Post by sandi66 on Mar 5, 2011 9:49:17 GMT -5
www.moneylaundering.com/pages/FromTheEditor.aspx
Breaking News
February 14, 2011
Evidence that Moneylaundering.com/Compliance Advantage is a journalistic enterprise, albeit one dedicated to compliance, can be found in how much we like scoops.
Sometimes the stories we see as scoops give you an advance on big penalties or new regulatory actions that are about to be issued. Occasionally, they are part of a larger story that has national or global implications.
An example of the first type of scoop is our report last week that Ocean Bank in Miami is expected to pay between $10 million and $15 million to the U.S. government some time in the next month for Bank Secrecy Act violations. More
The story involved lots of work on the part of our reporter and scrutiny by our editors to make sure we had the facts, even if no one would officially confirm the story.
An example of a scoop that raises even larger issues is our mid-January story that U.S. officials believe that representatives of at least two major U.S. banks agreed to help top Afghan officials disguise hundreds of millions of dollars in proceeds from corruption, including repatriating much of that money to Dubai . More
While that particular assertion has appeared nowhere but MLDC/Compliance Advantage, in the weeks that followed lots of stories surfaced about the corruption of Afghan officials, the pillaging of Kabul Bank and the export of funds to Dubai .
The most comprehensive thus far is in last week’s New Yorker. It should be required reading for compliance officers and, for that matter, all sorts of people as the debate goes forward about what the U.S. and its allies’ role should be in Afghanistan.
Both Republicans and Democrats have downplayed the depth of the corruption and dysfunction of the Karzai government because the issue becomes tangled up with how long we should stay in Afghanistan . But it’s time to speak more bluntly about what is going on in Afghanistan with regard to corruption, and to hopefully develop a strategy to deal with it more directly.
That’s the kind of thing I am allowed to say in the “From the Editor” column. Rest assured, under the banner of news that appears on the far right column of our home page, we will continue to avoid recommendations and seek to break news that’s pertinent to compliance officers.
Do Good
January 4, 2011
We’ve just passed that time of year when some of us dusted off our DVDs of “It’s A Wonderful Life,” popped some corn and gathered the kids to bask in the glow of our flat screen TVs on the dark nights that mark – at least in the Northern Hemisphere – the shortest days of the year.
Yes, the 1946 Frank Capra classic is schmaltzy, but admit it: it’s genuinely reaffirming to think that people can do right by each other and that good deeds have a profound and lasting effect.
George Bailey isn’t a big success, but his many little acts of kindness and decency over the years, acts which spring naturally from his character, literally save lives and make Bedford Falls , New York the wonderful place it is. And, as the movie concludes, for that reason George Bailey is the richest man in town.
But, if it’s true that doing the right thing can have lasting, profound and often immeasurably positive consequences, the opposite could be said of doing evil.
Bernie Madoff was a big success, but his many acts of deceit and treachery over the years, acts which seem to spring from his character or lack thereof, literally destroyed lives and even caused death. And unlike “It’s A Wonderful Life,” the conclusion to the Madoff story has yet to be written.
I was reminded of all this by accounts of the apparent suicide of Mark Madoff on the second anniversary of the day his father Bernie was arrested for perpetrating a $50 billion Ponzi scheme. His suicide is the latest—there have been two others that I know of— directly connected to Madoff’s massive fraud, which also of course resulted in financial ruin or serious setback for hundreds of people.
I did not know Mark Madoff but (many) years ago had lunch with Thierry Magon de la Villehuchet, the French money manager who steered over $1 billion of investors’ funds to Madoff. He slit his wrists and swallowed a box of sleeping pills while sitting at his desk once Madoff’s scheme had been revealed. I recall de la Villehuchet as a gracious and charming fellow, despite his pique at a couple of admittedly gossipy pieces I had written about a small broker-dealer subsidiary he had recently taken charge of.
And then there is Bernie. I had occasion to meet him 10 years ago, during a Securities Industry Association “Day on the Street,” that lets reporters spend time on trading floors with prominent Wall Street figures on a “for background” basis. I recall distinctly that Bernie held forth on how sophisticated his brokerage operation was, and how unsophisticated U.S. regulators were. On this last point, he dwelt briefly on the burden of dealing with young SEC types who lacked experience, didn’t understand how the equity markets actually work and usually left government just as he had succeeded in training them.
As I said at the beginning of this piece, the suffering that Bernie Madoff wrought continues. It’s passed down from generation to generation, both in the dreams now deferred that parents and grandparents sought to fund for their heirs when they invested with Madoff and, even more devastatingly, in the destruction Madoff brought upon his own family, de la Villehuchet’s and others who trusted him.
As we begin 2011, it’s important to remind ourselves of the simple truth that it’s important to do good. While there are hundreds of opportunities to do good in our personal lives, compliance professionals can further take heart that they get paid to catch the bad guys, thereby limiting the reach of their evil deeds and protecting the George Baileys of the world.
A Happy New Year to all.
Kieran Beer
Wiki Work
December 3, 2010
The publication of thousands of U.S. State Department cables on the Wikileaks Web site over the past week – with the promise of more to come - has given compliance departments at financial institutions something new to worry about.
The release of the sensitive diplomatic dispatches, the result of poor security procedures at the Pentagon, requires compliance professionals to consider additional due diligence of their client rolls and adjustments to their risk rankings.
Reviewing the data is an “obligation, now that it’s out in the open,” one AML officer told reporter Brian Monroe in a moneylaundering.com/Compliance Advantage story we ran Monday, November 29.
