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Cryptocurrency-Friendly Bank Faced AML Enforcement Before Collapse

By Benjamin Hardy

The Federal Deposit Insurance Corp. was preparing a consent order against Signature Bank for “apparent violations” of U.S. sanctions and anti-money laundering rules before the Manhattan-headquartered lender permanently closed down in March, the regulator has disclosed.

Signature, previously the 29th-largest bank in the U.S., suffered a massive outflow of deposits after the collapse of San Diego-based Silvergate Bank on March 8 and federal seizure of Silicon Valley Bank, another West Coast lender, on March 10. On March 12, New York’s Department of Financial Services, or DFS, shut Signature down and appointed the FDIC as receiver.

Like Silvergate, Signature faced high exposure to turmoil from digital assets-related firms, which accounted for 20 percent of the bank’s $88.6 billion in deposits at the end of last year. Like Silicon Valley, the lion’s share of Signature’s deposits exceeded the FDIC’s $250,000 insurance limit, which triggered a liquidity crisis when clients began withdrawing their money in bulk.

A 62-page analysis published by the FDIC on April 28 focuses primarily on the missteps that allowed Signature to accrue so much liquidity-related risk unchecked and ultimately lead to the bank’s demise. But the analysis also references chronic deficiencies in Signature’s AML and counterterrorist financing controls, and weaknesses in complying with U.S. sanctions.

No fewer than eight of the 13 total “matters requiring board attention,” or MRBAs, that surfaced during federal examinations of Signature in 2022 flagged shortcomings with the lender’s AML program, according to the FDIC.

Corporate governance and liquidity risk issues at Signature accounted for two MRBAs apiece last year, while problems with the lender’s “fund banking division” accounted for the remaining one.

“Due to weaknesses emerging from the 2022 targeted reviews, the FDIC was considering pursuing … a formal consent order related to AML/CFT and OFAC [Office of Foreign Assets Control] weaknesses and apparent violations,” the regulator disclosed in the analysis.

The FDIC also pursued “an informal enforcement action” against Signature in 2016 “related to [Bank Secrecy Act]/AML internal-control weaknesses,” but closed the book on the matter in June 2018 after determining that the bank had addressed the issues.

On March 14, two days after the collapse, Bloomberg reported that the Justice Department and Securities and Exchange Commission had launched parallel investigations into suspected AML breaches at Signature that involved some of the bank’s dealings with the cryptocurrency sector.

The FDIC makes no mention of either investigation in the analysis, but instead confirms the existence of long-term gaps in Signature’s defenses against illicit finance.

Whether those gaps involved Signature’s ties to cryptocurrency exchanges, stablecoin issuers and other virtual asset service platforms remains unclear, but the analysis suggests they may have played some role in the bank’s eventual unraveling.

The cryptocurrency industry suffered a series of bankruptcies and multi-billion-dollar fraud schemes in 2022, culminating with the collapse of FTX, previously the world’s second-largest exchange, in November, and the arrest of Sam Bankman-Fried, the platform’s co-founder and former chief executive, the following month.

Plaintiffs filed a lawsuit against Signature in February, claiming the bank had “substantially facilitated” the “commingling of accounts” at FTX. As troubles at Silvergate and Silicon Valley began to mount, a short seller who stood to profit from a drop in Signature’s value accused the lender of involvement in a money laundering scheme tied to the exchange.

“Despite this flurry of negative press, [Signature Bank’s] management did not seem sufficiently concerned about their own depositors fleeing,” the FDIC concluded. “SBNY management continued to differentiate itself from SVB and Silvergate, despite its similar reliance on uninsured deposits … and its similar deposit concentration in the digital asset market.”

As late as noon on Friday, March 10, Signature’s president dismissed examiners’ concerns about the impending crisis. It was only hours later, with deposits pouring out the door, that management finally grasped the seriousness of the problem, the FDIC alleged.

DFS seized the bank the following Sunday.

Signature’s executives displayed a similarly blase attitude towards warnings about the bank’s AML-related flaws and other problems, according to the FDIC, and sometimes appeared “disengaged from the examination process and … generally dismissive of examination findings.”

“Management was described by FDIC supervisors as reactive, rather than proactive, in addressing bank risks and supervisory concerns,” the regulator concluded. “[Management’s] primary focus on growth, deposits, and profits took priority over the responsibility to ensure sound risk management and responsiveness to SRs [supervisory recommendations].”

Signature, like Silicon Valley, maintained dozens of accounts with balances of more than $250 million prior to collapsing in March. By the end of last year, 90 percent of all deposits at the bank were uninsured.

Along with the release of the FDIC’s analysis on Friday, DFS published findings from its own review of¬†Signature’s supervision and closure. The Federal Reserve meanwhile published a 118-page report on the collapse of Silicon Valley Bank, previously the 16th-largest lender in the U.S.

On Monday, regulators seized San Francisco-headquartered First Republic Bank, the 14th-largest lender, and quickly sold the company to JPMorgan Chase.

Unlike Silvergate, Silicon Valley and Signature, First Republic did not maintain an extensive relationship with the cryptocurrency sector or other segments of the digital-assets industry.

However, like those banks, a large share of total deposits at First Republic exceeded the threshold for federal insurance.

Contact Benjamin Hardy at bhardy@acams.org

Topics : Anti-money laundering , Cryptocurrencies
Source: U.S.: FDIC
Document Date: May 4, 2023