The cost of failure of these banks to the FDIC insurance fund was about $42 million each, according to the FDIC. But the two banks closed on Friday were relatively small and the FDIC has shelled out hundred of millions to deal with bad assets at the 23 institutions it has been named receiver for since the year began.

On April 10 it cost the FDIC an estimated $670 million to shut down New Frontier, a Colorado bank and $131 million to handle the closing of Cape Fear Bank in Wilmington, North Carolina.

The closings have been a blow to the FDIC’s Deposit Insurance Fund, which has fallen below the 1.15 percent threshold of insured deposits it is required by statute to maintain. On February 27, 2009, the FDIC Board approved increases in deposit insurance premiums for member banks across all risk assessment categories, as well as a special assessment.

It is the 25^th bank to fail because American Sterling Bank of Sugar Creek, Missouri, the 24^th to be seized by regulators, was closed just hours before the Nevada bank.  More

Perhaps the worst is NOT yet to come. But we can expect more closings and should be prepared for them.

Kieran Beer

Not So Fast

 April 11, 2009

It is possible that the appellate court will see things differently. But in a little noticed ruling, Southern District of New York Judge Charles Haight, Jr. said federal prosecutors didn’t have jurisdiction to bring lawsuits against Lloyds TSB and Bank of Cyprus, because wire transactions that allegedly funneled fraud proceeds occurred outside of the United States.

Many in the bank compliance community believed that the suit would be the first of many cases to use Section 1956 (b) of the Money Laundering Control Act of 1986 as the basis for making foreign banks pay large sums of money. But Haight, a judge in the Southern District Court of New York, said that federal prosecutors ultimately failed to meet either of the two tenets needed to establish jurisdiction in a money laundering case: proving that the offense occurred in the United States and determining whether the crime was committed by an American. More

 The lawsuit brought in October 2007, alleged that Lloyds and the Bank of Cyprus knowingly aided Cypriot fugitive Lycourgos Kyprianou in laundering the profits of an insider trading scheme that cost investors more than $500 million. In January, both banks filed motions to dismiss the case on jurisdictional and statute of limitations grounds.

The Justice Department countered that, among other things, both banks had consented to U.S. jurisdiction when they sought charters to open bank branches in the U.S.

 But Haight didn’t buy Justice's argument and said his court had no power to pursue the case regardless of the U.S. bank charters or 1956 (b). The clue that this might be his position lay in Haight's earlier decision to dismiss a civil lawsuit against the Swiss bank UBS for handling funds also connected to Kyprianou, chief executive of software company AremisSoft, who was indicted for inflating the company’s earnings to boost its stock price.

A government official told reporter Brian Monroe that it was worrisome that Haight believed that Congress didn’t intend for Section 1956 (b) to give prosecutors wide latitude for bringing civil suits against foreign banks. “The only course of action is for DOJ to appeal the dismissal and state the jurisdiction is proper,” the official said. More

As of last week spokesperson for the Justice Department declined to comment whether it would appeal the decision.

Haight’s decision closely follows two successful asset forfeitures sought against foreign banks: the $350 million settlement paid by Lloyds for hiding the fact it moved money for sanctioned Iranian banks and the $780 billion paid by UBS for aiding 17,000 U.S. tax evaders. But both of these deferred prosecution agreements involved crimes committed in the U.S. and neither pushed the limits of U.S. jurisdiction of foreign banks.

It will be interesting to see what the appellate court has to say about those limits. 
Kieran Beer

FDIC February Actions Point to More Troubled Banks
March 29, 2009
The FDIC made public 21 cease and desist orders late Friday, all from February and all but one involving lending,capital requirement and solvency issues. Two of the banks had already been, closed and placed in receivership.
Less than an hour later, it was announced that Omni National Bank of Atlanta was being closed and the FDIC named as receiver, bringing the total number of year-to-date bank failures to 21--versus the 25 failures for all of 2008, a record for more than a decade.More

The two banks “dinged” by a C&D in February, but already departed, are Security Savings Bank of Henderson, Nev., and Sherman Country Bank, Loup City, Neb. The C&D for Security Savings is dated February 3, 2009; it was closed by its state regulator, in conjunction with the FDIC, on February 27. Sherman County Bank didn’t last that long: the FDIC enforcement action against it is dated February 9, but the FDIC declared it a failed bank four days later. 
It seemed clear that among the surviving banks disciplined with C&Ds there are some zombies also headed toward receivership since all but one of the banks were singled out for lending and capital requirements shortcomings (the C&D against Bank of Westminster in Westminster, South Carolina was entirely about anti-money laundering).
The enforcement actions against the “surviving” banks include requirements to increase capital in any way possible, and quickly: stock issuance, merger or acquisition. All of which suggests some of these could soon be failed banks—after all, bank stocks aren’t that popular right now and, in fact, banks aren’t in general highly sought after assets.
The large number of capital and lending requirement actions released on Friday by just one agency echoes a trend spotted in Fortent Inform’s First Annual U.S. Banking Enforcement Action Survey published last week. More
The Inform survey reports that overall enforcement actions more than doubled from 122 in 2007 to 273 in 2008.  Federal enforcement actions that addressed AML, lending or capital requirements jumped 124 percent last year, according to Fortent Inform data.  The OCC, which issued 97 such actions in 2008, saw the biggest jump, at 246 percent, while the FDIC increased its enforcements by over 90 percent, issuing 99 last year.
And these numbers, which reflect actions by the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC), the Financial Crimes Enforcement Network (FinCEN), the Office of Thrift Supervision (OTS) and the Federal Reserve Board, don’t tell the whole story.
While anti-money laundering enforcement actions by the banking regulators fell by 16 percent in 2008 over 2007, the surprise may be that they didn’t fall more given the focus on lending, capital requirement and solvency issues.
And, every compliance officer is aware of how active the Justice Department and law enforcement agencies of various stripes, including the Manhattan D.A.’s office, have been in pursuing Bank Secrecy Act and sanctions violations. Over the past three years prosecutors have struck deferred prosecutions agreements that cost banks hundreds of millions of dollars.
The Fortent survey includes those agreements, although the monumental DPA with Lloyds TSB for $350 million, reached early this year, will be included in Inform’s Second Annual U.S. Banking Enforcement.  Based on the sheer volume of enforcement actions thus far, there’s likely to be no let up in disciplinary actions against banks in 2009.
Kieran Beer

What’s Yours is Mine
March 14, 2009

One of the things America’s founding fathers believed in deeply was that the law should protect the right of the individual to own property. It is a right that was inseparable in their minds from life, liberty and the pursuit of happiness and an idea so powerful that it is a right now recognized throughout much of the world.

In the fight against money laundering, we’ve witnessed several challenges to this right.

The Office of Foreign Asset Control’s (OFAC) prerogative under the International Emergency Economic Powers Act, a post-9/11 executive order and the US Patriot Act of 2001to preemptively freeze assets is a leading example of the potential for rights abridgment. Although clearly born of good intention—the effort to stop funding terrorism—use of this act to freeze an Islamic charity’s assets without a warrant or due process prompted a Federal judge in Oregon to question whether it violated basic constitutional rights. The judge nonetheless upheld the freeze. More

An instance of encroachment involving domestic asset forfeitures was highlighted this week by a feature story in the Chicago Tribune. The Tribune reported that police in Teneha, Texas, a town located on a major thoroughfare linking Texas to several Louisiana casinos, have stopped more than 140 motorists, many of them black, and stripped them of whatever property they could seize. The motorists were offered the choice of signing over their property to the town or facing felony charges of money laundering or worse.  None of the motorists were ever charged with a crime.

According to the Tribune story, a local law enforcement official claimed the confiscations of funds and property were to fight drug money laundering—a fight that apparently extended to seizing $4,000 in cash from a black grandmother and $6,000 from an interracial couple, according to court documents cited by the newspaper. The Tribune account adds that the latter couple surrendered the money only after Teneha police threatened to seize their children and place them in foster care.

