Californian bank fined $7 million in AML case

Mar 06, 2017
<p>Merchants&rsquo; board accused of failing to implement an effective BSA program</p>

A Carson, California-based bank has agreed to pay a $7 million fine to settle what regulators called ‘willful’ violations of anti-money laundering (AML) rules – and allegations that the bank’s board failed to implement an effective AML program.

According to a Financial Crimes Enforcement Network (FinCEN) filing, Merchants Bank of California admits it willfully violated the Bank Secrecy Act (BSA) program and reporting requirements from March 2012 to September 2016. The US Department of the Treasury says Merchants failed to:

  • Establish and implement an adequate AML program
  • Conduct required due diligence on its foreign correspondent accounts
  • Detect and report suspicious activity.

‘Merchants’ failures allowed billions of dollars in transactions to flow through the US financial system without effective monitoring to adequately detect and report suspicious activity,’ FinCEN officials note in the filing. ‘Many of these transactions were conducted on behalf of money services businesses (MSBs) that were owned or managed by bank insiders who encouraged staff to process these transactions without question or face potential dismissal or retaliation.’

The regulatory filing does not identify any bank officials. A request for comment from a Merchants representative was not returned.

At a minimum, FinCEN states, a bank’s AML program must do the following, known as the four pillars of BSA compliance:

  • Provide for a system of internal controls to assure continuing compliance
  • Provide for independent testing for compliance to be conducted by bank personnel or by an outside party
  • Designate an individual or individuals responsible for co-ordinating and monitoring day-to-day compliance
  • Provide training for appropriate personnel.

According to the agency, Merchants did not establish and maintain adequate internal controls to assure continuing compliance; did not conduct a sufficient independent audit commensurate with the bank’s complexity and risk profile; failed to provide the necessary level of authority, independence and responsibility to its BSA officer to ensure day-to-day compliance; and did not provide adequate training for appropriate personnel.

For example, FinCEN says the bank provided banking services for as many as 165 check-cashing customers and 44 money transmitters, many of which were located hundreds of miles away, without adequately assessing the money-laundering risk of the customers or designing an effective AML program to address those risks.

Specifically, the agency says, Merchant did not implement adequate due diligence programs and provided its high-risk customers with remote deposit-capture services without adequate procedures for monitoring their use.

Bank insiders in several cases directly interfered with the BSA staff’s attempts to investigate suspicious activity related to insider-owned accounts, FinCEN says. It also says Merchants failed to adopt and implement adequate policies and procedures to conduct required due diligence for its large portfolio of ‘high-risk MSB customers.’

Considering those customers and services, risk-based due diligence assessments were necessary to help the bank in determining when transactions were potentially suspicious and enable reporting of those transactions as required by the BSA, officials say.

Merchants did not collect the information necessary to establish sufficient knowledge of its MSB customers’ activities and did not have procedures for identifying the source of funds for its high-risk MSB customers, according to the agency.

For example, officials say, one of these customers owned check-cashing businesses located along the Mexican border, which increased the possibility that its source of funds came from Mexico. Despite this, the bank did not sufficiently monitor or analyze this account activity, nor did it conduct any due diligence to identify the source of funds for the MSB’s check-cashing businesses, FinCEN says.

Before September 2016, Merchants’ leadership had not ensured the BSA officer had sufficient authority and resources to administer an effective AML compliance program by failing to define a permanent BSA department structure and to establish criteria regarding how the BSA officer roles and responsibilities would be performed successfully, according to FinCEN.

‘The banking of [MSBs] is important to the global financial system, and we believe banks can mitigate the risks associated with such businesses, just as they do with other customers,’ acting FinCEN director Jamal El-Hindi says in a statement. ‘But here we had an institution run by insiders essentially to provide banking services to MSBs the insiders owned, combined with directions from bank leadership to staff to ignore BSA requirements with respect to those MSB customers and others. It is certainly not an acceptable way to bank MSBs.’

Merchants also settled a related Office of the Comptroller of the Currency (OCC) action, agreeing to pay a $1 million penalty. The bank did not admit or deny wrongdoing in settling the OCC claims. According to a FinCEN statement, the $1 million OCC penalty will be credited toward paying the FinCEN penalty.

The OCC alleges that it identified deficiencies in the bank’s practices that resulted in violations of consent orders entered into by Merchants in 2010 and 2014. The 2010 consent order required the bank to, among other things, develop and adhere to a revised BSA program, but the bank was in continuous non-compliance with this between June 2010 and April 2013, the OCC says.

The bank remained in non-compliance with the 2010 consent order and requirements regarding procedures for monitoring BSA compliance, according to the OCC. The latter was ‘the result of the board’s failure to implement an effective BSA program that addressed the regulatory requirements contained in 12 CFR 21.21,’ officials allege.

The board’s alleged failure to implement an effective program included ‘substantial deficiencies’ in all four pillars of the BSA program, the OCC says. In addition, officials allege, as of May 25, 2016 the bank was in non-compliance with 19 of 20 actionable articles in the 2014 consent related to Merchants’ BSA program. 

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