“We need to find out what is of interest to our bank” in terms of risk, said the person, who added that it would take days to assess the need for changes from just the first batch of the leaks involving hundreds of documents. With a couple hundred thousand more promised, financial institutions may be occupied with future disclosures of scores of politically exposed persons and the need for further due diligence of financial institutions and other entities named in the documents.
But if the fallout is a bigger workload for compliance departments, it’s primarily an embarrassment for the U.S. government.
That’s because the documents contain lots of sourced quotes that border on gossip, but aren’t revelations, including that the Saudis wouldn’t mind if the U.S. or Israel attacked Iran to destroy it’s nuclear effort and that Italy’s Prime Minister Silvio Berlusconi is “feckless, vain and ineffective as a modern European leader.”
But diplomats, both foreign and U.S. , aren’t happy that their names or governments are associated with these observations. Their release makes the U.S. look less trustworthy and undermines U.S. diplomats’ efforts to trade in low-level classified information and frank observations with their counterparts.
But if the cables aren’t generally the stuff to stir policy debate, there may already be an exception to the rule.
On Afghanistan , the cables contain information that has ramifications not only for compliance professionals, but also for U.S. foreign policy.
The allegations of corruption go further than earlier press reports and trace that corruption directly to Afghan President and U.S. ally Hamid Karzai.
As I write this, the major news organizations are reporting that Obama has flown to Afghanistan to hold talks with U.S. generals and President Karzai. Right now it appears as though he won’t have a face-to-face with the latter because of weather conditions.
And the cables underscore the importance of a debate within the U.S. about what America can realistically hope to accomplish in Afghanistan.
“The widespread corruption is made possible in part by a largely unregulated banking infrastructure and the ancient hawala money transfer network that is the method of choice for politicians, insurgents and drug traffickers to move cash around the Muslim world,” The New York Times concluded in it’s coverage of the Afghanistan-related leaked cables.
That points to a role for U.S. financial institutions, as do the other documents, in detecting the proceeds of corruption that might try to enter the global financial system.
But the weight of the documents point to a much larger, more dire situation in Afghanistan than can be addressed by banks and other financial institutions.
Kieran Beer
Caveat Emptor
October 11, 2010
Securities firms, some of them subsidiaries of banks, are in the news again for suing brokers they hired in order to get back the upfront bonuses they paid the brokers to join their firms.
Luring brokers from a competing firm with a bonus – usually paid as a forgivable loan that brokers are expected to “work-off” over a three- or five-year period– isn’t new. More than 20 years ago, I started out as a financial reporter covering, among other things, these kinds of arrangements and the resultant disputes. Over the years, I’ve watched various broker-dealers break their pledge never to pay upfront bonuses again.
What is new is that year-to-date arbitration awards involving the payments have reached a record as a percentage of awards handed out by Finra. Over 17 percent of all the arbitration awards levied by Finra panels in 2010 involved the upfront payments, according to a Wall Street Journal story on Monday.
In some cases, the securities firms took the brokers to arbitration after paying them millions of dollars because the brokers failed to deliver an appropriate level of assets or transaction revenue once they joined the firm. In other cases, the brokers left the firms before they’d generated enough revenue to justify the bonus, the news agency said.
Not surprisingly, the WSJ story called the arbitration suits an expression of buyers’ remorse on the part of the securities firms.
What the article didn’t address is how the bonuses create a lot of buyers’ remorse for retail investors.
The bonuses are part of a nasty system that aligns the interest of the broker against the interest of their client. That’s because a broker has to bring in a lot of new assets and generate a lot of new transactions to pay for those bonuses.
Even the most upright broker will feel pushed to generate unnecessary transactions and sell unsuitable, high commission products to justify the money they pocketed coming in the door
The closest the article comes to examining the real problem with recruiting bonuses is a quote from unnamed securities executive to the effect that “the economies of the industry has got to change.” Ya think?
On Sunday The New York Times ran a story detailing the arbitration award won by Larry Hagman and his wife – yes, the actor who played J.R. on Dallas - for what a Finra panel identified as a lack of supervision by the securities firm that employed Hagman’s broker.
Hagman had moved his account from a registered investment advisor, who had placed 75 percent of the couple’s portfolio in fixed income and the rest in stock, to a Smith Barney broker. Despite instructions that the account be managed conservatively, the broker flipped the allocation to 75 percent stock and 25 percent fixed income. The broker also sold the Hagmans an expensive and unnecessary insurance policy that subsequently cost them a lot of money to get out of.
The question could be asked, what did the Hagmans hope to gain in moving their account? And why didn’t they check on the broker, who had amassed a number of complaints against her that were in the public domain?
But for our purposes, it’s enough to identify this as another example of an industry that operates under an economic model that doesn’t work unless assets are moved regularly and even furiously to generate fees.
Kieran Beer
Blood, Not Money
August 18, 2010
A federal judge’s initial rejection of an agreement Barclays Bank struck with the U.S. Justice Department to settle a decade’s worth of violations of U.S. sanctions laws reflects what may be a trend. Judges asked to sign off on multi-million dollar deferred prosecution or regulatory agreements want blood, not just money, from recalcitrant financial institutions.
The Barclays agreement, which U.S. District Court Judge Emmet Sullivan would not sign off on Tuesday, got his approval the following day.
More
But the signoff was grudging. Sullivan asked a Justice Department prosecutor why no individuals from Barclays were punished for the sanctions violations and why shareholders should pay $298 million dollars for the wrongdoing of bank employees?
