WASHINGTON — Almost six years after the USA Patriot Act toughened banks' anti-laundering requirements, large banking companies continue to face massive fines for failures in their programs.
In interviews with top bank anti-laundering officials, industry representatives, consultants, and many others, no clear consensus emerged as to the reasons. Responses range from a defense of the industry, with some arguing that the Justice Department is overly aggressive and that the bar for compliance is too high, to a condemnation of financial institutions, with some saying bankers are too confident in their systems and have not fully embraced their heightened responsibilities.
However, all of those interviewed for this article agreed on one thing: More large fines are undoubtedly on their way.
"The bar has changed, and it continues to change and get higher and higher," said Ellen Zimiles, co-founder and chief executive officer of Daylight Forensic and Advisory LLC. "It means you can never rest. Every time you think you have it covered, you constantly have to update what you do."
In a little over a month two banking companies have received large fines for failure to comply with the Bank Secrecy Act. American Express Co. was fined $60 million last month, and Union Bank of California (which is majority owned by Mitsubishi UFJ Financial Group Inc.) was fined $31.6 million last week.
But the biggest fine is likely still to come. ABN Amro Holding NV, which was fined $80 million in December 2005 for problems in its anti-laundering system, disclosed in April that it may receive a second penalty of nearly $500 million. Such a fine not only would obliterate the record for a laundering penalty, but it also would be well over the combined amount regulators have assessed against banking companies for laundering problems since 2001.
In July, ABN Amro said it expected to enter a deferred prosecution agreement with the Justice Department covering its clearing activities, compliance with the Office of Foreign Assets Control, and other problems. Details of the agreement are still being worked out.
Industry insiders said they were aware of several other large fines expected to be assessed during the next few months, likely making 2007 a record year for anti-laundering penalties.
The list of companies fined by the government continues to grow and raises questions about the efficacy of the industry's anti-laundering efforts. Some analysts said the fines are the result of impatient regulators, who tolerated problems more readily immediately after 2001 but now feel like bankers have had plenty of time to adjust to their enhanced requirements.
Fines "will continue as long as certain banks are perceived as not keeping pace with regulators' expectations and their peers," said David Caruso, the CEO and managing director of Dominion Advisory Group LLC in Centerville, Va. "The regulators would expect that the banks would get it by now. How could they not? The Patriot Act became effective in 2002."
The act included a broad expansion of BSA guidelines to cover new industries, such as money-services businesses, and it broadened banker obligations, including additional know-your-customer requirements.
"It appears that certain institutions are still struggling with the part of the Patriot Act that requires an end-to-end anti-money-laundering program in banks, because most of the orders, if not all of them, document programmatic failures," said William Fox, a former Financial Crimes Enforcement Network director and now the head of Bank of America Corp.'s anti-laundering compliance.
Many in the industry complain that regulators expect too much, but Mr. Fox argues that compliance is possible. He also said there was no excuse for a bank that did not fix problems quickly if they were identified by regulators.
Recent fines have shown several companies did not handle government warnings properly. Regulators had criticized both ABN Amro and Amex publicly for lapses, and Union Bank was told of issues as early as 2003, according to government documents. After signing a memorandum of understanding with the Office of the Comptroller of the Currency in 2005, Union Bank had a year to fix its problems, but it did not do so.
Mr. Fox said he simply does not understand why that happens.
"I can't imagine why a bank wouldn't fix what was previously called out," he said. "Fortunately, we have not been in that situation where we throw up our hands and say, 'We can't do this,' and if we were in that position, we would certainly let our colleagues know that."
Though Mr. Fox said that "the statute can be complied with," others say the government expects too much from financial institutions. Regulators have repeatedly said bankers should have systems that focus primarily on the biggest risks. Bob Serino, a former OCC anti-laundering officer and now a counsel at Buckley Kolar LLP, said such systems are bound to have lapses at some point.
"Banks are spending a lot of money to put in systems and processes and people, but sometimes things slip through the cracks. It doesn't mean the bank doesn't get it, but sometimes with big institutions there are a lot of things that can go wrong," he said.
But observers said that even if bankers are spending money on the problem, they sometimes fail to do so effectively. Union Bank received its fine despite spending over $100 million on anti-laundering compliance, hiring additional staff members, upgrading training, and forming a financial intelligence unit.
"Unfortunately, people in the industry equate spending a lot of money with doing a great job. That's not the case," Mr. Caruso said. "For far too many banks, they're still unaware of the complexities and intricacies of what makes a BSA program effective. … There are many banks out there who have still taken a minimalist approach, and some may regard that as complying with the letter of the law but not the spirit."
A common problem remains when and how to file suspicious activity reports. The issue gained prominence in 2004, when AmSouth Bancorp. was fined $50 million for failure to file SARs. Though bankers responded by filing record numbers of reports, even on activity that was not really suspicious, regulators are now documenting other filing-related problems. Union Bank and Amex, for example, were cited for filing incomplete and late SARs.
"This is a wake-up call to the industry that we want to see SARs that are useful," said Carmina Hughes, executive director of Daylight Forensic. "It seems to me what might be happening is Fincen is saying, 'We've given you a lot of guidance. Enough is enough. If you are going to file SARs, you should file it correctly.' "
But many in the industry said that filing reports remains a subjective call, and that it is impossible for a company to know if it is doing enough.
"SARs are one part of compliance that aren't black and white," said Jean Veta, a partner at Covington & Burling LLP. "It's not a black-letter rule like reporting currency transaction reports."
Another recurring theme among recent cases is the presence of the Justice Department, which many observers said is getting more involved in pursuing bankers for laundering compliance. Several bankers have said the department is too aggressive and does not properly weigh how hard bankers are working to be compliant. But others say its involvement is proof that banking regulators are not doing enough on their own to find problems.
Stephen Kroll, a former Fincen official and Democratic counsel for the Senate Banking Committee, who now lectures at American University, said the Justice Department's activism demonstrates a disconnect with bank regulators.
"Someone needs to look very hard at the way the system can be improved — for everybody's benefit," he said. "Bank regulators need to work more closely with the Department of Justice to get the message out identifying money laundering risks and seeing that the system is tightened in real time. Otherwise, you're going to continue to have situations in which a lot of money is spent on surface compliance, the Justice Department traces laundered funds back to particular banks, and the roof falls in."
Despite the fines, Richard Riese, director of the American Bankers Association's Center for Regulatory Compliance, said that fines remain the exception, not the rule. "We're looking through the wrong end of the telescope. There are 8,000 institutions who are getting it," Mr. Riese said.