Teneha officials say their search-and-seizure practice is a legitimate use of the Texas asset-forfeiture law. That law permits local police to keep drug money and other property used in the commission of a crime and add the proceeds to their budgets.

Asset forfeiture is a powerful tool and its potential for abuse is great. It’s tempting for localities to seize assets regardless of their attachment to crime on the grounds they’ll help them buy an extra police cruiser or hire an extra officer.  Even used carefully and sparingly, asset forfeiture laws warrant vigorous and open public debate.
Debate and discussion is what this coming week will be all about as anti-money laundering professionals meet at the 14th Annual International Anti-Money Laundering Conference in Hollywood, Florida, March 16th to 17th. 

They will be assembling in the ninth year since they were enjoined in the fight against terrorism. In coming up to speed with the new regime, banks have paid civil penalties and faced asset forfeitures at the hands of federal regulators and federal law enforcement officials.

In fact, one topic of debate at the conference is summed up by the title of the panel: “Point-Counterpoint: The Fight Against Terrorist Financing: Necessary Bulwark or Unnecessary Burden?” The panel features two former FBI agents, both with distinguished records of service, and very different points of view: Dennis Lormel, who created the FBI’s counter-terrorism task force after September 11, 2001 and Michael German, who served on the FBI’s domestic counter-terrorism task force. Lormel is now a consultant and German now works for the American Civil Liberties Union. More

An opening keynote speech will also provide an anatomy of the Justice Department and New York District Attorney’s deferred prosecution agreement with Lloyds TSB. The panel features two of the people at Justice and the Manhattan D.A.’s office that brokered the agreement: Mia M. Levine, assistant chief for litigation of the asset forfeiture and money laundering section of the criminal division, U.S. Department of Justice, Washington, D.C. and Adam S. Kaufmann, assistant district attorney and chief of investigations, New York County District Attorney’s Office, New York.

Som of the good news is that AML professionals have been very successful in meeting the requirements of regulators. That at least has been the word from regulators (who in their second breath caution that AML departments should not take that to mean they should cut back on their efforts), and borne out by a joint moneylaundering.com/Fortent Inform survey of all banking enforcement actions in 2007 and 2008 that will be published within the week.

While enforcement actions by the major banking regulators more than doubled in 2008 to 273 actions from 121 in 2007, most of those actions reflected a rise in lending and capital requirement violations.

Together the Office of the Comptroller of the Currency, Federal Reserve, Federal Deposit Insurance Corporation, Office of Thrift Supervisor, Financial Crimes Enforcement Network and New York State Department of Banking issued 41 enforcement actions that involved AML in whole or in part. That number compares with 69 AML enforcement actions in 2007.

But as the debate about counter-terrorism finance and panels on mortgage fraud and sanctions regulations show, the challenge for AML officers continues even if there were fewer AML enforcement actions. These are challenges addressed in both the education provided by the panels and the questions they raise for legislators and regulators about how we catch money launderers, tax cheats, and fraudsters, while holding true to some of the deeply held values of this country with regard to property and privacy rights.

Kieran Beer

A Very Useful Engine
February 27, 2009

Those of you with children may have suffered through stories of the Reverend W.V. Audrey’s Thomas the Tank Engine. Even with the American PBS wrapper that packaged the stories as “Shining Time Station” and included the very cool Jukebox Puppet Band introducing tales of the plucky Thomas, you couldn’t help but feel you were being scolded at the end of each segment.

Thomas and his friends on the Island of Sodor learned something new each week, but there was a recurring lesson about the importance of utility. The great payoff for Thomas was receipt of the accolade that he was a very useful engine.

Despite the cloying sound of it, we’re all in the position of needing to feel very useful. Rumor has it that several large banks have begun to cut their compliance staff in the face of financial pressure and in the belief regulators don’t care as much about AML anymore.

But if their role in filing mortgage fraud SARs wasn’t enough, anti-money laundering professionals have gotten another compelling argument for their importance: the $780 million settlement the Justice Department struck with UBS AG last week. More

Switzerland’s largest bank helped about 17,000 U.S. citizens evade paying taxes on offshore revenue generated by their investments with UBS, according to the U.S. Justice Department. To avoid prosecution UBS AG will turn over the largest money penalty ever and the names of some of the U.S. clients involved. Between 2002 and 2007, UBS generated approximately $200 million in profits per year from their cross-border business with U.S. clients, according to the deferred prosecution agreement.

Separately, tax consultants and former investigators wondered if LGT in Liechtenstein might be the next big bank to reach an accommodation with the Justice Department over tax evasion. More

The argument for the importance of AML pros is a two-parter because, historically, compliance departments didn’t have to worry about whether money appeared to be on the move to avoid taxes unless they had reason to suspect the money represented the proceeds of a crime. They were only supposed to file a suspicious activity report if they were certain the money they were being asked to accept or move was due the taxman.

But with AML folks as the keeper of the SAR filing, a bill pending in the Senate will change that. It will also put an end to those countless queries and arguments on the ACAMS (Association of Certified Anti-money laundering Specialist) list serve about whether you file a SAR on someone possibly depositing or withdrawing funds to avoid taxes.

(The expert advice more than one list serve participant gave, including some former law enforcement folk, was no, don’t file a SAR.)

But an anti-fraud bill proposed by Sens. Patrick Leahy, a Vermont Democrat, and Charles Grassley, an Iowa Republican, would broaden the application of money laundering laws to include money funneled offshore to avoid taxes. Of course, the bill would do more than that: it would define the gross receipts from a criminal enterprise as subject to money laundering laws to remedy the Supreme Court’s decision in United States v. Efrain Santos. More

But the significance of making tax evasion a money laundering charge a part of the bill is that it gives AML types a further reason for being. Compliance departments will need to look for tax evasion, in addition to filing SARs for mortgage fraud, doing the necessary added due diligence on politically exposed persons and making sure their bank doesn’t break any sanctions laws.

I’ve already talked about what sanctions violations cost Lloyds TSB - $350 million – in an earlier column. Banks are not going to want to find out what failing to report suspected tax evasion will cost them, especially if its hundreds of millions as it was for UBS. 

Kieran Beer

Of Foxes and Henhouses
February 20, 2009

It has been an active week in the banking world: the Obama administration rolled out its plan to aid U.S. mortgage holders, the U.S. Justice Department announced a record $780 million penalty against UBS for aiding U.S. residents in tax evasion and the cable financial shows carried frequent updates that asked the question “Where in the world is Robert Allen Stanford?” (It turns out Virginia.)

For anti-money laundering professionals, there is an interesting footnote to the Stanford saga. While there are allegations of a Ponzi scheme and questions about whether drug cartel money might have visited any of Stanford’s banks, Stanford at one-time positioned himself as an AML guru.

In 1998 and 1999, Allen headed a private commission empowered by Antigua’s then Prime Minister Lester Bird to overhaul the island nation’s money laundering laws. Stanford, who Money Laundering Alert called an entrepreneur and Texas banker, had opened an offshore and a domestic bank in Antigua in 1990, according to the New York Times. He ingratiated himself with the prime minister by various acts of philanthropy, including covering some of the expenses of the commission out of his own pocket. It was Stanford who hired a number of respected former U.S. law enforcement officials to make AML recommendations for Antigua.

The commission was formed to undo the perception that Antigua had lax money laundering controls and that financial institutions should give enhanced scrutiny to any transactions they had with the island. That was the message the U.S. Treasury Department issued on April 7, 1999 and that Great Britain issued twelve days later.

Antigua had hoped to avoid the release of that advisory. A representative of its prime minister and its AML officials sat down in January 1999 to make its case to 23 government officials from various agencies. One of the government officials attending that meeting was Jonathan Winer, then deputy assistant secretary of state with responsibility for the department’s Bureau of International Narcotics and Law Enforcement Affairs, according to a Money Laundering Alert editorial written at the time.