Sullivan’s posture echoes that of two other federal judges, one who on Monday refused to sign off on a deal the Securities and Exchange Commission (SEC) reached with Citibank for $75 million and another who held up an SEC settlement a year ago with Bank of America. More In that case, the initial settlement of $33 million engineered by the SEC became $150 million before the judge reluctantly accepted it.
Although Sullivan sounded slightly xenophobic when he asked on Tuesday if the Barclays deal was special treatment for foreigners, it’s clear that anger toward foreign and domestic financial institutions runs deep in the courts and within the general population.
From the point of view of much of the country, still suffering the worst economic setback since the great depression, banks and other financial institutions caused the problems and are now walking away unpunished. And, what's worse, they’re walking away with a lot of taxpayer bailout money.
The three judges all asked why some (or in the case of Citi, why more) of the executives at the three financial firms weren’t charged and held responsible. Like many of the public, these judges seem to want some executives to be “perp-walked” out of their offices and to face serious financial loss or even jail time.
It’s not clear how this incipient judicial resistance to negotiated settlements will play out. But, in the current environment it’s an understatement that your chief executive, in whatever tone he or she is willing to listen to, needs to be reminded just how serious a matter compliance is.
Who knows, the life you save may be your CEO’s own.
Kieran Beer
Our Own Petard
June 29, 2010
In September 2009, the United States , in part through its leadership within the G-20, pushed the Financial Action Task Force (FATF) to restart its blacklist of states that weren’t meeting international anti-money laundering standards.
The Paris-based anti-money laundering (AML) watchdog group responded to the leaders of the world’s 20 largest economies by issuing a list of eight non-cooperative and 20 improving, though still high-risk, nations on February 18, 2010. More
Last week, FATF issued a revised list that recognized five of the original non-cooperative eight as at least trying (or saying that they were trying) to comply with the 40 + 9 FATF recommendations. Those efforts got the five listed with the 20 other high-risk states identified in February as trying to improve their AML regimes.
Iran , North Korea and São Tomé and Príncipe remain on the list of truly recalcitrant states. More
With the exception of nations that operate beyond the pale of international standards, including Iran and North Korea, countries don’t like to be singled out by FATF, not even as merely high-risk, but improving states.
Illustrative of this was Nigerian President Goodluck Jonathan’s plea last week to his nation’s Senate to expedite passage of long stalled anti-money laundering laws for fear of being blacklisted by FATF. And Ecuador , one of the original eight non-cooperators, quickly issued a press release touting its achievement of being moved to the list of merely high-risk nations.
All of this is to set the stage for, irony of ironies, the coming mutual evaluation by FATF of the United States . While it seems unlikely that the U.S. will earn a place on either of FATF’s two “bad” lists, the U.S. remains “challenged” with regard to compliance with the group’s recommendations 5, 33 and 34.
The U.S. fails to meet the letter, let alone the spirit, of the three recommendations because of the lack of transparency the various states in the Union allow in registering a shell corporation, according to FATF.
Not for nothing did Delaware , one of the smallest and least populated states in the U.S. , rank as the most secretive jurisdiction in the world for financial transactions in a Tax Justice Network survey of 60 nations. More
The Senate’s Permanent Subcommittee on Investigations (PSI) under Sen. Carl Levin (D-MI) has long sought to remedy this situation with legislation that would require states to ask for beneficial ownership information. But, since registering companies is a pretty lucrative business for some states and since each U.S. senator is a demigod, the PSI doesn’t appear to be succeeding.
There are rumors floating about that President Obama’s Treasury might step into the breach, negotiating with lawmakers on legislation that would begin to remedy the situation. But the administration has seemed busy with other things and it isn’t clear that (a) the rumor is true or (b) how a high of a priority it is for the President.
In the meantime, as was noted by panelists at a recent American Bankers Association conference on compliance in San Diego , the U.S. is likely to be found noncompliant on at least three counts in its next mutual evaluation by FATF.
That’s an embarrassment that could be avoided if there wasn’t so much resistance from some states.
Kieran Beer
Policing PEPs a Matter of Life or Death
May 3, 2010
Bank compliance departments worldwide spend a lot of time worrying about how and even whether to bank politically exposed persons. It doesn’t help that there is no single international standard to follow. Governments and non-governmental organizations don’t even agree on who’s a politically exposed person (PEP).
So it’s easy to forget what’s at stake. To facilitate the movement of funds associated with bribery and embezzlement by public officials, particularly in the developing world, is to aid the spread of poverty, suffering and even death.
“You can’t permit malaria medicine to be stolen, leaving thousands to die,” Ted Greenberg, a former World Bank official, told the New York ACAMS (Association of Certified Anti-Money Laundering Specialists) chapter on Tuesday. Greenberg, also a former U.S. Justice Department prosecutor who now runs a consultancy, said that about $1 trillion per year is pilfered through bribery and corruption. Citing World Bank estimates, he said that $40 to $50 billion of that is taken from the developing world.
All that alleged theft has a human face. In Equatorial Guinea , from 2004 to 2008, it’s Teodoro Nguema Obiang Mangue, son of that country’s president. Obiang in addition to being the son of the president is the subject of ongoing criminal investigations in the U.S. , named in corruption complaints filed in France and figured prominently in the Congressional hearing on Rigg Banks in 2004. But no man is an island. Enabling the repatriation of more than $110 million in suspect funds from the west coast African state are U.S. lawyers, bankers, real estate and escrow agents, according to the Senate Permanent Committee report issued in February.
