BSA/AML News: $29M Fine and BSA Changes Under Consideration

Financial Services Law

Anti-money laundering (AML) violations resulted in a Taiwanese bank and its U.S. branches being hit with a $29 million civil monetary penalty from the Board of Governors of the Federal Reserve System. Separately, the Senate Banking Committee is considering the need for changes to the Bank Secrecy Act (BSA) laws and regulations.

What happened

A Taiwan-based bank, Mega International Commercial Bank Co., Ltd., with branches in Silicon Valley, CA, Chicago, IL, and New York City, failed to maintain an effective BSA/AML compliance program, according to a cease and desist order it entered into with the Federal Reserve Board and the Illinois banking department on Jan. 17, 2018.

The bank’s 2016 examination revealed significant “deficiencies” relating to its risk management and compliance with federal and state anti-money laundering requirements.

In addition to paying a $29 million civil penalty, the bank agreed to institute a series of policy and program changes. Specifically, the bank’s board of directors must submit a written plan to strengthen oversight of BSA/AML compliance across its U.S. operations by the board and senior management, including providing details about the actions the board will take to establish a consolidated framework for compliance and a description of the information and reports that will be regularly reviewed by the board. An evaluation of staffing needs in order to ensure adequate personnel to comply with the relevant laws and regulations must also be provided.

The board of directors and branch management of the three branches must also submit individual written plans to enhance management oversight, and must create “clearly defined roles, responsibilities, and accountability regarding compliance with the BSA/AML requirements” for the branches and their respective management, compliance personnel, and internal audit staff. A “direct line of communication” between each branch’s BSA/AML compliance officer and the bank’s board of directors must also be established.

In addition, the cease and desist order contains specific requirements applicable to the U.S. branches. For example, each branch must submit a written enhanced BSA/AML compliance program that includes a system of internal controls to ensure compliance with all applicable BSA/AML requirements; enhanced independent testing to perform comprehensive and timely reviews on a regular basis; a comprehensive risk assessment that identifies and considers all products and services of the branch, customer types and geographic locations to evaluate risk; effective training for branch personnel; and management of the branch’s BSA/AML compliance program by a qualified, independent compliance office.

Customer due diligence must also be improved at each branch, with a revised written program that includes an improved methodology for assigning risk ratings to account holders; a risk-focused assessment of the customer base; and policies, procedures and controls to ensure that the branch collects, analyzes and retains complete and accurate customer information for all account holders.

The bank and the branches need to submit two enhanced written programs: one for compliance with the Office of Foreign Assets Control regulations and a second “reasonably designed to ensure the identification and timely, accurate, and complete reporting” of the branch of all known or suspected violations of law or suspicious transactions.

The New York branch also must undergo an independent third-party review of all U.S. dollar clearing transaction activity from Jan. 1, 2015, through June 30, 2015, involving “high risk customers or transactions.” Depending on the results, the regulators reserve the right to broaden the review required by the order for additional time periods and business activities.

Separately, the Senate Committee on Banking, Housing and Urban Affairs recently held hearings and is considering changes to the current BSA/AML requirements, and a draft bill amending the BSA has been proposed.

The hearing, titled “Combating Money Laundering and Other Forms of Illicit Finance: Opportunities to Reform and Strengthen BSA Enforcement,” was held on Jan. 9, 2018, with Committee Chair Sen. Mike Crapo (R-Idaho) noting that the BSA is decades old.

“[A] lot has changed in this nearly 50 years that have passed since BSA was enacted,” Crapo said. He welcomed comments from the witnesses “to help inform the Committee of potential ways to sharpen the focus, sustainability, and enforcement of a modernized, more efficient U.S. counter-threat-finance architecture.”

Sen. Elizabeth Warren (D-Mass.) stated at the hearing that “money laundering is a massive problem,” and “it seems to me we need to rethink a lot of our money laundering laws some of which … were written back in the 1970s and are badly out of date.” Sen. Mark Warner (D-Va.) called on the committee to take a closer look at the implications of the rise in anonymous digital currencies for combating money laundering and urged lawmakers to get ahead of the issue.

Witnesses at the hearing offered suggestions for improvements ranging from increased interagency coordination and improved information sharing between financial institutions and regulators (particularly law enforcement) to encouraging the participation of entities outside the banking industry (such as real estate).

Greg Baer, president of The Clearing House Assn., shared with attendees an example of a community banker with a $100 million bank and three branches. While the bank has four lending officers, it found it necessary to have six AML compliance officers, he told lawmakers.

The committee held a second hearing on Jan. 17, this time on “Administration Perspectives on Reforming and Strengthening BSA Enforcement.” Sen. Crapo said at the second hearing that the first hearing showed “a clear bipartisan interest in modernizing the BSA/AML regime” and a “significant interest in several areas: beneficial ownership, information sharing, technology, and BSA requirements.”

M. Kendall Day, Acting Deputy Assistant Attorney General, U.S. Department of Justice, in his Jan. 17 testimony, listed several specific money laundering threats, including illicit cash, trade-based money laundering, illicit use of banks and misuse of money services businesses, obscured beneficial ownership, prepaid cards and virtual currency, and the purchase of real estate and other assets.

Potential BSA amendments are contained in a discussion draft of a bill currently pending before the committee, proposed by Reps. Steve Pearce (R-N.M.) and Blaine Luetkemeyer (R-Mo.). The so-called “Counter Terrorism and Illicit Finance Act” (CTIFA) contains the most significant changes to the BSA since the PATRIOT Act.

One significant element of the proposed legislation relates to the creation of a beneficial ownership database. The bill would require legal entities to submit to the Financial Crimes Enforcement Network (FinCEN) a list of their beneficial owners, and FinCEN would use the information to create a central directory of beneficial owners, accessible to local and international law enforcement and financial institutions.

Other provisions include raising the minimum dollar thresholds for filing Currency Transaction Reports (CTRs) from $10,000 to $30,000, and Suspicious Activity Reports (SARs) from $5,000 to $10,000, and assessing the usefulness of the BSA filing requirements and requiring a review of how to streamline the filing requirements to “ensure that the information provided is of a ‘high degree of usefulness.’”

The bill would codify civil immunity for SAR filings and expand the prohibition against disclosing SAR-related information to third parties (including in private litigation, where plaintiffs are increasingly requesting discovery of such information from financial institutions).

Pursuant to the CTIFA, FinCEN would have the authority to issue no-action letters for inquiries regarding the application of the BSA “or any other anti-money laundering and counter terrorist financing law or regulation to specific conduct, which shall include a statement as to whether or not FinCEN has any intention of taking an enforcement action against the person with respect to such conduct.”

The bill would also expand the scope of voluntary information sharing among financial institutions and create a safe harbor for AML-related technological innovation.

To read the Federal Reserve Board’s cease and desist order, click here.

To view a webcast of the first committee hearing, click here.

To view a webcast of the second committee hearing, click here.

To read a discussion draft of the CTIFA, click here.

Why it matters

The monetary penalty and significant list of compliance requirements imposed on Mega International Bank and its U.S. branches, and its board of directors and U.S. senior management, is evidence of the detailed investigatory review by the regulators and their willingness to force major changes in compliance through the use of a cease and desist order.

There appears to be support for changes to the BSA to update the law and address concerns by banks and regulators and the business community. Although it’s too soon to assess the likelihood of this legislation moving forward, it appears to have backing from both sides of the political aisle.



pursuant to New York DR 2-101(f)

© 2023 Manatt, Phelps & Phillips, LLP.

All rights reserved