Winer, and clearly some of the other assembled officials, actively questioned the depth of the reforms undertaken by Antigua. This week he told mldc/Inform reporter Matt Squire, “The issue was not the quality of work being done by the people being retained by Stanford. It was the relationship between Stanford and the government in connection with the regulation.”  More

Anyway, the government group that met with the Antiguans was not persuaded and the advisory was released four months later.

It isn’t clear what Antigua did about all those recommendations generated by the paid law enforcement consultants. The country did get a better grade from the Treasury Department in 2001. But if you flash forward to the Caribbean Financial Action Task Force’s evaluation of Antigua and Barbuda dated June 23, 2008, you will read a damning report.

The CFATF evaluation finds Antigua non-compliant in 19 out of its 40 + 9 recommendations for best practices. The island nation is only partially compliant in 16 of the recommendations.

Kieran Beer

No Small Roles, Only Small Actors
February 13, 2009

Compliance departments can take comfort in one change that the current economic crisis has wrought, even if it is a small one.

Once, seemingly long ago, in a time before Lehman Brothers collapsed and Merrill Lynch was saved (sort of) and before TARP roamed the land, there were titans who produced the big profits at investment banks and then there were the cost centers.

Many a banker who was responsible for managing a business complained about having to deal with the idiots who stood in the way of their launching a new product or writing a lot of swaps. These folks – everyone from the most junior compliance officer, to legal counsel to risk management – didn’t get it. And if their cautions and pleas were heeded, banks wouldn’t make money.

Or, at least the investment bankers, traders and salesmen who created and moved some of the exotica opposed by risk management and compliance wouldn’t.

There are many anecdotal tales of risk managers and their compliance brethren being overruled or pushed to redo the numbers or propose a compromise that “works.” In these cases, what “works” was what would allow the much smarter profit centers to do what banking professionals thought was necessary to write a piece of business and take their commission.

And, often risk management and compliance people weren’t even invited to the table to object to new products, new loans, and new proprietary positions.
So it is refreshing that one of the titans of Wall Street has weighed in on the importance of the cost center folks.

“Risk and control functions need to be completely independent from the business units. And clarity as to whom risk and control managers report to is crucial to maintaining that independence. Equally important, risk managers need to have at least equal stature with their counterparts on the trading desks: if there is a question about the value of a position or a disagreement about a risk limit, the risk manager’s view should always prevail.”

Lloyd Blankfein, chairman of Goldman Sachs, wrote the above as an Op-Ed piece in the Financial Times Monday, trying to set the stage for his congressional testimony on Wednesday.

In fact, is it too much of a stretch to see the testimony of Blankfein, and his counterparts at JP Morgan Chases, Wells Fargo, Bank of America and Citicorp as the ultimate cost center’s – government’s – challenge to the profit center to abide by the rules of risk management and other regulations?

Anyway, it’s nice to see the cost centers get their due. They are not the ones that got us into this mess. The ones that did were the smart “profit makers” in banks. 

If Blankfein’s piece is any indication, perhaps that will change for a while. At least until the economy takes off again and the profit titans reassert themselves.
Kieran Beer

Banks Must Preserve Their Compliance Efforts, Even in These Hard Times
February 8, 2009

There were 600,000 jobs lost in the U.S. at the end of December, bringing total unemployment in the country to 7.6%, the Labor Department announced Friday.

The latest numbers showed suffering all around: service-sector employment fell 279,000, business and professional services companies shed 121,000 jobs and the financial-sector eliminated 42,000 jobs.

I’m not sure what the number for the financial sector means in terms of percentage of total jobs lost, but it seems high and, anecdotally, stories of financial professionals being laid off abound in my neighborhood. 

Because both my neighbors and readers are involved, this may sound like self-interested special pleading, but it is important that compliance departments aren’t decimated by layoffs

Given both the rise in financial crime and some nascent signs of success in fighting it, this is no time to cut compliance staff.

One example of the usefulness of all those compliance pros is the near explosion in prosecutions of former political leaders – in some cases dictators will suffice as a description – who have salted public monies into private, off-shore secret accounts

As Brian Monroe reported in a story we ran yesterday, when Taiwanese authorities arrested former Prime Minister Chen Shui-bian and his wife on money laundering charges in December, it came as a surprise to the country he once led. Prior to the case, the Taiwanese government had never gone after a former leader for crimes allegedly committed while in office.

But the charges, which follow Taiwan’s passage of anti-corruption laws in February 2003 and precede the introduction of similar measures last month, are indicative of broader, international efforts to combat corruption associated with the political elites.

The international anti-corruption laws and resultant trials of politically exposed persons have been largely driven by the U.S. and by a big push from the Paris-based Financial Action Task Force (FATF) in June 2003, when the organization published monitoring standards. A dozen countries have introduced PEP laws since 2004 – including Chile, India, Thailand, the Philippines and the European Union.

But should something temper the rise in PEP-related corruption cases, it is likely to be the downturn in the economy that results in fewer compliance professionals, according to John Wood, chief executive officer of Washington, D.C.-based AML consultancy, Playfair Group. He told Inform that banks could be hard pressed to adequately investigate PEP related transactions because they have eliminated compliance staff and they are too busy just keeping their institutions afloat.

And, compliance professionals are responsible for the rise in suspicious activity reports (SARs) on suspected cases of mortgage fraud by 39 percent in 2008 over the previous year. The rise will no doubt be of great use to the teams of law enforcement professionals being assembled across the country to bring the perpetrators of this kind of fraud to justice.

So there are lots of good arguments for sparing compliance jobs, funding and training them. More importantly it is that is consistently message of the various regulators when they appear at conferences and speak to the press.

 “The thing that has kept us thinking and alert all year is the credit crisis, that banks might be suffering so severely that they may have to shift their priorities away from AML compliance,” Lisa Arquette, associate director of the FDIC’s Anti-Money Laundering and Risk Analysis division told Inform reporter Matt Squire. “We are reminding our examiners to be vigilant and be aware of that.”
Kieran Beer

The More Things Change, Will They Stay the Same?
January 30, 2009

“The more things change” – well, you know the axiom: “the more they stay the same.” I’m not sure it’s always true. Several counter-proverbs come to mind including “the only thing constant is change,” and “if you want things to stay the same, you have to change them a bit.”

But the first axiom does seem to ring true with regard to the Financial Crimes Enforcement Network (FinCEN) and, to lesser degree, the Office of Foreign Assets Control (OFAC).

Despite the fact that the Obama administration and a Congress with a large Democratic majority seems to be settling into their jobs in the District of Columbia, it looks as though the team appointed by the Bush administration is there to stay – at least for the near term.

Early in January, The New York Times reported that Stuart Levey, the under secretary for terrorism and financial intelligence, was asked by then Treasury Secretary designate Timothy Geithner to stay on. The NYT framed the request as one intended to keep Levey in place at least until a suitable replacement could be found. Ten days later, The Wall Street Journal made Geithner’s request seem more open-ended and less temporary: "Mr. Geithner has already asked Stuart Levey, who is running Treasury pending Mr. Geithner's confirmation, to continue overseeing the department's financial-counterterrorism efforts. Mr. Levey has been a key architect of sanctions against Iran. His retention suggests the Obama administration may continue Bush administration policy in that arena."

It is not as though the Obama administration won’t change some of the priorities of the Bush presidency. Sources on the record and off who spoke to moneylaundering.com/Inform reporter Brian Monroe said they expected the Obama administration to be prepared to ease sanctions against Iran and North Korea if solid diplomatic gains can be scored from either state in return. And, while we have reported earlier that Obama might ease some Cuba sanctions, the new president has called for sanctions against Zimbabwe on the grounds its not-really-elected president Robert Mugabe is starving, torturing and killing its citizens.