Rich in oil wealth, Equatorial Guinea is one of the poorest nations in the world, Jack Blum, chairman of the Tax Justice Network, told ACAMS attendees assembled in a large meeting room at Ernst & Young.
Blum went on to express sympathy for the compliance officers assembled with regard to efforts they might make to uproot PEPs. They face the wrath of aggressive business units who “are selling like hell” and not above angrily telling them “I pay your salary,” he said.
Recognizing that bank compliance officers are not positioned to be the last bulwark against corruption and that there needs to be a stronger governmental framework against international bribery and corruption, both Greenberg and Blum touted the work of the Senate Permanent Subcommittee on Investigations. “Keeping Foreign Corruption Out of the United States” not only offers a detailed exposé of how corrupt PEPs operate – it has four case studies that are critical to understanding the problem – it also contains concrete recommendations of what should be done to stop them. More
Perhaps those recommendations haven’t gotten the attention they should have. A lot of the attention the report got involved the brazenness of the PEPs profiled. But Greenberg summarized the recommendation and urged their adoption.
The recommendations as they appear in the report are:
“(1) World Bank PEP Recommendations. Congress should enact a law and the U.S.
Treasury Department should promulgate rules implementing the key recommendations of a recent World Bank study to strengthen bank controls related to Politically Exposed Persons (“PEPs”), including by requiring banks to use reliable PEP databases to screen clients, use account beneficial ownership forms that ask for PEP information, obtain financial declaration forms filed by PEP clients with their governments and conduct annual reviews of PEP account activity to detect and stop suspicious transactions.
(2) Real Estate and Escrow Agent Exemptions. Treasury should repeal all of the exemptions it has granted from the Patriot Act requirement for anti-money laundering (AML) programs, including the 2002 exemption given to real estate and escrow agents handling real estate closings, and sellers of vehicles, including escrow agents handling aircraft sales, and use its existing statutory authority to require them to implement AML safeguards and refrain from facilitating transactions involving suspect funds.
(3) Attorney-Client and Law Office Accounts. Treasury should issue an AML rule requiring U.S. financial institutions to obtain a certification for each attorney-client and law office account that it will not be used to circumvent AML or PEP controls, accept suspect funds involving PEPs, conceal PEP activity or provide banking services for PEPs previously excluded from the bank, and requiring enhanced monitoring of such accounts to detect and report suspicious transactions.
(4) U.S. Shell Corporations. Congress should enact legislation requiring persons forming U.S. corporations to disclose the names of the beneficial owners of those U.S. corporations.
(5) Immigration Restriction. Congress and the Administration should consider making significant acts of foreign corruption a legal basis for designating a PEP and any family member inadmissible to enter, and removable from, the United States .
(6) Visa Restriction. The U.S. State Department should strengthen its enforcement of the law and Presidential Proclamation 7750 denying U.S. visas to foreign PEPs involved with corruption, and law enforcement agencies should increase the assistance they provide to State Department investigations of PEPs under review.
(7) Professional Guidelines. Professional organizations, including the American Bar
Association, National Association of Realtors, American League of Lobbyists and
American Council for Education, should issue guidance to their members prohibiting use of any financial account to accept suspect funds involving PEPs, conceal PEP activity, facilitate suspect transactions involving PEPs or circumvent AML or PEP controls at U.S. financial institutions.
(8) FATF Recommendations. The United States should work with the international
Financial Action Task Force on Money Laundering to amend its existing 40+9 recommendations to strengthen anti-corruption and PEP controls
Kieran Beer
FinCEN Wachovia Action a Must Read
March 26, 2010
Guidance and other official pronouncements from the Financial Crimes Enforcement Network generally don’t receive plaudits for being compelling reading. Worse, they are frequently faulted for failing to answer the financial industry’s questions about the regulatory issues they are supposed to address.
But the agency’s assessment of a civil penalty against Wachovia Bank, dated March 12, is both a “must read” and explicit about what is required from banks with regards to anti-money laundering (AML).
The FinCEN document is part of a package that includes a Justice Department deferred prosecution agreement which address Wachovia’s failure to sufficiently scrutinize $420 billion in transactions involving Mexican foreign currency exchanges suspected of drug cartel ties. These transgressions cost Wachovia’s parent since December 2008, Wells Fargo & Co., $160 million to settle the charges. More...
