Feeding the Beasts: Anti-Money Laundering Enforcement in 2009-2016

Money Laundering

Monetary penalties for Bank Secrecy Act compliance failures soared in 2009-16, and high penalties are likely to continue in 2017 and beyond. In the first article of a two-part series, Bloomberg BNA's Robert Kim examines how the rise occurred and the factors affecting its continuation.

Robert  Kim

By Robert Kim

Robert Kim is a Legal Editor with Bloomberg BNA. He previously worked for the Securities and Exchange Commission and the Department of the Treasury's Financial Crimes Enforcement Network.

The U.S. has been the leader in establishing international standards of financial integrity, and a significant part of that effort has been the anti-money laundering/combating the financing of terrorism (AML/CFT) regime. Intended to deter and detect financial crime, the AML/CFT regime depends on the establishment and enforcement of regulatory standards for a system that effectively deputizes financial institutions to prevent, monitor, investigate and report suspected criminal activity.

Since the enactment of the Bank Secrecy Act (BSA) in 1970 and its strengthening by the USA PATRIOT Act in 2001, regulatory enforcement actions have been essential to ensure compliance by the financial industry. BSA enforcement actions soared to unprecedented levels between 2009 and 2016, however, exceeding $1 billion in penalties a year by the end of this period. These high penalties, which coincided with the Obama administration, have continued in 2017 as a result of the regulatory and enforcement paradigm in AML/CFT that developed in 2009-16 but has survived the change in administrations.

The Growth of BSA Enforcement Actions in 2009-2016

The agencies involved in BSA enforcement concluded BSA enforcement actions with monetary penalties more often and expanded the range of financial institutions subjected to enforcement actions during this period. BSA enforcement actions concluded with monetary penalties became more frequent during this period, growing from a single digit number each year during the 2000s to as many as 20 in one year by the mid-2010s. Actions against banks and other depository institutions by the Financial Crimes Enforcement Network (FinCEN) and the federal financial regulators increased substantially, as did actions against securities firms by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA).

FinCEN also pursued enforcement campaigns focused on small money services businesses (MSBs) in 2011 and on MSBs and casinos in 2014-16. For the first time there were BSA enforcement actions against certain businesses not normally considered to be financial institutions, including dealers in precious metals, precious stones, or jewels (considered to be financial institutions for purposes of the BSA) and consulting firms working for financial institutions.

The two periods of increased enforcement actions against MSBs, casinos and other non-bank financial institutions reflected increased attention to these areas under consecutive FinCEN directors. Under James Freis in 2007-12 and Jennifer Shasky Calvery in 2012-16, FinCEN conducted attention-getting enforcement campaigns toward the end of each directorship. How FinCEN will approach these areas under the current administration remains to be seen.

The monetary penalties imposed in BSA enforcement actions increased far more dramatically than the number of actions. Whereas the largest individual penalties and the annual totals of all penalties had been measured in tens of millions of dollars in the 2000s, the largest penalty having been $80 million in the 2005 action against ABN AMRO Bank NV, penalties exceeding $100 million were assessed in 2010 and 2012, and since 2014 they have occurred regularly each year. Total monetary penalties exceeded $1 billion in 2014 and have been over $600 million each year since, including over $600 million in only the first quarter of 2017.

Enforcement actions against large international banks accounted for the majority of the increase in total penalties. Monetary penalties exceeding $100 million were assessed on these banks:

2010 Wachovia $160 million
2012 HSBC Holdings plc, and HSBC North America Holdings, Inc. $500 million
Standard Chartered Bank $170 million*
2014 JPMorgan Chase Bank, NA $811 million
Standard Chartered Bank $300 million
2015 Commerzbank AG $734 million
Banamex USA $140 million
2016 Mega International Commercial Bank of Taiwan $180 million
Agricultural Bank of China $215 million
Intesa Sanpaolo S.p.A. $235 million
2017 Deutsche Bank $425 million
* estimate based on $340 million in total penalties for BSA and economic sanctions violations

OFAC-administered economic sanctions violations were a substantial component of certain BSA enforcement actions against international banks, and the monetary penalties assessed against these banks for BSA violations could have been considered substantially higher if the agencies involved had decided to categorize their penalties in that way. The penalties assessed on Commerzbank and HSBC included $718 million and over $1.4 billion, respectively, for violations of economic sanctions. The $170 million figure for the penalty assessed on Standard Chartered in 2012 is an estimate based on half of the $340 million settlement for both BSA and economic sanctions violations. Other sanctions enforcement actions with sizable monetary penalties included findings of BSA compliance failures without any declared penalties for them.