It remains to be seen how Levey will cope with a lessening of sanctions against Iran – sanctions that he has been the primary architect of. Presumably those sanctions are in place to change Iran’s behavior, particularly its alleged headlong rush to build a nuclear weapon, and its support of Hezbollah, Hamas and radical Shiite elements in Iraq responsible for killing U.S. soldiers and Sunnis.

Levey’s staying on also seems to portend that head of OFAC, Adam Szubin, will stay in place too.
It seems a vote of confidence in what both men have done and, as sources pointed out, also a manifestation of the fact the Obama administrations is primarily concern focused on fixing the economy.

This reality is also an argument put forward for James Freis’ ongoing tenure at FinCEN. There is no urgency to make a change there. 

If this continuity gives bankers some comfort, other comments on the changes (or lack thereof) may not. Nobody argues that banks will feel any lesser regulatory burden in the anti-money laundering or sanctions area.

And keep in mind this comment from one former Washington hand: “It’s not that unusual for Treasury enforcement personnel to straddle administrations; but they usually are only keeping the seat warm until a new political appointee is named.  If experience is any judge, a new person will be appointed and that person will be bringing in his or her own people in short order.”

Kieran Beer

Nobody Loves You When You’re Down and Out
January 19, 2009
It has started again. Two banks were closed last Friday, placed into receivership with the Federal Deposit Insurance Corporation. They were the first to fail in 2009. A third was closed today. Last year, 25 banks failed. That number is likely to be topped this year. One analyst, cited in The New York Times today, predicts that 200 to 300 banks will either fail or be forced to merge this year.
 
While the insured deposits were picked up by other banks in a nearly seamless fashion, the cost to the FDIC’s insurance fund to close the three banks – one in Illinois. one in Washington and the third in California – is about $450 million, according to the agency. You can do the math on the 25 other banks closed by trawling the FDIC’s Web site. And you can speculate on what 200 to 300 more failures or mergers will mean.
And then there are the problems being faced by some of the biggest banks in the country that are costing taxpayers billions of dollars.
 
The result is that, generally, whether you’re a commercial banker on Main Street or an investment banker more tied to Wall Street, there isn’t a lot of good feeling out there toward you. Comments posted around a story that appeared in the Washington Post on TARP and the proposed future bank bailouts overwhelmingly argued that failing banks should be allowed to fail and – basically – that banking executives should be boiled alive in their own vats of collateralized debt obligations.
 
In the midst of all this I have had several flashbacks to simpler, pre-Gramm-Leach-Bliley days when, as the editor of a daily banking publication, I used to travel to meet with lots of bankers.
 
The model for banking then was pretty simple and the bankers I interviewed had pretty transparent business models. And it struck me that being a banker seemed like a great way to make a living.
 
One particular bank tour some time in early 2000 started with a flight to a metropolitan area to meet with chief executives at large banks. They were all busy trying to increase their loans to the higher mid-tier companies to make money and dabbling in transaction processing as a profit center.
 
The trip concluded with a drive on back roads to meet with community bankers.
 
In one small town, I spent time with the chairman and chief executive of a bank that had opened six months before. While the bank was new, the CEO was an old hand, having launched a number of banks and then sold them to larger institutions.
 
Looking out of the window of his office of the newly built bank, I could see construction everywhere. It was all connected, all part of his relatively easy business model.
 
People migrating from the big city I had jetted into to meet with the big banks were depositing their money at the new bank. Although the bank paid relatively low interest rates, the deposits were insured. The bank then loaned out the money at a higher interest rate to fund all that construction: homes that quickly sold and commercial buildings that filled with tenants before completion.
 
It wasn’t rocket science, but it was building a community. And it struck me that the banker enjoyed an honored place in the community: a berth at the local country club and great treatment from all the restaurateurs and merchants he’d funded. As he continued to build banks and sell them to larger institutions, he could count on being a wealthy man – not hedge-fund-manager rich, but wealthy.
 
But that was a different era. Not only pre-GLB, but before securitization and the leveraging of mortgage loans reached their current disastrous levels.
 
I didn’t think the chairman of that bank was the smartest man I’d ever met, not that he wasn’t smart. It’s just that he was nowhere near as creative as the guys who were going to figure out collateralized debt obligations and swaps.
 
But those guys and their followers seemed to have brought us to where we are now, including the country’s low regard for bankers. Banks like that community bank are failing, some having lent too aggressively, without having done proper due diligence on their borrowers. And I suppose that some of them might have failed in even more forgiving markets – but the current incalculable damage that the entire banking system suffers from isn’t from overly aggressive lending in communities. The depth of the crisis for community banks is attributable to how some of their loans were packaged, leveraged and moved upstream by the smarter guys.
 
Kieran Beer

Lloyds' DPA Could be Just the First of Many for Banks
January 12, 2009
Anxiously waiting for the other (proverbial) shoe to drop is an age old practice, particularly at banks dealing with regulators.
But following the $350 million deferred prosecution agreement (DPA) Lloyds TSB Group reached with the U.S. Justice Department and the New York County District Attorney, banks are waiting for lots of other shoes to fall.

That’s because the Lloyd’s settlement is only the first dramatic resolution of one of at least nine other investigations by the Justice Department and Manhattan D.A. Robert Morgenthau. The names of all of the other institutions aren’t known, but Credit Suisse announced year ago that it was working with the Justice Department and reiterated that today.
Under the DPA, Lloyds agreed that it violated the International Emergency Economic Power Act. The act allows the President (or his proxy at the U.S. Treasury Department’s Office of Foreign Asset Control) to impose sanctions on countries and entities giving material support to terrorism. 

According to reports, at stake was the ability of Iran to buy technology for its nuclear program and for other military uses. Perhaps that is why Lloyds agreed to a whopping $350 million forfeiture - $175 million to New York and an equal sum to the Fed.
Lloyds folded, at least according to the Justice document, because the bank’s material support of sanctioned entities was manifold and undeniable. Between 2001 and 2004, Lloyds allowed over $300 million in wire transfers into the United States from Iranian banks, including Bank Melli, Bank Saderat and Bank Sepah, whose origins were concealed so that Iran was able to engage in otherwise prohibited transactions. Lloyds also allowed $20 million of transfers from sanctioned Sudanese clients to enter the United States up until 2007.

It would be nice to think that someone at Lloyds merely goofed up – you know, turned their back for a second while the wires were being processed and didn’t notice that the money was coming from Iran or the Sudan. But the Justice documents make clear that “Lloyds removed material data from payment messages in order to avoid detection of the involvement of OFAC sanctioned parties by filters used by U.S. depository institutions.”

The process was referred to by employees as stripping and, perhaps unfairly, it is possible to imagine new Lloyds’ employees being schooled in “Stripping 101.”

Lloyds’ business with the Justice is by no means finished. But the bank’s argument in another outstanding case with the department seems further eroded by the January 9, 2009 DPA.

In that case, Lloyds argued in January of 2008 that the United States had no jurisdiction over it. The case involved a claim that Lloyds had knowingly helped a Cypriot millionaire wanted by U.S. investigators launder profits from an insider trading scheme. Justice was seeking $130 million from Lloyds (and $160 million from the Bank of Cyprus).
Justice countered Lloyd’s challenge by pointing out that the crime and subsequent money laundering initially took place in the United States and was, under 18 U.S.C. 1956(b), within U.S. jurisdiction.  Besides, the bank had agreed to be regulated by the Federal Reserve, signing an agreement with the Fed to open a New York branch.

The Lloyds and Bank of Cyprus cases are unresolved in the courts, but observers think the resolution of this sanctions case, coupled with Lloyds expressed desire to continue to do U.S. business, will result in an out-of-court resolution. (Bank of Cyprus may hold out, but that is a different matter.)
Kieran Beer

Everything Old Becomes New Again
Ocotber 24, 2008
Having children means that there was a time not so long ago that I watched a number of animated Disney features repeatedly. The take away is that I currently have the song “Everybody Wants to be a Cat” running around in my brain, except that occasionally, while singing the frenetic lyrics to myself, I substitute “bank” for “cat.”