To prove the point about the FinCEN penalty, below are some highlights from the document arranged topically:
KYC/Due Diligence
“A sampling of foreign correspondent customer files showed significant gaps and inaccuracies in the Bank's documentation of specific customer information, including the nature of the customers' businesses, verification of owner/operator identities, and anticipated account activity.” p.3
“The Bank's enhanced due diligence files were not readily available to key compliance officials. The Bank also failed to update or conduct periodic reviews of foreign correspondent accounts, and failed to focus sufficient attention on the accounts and transactions that exhibited high-risk characteristics for money laundering.” p. 3
Transaction Monitoring
“Wachovia's automated transaction monitoring systems were inadequate to support the volume, scope, and nature of international money transfer transactions conducted by the Bank. The automated transaction monitoring systems were designed to monitor international correspondent transactions at the bank level, and were not designed to readily identify suspicious elements, ‘Red Flags’ or suspicious activity associated with individual transactions.” p.4
“The number of alerts or events generated by the Bank's automated transaction systems was capped to accommodate the number of available compliance personnel.” p. 4
“The Bank placed greater emphasis on clearing alerts and eliminating backlogs than reviewing and reporting possible suspicious .activity. In 2008, a unit within the Bank reviewed and cleared a backlog of approximately 5,000 cash alerts generated by the Bank's Large Currency Transaction Retrieval System. These alerts were not referred for further review to determine whether possible suspicious activity needed to be reported, and instead were closed following the filing of a currency transaction report. The 2008 review of these 5,000 cash alerts determined that 30% involved round dollar transactions, transactions greater than or equal to $9,000, or consecutive day transactions. A further review of 100 sample alerts determined that 85% exhibited indicia of suspicious activity and should have been referred for further evaluation. In addition, the Bank had a practice of clearing cash alerts based solely on a single instance of structuring. It was not until the spring of 2008 that the Bank curtailed this practice.” p. 5
Sequentially Numbered Checks
“A 2006 FinCEN Advisory specifically addressed the deposits of sequentially numbered monetary instruments at U.S. financial institutions by nonblank exchange houses known throughout Latin America as ‘casas de cambio.’ The Bank failed to adequately respond to several warnings, beginning in December of 2006, relative to the receipt of large volumes of sequentially numbered traveler's checks in pouches from Mexico . The Bank failed to recognize the risks associated with pouches and cash letters received from jurisdictions with lax or deficient AML structures.” p. 6
Bulk Cash
“During the period from 2004 to 2007, Wachovia repatriated approximately $10 billion in bulk cash from Mexico into the United States . Internal discussions at the Bank demonstrated that employees of the Bank were aware of the 2006 FinCEN Advisory with respect to bulk cash repatriation. However, the Bank failed to implement adequate procedures and controls to ensure that bulk U.S. dollar deposits received from foreign correspondent customers were monitored for suspicious activity. Furthermore, on those occasions where employees of the Bank identified anomalies in the volume or mlX of bulk cash deposits that should have warranted further review, these anomalies were not brought to the attention of the Bank's Compliance or AML Investigative Services groups.” p. 7
Compliance Staffing
“Wachovia failed to adequately staff the BSA compliance function at the Bank, with individuals responsible for coordinating and monitoring day-to-day compliance with the BSA. The AML Investigative Services unit responsible for monitoring the Bank's correspondent relationships with foreign financial institutions was understaffed, and personnel lacked the requisite knowledge and expertise to adequately perform their duties. At its inception in 2005, the Bank staffed this monitoring unit with as few as three individuals. The Bank failed to recognize the risks inherent within its international business line and provide adequate staffing to mitigate such risks.” p. 10
Internal Audit
“In view of the inherent risk, the Bank did not implement an effective independent audit function, in terms of both scope and frequency, to manage the risk of money laundering and compliance with the BSA. The internal audit function did not adequately evaluate and test Wachovia's suspicious activity monitoring and reporting systems, the Bank's foreign correspondent customer due diligence program, or other aspects of its AML program. Specifically, internal audit did not adequately evaluate and test bulk cash, cash letter, RDC, pouch activities, and the enhanced due diligence process relative to foreign correspondent financial institution accounts.” p 10-11
It is possible to look up from this document and wonder how things could go so wrong and to ask “What were they thinking?”
Anyway, the document is here on moneylaundering.com/ComplianceAdvantage.com along with three stories that shed light on the case. Actually, the Justice Department and Office of the Comptroller of the Currency documents are here too. I’d recommend them all if you haven’t already poured over them.
Kieran Beer
Sweet Charity
February 11, 2010
The extortion and bribery trial of Jersey City Deputy Mayor Leona Beldini kicked off at the end of January and continues in the Federal courthouse in Newark . While the focus is, quite properly, on allegations of political corruption, the case raises a number of questions about the oversight of charitable organization, particularly religious foundations.
Beldini’s arrest is one of 44 made in July of a colorful assortment of rabbis, politicians and public officials in New Jersey . It is the first of a series of trials, although 10 of the arrested have already pleaded guilty.
The U.S. Attorney has been pounding home allegations that Beldini is one of almost two score of politicians that committed criminal breaches of public trust, but an important aspect of the case is that it also highlights how religious charities were used to launder money.
That’s where the rabbis, Brooklyn and New Jersey-based, come in. The alleged scheme involved over a dozen rabbis who accepted illicit profits under the guise of charitable donations and returned 85 to 90 percent of the money in cash or “clean” checks, according to the FBI.
Between June 2007 and July 2009, approximately $3 million in bribery money provided by federal investigators was laundered with the help of the Syrian and Hasidic Jewish rabbis. According to court documents, the rabbis charged did know the money was being used to bribe public officials: they believed it was from bank fraud and a counterfeit accessory operation!
Gmach Shefa Chaim, one of the charitable foundations involved, has already hired a lawyer David Liston, of Hughes Hubbard and Reed, to get back $508,000 seized by the FBI.
Liston told the Star-Ledger that the FBI has not suggested, let alone proved, that the officials who ran the charity knowingly laundered money. According to the newspaper, he wants the privacy of the group protected: the Gmach is an entity that values its privacy for religious reasons and provides help to the needy anonymously.
Privacy is all well and good, but the arrest, indictments, pleas and coming trials suggest that there is a need for religious charitable foundations to meet the same requirements that non-religious foundations and 501(c)3 (not-for profits) meet. This abuse of religious charities, if proven true, would not have happened so easily if they were required to file a form 990.
The banks used by the rabbis for the alleged money laundering include the nation’s largest bank, a super-regional and well-known local financial institution. And that means the trial is also a reminder to compliance professionals that due diligence and monitoring of suspicious activity is necessary even if the account holders are clergy.
Kieran Beer
Lord of the Bills
December 15, 2008
Last Friday, the U.S. House of Representatives passed the most comprehensive overhaul of the financial markets since the 1930s.
