Merchants Bank of California fined $7 million for widespread anti-laundering failings

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WASHINGTON — Merchants Bank of California was fined $7 million for failing to implement anti-money-laundering controls, specifically citing its relationships with money-services businesses affiliated with company executives, regulators announced Monday.

The Treasury Department’s Financial Crimes Enforcement Network said the bank of failed to file suspicious activity reports and implement sufficient due diligence on its foreign correspondent accounts. The $64.8 million-asset bank’s AML program was “inadequate” overall, Fincen charged.

The Carson, Calif., bank was fined $6 million by Fincen in addition to $1 million by the Office of the Comptroller of the Currency, which it has already paid. In an assessment from Fincen, Merchants acknowledged that it had “willfully” violated the Bank Secrecy Act. But in an OCC consent order issued earlier this month, it neither admitted nor denied wrongdoing.

“Here we had an institution run by insiders essentially to provide banking services to MSBs that the insiders owned, combined with directions from bank leadership to staff to ignore [Bank Secrecy Act] requirements with respect to those MSB customers and others,” Fincen's acting director, Jamal El-Hindi, said in a press release. “It is certainly not an acceptable way to bank MSBs.”

The OCC, meanwhile, accused Merchants of failing to follow the terms of two prior consent orders filed in 2010, and 2014, and of “continuously" violating the Bank Secrecy Act. Under the OCC’s prior orders, the bank was required to send regular, detailed progress reports on its AML program, refrain from taking in new high-risk customers and maintain minimum capital levels. Merchants reported close to $500,000 in losses in the third quarter of 2016.

In a 17-page filing, Fincen laid out detailed accusations on the bank's alleged failings, ranging from internal conflicts of interest to widespread failure to enforce basic AML procedures.

Merchants did not respond in time to a request for comment.

Fincen accused Merchants of “willfully" violating BSA program reporting requirements between March 2012 and September 2016. Officials at the bank who had ties to the money-services businesses impeded the work of anti-laundering staff, the agency found.

These insiders “directly interfered” with investigations into the suspicious activity of MSBs with which they had ownership ties, Fincen alleged. In some cases, the AML employees “were threatened with possible dismissal or retaliation” for trying to report suspicious activity from these companies.

Accounts associated with these insider-owned MSBs were possibly involved in layering schemes, transactions that did not square with the business’ stated purpose and suspicious commingling of funds, Fincen said.

Merchants Bank also failed to create clear accountability standards for its BSA/AML procedures, according to the regulator.

Fincen alleged that at one point the bank lacked a single designated Bank Secrecy Act officer. Instead, three officials were sharing BSA duties — including two executives who were also charged with seeking out business from money-services businesses.

This created "a conflict of interest that impeded them from performing compliance duties on their own customers,” Fincen said.

Merchants also failed to implement such basic AML procedures as information gathering, the regulator charged.

In its application forms, the bank did not ask for sufficient documentation on customers’ anticipated account activity, Fincen said. And it did not have procedures for searching the source of funds ties to their high-risk MSB clients, according to the regulator.

As a result, the bank failed to investigate money sources for one check-cashing company with locations along the Mexican border.

In another example, Merchants allegedly maintained an account for an MSB that purported to cash checks in three Puerto Rico locations. But the company was found to also be using its Merchants account to make deposits for remittances associated with another money-services business, according to Fincen. Yet the bank did not take this into account in its AML procedures, the agency charged.

“Merchants failed to identify the sources of funds and failed to detect and report suspicious activity related to the commingled transactions," Fincen said.

The bank's monitoring of the activity of 165 customers that used their check-cashing account for moving large volumes of cash also was subpar, Fincen said.

“Merchants did not perform sufficient account cash flow analysis to monitor the ways MSB customers were funding their check cashing operations.”

Additionally, the bank did not appropriately manage risks associated with remote deposit capture services until 2016, according to Fincen.

Merchants was also accused of improperly managing its foreign correspondent bank customers. For instance, it had banking customers in the high-risk jurisdictions of Honduras, Mexico, Colombia and Romania.

Those partner banks were not identified as foreign correspondent customers, Fincen said. As a result, the bank did not conduct proper due diligence on the $192 million in wire transfers these customers received between August and October 2014, according to the regulator.

The bank also failed to report suspicious activities on a large scale, Fincen charged. From 2012 to 2016, it let billions of dollars of transactions slip through the cracks unmonitored, the agency said.

One such suspicious MSB that was not reported in time was located in the owner’s private New York residence and had previously received attention from law enforcement, Fincen said.

In addition, the bank was accused of not conducting an adequate independent audit of its BSA/AML program, given its risk profile, until it commissioned a look-back review in 2015.

The bank hired an independent consultant to conduct a look-back review of 100 of its high-risk MSB accounts.

It subsequently filed SARs on a number of transactions flagged in the review, including reports covering more than $400 million in structured transactions over two years. Some of those transactions involved payouts to unknown individuals in Mexico, Colombia and wire transfers toward countries sanctioned by the Office of Foreign Assets Control.

Merchants is also one of the rare banks to serve MSBs based in Somalia, a country that lacks a formal banking system and relies heavily on international remittances — a transaction category that financial institutions and regulators alike consider to be highly risky.

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