MSB enforcement actions in 2009-16 indicate the persistence of AML problems in the sector, in which there have been multiple enforcement actions against major institutions, in addition to the numerous actions against small MSBs. Western Union Financial Services, Inc., the subject of an enforcement action by FinCEN with a $3 million monetary penalty in 2003, reached a settlement in 2010 with the attorneys general of four southwestern border states that required $94 million in penalties and remedial actions. Western Union again was the subject of a major BSA enforcement action in 2017, assessed a $184 monetary penalty for BSA violations by FinCEN along with penalties for fraud by the Department of Justice (DOJ) and the Federal Trade Commission. Moneygram forfeited $100 million to DOJ for BSA violations in 2012.

Things Fall Apart; The Center Cannot Hold

Supervisory authority over financial institutions for BSA compliance has been delegated to financial institutions’ primary regulators since before 2001, and in 2009-16 BSA enforcement authority became decentralized as well. Enforcement actions against banks and other depository institutions, previously conducted jointly by FinCEN and the institution’s primary federal or state regulator in major cases, increasingly became initiated and concluded by the primary federal or state regulators in 2009-16. These actions ranged from cases against smaller banks with penalties under $100,000 to cases involving large, multinational banks presenting complex supervisory issues, with penalties exceeding $100 million. (Financial institutions with no primary federal regulator, such as MSBs and casinos, have not been part of this trend.) As a result, there is the risk of divergence in approaches to significant issues with respect to BSA compliance and enforcement.

The expansion of BSA enforcement by the state of New York since 2009 has demonstrated a divergence of federal and state approaches. The New York Department of Financial Services (NYDFS) under its first superintendent, Benjamin Lawsky, initiated and concluded a series of actions in 2011-15 enforcing both the BSA and economic sanctions administered by OFAC. Enforcing requirements created under federal laws, NYDFS imposed penalties far greater than those assessed by federal authorities, in some cases independently of any federal action.

NYDFS concluded actions independently and with federal authorities during this period. NYDFS independently penalized Standard Chartered $340 million for BSA and economic sanctions violations in 2012, then $300 million for BSA violations in 2014. In a 2015 action against Commerzbank AG, NYDFS concluded the matter jointly with federal authorities, accounting for $300 million of the $734 million in monetary penalties and forfeitures.

Independent actions continued under current NYDFS Superintendent Maria Vullo and after the change in administrations in Washington in 2017, indicating that New York will continue its approach regardless of any changes in federal policy under the current administration. In 2016, three independent actions by NYDFS totaled $630 million in penalties and accounted for 92 percent of monetary penalties assessed for BSA violations in that year. In the first quarter of 2017, the $425 million penalty assessed on Deutsche Bank was the largest penalty assessed independently by NYDFS to date and accounted for more than two-thirds of the monetary penalties assessed during the quarter.

New York’s independent actions have involved the New York branches of foreign banks, and international banks are important channels for the potentially suspicious transactions that the BSA is intended to address, so these actions significantly affect federal policies for implementing the BSA. NYDFS assessing penalties on international banks not penalized by federal authorities, at higher levels than in federal actions, strengthens deterrence of negligence or willful violations, but it also adds to the regulatory burden created by the BSA. Whether the costs and benefits are appropriate to the goals of the BSA is a question beyond the scope here, but it is likely to be an important issue for the banking industry if current enforcement practices continue.

The purpose of BSA regulatory enforcement actions being to ensure compliance with the requirements of the BSA, not to grow as an end in themselves, the rise in BSA enforcement actions may cause both the financial industry and regulatory authorities to re-examine BSA regulation and enforcement and their effectiveness at fulfilling the purposes of the AML/CFT regime. Escalating monetary penalties, and the costs of compliance with the numerous consent orders that have not included monetary penalties, have made compliance with the BSA increasingly burdensome to financial institutions in many sectors since 2009. The effectiveness of the AML/CFT regime at deterring financial crime and causing reporting of suspicious transactions useful to law enforcement has not clearly improved at the same time. These trends may make the effectiveness of current policies at the federal and state levels a legitimate question in the near future.

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The statistics and charts presented here are derived from the AML Enforcement Tracker available on Bloomberg Law since May 2017. The AML Enforcement Tracker has detailed information and analytics on AML/BSA regulatory enforcement actions by the U.S. Department of the Treasury and other federal and state agencies and self-regulatory organizations (SROs) since 2009.

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