A Flurry of AML/BSA Enforcement Cases

By Dawn Causey, Thomas Pinder and Andrew Doersam

Money laundering is the process of making illegal income appear legal without arousing the suspicions of banks or law enforcement. “You can launder money so many different ways. It’s as unique as snowflakes,” said Robert Mazur, a former-undercover agent who infiltrated Pablo Escobar’s drug cartel.

A snowflake is intricately formed with graceful spires radiating from its center. When snowflakes tumble and swirl through the air, they each take a different path to their final resting place. Likewise, laundered money tumbles and swirls through the financial system, taking different paths along the way, but financial institutions are expected to detect and track the funds’ circuitous path.

While many of us were distracted by snowflakes this past winter, regulators focused on enforcing anti-money laundering and Bank Secrecy Act laws. A recent flurry of enforcement actions highlight regulators’ expectation that financial institutions implement robust AML/BSA compliance programs.

On December 17, 2018, FinCEN, FINRA and the SEC fined UBS Financial Services $14.5 million for allegedly processing numerous foreign currency wires without sufficient oversight, including wires to and from countries known to be at high risk for money laundering. The regulators alleged that UBS haphazardly monitored several of its higher risk brokerage accounts that were flagged and affiliated with shell companies. FinCEN Director Kenneth Blanco pointed out that brokerage firms “need to apply commensurate diligence to ensure that the firm does not become a conduit for movement of illicit funds creating a haven for criminals and other malign actors to benefit from, and to further, their illicit activity.”

Two days later, federal prosecutors in New York announced the first AML/BSA criminal charge against a broker-dealer. The charges were resolved by a deferred prosecution agreement that also imposed a $400,000 forfeiture. Prosecutors in the case charged Central States Capital Markets for failing to maintain an adequate AML program, including not filing suspicious activity reports concerning a customer who laundered money in an illegal payday lending scheme. To circumvent state usury laws, the customer allegedly created sham relationships with Native American tribes to conceal his ownership and control of the companies involved. According to the prosecutors, CSCM ignored news reports alleging the customer’s use of shell companies to evade usury laws and did not review more than 100 AML alerts generated over a four-year period.

In another case involving a broker-dealer, FINRA in December levied a $10 million fine against Morgan Stanley for alleged AML/BSA compliance failures. FINRA found that Morgan Stanley’s automated AML surveillance systems did not receive critical data from several upstream systems. FINRA also discovered that Morgan Stanley did not devote enough resources to reviewing alerts generated by its AML systems, and its AML department did not dig deep enough into customers’ penny stock trades for potentially suspicious activity.

Not surprisingly, both FINRA and the SEC’s Office of Compliance Inspections and Examinations announced that AML compliance will be a high priority for this year. In December, FINRA issued its 2018 report on examination findings. The report highlighted AML exam findings, including inadequate monitoring for “commonalities” among unrelated foreign legal entity accounts; inadequate documentation of initial reviews and investigations triggered by exception reports; and failures to conduct or document biweekly reviews of FinCEN’s Secure Information Sharing System. Further, the SEC’s OCIE signaled its intention to focus on broker-dealers’ AML compliance for this year.

As Agent Mazur explained, Pablo Escobar went to great lengths to conceal the nature and source of billions of dollars of drug proceeds. Today, money launderers have become even more sophisticated at concealing illicit funds. Soon there may be as many unique money laundering ruses as there are snowflakes, meaning banks have the thankless and impossible task of identifying the constantly evolving, unrelenting flurry of money laundering schemes. Banks beware: winter is coming.

Dawn Causey is general counsel of the American Bankers Association, where Thomas Pinder is deputy general counsel and Andrew Doersam is a paralegal.