Texas Bank Faces $2M Fine From FinCEN

by Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

The Financial Crimes Enforcement Network (FinCEN) hit a Texas bank with a $2 million Assessment of Civil Money Penalty for Bank Secrecy Act and anti-money laundering (BSA/AML) violations of Section 312 of the USA PATRIOT Act related to a correspondent relationship with a Mexican bank.

What happened

The privately held community bank—located in Pharr, TX, with more than $2.2 billion in assets and 28 branch locations—admitted to the facts set forth in the regulator’s Assessment of Civil Money Penalty that it willfully violated the BSA’s program and reporting requirements from 2010 through 2014. More specifically, the bank failed to establish and implement an adequate AML program, conduct required due diligence on a foreign correspondent account and report suspicious activity.

“[The bank’s] failures in these areas allowed a single foreign financial institution to move hundreds of millions of U.S. dollars in suspicious bulk cash shipments through the U.S. financial system in less than two years,” according to the Assessment.

As set forth by the BSA and implementing regulations, banks are required to develop and provide for the continued administration of an AML program reasonably designed to assure and monitor compliance with the BSA’s recordkeeping and reporting requirements.

But the Texas bank had repeated deficiencies, FinCEN said, including failing to collect and analyze information necessary to assess each customer’s risk and to develop and implement specific customer risk profiles; neglecting to identify the intended purpose of the customer’s account, the anticipated activity within the account, the nature of the customer’s business, the types of bank products and services used by the customer, and geographic indicators of risk; and failing to appropriately risk-rate certain of its customers during the account opening process.

The bank had knowledge of these deficiencies and did not correct them, FinCEN added. An external auditor found that information was missing or incorrect for 37 out of 50 accounts reviewed in a testing sample in 2014, while the bank had 4,888 outstanding alerts, 627 cases and 213 internal referrals during the period from January through November 2014.

Other problems occurred with the due diligence requirements for correspondent accounts for foreign financial institutions. Between May 2010 and November 2011, the bank provided U.S. currency bulk cash deposit and other correspondent banking services to a large financial institution headquartered in Mexico. “During this time period, the bank allowed approximately $260 million to flow through the foreign bank’s account without sufficient controls in place to detect and report suspicious activity,” FinCEN wrote.

The errors began with the account opening process, when the bank failed to identify well-known and public information about the principal owner of the foreign bank (who had agreed to pay civil penalties to the U.S. Securities and Exchange Commission to resolve allegations of securities fraud) or verify the accuracy of assertions from the foreign bank regarding the source of funds, purpose and expected activity.

Despite red flags, the bank further failed to adequately investigate increasing cash deposits of U.S. dollars and unusual wire activity in the account. For example, at the account opening, the foreign bank stated that monthly deposits of U.S. currency would be in amounts from $8 million to $9 million, with $3 million to $4 million expected to remain in the account. In reality, the deposits were two to three times greater—but the bank conducted no investigation into the cause.

In addition, the foreign bank requested a substantial number of wire transfers with the date of the transaction embedded into the dollar amount of the transfer (a wire transfer conducted on June 3 would be in the amount of $1,000,003.06). “[The bank] did not identify the issue in monitoring and could provide no explanation for what appeared to be a suspicious pattern embedded in each outgoing wire transfer to match the date it was sent,” according to the Assessment.

Further BSA/AML violations occurred when the bank did not file Suspicious Activity Reports (SARs), FinCEN said. Based on a review ordered by the Office of the Comptroller of the Currency (OCC) as part of an earlier enforcement action, the bank was required to file 161 SARs, 69 related directly to cash structuring and 92 related to other types of suspicious activity, representing approximately $131 million in previously unreported suspicious activity.

The bank addressed the BSA/AML deficiencies through “significant measures” recommended by both FinCEN and the OCC, with updated policies on due diligence measures and account opening procedures. The bank closed its accounts with the foreign bank and modified its customers and services to mitigate money laundering risks of certain accounts. New senior management and board level committees were formed to ensure the implementation and maintenance of the new plans.

Given these changes—and the bank’s cooperation with the regulator—FinCEN assessed a $2 million civil penalty, with $1 million partially satisfied by a payment already made to the OCC in 2015.

To read the Assessment of Civil Money Penalty, click here.

Why it matters

Announcing the Assessment, FinCEN sounded a cautionary note. “The action underscores the dangers that institutions face when taking on international correspondence activities without properly equipping themselves to manage such business,” the regulator wrote in a statement. “Smaller banks, just like the bigger ones, need to fully understand and follow the 312 due diligence requirements if they open up accounts for foreign banks,” added FinCEN Acting Director Jamal El-Hindi. “The risks can indeed be managed, but not if they are ignored.”


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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