East West Bancorp has been placed under an enforcement action for anti-money-laundering compliance weaknesses, as it continues a plan to spend an estimated total of $12 million on program upgrades.
The Federal Reserve Bank of San Francisco on Monday placed the $31 billion-asset company under a written agreement, requiring it to submit a revised compliance program, hire an independent firm to conduct a historical review of higher-risk customers and transactions and take other undisclosed actions.
The Fed has told the Pasadena, Calif., company that it has identified deficiencies in its compliance with Bank Secrecy Act and AML compliance rules, and with the Treasury Department's Office of Foreign Assets Control compliance program.
The Fed's written agreement had not been made public as of Thursday. East West did not return requests for comment.
The agreement relates to East West's deposit accounts and the deficiencies were first identified in a recent regulatory examination, KBW analyst Julianna Balicka told American Banker in an email. East West has said it expects to complete the AML/BSA upgrade by the end of the next year.
"It is not specific to any particular accounts, but to the procedures the bank follows," Balicka said. "What is appropriate for a smaller bank changes as the bank grows" in asset size.
East West has not been forced to cancel customer relationships and has not had customers "involved in money laundering, drug money, Ponzi schemes, etc.," she wrote in a research note to clients.
East West had already been working on the issues before the written agreement was signed, company executives have said during recent earnings conference calls with analysts. That plan was a contributing factor in East West's $2.8 million increase in consulting expenses during the third quarter, Chief Financial Officer Irene Oh said during an Oct. 22 call.
East West expects elevated expenses related to these projects in the fourth quarter and potentially 2016, Oh said. Additionally, East West is upgrading its commercial online banking system.
Balicka projects that East West will spend another $2.5 million on the upgrade program this year and an additional $7 million spread over 2016 and 2017.
The Fed's written agreement should not be detrimental to East West's earnings, since it has already been factored into forward guidance, Balicka said. The agreement also likely won't hurt East West's business with customers related to China.
"The immigrants in [East West's] deposit base may have a smaller paper trail [and would have required] a heightened degree of BSA compliance, but that would have applied all along," Balicka said.
Balicka does not believe the enforcement action is related to East West's China-related business growth.
East West is classified as a minority deposit institution by the Federal Deposit Insurance Corp., serving the Asian community. East West describes its role as serving as "the financial bridge between the U.S. and China," according to its regulatory filings. East West opened two branches in China in 2014, in Shenzhen and the Shanghai Pilot Free Trade Zone. East West's portfolio of loans held in its overseas offices, including China and Hong Kong, was $982.8 million, as of Sept. 30.