That’s because you can’t go more than a week without reading in the newspapers that a financial institution wants to become a bank holding company.

There was a time when the last thing managers of non-bank financial institutions wanted was to be a bank. Banks were stodgy, slow-moving institutions and the smart guys were at investment banks, broker-dealers and hedge funds. Actually, they were at a lot of places, just not banks – at least not the part of the bank that was a boring, old depository institution.

Now Goldman Sachs wants to take deposits. Someday soon, you might even be able to get a toaster for opening an account with the same guys who wouldn’t talk to you unless you had millions or even tens of millions of dollars.

In addition to Goldman, there is a lengthy list of companies seeking to be bank holding companies and buy deposit-taking institutions. Initially, it looked like they might get access to the $700 billion Troubled Asset Relief Program (TARP) funds for their troubles. But now that Treasury has taken a go-slow stance on disbursing more than the nearly $350 billion already released, some may have to settle for one of the other advantages of being a bank:  cheap funds from deposits.

“With deposits comes responsibility.” Yes, that’s not an aphorism, but perhaps should be. Anyway, with deposits comes a different, tighter anti-money laundering regime. Hopefully, these newcomers to banking will be ready for it.

Here is the list to-date. Feel free to let me know whom I have missed:

Aegon
American Express (financial services)
CIT Group (insurance)
Genworth Financial Inc
GMAC
Hartford Financial Services Group Inc
Lincoln National Corp.
Morgan Stanley (investment bank/broker-dealer)
Phoenix Cos. (insurance)
PHH Corp.
Rock Holdings

Kieran Beer

As ABA Calls for Decriminalization of AML Deficiencies, Justice Gears Up for Subprime Investigations 
Ocotober 17, 2009
Well, it’s already happening. The New York Post reported today that a dozen Lehman executives had been subpoenaed in conjunction with three grand jury hearings. They are likely to be “quizzed” – don’t think Jeopardy, think inquisition – about how they represented the health of the company and the value of its assets in the run-up to its demise. Washington Mutual is also spending time talking to prosecutors.

We’ve already reported that the Economic Emergency Act of 2008 contains provisions that encourage the involvement of FBI agents and prosecutors in assigning criminal blame for the subprime meltdown. U.S. attorney’s offices throughout the country, state attorneys general and other prosecutors are gearing up to bring criminal and civil actions against banks and other financial institutions, DeMaurice Smith, a Patton Boggs partner, told a recent breakfast gathering at the Yale Club. The Lehman subpoenas suggest that law enforcement is already geared up and ready to go.

One irony for the anti-money laundering professionals in all this is that the criminalization of the subprime meltdown comes just as the American Bankers Association has released its plea for reform. One significant part of that reform, laid out in a 120-page document created by some of the leading lights of the AML community, is   the recommendation that “the Department of Justice leave the oversight of BSA regulatory compliance by a bank to the bank regulatory agencies.”
And, the ABA report asks that limits be imposed on the powers of the U.S. Justice Department to regulate financial institutions for AML deficiencies, including a requirement that criminal action against a bank be prohibited unless bankers and financial regulators have first been consulted.
The irony is that, in the wake of the subprime crisis, prosecutors will get more power overseeing the financial system at a time when lawmakers and regulators aren’t  focused on reforming or even refining the AML regulatory regime right now.
Expect Congress, the Department of Justice and teams of litigators to seek a pound of flesh over the collapse of financial institutions and not to worry about AML in the months ahead.
None of this is to say there aren’t legitimate concerns about the criminalization of AML violations. The rise in deferred prosecution agreements can be seen as a legitimate way to deal with regulatory lapses or as blackmail. The alternative to signing a DPA can be a perp walk for executives – so there is great incentive to sign.
But these concerns of the report aren’t likely to get a hearing as the country focuses on subprime and as the Department of Justice is tapped to bring prosecutions related to the meltdown.
I have not addressed any of the other recommendations of the ABA report, perhaps best saved for another column. Suffice it to say that the creation of an ombudsmen or gatekeeper position that will intercede with regulators seems to have even less chance of getting serious consideration than the push for a  scaled back role for DOJ.
Kieran Beer

Let’s Not Forgot Our Commitment to Main Street.
September 22, 2008

Overlooked in the bailout of Wall Street institutions proposed by Treasury Secretary Henry Paulson is concern about Main Street’s savers.

Despite having no statutory obligation to protect the likes of AIG, Bear Stearns, Fannie Mae or Freddie Mac, allowing them to fail is unimaginable because there was no way to anticipate how devastating the consequences might be.

As a result the Treasury, on the taxpayers’ behalf, has vowed to make $85 billion available to AIG, provide up to $30 billion in guarantees to Bear Stearns and to spend about  $700 million to buy toxic mortgage obligations to “unclog” the entire financial system.

But there is little talk about the explicit commitment we have to protect tens of millions of depositors in banks and savings and loans to avoid financial panic on Main Street. That commitment is complicated by the fact that the Federal Deposit Insurance Corporation, having seized 12 failed banks year-to-date, has seen its insurance reserves fall below its legally mandated ratio of funds to insured assets.

The FDIC can count on an emergency line of credit from the U.S. Treasury in the event a big bank should fail, according to FDIC Chairman Sheila Bair, speaking earlier this month. Further, she added, the FDIC will develop a plan, to be announced in October, which will bring its insurance ratio to at least the minimum mandated by law over the next 5 years as required by statute. But what if there are a number of bank failures before then?

In June the FDIC named 117 institutions to its “Problem List” that collectively represent $78 billion in assets and conceded that the number of troubled banks on the list will rise.

Clearly there is a need to act now, and with real courage, to increase the insurance fund. Among the solutions floated by the FDIC is an increase in premiums paid by insured banks. However, the American Bankers Association (ABA) President Edward Yingling is already on record opposing any increase on his members on the grounds the FDIC fund is actually in good shape. In contrast, he asserts, banks are having a rough year and need to preserve capital.

Despite its resistance to increased premiums, the ABA wisely, if also self-interestedly, questioned the Treasury’s guarantee last week to bail out money market funds. It is a question of unintended consequences: such a guarantee could give savers further reason to withdraw money from their insured depository accounts.

Sadly, discussion about the health of our banking system scheduled for hearings in the Senate last week were cancelled. That’s because the larger problems of Wall Street are diverting attention from the potential problems of banks on Main Street.

This is not the time to risk a failure of confidence in our depository banking system because we are distracted by the crisis on Wall Street. It’s time for Congress to take up the urgent needs of the FDIC, increase the fund, and consider increasing the promise the fund makes to Middle America – for example, raising the amount insured from a maximum $100,000 to $150,000 for individual accounts and $300,000 for joint accounts. At least in this case, the average taxpayer would be the direct beneficiary of his or her own largess.

Founded 75 years ago in the wake of the Great Depression and country-wide runs on banks, the FDIC is a remarkable institution.

And, under Bair’s leadership, the FDIC acted quickly and quietly to avoid creating panic when it closed 12 banks this year.  Beginning this spring and continuing into the fall, it has become a Friday routine: a bank is closed somewhere, its insured assets are generally bought by another bank and its liabilities are assumed by the FDIC. There is every reason to think this Friday ritual will continue and that makes it imperative that measures be taken now to shore up the fund so it can handle future bank closings.

It is an iconic scene from a classic American film. “Don’t look now George, but there’s something funny going on over there at the bank,” Ernie the cabdriver tells George Bailey in “It’s a Wonderful Life.” “I’ve never seen one, but that has all the earmarks of a run.”

It’s unacceptable that the scene should ever actually recur in the modern U.S. banking system.

Kieran Beer

Hard Times, Come Again No More

It’s hard to be confident about the state of the economy, particularly the banking industry right now. Financial stocks seem to be the proverbial canary in the coalmine: dropping at the closing bell, signaling that there are systemic problems with the economy.

