Money Laundering: Two Bank Cases - Key PATRIOT Act Regulations Not Issued - PATRIOT Act Data System Inoperative

By Andrew Cochran

In the past week, U.S. banking regulators announced two important actions against major banks for weaknesses in anti-money laundering (AML) programs required under the Bank Secrecy Act, as amended by the USA PATRIOT Act. First, the U.S. branch of Deutsche Bank agreed to cure deficiencies in its AML program, specifically in the management and oversight of its correspondent banking and funds transfer clearing operations (no actual instances of money laundering were alleged or found). Correspondent banking, through which a foreign bank and domestic bank handle each other's banking relationships in their respective jurisdictions, has been a subject of intense debate and investigation due to the inherent potential for misuse as a vehicle for money laundering and terrorist financing. The U.S. Senate Permanent Subcommittee on Investigations issued a report in 2001 on the issue and concluding that "The staff's investigation led them to conclude that allowing high-risk foreign banks and their criminal clients access to U.S. correspondent bank accounts, among several negative impacts, 'facilitates crime' and 'undermines the U.S. financial system.'" One Arab-based paper wrote last week, "Investigators have found that some large banks that engage in correspondent banking, including several US institutions, have become conduits for illicit foreign money and unwittingly aided drug trafficking, fraud and other crimes." Second, federal regulators signed a consent order with another major bank, KeyBank, over weaknesses in its AML program. Although the order doesn't allege actual money laundering, it makes it clear that KeyBank's board of directors had not exercised sufficient responsibility over a wide range of AML systems and issues (the board is mentioned over 30 times).

The Deutsche Bank case comes amid continued delays in the issuance of final regulations governing correspondent banking, which were mandated under Section 312 of the PATRIOT Act.

Interim final regulations were issued on July 23, 2002, but have never been finalized. Senators on the U.S. Senate Banking Committee have made a practice of excoriating Treasury Department hearing witnesses for the delays and then demanding a date for the issuance of the regulations. I was told 2 weeks ago by an Executive Branch official involved in the process that the regs would be issued very soon, so I suspect that pressure from outside the Treasury Department continues to hold up the final regulations. Financial institutions deserve to have the final official guidance so they can adjust AML systems for their correspondent accounts, especially if the regs impose costly requirements for identifying higher-risk customers (a.k.a. "politically exposed persons," or PEPs).

Finally, I wrote here about the shutdown of the automated system whereby FinCEN and law enforcement request and receive information from financial institutions for use in terrorism and money laundering cases. The shutdown was caused by the September 23 "cyberjacking" of FinCEN's outside e-mail list. Three weeks later, FinCEN hasn't been able to bring the system back up, and all parties involved should question whether the substitute system (paper-based?) provides the same quality of information in the same timeframe. The automated system had provided law enforcement with real money laundering and terrorist financing case leads, and I know that its restoration is a priority at FinCEN.

TrackBack