“The Wall Street Reform and Consumer Protection Act” cobbles together two bills authored by Rep Barney Frank (D-MA) and eight other bills passed by the House Financial Services Committee that Frank chairs. Weighing in at 1,279 pages, H.R. 4173 may prove to be the equivalent of THE ring in The Lord of the Rings: the one financial reform bill that rules them all.
Sen. Christopher Dodd (D-CT) seemed to want to write the one bill that would determine the debate on reform, but that role, at least right now, has passed to Frank with the passage of H.R. 4173.Dodd’s bill is still in draft form and looks unlikely to surface for debate until April.
Right upfront, anti-money laundering and compliance offices should know there is little in Frank’s bill that directly addresses their area of expertise and responsibility. But H.R. 4173 in its current form nonetheless represents major reform: it will change which bank regulatory agency examines your bank; it will allow control of your institution by regulators if your institution is considered to be faltering and a threat to the stability of the U.S. financial system; and it adds layers of new consumer regulation and another set of bank examiners for consumer issues.
Having discussed Dodd’s bill in my previous post, below are some of the highlights of the Frank bill.
H.R. 4173: The Consumer Financial Protection Agency
Frank’s bill keeps in place three of four existing federal bank regulators: the Federal Reserve Board, the FDIC and the Office the Comptroller of the Currency. The OCC would become the primary national bank regulator. The OTS would cease to exist as a separate agency and would become the Division of Thrift Supervision inside the OCC, headed by a Senior Deputy Comptroller of the Currency.
In response to the charges that banks shop their regulator, the bill would prohibit a bank from changing its charter – to become, say, a state chartered bank if it’s a national bank – while it was subject to any kind of enforcement action.
Frank would, however, transfer some of the powers of the OCC, FDIC and Federal Reserve to a new regulator, the Consumer Financial Protection Agency, which would take staff, resources and fees formerly collected by these regulators.
The CFPA as envisioned by Frank would review all of the consumer regulations of the other agencies and decide on their fairness. The bill gives the agency oversight of mortgage and real estate lending, credit cards, debit cards, consumer loans, payday loans, credit reporting agencies, debt collection and stored-value cards.
In general, the bill gives the CFPA responsibility for creating user-safety rules for virtually all consumer financial products and the legal firepower to levy huge fines against financial institutions that violated those rules.
For example, the bill empowers the CFPA to dismantle mandatory arbitration clauses in the fine print of contracts that send business-consumer disputes to arbitrators rather than to courts if they are shown to tilt against consumers' interests.
To see that its regulation are implemented and abided by, CFPA would conduct examinations of banks. However, in the Frank bill, about 98 percent of the financial institutions would be exempt from those examinations. Still, institutions exempt from CFPA examinations would be audited by their existing bank regulators for adherence to CFPA regulations.
Many of the consumer protection powers now exercised by the National Credit Union Association, Federal Trade Commission, Department of Housing and Urban Development would also be transferred to the CFPA.
The director of the CFPA would be appointed by the President to a five-year term and is supposed to consult with a 7-member advisory board that has no executive powers. The board would be comprised of the Chairman of the Federal Reserve Board of Governors, head of the agency responsible for chartering and regulating national banks, chairperson of the FDIC, chairman of the National Credit Union Administration, chairman of the Federal Trade Commission, Secretary of Housing and Urban Development and chairman of the liaison committee of representatives of State agencies to the Federal[b1] Financial Institutions Examination Council.
H.R. 4173: The Financial Services Oversight Council
Frank’s bill would also create the Financial Services Oversight Council (FSOC), an interagency body that would identify and regulate financial firms that are so large, interconnected or risky that their collapse would put the entire financial system at risk. Voting members of the FSOC are the Treasury Secretary, as the Chairman, Chairman of the Federal Reserve, Comptroller of the Currency, Director of the Office of Thrift Supervision, until the functions are transferred to the OCC, Chairman of the Securities and Exchange Commission, Chairman of the Commodity Futures Trading Commission, Chairperson of the FDIC, Director of the Federal Housing Finance Agency and Chairman of the National Credit Union Administration. There would be two-non voting members: a state banking and state insurance commissioner.
In pursuit of stability, the FSOC would have the power to identify risks to the system—even in non-financial institutions—and to issue formal recommendations that a council member agency adopt stricter prudential standards for firms it regulates. FSOC staffing would come from the Treasury, and the FSOC may take a hands-on approach to a troubled company if it finds the primary regulator who is a member of the council isn’t being aggressive enough.
Beyond the FSOC, Frank’s bill would give primary responsibility for monitoring for safety and soundness to the Federal Reserve and give primary resolution authority to the FDIC.
That resolution authority has some interesting and controversial features. For example, the legislation would allow shareholders, unsecured creditors and bondholders to be wiped out if the government has to close a failing financial company. It would also subject secured creditors to losses of up to 20 percent of their money.
Where Will it End?
Frank has been amazingly dogged in bringing together these ten bills and getting them passed.
Dodd says he too is serious about moving ahead, looking to mid-April or so to begin to bring his package to a vote. He says that he has reached out to Republicans and, getting no cooperation thus far, will move ahead without them.
It is possible that some combination of the Dodd and Frank bill will be enacted. There is a big push for some kinds of consumer protection – despite the opposition from the financial services industry – and some kind of desire for a body that addresses systemic risk.