One sign of this is that bank stocks are not just falling. Many are down by more than 50% of their former market capitalization, and some banks are out-and-out failing.

A sad symptom of this is the need for someone here at Inform to keep watch on Friday evenings for bank closings. Yes, in the dog days of August, on those hot end-of-week evenings, when our legal team would like to head out to the beach or at least a get a beer and then go to a movie in a cool dark theater, it’s necessary to be keep someone on alert.

At about 6.10 p.m. on Friday, August 1, it was announced that First Priority Bank of Bradenton, Fla., was shut down by its state regulator. The Federal Deposit Insurance Corporation was named as receiver and SunTrust Bank in Atlanta, Georgia acquired all the insured non-brokered deposit accounts.

The week before, at 9.30 p.m. on Friday, July 25, the Office of the Comptroller of the Currency seized two banks and designated the FDIC as their receiver: First Heritage of Newport Beach, Cal., and First National Bank of Reno, Nevada. Deposits at the two banks were acquired by the Mutual of Omaha Bank.

These aren’t the only bank closures this year, just the most recent. The FDIC lists a total of eight bank failures for 2008 versus three for all of 2007 and none in 2006 or 2005.

These look to be hard times, not least of all because they are a little like Lake Superior – no one really knows what the bottom looks like.  Without being Pollyanna, we can at least hope this is the bottom or pretty darn near. In the meantime, I’ve got that 1854 Stephen Foster song “Hard Times” ringing in my ears.

“'Tis the song, the sigh of the weary;

Hard Times, Hard Times, come again no more:
Many days you have lingered around my cabin door;
Oh!  Hard Times, come again no more.”

Kieran Beer

AML Regulations for Hedge Funds: Fuhgedaboutit!

 A quick search on Fortent Inform or moneylaundering.com reveals that we have done a number of stories about hedge funds, including “Hedge Funds Operate Free of AML Programs Five Years After Rules Proposed.”

 Now, months after this story ran, it could run again with few changes. In fact, although the U.S. Treasury’s Financial Crimes Enforcement Network proposed AML requirements in September 2002 for unregistered investment companies, including hedge funds, it has not finalized the rules.

 The Bush administration isn’t moving to remedy this situation. A May 9 directive to all federal agencies to issue any new regulatory proposals by June 1 and any final regulations by Nov. 1 is probably a final blow to hedge fund AML regulation by this administration. While the memo allows the executive branch to make exceptions in cases of “extraordinary circumstances,” according to a The New York Times report, hedge funds rules aren’t likely to be fast tracked.
And, that’s not because hedge funds aren’t high risk when it comes to money laundering or fraud.

Just two week ago a former Atlanta hedge fund manager was convicted of running a scheme that took millions of dollars from investors to pay for luxury items, including a $500,000 wedding for himself. It was a horrible story the tabloids love: big-name NFL players were bilked and the fund manager, Kirk Wright, committed suicide just four days after he was found guilty.

But just because the feds haven’t acted, doesn’t mean banks shouldn’t. As Brian Orsak reports in his story “As Hedge Fund Fraud Rises, Need for Greater Institutional Diligence Follows,” banks that serve hedge funds need to take steps to protect themselves. His story suggests a few ways banks can do that. Among them, due diligence that includes:

·      Checking civil litigation records and Financial Industry Regulatory Authority (Finra) central registration depository reports for information about the fund,

·      Talking to clients of the fund,

·      And, doing an internal controls analysis of the fund.

Financial institutions will additionally want to see that the hedge fund manager has hired quality auditors and lawyers and has functioning offices of a quality commensurate with the assets of the fund.

But of course, banks protecting themselves aren’t the same thing as greater hedge fund oversight, including finalization of AML rules for hedge funds. A lot is at stake. We’re not talking small potatoes here: two years ago the Securities and Exchange Commission estimated there were 8,800 hedge funds, with approximately $1.2 trillion of assets.

Kieran Beer

War by Other Means
March 18, 2008

 “Freezing assets and denying a country access to international markets is war by other means,” wrote Prussian Major-General Carl von Clausewitz’s in his seminal work, “On War.”

Okay, what he actually wrote, albeit in German, is that “politics is war by other means,” (which is frequently rendered by pundits as “diplomacy is war by other means.”)

But it’s clear the Bush administration has built on to von Clausewitz’s concept in its effort to punish Iran for its once and possibly future pursuit of nuclear weapons.

One former government official told our reporter Brian Orsak that the Bush Administration has been investigating at least a half-dozen large foreign banks for Iranian sanctions violations.

Evidence of the investigations and the penalties that might follow wasn’t hard to find in the public record.

UK-based institutions Barclays PLC and Lloyds TSB Bank both said last month that they were being investigated by the U.S. Justice Department (DOJ) and the Treasury Department’s Office of Foreign Assets Control (OFAC) for possible violations of sanctions against state sponsors of terror. In filings with the Securities and Exchange Commission each institution reported that the probes involved dollar transactions cleared through New York branch offices and that they were cooperating with U.S. authorities.

Barclays said in its filing that it could not estimate the cost of resolving the investigation, but acknowledged that it “could be substantial.”

But it’s hard to conduct a war without allies. The effort to lean on foreign banks can alienate even the U.S.’s closest friends. The upshot is that the European Union tapped the same French judge who is credited with snaring Carlos the Jackal to determine if the U.S. was respecting privacy guarantees in its anti-terrorism financing fight. We will have to wait to see what Jean-Louis Bruguiere concludes after his inquiry, but there is plenty of resentment toward the U.S. within the E.U. That resentment will undoubtedly be reflected in Bruguiere’s analysis and recommendations.

Kieran Beer

Lafayette, We Are Here
January 24, 2008

Compliance costs grew faster than net income at 20 U.S. financial institutions surveyed for a Deloitte Center for Banking Solutions study released early this month. Actually, that finding could be shaped into a headline and put on top of a number of studies or news stories about compliance costs. By any number of measures, the cost of compliance has grown each year.

Part of the cost increases are associated with the fact banks had been adding staff to deal with their compliance burden, the study concludes. And, in addition to those staff increases, there are a lot of other costs. Ninety-five percent of those surveyed said senior executives had become much more involved in compliance issues than in past years. Forty percent said that time dedicated to compliance had risen by more than 25%.

A big problem associated with compliance is that there haven’t been any breakthroughs or advances in efficiently managing compliance information, according to the Deloitte study. The Deloitte survey found that only 10% of the institutions thought that compliance information was always effectively digested and disseminated and 15% that it was always timely "suggesting that there is still substantial progress to be made in compliance management information," according to the study. Presumably, that’s the reason that banks are throwing staff and senior managers’ time at compliance.

Well, it just goes to show that someone should invent a service that gathers all new regulations, alerts users of their advent and import, makes them easily searchable and perhaps summarizes them in whole or in part to make them more immediately accessible to compliance professionals. It would be good if that service also had professional news coverage trained on the compliance world. And, it would be great if that same service allowed banks to notify all pertinent individuals of new or changing regulations and track that they have read them.

Kieran Beer

Nothing Suspicious About SOCA Report
December 5, 2007

A significant feature of “The Suspicious Activity Reports Regime Annual Report 2007” is the clear “value equation” it lays out for filing SARs in the United Kingdom. Prepared by a committee comprised of representatives from the financial industry, law enforcement, and the Serious Organised Crime Agency, the report states at the beginning and then again at the end:

 “The overall goal is a SARs regime which provides the best possible balance between:

• the costs to reporters and to other regime participants;

• addressing the threats to the U.K. from crime and terrorism; and

• the reward that the regime potentially offers through the reduction of harm and the recovery of the proceeds of crime.”

Mind you, I am not sure that the U.K. has it perfectly right when its regulators talk about principles-based regulation. A number of sobering Financial Times op-ed pieces on the matter give me pause, and principles-based regulation seems a little too touchy-feely a concept, one that leaves both the regulated and the public unaware of where the lines are.

