The price of doing financial business in the United States has just gone up. The Department of Justice is taking a new tack in its efforts to track and prosecute money laundering that occurs through financial institutions. Rather than focusing on money laundering that results from substantive criminal violations, such as mail or wire fraud, drug crimes, or corruption, federal prosecutors are looking instead at weaknesses in the internal procedures employed by financial institutions to prevent laundering.
Myriad laws govern what, when, and how often a financial institution has to report certain financial transactions. These laws, mostly codified under the Bank Secrecy Act (BSA) and its regulations, require financial institutions to report any currency transactions over $10,000 and suspicious transactions that may relate to money laundering activity. Financial institutions also are required to develop, implement and maintain effective anti-money laundering programs (AML programs) reasonably designed to prevent the institution from being used to facilitate money laundering.
For some time, BSA violations have been addressed by regulators as a compliance shortcoming, or occasionally resolved through the use of deferred prosecution agreements pursuant to which the government agrees to dismiss the charges against a financial institution in exchange for the implementation of additional anti-money laundering measures, forfeiture of fees and an agreement in which the bank neither admits nor denies wrongdoing. Recently, however, the Justice Department has made no secret of its intentions to more aggressively prosecute such violations.
Several highly-publicized examples of these efforts include the government’s focus on “sanctions busting” where a financial institution engages in transactions with a sanctioned foreign country deemed to pose a threat to national security, foreign policy, or the economy of the United States without properly disclosing the transaction’s connection with the sanctioned country. Federal and state prosecutors have reached settlements with large international banks, including ING and the British bank Standard Chartered, for their sanctions busting transactions with countries such asCuba andIran.
In addition, the Justice Department is now more broadly examining whether a financial institution’s AML processes are up to snuff. Rather than bringing criminal charges based on a specific underlying transaction in which a bank or other financial institution failed to file a Currency Transaction Report or Suspicious Activity Report, federal prosecutors are charging financial institutions with an overall failure to maintain an effective program to prevent money laundering. This June, the Justice Department brought criminal cases against a number of check-cashing businesses and their owners for failing to implement effective AML programs – remarkable because they are among the first BSA prosecutions brought against non-bank financial institutions and individual owners.
The global bank HSBC has been under investigation by federal regulators and the Senate Permanent Subcommittee on Investigations for similar conduct. A recent report issued by the Subcommittee details widespread and long-standing deficiencies in the bank’s AML program, including a backlog of more than 17,000 unreviewed alerts of possible suspicious activity, a failure to file timely reports with federal regulators and law enforcement, and inadequate staffing and resources for the bank’s AML program.
What does this mean for global financial institutions operating in the United States? Banks used to measuring the effectiveness of AML programs against standards established and enforced by bank regulators – in an arguably ineffective manner – will now have to consider whether their AML programs measure up to Justice Department standards or leave them vulnerable to criminal charges. These increased expectations are coupled with a push by the Justice Department to add new rules requiring financial institutions to increase due diligence. Financial institutions already spending in excess of $100 million annually to comply with the BSA likely will have to spend much more to shore up their AML programs.