Industry opposition is not insignificant. The American Bankers Association is opposed to the creation of the CFPA and it has already had some victory in getting things cut from the Frank bill. For example, Frank had envisioned requiring model financial products that met a plain English standard. But these have been dropped in H.R. 4173. Frank also consented to having the consumer regulations created under H.R. 4173 create a ceiling for state regulations.
Just before Thanksgiving, Washington Post columnist Dana Milbank wrote about an American Financial Services Association conference call with reporters claiming success in torpedoing plans for the CFPA.
"This was supposed to be a slam-dunk," he quotes Bill Hempler, the group's top lobbyist, as saying. Instead, he said, "Democratic members are increasingly having heartburn over CFPA and maybe second thoughts."
It is easy to be impressed at how quickly the House has moved under Frank’s leadership. Of course, the Senate is a different story. Dodd’s bill is more radical and every Senator is a demigod who can go their own way. (Witness the heath care legislation debate!)
Still, banks should not underestimate public anger at some credit card and mortgage lending practices. Nor should financial institutions forget that the push for financial stability arises out the experience the country has just gone through of near financial devastation.
Kieran Beer
Dodd Bill Would Rock Your World
November 20, 2009
Washington’s latest contribution to financial regulatory reform weighs in at 1,136 pages. Introduced by Sen. Chris Dodd (D-CT), chairman of the Senate Banking Committee, the bill goes well beyond any of the other 10 or so financial reform bills floating around that limit themselves to a particular aspect of regulatory revision.
In fact, you could combine all of the proposed post-financial-apocalypse bills, including the House bill that would create the Consumer Financial Protection Agency, the Financial Stability Act and the Stop Tax Haven Abuse Act, and you wouldn’t come close to calling for the sweeping changes that Dodd does.
Despite the bill’s girth, it takes a reading of only the first 25 pages to get a sense of the profound and even radical change it envisions. The measure would eliminate the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS) and diminish the powers of the Federal Reserve and Federal Deposit Insurance Corp. (FDIC). In their place, it would create three new regulatory bodies: a Consumer Financial Protection Agency, the Agency for Financial Stability and the Financial Institutions Regulatory Administration. It would also create a fourth “semi-regulator” that will be part of Treasury: the Office of National Insurance.
The Financial Institutions Regulatory Administration would become the new bank regulator under the Dodd bill, and would pool staff and budget from the OCC, OTS, FDIC and Fed. Bank oversight related to consumer protection would reside with the Consumer Financial Protection Agency.
A word search of the bill may cause anti-money laundering and anti-fraud professionals to shrug it off. The bill never mentions “anti-money laundering,” “money laundering,” “financial crime” or “fraud.”
But make no mistake that its passage or the passage of even parts of the bill would have a profound effect on the institutions compliance professionals serve. Here, for example, is what the three new agencies would be empowered to do:
Consumer Financial Protection Agency (CFPA)
(CFPA) is mandated “to promote transparency, simplicity, fairness, accountability and access in the market for consumer financial products or services,” under the bill. To accomplish that mission, the agency will have broad rulemaking powers, with the caveat that it is supposed to consult with other federal agencies in crafting rules. The CFPA would assume all of the “consumer financial protection functions” currently performed by existing banking regulators – the planned-for-demolition OCC and OTS, as well as the diminished Fed and FDIC. In addition, the CFPA takes on those functions from the Federal Trade Commission, National Credit Union Administration and the Department of Housing and Urban Development.
The CFPA would have a five-member board, four members being appointed to five-year terms by the President with the advice and consent of the Senate. The fifth member would be the director of the Financial Institutions Regulatory Administration.
Agency for Financial Stability (AFS)
AFS is charged with making sure financial institutions don’t fail and taking the proper steps to shut them down in an orderly manner if they do. For both tasks, the agency would direct and utilize other federal agencies, while setting the parameters under which the financial institutions can operate. AFS is supposed to identify risks to the U.S. financial system that arise from the distress or actual failure of large financial companies, promote market discipline by eliminating expectations the government will bailout large financial companies and respond to risks that emerge from financial product innovation. AFS is empowered to promulgate regulation and to get any data it needs from financial institutions from its member agencies (whose chiefs comprise its board).
The agency would have a nine-member board that includes representative of those other federal agencies. Its chairman and one independent member are appointed by the President. Also on the board are the Treasury Secretary, Chairman of the Board of Governors of the Federal Reserve, the director of the CFPA and the chairmen of FIRA, the FDIC, CFTC and SEC.
Financial Institutions Regulatory Administration (FIRA)
FIRA is charged with providing for the safe and sound operation of the banking system, preserving the dual federal and state-chartered depository institutions, ensuring the fair and appropriate supervision of each depository institution, streamlining the supervision of depository institutions and their holding companies and improving supervision of what it calls systemically significant institutions. It would replace the Office of the Comptroller of the Currency, the Office of Thrift Supervision and take bank oversight powers from the FDIC and the Federal Reserve. FIRA is to be governed by a five-person board, including its presidentially-appointed chairman, the chairman of the Federal Reserve and three individuals also appointed by the President. To accomplish its mission with regard to state banks, the Dodd bill would create a division of community bank supervision and an advisory committee of five state bank regulators who would serve two-year terms.
Separately, a curiosity in the bill, at least to me, is Title V, starting on page 304. It addresses the creation of that Office of National Insurance (ONI) alluded to above. ONI clearly wouldn’t have the power of the other new agencies. Its director would be appointed by the Treasury Secretary and the slot held for careerists in that department. The agency would monitor the varied pieces of state regulation and look for gaps that would contribute to a systemic crisis in the insurance industry or U.S. financial system. In that capacity, ONI is supposed to identify specified (or troubled) financial companies that are insurers, help administer the Terrorism Insurance Program, coordinate policy on international issues, consult with states on insurance matters of national importance and perform other duties the Secretary comes up with. (Okay, the bill says “as may be assigned by the Secretary.”)