But, even if it isn’t clear that the U.K. is doing any better with regard to making its SAR filings useful, the organizing principal in the report is worth emulating because it is dedicated to doing so. (See the report Original.)

And, the above principles echo a number of the questions I’ve raised in postings here, primarily about the costs and benefits of the U.S.’s SAR regime. Law enforcement just keeps asking for more information from institutions, but there are no measures as to how effective the information is in addressing crime and terror threats to the U.S. There are no metrics as to how well the information is being distributed and accessed.

In fact, in contrast to reports and other information from regulators in the U.S., the SOCA report is blunt about some of the shortcomings of the U.K. SARs system. It also contains specific benchmarks. Among other features of the report, there is a checklist of 24 recommendations made a year ago to improve U.K. SAR filings and facilitate their use. It is accompanied by a check off of how well they have been executed by British regulators.

The SOCA report doesn’t give the agency an “A.” The use of SARs “remains patchy, with significant areas of weakness,” the report concludes when talking about the use of SARs data by law enforcement and it cites understaffing at the Financial Intelligence Unit, a branch of SOCA, as part of the problem. See story.

In the U.S., we are awaiting the General Accounting Office (GAO) report on currency transaction reports due out in January. Congressman Barney Frank has also asked for a GAO report on the state of SARs filings and Bank Secrecy Act enforcement. Hopefully, both will match or exceed the standard set by the SOCA report.

 Kieran Beer

Light on SARs
November 8, 2007

In a report issued this week, the Financial Services Roundtable argues that compliance with anti-money laundering rules and regulations has become too burdensome for its members, the 100 largest financial institutions in the U.S. The report makes specific recommendations intended to relieve that burden, including the elimination of currency transaction report (CTR) filings in favor of suspicious activity report (SAR) filings on multiple transactions less than $10,000.

According to the report, financial institutions are being forced to put expensive compliance programs in place to deal with risks they don’t necessarily face. For instance, the report cites regulators requiring systems that monitor politically exposed persons (PEPs), even when they aren’t a part of an institution’s client-base.

And, as significantly, the report says that no metrics exist to determine the efficacy of CTR and SAR filings, the numbers of which climb each year and have evolved into a costly compliance exercise.

“The value of these filing requirements is clouded by the lack of data surrounding their use,” the trade group said in the report. “While law enforcement are able to cite examples of the value of CTR and SAR filings in individual cases, no aggregate data are available to measure the overall cost effectiveness of filing requirements.”

It is possible to dismiss this concern with an ad hominem attack – pretty popular in political “discourse” these days – that the Financial Services Roundtable is only looking out for its members.

But that wouldn’t be fair, because it’s a valid question: How effective are these numerous and voluminous filings?

Despite the slide shows and video presentations rolled out by law enforcement officials that highlighted successful investigations aided by SARs or CTRs at the American Bankers Association’s anti-money laundering conference in Washington, D.C., last month, bankers worry that they are feeding filings into a black hole. It is easy to wonder if the feds can really handle all that data.

And, there is the “fear card” played on banks. If they don’t do the filings, terrorists will be able to finance their operations with impunity.

However, as the FSR report points out, the 9/11 Commission found that SAR and CTR filing won’t help to identify the small amounts of money terrorists need to move to fund their activities.

And, here’s the most important point, one only implied by the FSR report: the lack of metrics, indeed the opacity of the entire process now required in the name of national security, may actually be distracting us from the real task of catching terrorists.

An honest examination of the reporting system is overdue.

 Kieran Beer

A Hush All Over the World
September 7, 2007

“There’s a kind of hush all over the world,” British pop group Herman’s Hermits sang in 1967.  While they were singing about the sound of “lovers in love,” 40 years later there is a different kind of hush that’s hit the international banking community. It’s the silence that comes while an entire group holds its breath waiting for bad news.

U.S. regulators and criminal investigators have widened their probe of ABN Amro to include other banks, according to an Aug. 29 report in the Financial Times. U.S. authorities are examining “whether a handful of banks similarly violated laws by processing U.S. dollar payments through U.S. counterparts for clients in Iran, Cuba, Libya and Sudan,” the FT reported, citing people familiar with the matter.

That has to send a shiver up a few bankers’ spines. ABN Amro’s run in with U.S. regulators cost it $80 million in civil penalties in 2005 for violating sanctions against Libya and Iran. Turns out that is just the down payment. The bank has set aside an additional $500 million to settle potential criminal charges being pursued by the U.S. Justice Department.

The overseas push by U.S. regulators and the Justice Department follows on the Bush administration’s expressions of frustration with international regulatory regimes.

Truth is, much of what Treasury wants other nations to do is a matter for diplomats to work out. Using the U.S.’s financial might, which is based on the fact that most banks need to do business here, isn’t the equivalent of winning the cooperation of governments.

Tougher international standards would of course both relieve the U.S. of being the world’s policeman and be more effective in preventing the flow of money to terrorists because of the resultant greater vigilance and cooperation of each nation.

In the meantime, those European banks in the target of U.S. scrutiny are reportedly already beginning to negotiate, according to the FT. “One person familiar with the probes said some banks had started to discuss settlements with the authorities and could agree to financial penalties by the end of the year,” the FT reports.

Kieran Beer

 
Good News, Bad News
August 11, 2007

This has been one of those good news, bad news weeks. No I’m not talking about the stock market, which continues to ricochet between sadness and euphoria as I write this.

On the good news front, I’m talking about the Financial Crimes Enforcement Network’s nod to financial institutions’ concerns. Mind you, it doesn’t begin to dig bankers and others out from under the mound of laws and regulations they find themselves buried under. But, allowing financial institutions to obtain “reasonably available” information about the anti-money laundering efforts of the foreign financial institutions with which they have correspondent relationships is an improvement over the standard set forth in an earlier version of the rules implementing Section 312 of the Patriot Act.

Under FinCEN’s original proposal, banks were to obtain and review documentation of a correspondent bank’s AML program. But, in a comment letter to FinCEN in March 2006, a group of financial industry organizations, including the American Bankers Association, and the Financial Services Roundtable, argued that banks would not be able to effectively review a foreign bank’s AML program. Among other things, they cited the difficulties financial institutions faced in dealing with different in language, terminology and procedures that they would encounter in doing detailed due diligence on foreign banks.

As for the bad news, it came in the form of a Harris Interactive poll of the public perception of 23 professions and occupations. The results, based on phone interviews conducted from July 10 to July 16, 2007, resulted in firefighters, scientists, teachers, doctors, military officers, and nurses being identified as the most respected.

Sadly, only 10 percent of those responding thought bankers had “very great prestige,” down from 17 percent. In fact, bankers did worse than stockbrokers in the survey: 12 percent of the respondents said stockbrokers had prestigious jobs. Actually, only actors and real estate brokers did worse than bankers.

By the way, 13 percent of those responding thought that journalists had prestigious jobs.

Kieran Beer

Never Having to Say You're Sorry
July 24, 2007

In a defensive statement that argued its efforts were misunderstood and even misrepresented, the Securities and Exchange Commission announced late Friday that it was suspending its program to identify companies that do business with terrorist nations.

The SEC’s less than thoughtful contribution to the war on terror involved links on the agency’s website that identified companies that disclosed business dealings in the five countries on the U.S. State Department’s state sponsors of terrorism list in their annual reports.
The SEC’s initiative has been criticized since its June 25 inception by lawmakers on both sides of the aisle and industry representatives. U.S. Representative Barney Frank (D-Mass) sent a July 12 letter to SEC Chairman Christopher Cox complaining that the list unfairly includes companies that have divested, or have negligible business dealings, in the countries sponsoring terrorism.

According to the New York Times, the SEC list named 29 companies whose 2006 annual reports mentioned doing business in Cuba, 57 in Iran, 8 in North Korea, 35 in Sudan and 24 in Syria.

