WASHINGTON — Compliance officers are terrified of a New York State Department of Financial Services proposal that could make them criminally liable for failings in their firm’s anti-money-laundering programs, according to industry representatives.
"You might go to jail. Who wants a job like that?" Nelson Everhardt, a consultant and former compliance executive at Bank of America, said in an interview.
The proposal would impose new guidelines on transaction monitoring and filtering to ensure that financial institutions adhere to the Bank Secrecy Act. A financial institution's chief compliance officer or equivalent would be required to sign yearly certifications declaring they have complied with the new requirements.
In theory, the plan does not depart from federal requirements and guidelines already in place. But critics said it may add another layer of requirements that raise compliance costs and potentially subject officers to criminal penalties.
The proposal's requirements are "already in the examination manuals," Everhardt said. "Why do you need to put something on top of this?"
In its Dec. 1 proposal, the New York regulator said the plan results from investigations that turned up "shortcomings in the transaction monitoring and filtering programs" of several New York-chartered financial institutions.
Modeled after the Sarbanes-Oxley Act, the plan aims to reduce Bank Secrecy Act violations by targeting compliance executives. But industry representatives argue that it is draconian and that it could backfire.
"It may be a cannon blast when a surgical knife would do," Jorge Guerrero, chief executive of the compliance consultancy Optima Compass Group in Austin, Tex., said in an interview.
A spokesman for the state regulator declined to comment, noting that the comment period for the plan has been extended until March 31.
On the one hand, the proposal's intended targets — financial institutions with subpar anti-money-laundering practices — are likely to respond swiftly if it is implemented. Banks will also be encouraged to improve their advanced testing, a growing arm of AML compliance practice.
"Algorithms behind the system and the data that goes into the system are critical," said John Caruso, a principal at KPMG. "I would expect that banks would have to step that up and increase both manpower and expertise in that area."
But the proposal could also impose unrealistic standards on compliance officers, who worry they could be subject to lawsuits even for mistakes made in good faith.
AML compliance failures should be evaluated "when you're in the heat of battle, not in hindsight, when you have more facts and more knowledge about possible risks and specific details as to what" transpired, Guerrero said.
Everhardt agreed. "It's kind of like nailing jello to the wall," he said. "There's not one product in any of the financial institutions that hasn't already been compromised."
It could also be a counterproductive exercise for banks that already have solid anti-laundering arms, industry representatives said. Instead of marshaling their resources toward an AML infrastructure tailored to their needs, financial institutions will be forced to follow the DFS's guidelines to the letter.
AML programs are "supposed to be flexible, and not prescriptive," said Robert Rowe, vice president and associate chief counsel for the American Bankers Association. "The New York proposal goes in the other direction."
Experts also said that the regulatory straitjacket could drive compliance officers away.
"I had a few compliance officers from large banks say that if this goes through, they are going to find something else to do," Rowe said.
Banks are already worried about a growing chorus demanding "heads on a plate" since the financial crisis, said Brian Monroe, director of content at the Association of Certified Financial Crime Specialists.
Lee Kurman, a former general counsel of Morgan Stanley’s largest bank subsidiary who is now a managing director of the consulting firm Exiger, said, "There's a lot of pressure … to say, 'OK, the banks have been fined [but] few, if any, people in the banks have been held personally responsible.' "
The record $1.92 billion money-laundering settlement with HSBC in late 2012 sparked outrage in the public at large because it did not lead to any indictments of executives.
The courts may already be moving in the same direction as the New York rule. In January, a U.S. District Court judge in Minnesota ruled that corporate officers could be held personally liable for Bank Secrecy Act compliance failures. The case involved MoneyGram's former chief compliance officer, Thomas Haider, who was fined $1 million for wire fraud and anti-money-laundering violations that occurred under his watch.
As the perceived risks shouldered by compliance officers have grown, so has their income. According to a Robert Half salary guide, compensation for compliance directors is set to increase 5.8% this year, making it among the fastest-growing in the legal field.
"It has become more challenging than ever to attract top-tier compliance officers," said Justin Mandel, the managing director at the New York headhunting firm JW Michaels & Co.
Salaries can now range from about $400,000 to $1 million, said Mandel, who expects to see seven-figure incomes become more common.
Financial institutions could see other indirect costs stack up if the proposal comes to pass — from personal liability insurance for compliance officers to outside consultants hired to kick the tires on a firm's AML program.