The big question is, how much of this will actually survive the dance of legislation? It’s not clear, but Congress does appear poised to pass some financial reform bills (in addition to the ones they have already passed in the wake of the financial crisis). And, Rep. Barney Frank (D-MA), chairman of The House Financial Services Committee, has a slew of his own bills floating around. There is some overlap of his measures and Dodd’s. I’ll look at the overlap and the contradictions in my next posting in search of clues as to what may actually come to be.
Kieran Beer
Getting the Board’s Attention
October 27, 2009
If you’re at a bank and looking for a way to prod your board of directors into properly funding your anti-money laundering (AML) efforts, recent remarks by a Federal Deposit Insurance Corporation (FDIC) official should give you an argument that will get their attention.
The FDIC will levy civil money penalties against directors on boards that don’t have Bank Secrecy Act (BSA) and AML programs that meet agency standards, Lisa Arquette, associate director at the FDIC told attendees at an American Bankers Association conference in Washington , D.C. More
The hope is that these penalties will prevent boards from cutting AML department’s budgets to the bone, gutting BSA compliance in the process. And in going after board members, the FDIC won’t imperil a bank’s capital by making the institution pay a penalty, Arquette told moneylaundering.com/complianceadvantage.com. Directors are, after all, ultimately responsible for BSA compliance, she said.
Arquette’s comments follow on remarks made by FDIC and Office of the Comptroller of the Currency officials at the eighth annual Association of Certified Anti-Money laundering Specialists conference in Las Vegas a week earlier. In Las Vegas , the message was that bank examiners were encountering institutions that had gutted their AML efforts to save money. These institutions shouldn’t think there won’t be regulatory consequences. More
Of course directors may argue that they are doing all they can in tough times to fund AML efforts. And some may even conclude that Arquette’s not so veiled warning doesn’t apply to them.
In the wake of our running Arquette’s remarks I heard from brokerage compliance officers.
One reported that his board had dismissed a presentation that talked about their AML responsibility. That’s something the bank regulators aren’t pushing, they concluded.
Maybe, but this was a week in which securities firms were highlighted by a Financial Action Task Force report that said that relatively few suspicious transaction reports are filed by brokerage firms globally. It is a report that is likely to get regulators’ attention—the same kind of attention that Scottrade got when the Scottsdale , AZ firm was dinged to the tune of $600,000 for failing to have an adequate transaction monitoring system or AML program. More
That doesn’t translate to holding securities firms’ directors responsible for AML failures, but brokers are facing increased scrutiny. The Financial Industry Regulatory Authority (Finra) has issued at least 15 enforcement actions, all but one involving monetary penalties, so far this year.
So bank compliance officers may have an important message to deliver to boards, but securities firms’ AML professionals can deliver a similar, if not quite so personal, message.
Kieran Beer
Russian Roulette
September 17, 2009
The Russian government’s lawsuit against Bank of New York has ended with a whimper not a bang. Good thing too. The suit didn’t do much for either the Russian government or, needless to say, the Bank of New York.
While it sought $22.5 billion, Russia ’s finance minister announced Wednesday that his government would settle for legal fees: $14 million. That figure was far less than Russia ’s lawyers, working on a contingency basis, had hoped to get.
Russia should nonetheless be satisfied to bring the matter to a close sans the $22.5 billion because of the lessons foreign companies could take away from the suit. The case seemed only to prove that it could be difficult to do business in the Russian Federation .
Russia based its case on the very dubious argument that U.S. Racketeer Influenced and Corrupt Organization Act (RICO) applied to the actions of Lucy Edwards, a Bank of New York employee who, in concert with her husband, laundered $7.5 billion.
Russia’s effort to stick it to Bank of New York for Edwards’ crimes was based on at least a couple of dubious premises.
First, there was the use of U.S. law in Russia . Nations generally don’t bring charges against individuals or entities based on other countries’ laws.
Then there was the mistaken notion that Bank of New York had pleaded guilty for Edwards’ actions in the U.S. It had not: that was a U.S. Justice Department press release typo that was later acknowledged by the department.
As said above, the damage to Russia ’s image was costly too. Non-Russian banks and other kinds of companies looking on could not help but question the wisdom of doing business in Russia . Russia , in pursuing this case, seemed to possess an ill-defined legal system and a well-defined sense of opportunism.
Of course, Bank of New York should be happy to have the matter behind it. The bank asserted from the beginning that it was innocent and that if, by some twist, a Russian court found it guilty, the bank had few assets in Russia to seize. Other nations, the bank argued, were unlikely to enforce a judgment. Still, the whole thing was a distraction for the bank and it was undoubtedly costly to mount a defense.
All of this tsoris, or sorrow, has its roots in the actions of a rogue employee. There are undoubtedly lessons banks can take away about the need for monitoring systems and employee oversight.
Oddly, Edward’s reflections on her action demonstrate only a modicum of contrition.
“It was up to the Bank of New York to verify the wire transfers sent. If you see that the character of the transactions has changed, then it is up to the compliance officer to ask questions. They should have asked questions,” Edwards said of the transactions worth $7.5 billion in money that she helped launder.
Since banks cannot count on religious conversions and outbreaks of conscience to cause errant employees to turn themselves in, she is right.
Kieran Beer
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