In a press release issued just before 5 p.m. under cover of the start of a midsummer weekend, SEC Chairman Chris Cox acknowledged the criticism and suspended the website. Because the web tool might not take into account that a company has terminated its dealings with a sanctioned country, the agency was “temporarily suspending” it, wrote Cox in the announcement.

Kudos to Cox for making the change. Backing off, even if it’s done in what passes for the dead of night in Washington, sometimes not only makes sense, but can be courageous.

Still, since the program is only suspended, will it be back? “We will work to improve the web tool so that it meets the various concerns that have been expressed.  Alternatively, our staff is considering whether the use of interactive data tags applied by companies themselves could permit investors, analysts and others to easily discover this disclosure without need of an SEC-provided web tool at all,” Cox writes in the press release.

Not only can investors find this information on their own, other agencies are better equipped to police corporate interactions with rogue states. As one former bank regulator told Fortent Inform’s Washington reporter Matt Squire, the SEC list pales in effectiveness with the screening process against sanctioned entities managed by the Office of Foreign Assets Control (OFAC).

So, it would be reassuring if in addition to suspending the program the agency admitted it had made a mistake. That would suggest that they had learned this particular task was best left to OFAC and others. Any new efforts to track corporate ties to terrorism should be the subject of much thought and debate.

Kieran Beer

Ball of Confusion
June 11, 2007

The rise in suspicious activity report filings by banks might suggest that efforts to meet the Bank Secrecy Act requirements are going smoothly. The more than 1 million SARs filed in fiscal 2006 represent a 19 percent jump from 2005, a much smaller jump than the 32 and 61 percent increases in filings in fiscal 2005 and 2004, respectively. Regulators have argued that the leveling off reflects fewer defensive or CYA filings. Still, conversations with compliance professionals reveal a lot of confusion about what is expected of them from regulators, not only about when to file SARs, but how to handle the information in the SARs they generate.

Evidence that compliance professionals are overwhelmed isn’t hard to come by. Some 58 percent of 500 bankers who took part in a recent American Bankers Association survey said their BSA efforts are causing them to stumble in their overall compliance responsibilities.

One issue for bank compliance professionals is how constrained they are in sharing SARs filings within their own organizations. At an ABA conference in Atlanta, former Financial Crimes Enforcement Network director William Fox argued that a rule prohibiting financial institutions from sharing SAR information with nonbank affiliates hinders banks’ due diligence efforts. “When you have a company that has wholly owned subsidiaries – they may not even be financial institutions – there are certain restrictions on the ability to share information. I think we ought to break that down, I think the more we share information the better chance we have,” said Fox, now Bank of America’s anti-money laundering compliance chief.
Read Story

Adding insult to injury, at least from the point of view of the regulated, is some regulators’ almost cavalier handling of SARs filings. While banks are afraid to share the information internally, the Internal Revenue Service has forged its own path on the use of SARs as we reported in our May 2, 2007 story “Banks Agitated by IRS Letters Telling Customers Transactions May be Illegal.”
Read Story

That story brought to light the IRS criminal investigation division’s acknowledged use of suspicious activity reports to swoop in on banks’ customers and tell them they were under investigation.  The practice came to light, in part, when the manager of a MidAmerica Bank branch in Chicago was confronted by an angry customer with a letter in hand from the IRS. Why, the customer demanded, did you report me to the government?

“Since he only banks with us, he knew we reported him,” Jack Oskvarek, vice president of anti-money laundering compliance at MidAmerica Bank, said. “Those reports are supposed to be kept confidential. The IRS is putting our bankers at risk by tipping off customers that we’re on to them because they know who reported them. Now our tellers are in the direct line of fire. This is wrong.”

The IRS didn’t see it that way at all. “Banks have a burden to file SARs and we have an obligation to investigate them,” IRS spokeswoman Patti Reid said. “This is a national procedure available to agents, like search and seizure warrants, and they determine what’s most appropriate. This is our least-intrusive investigative technique. We’ve been using it for 10 years.”

However, in the wake of a hue and cry from the banking industry, the IRS conceded that it had plans to sit down with the good folks at FinCEN to discuss how it would use SARs going forward, as we reported in our follow up story “IRS, FinCEN to Review Letters Sent to Targets of Suspicious Activity Reports.” There is at least some reason to think that the IRS’s willingness to talk will lead to a change that will make life better for banks while not undermining the efficacy of SARs.
Read Story

Democrats, Republicans Should Reach Consensus over Reach of Patriot Act, Sarbanes-Oxley (3/19/2007)

The old saw “hard cases make bad law” can, from a compliance officer’s point of view, be taken a step further. Hard cases make bad law resulting in bad regulation.
Over the past two weeks, the country has started to have second thoughts about two laws based on hard cases that rightly inflamed the passions of both politicians and the electorate: the Sarbanes-Oxley Act of 2002 and the Patriot Act of 2001.
Anyone who has read “The Smartest Guys in the Room,” or saw the movie with the same name, can’t help but want to ensure that the destruction reaped by Enron Corp.’s collapse never happens again. The movie version especially brings home the damage wrought upon employees who depended on Enron stock-laden 401(k) plans for their retirements.
The employees’ mistake – and that of many Enron shareholders - was to trust rosy financial reports issued by Enron management as they parked significant losses in off-the-books limited partnerships. Managers were also, in some cases, selling their own Enron shares while encouraging employees to hold onto theirs. In response to the Enron collapse and, lest it be forgot, the blowup of WorldCom, Congress passed Sarbanes-Oxley.
Last week, a number of titans of finance gathered in Washington, D.C., at the invitation of U.S. Treasury Secretary Henry Paulson to discuss the state of regulation. Former Federal Reserve Chairman Alan Greenspan and current New York Stock Exchange Chairman John Thane argued against Sarbanes-Oxley as it now stands, while former Securities and Exchange Commission Chairman Arthur Leavitt and Berkshire Hathaway Chairman Warren Buffet defended it.
There is no harder case than the collapse of the World Trade Center and the attack on the Pentagon on Sept. 11, 2001. The deaths of more than 3,000 and the ability of a handful of terrorists to make the entire nation feel under siege resulted in the hasty passage of the Patriot Act.

But doubts about the reach of the Patriot Act resulted in a 2005 reauthorization act that curtailed some provisions, such as law enforcement’s right to obtain library records and requiring that National Security Letters be tracked and their usage reported to Congress by the Office of the Inspector General (OIG) in the Justice Department.
On March 13 that report was released to Congress.  In it, the OIG found that the letters were abused by agents of the Federal Bureau of Investigation. In a sampling of 293 National Security Letters the Justice Department’s OIG found 22 possible breaches of regulations, some of them potential violations of the law, according to a report in the Washington Post. There followed an outcry from both sides of the aisle.

Sen. Arlen Spector, a Pennsylvania Republican, said the FBI had badly misused the letters, according to a story in The Wall Street Journal. “This is, regrettably, part of an ongoing process where the federal authorities are not really sensitive to privacy,” he said.
“National Security Letters are a powerful tool, and when they are misused, they can do great harm to innocent people,” the New York Times quoted Senate Judiciary Committee Chairman Patrick Leahy,  a Vermont Democrat, as saying.
Both Sarbanes-Oxley and the Patriot Act represent major efforts to address serious issues: dishonest corporate governance not in shareholders’ best interest and the lack of coordination and efficacy of intelligence gathering in the wake of the Sept. 11 attacks. Not even Sarbanes-Oxley’s biggest critics argue for its total abandonment and the same is true for the voices that cried out in Congress about the use of National Security Letters under the Patriot Act. But debating how far these regulations go is healthy. And, that is especially true now when the country is in a much better position to think rationally about what constitutes good corporate governance and what police powers are best for interdicting terrorists without trampling our freedoms. Democrats and Republicans need to arrive at a consensus that reflects a greater perspective on the awful events that gave birth to Sarbanes-Oxley and the truly horrific events that resulted in the Patriot Act.

Kieran Beer