State Street Corp. said it expects to face an enforcement action by the Federal Reserve and the Massachusetts Division of Banks after it failed to comply with the Bank Secrecy Act, anti-money laundering rules and U.S. economic sanctions.
As part of a "written agreement," the bank expects to be required to improve its compliance program and retain an independent company to review account and transaction data, the Boston-based State Street said Thursday in a regulatory filing.
"If deficiencies in our historical reporting are identified as a result of the transaction review or if we fail to comply with the terms of the written agreement, we may become subject to fines and other regulatory sanctions, which may have a material adverse effect on us," the company said.
State Street in recent years has faced regulatory probes on issues including foreign-exchange trading and soliciting business from public pension plans. In November, State Street disclosed it was responding to subpoenas from the Department of Justice and the U.S. Securities and Exchange Commission on its use of consultants and lobbyists to solicit business from pension plans. Last year, the custody bank also agreed to pay $60 million to settle investor claims it inflated revenue by overcharging clients for foreign-exchange services, according to a preliminary pact filed in Boston federal court.
'Piling Up'
"In isolation, we view this as manageable," said Brian Kleinhanzl, an analyst at Keefe Bruyette & Woods Inc. "It is more concerning that you are starting to see these types of issues piling up."
The company's shares fell 0.8 percent to $77.37 at 1:27 p.m. in New York. The shares have declined 1.4 percent this year, compared with the 2.1 percent gain in the 18-company Standard & Poor's index of asset managers and custody banks.
The probe doesn't "impact our clients' compliance with their legal or regulatory obligations," Alicia Curran, a spokeswoman for State Street, wrote in an e-mailed comment, while declining to comment beyond that citing confidential discussions with regulators. Eric Kollig, a Fed spokesman in Washington, declined to comment.
The regulatory scrutiny may further curb earnings as State Street, like other custody banks, faces record-low interest rates, which hurt income from lending and investing. The firm said last month that money set aside for legal expenses related to litigation in its foreign exchange business reduced first- quarter earnings by $150 million, on a net after-tax basis.
Regulatory Scrutiny
The Federal Reserve supervises state-chartered member banks and bank holding companies among other entities. It imposes formal enforcement actions when it finds violations of laws or regulations, unsound practices or breaches of fiduciary duty. Those actions can include cease-and-desist orders, fines and "written agreements" in which the bank commits to fixing the problems identified and to submit a written reports on its plans and progress.
Regulators have been stepping up their enforcement of anti- money laundering rules as part of an effort to limit terrorist financing and to stymie drug- and human-trafficking proceeds, and have said they may begin to crack down even harder. New York's banking regulator floated a plan in February to spot- check banks' money laundering controls and hold executives accountable if they fail.
Germany's Commerzbank AG agreed to pay $1.45 billion in March to settle multiple U.S. investigations, including for money-laundering violations. Standard Chartered Plc in August agreed to pay $300 million to the office of Benjamin Lawsky, superintendent of the New York Department of Financial Services, for faulty anti-money laundering controls that that failed to flag suspicious transactions, as required by a 2012 settlement over Iran sanctions violations.
