 2001, they expected more to be done to ensure current regulators are properly enforcing the BSA and preventing terrorist financing. Daniel Stipano, deputy chief counsel of the OCC, admitted at a congressional hearing that the OCC made mistakes in its oversight of Riggs s BSA compliance by failing to take sufficient regulatory actions when previous examinations noted deficiencies. Stipano emphasized, however, that the Riggs case is not typical of overall OCC BSA enforcement. John D. Hawke, Comptroller of the Currency, told a Senate panel that, in response to the Riggs matter, he had ordered a comprehensive review of OCC oversight of national bank BSA/AML compliance. Separately, William J. Fox, director of FinCEN, encouraged greater communication between his agency and the other federal bank regulators, and James Gilleran, director of the Office of Thrift Supervision (OTS), testified that the OTS has taken recent enforcement actions to ensure that all savings associations that it regulates- large and small- have effective, risk-based BSA compliance programs. The Riggs situation is unusual both because Riggs served the embassy community in Washington, DC, thus giving it a higher than usual concentration of foreign customers, and because it was deemed to have disregarded the earlier OCC consent order. Even though the Riggs situation is somewhat unique, all financial institutions, particularly large money center banks with significant foreign customers, should remain vigilant in their BSA and AML compliance. Federal regulators continue to examine for such compliance, and, considering recent congressional interest, might be expected to enhance their examinations for compliance with the BSA as amended by the USA Patriot Act. (Note that the Patriot Act authorizes Congress to resolve in the fall of 2004 to sunset the portions of the Patriot Act specifically applicable to financial institutions. We have no evidence, however, that Congress is considering such a resolution.) * * * * * If you have any questions, please call Rebecca Laird, ( ), Melanie Brody ( ), Sam Ozeck ( ), or any other member of K&L s Financial Institutions Group. REBECCA H. LAIRD rlaird@kl.com MELANIE BRODY mbrody@kl.com SAM A. OZECK sozeck@kl.com Kirkpatrick & Lockhart LLP 4

5 Kirkpatrick & Lockhart LLP offers diverse experience in issues relating to money laundering. We can help banking and diversified financial services clients assess their risk, establish and review compliance practices, investigate potential weaknesses, perform internal investigations, and respond to regulatory inquiries and enforcement actions while being sensitive to the privacy of each client and their customers through an effective attorney-client privilege relationship. In addition, we have established a website dedicated to issues relating to anti-money laundering regulatory and legislative developments. The website is located at resources.asp?id= In addition to outlining K&L s enterprise-wide approach to assisting clients with money laundering compliance issues, the website contains a resource center with over 100 carefully selected links to various informational resources on money laundering. The resource center also includes a library of prior K&L publications on money laundering. We invite you to contact one of the members of our cross-disciplinary anti-money laundering practice team for additional assistance. You may also send general inquiries to antimoney@kl.com. BOSTON Michael S. Caccese mcaccese@kl.com D. Lloyd Macdonald lmacdonald@kl.com Stanley V. Ragalevsky sragalevsky@kl.com SAN FRANCISCO Eilleen M. Clavere eclavere@kl.com Jonathan D. Jaffe jjaffe@kl.com David Mishel dmishel@kl.com HARRISBURG Raymond P. Pepe rpepe@kl.com LOS ANGELES William J. Bernfeld wbernfeld@kl.com David P. Schack dschack@kl.com William P. Wade wwade@kl.com NEWARK Anthony P. La Rocco alarocco@kl.com NEW YORK Beth R. Kramer bkramer@kl.com Richard D. Marshall rmarshall@kl.com Loren Schechter lschechter@kl.com PITTSBURGH Heather Hackett hhackett@kl.com Mark A. Rush mrush@kl.com WASHINGTON, DC Diane E. Ambler dambler@kl.com Melanie Brody mbrody@kl.com Ronald A. Holinsky rholinsky@kl.com Kathy Kresch Ingber kingber@kl.com Henry L. Judy hjudy@kl.com Rebecca H. Laird rlaird@kl.com Charles R. Mills cmills@kl.com Michael J. Missal mmissal@kl.com Sam A. Ozeck sozeck@kl.com Laurence E. Platt lplatt@kl.com Jeffrey B. Ritter jritter@kl.com Francine J. Rosenberger francine.rosenberger@kl.com Robert H. Rosenblum rrosenblum@kl.com Ira L. Tannenbaum itannenbaum@kl.com András P. Teleki ateleki@kl.com Richard L. Thornburgh rthornburgh@kl.com Robert A. Wittie rwittie@kl.com Kirkpatrick & Lockhart LLP Challenge us. BOSTON... n DALLAS n HARRISBURG n LOS ANGELES n MIAMI n NEWARK n NEW YORK n PITTSBURGH n SAN FRANCISCO n WASHINGTON This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED.