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FinCEN hits Texas bank with $2 million penalty on correspondent failings, months after OCC OK

Thursday, November 2, 2017   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org
November 2, 2017

The U.S. Treasury Wednesday issued a $2 million penalty against a regional Texas bank for extensive and longstanding compliance failures, chiefly around lax oversight of a foreign correspondent relationship with a Mexican bank and issues with risk ranking customers, including ones with criminal pasts.

The Financial Crimes Enforcement Network (FinCEN) issued the monetary penalty against Lone Star National Bank for allowing $260 million to flow through its correspondent banking account with an unnamed large bank headquartered in Mexico in less than two years, more than $100 million over the stated anticipated activity, and without adequate scrutiny.

What makes the fine potentially more worrying for banks is that FinCEN based its penalty in part on enforcement actions taken by the Office of the Comptroller of the Currency, in 2012 and 2015, that were terminated this past July. FinCEN stated it would take the prior penalty into account, requiring only $1 million.

The tacit meaning: even if a bank complies, completes and closes the orders from one regulator, FinCEN can still come in at a later point using roughly the same information and make a statement-making point through further penalties on a hot-button issue in the area of financial crime compliance and national security – in this case the risks of foreign correspondent accounts.

FinCEN stated it was able to bring an additional penalty because of its powers to examine for compliance with Patriot Act Section 312, which requires banks to properly gauge the risks of correspondent banking connections and, when warranted, executive enhanced due diligence (EDD) procedures.

“Lone Star plainly failed to ask obvious due diligence questions in connection with its foreign bank account relationship, and did not follow up on inconsistencies in answers to the questions that it did ask,” FinCEN Acting Director Jamal El-Hindi said in a statement.

“Smaller banks, just like the bigger ones, need to fully understand and follow the 312 due diligence requirements if they open up accounts for foreign banks,” he said. “The risks can indeed be managed, but not if they are ignored.”

The penalty has several layers when put into the broader context of recent federal and state regulatory actions against domestic and foreign banks, including:

·         De-risking: Many large foreign banks in riskier regions, like Mexico, have been “de-risked,” or lost their connections, to U.S. and other large banks, disrupting their link to the international financial system. As a result, in the case of Mexico, these operations have approached smaller, less savvy U.S. banks near the border to open relationships, hoping they won’t realize the risk.

·         Border focus: Federal regulators and investigators have given U.S. banks near the Mexican border more scrutiny, worried about correspondent accounts, wires and bulk cash deposits from illicit or high-risk entities. In August, the Federal Reserve penalized Del Rio, Tex.-based The Bank & Trust for failing to properly risk rank customers and screen for entities on U.S. blacklists.

·         Foreign focus: In recent years, there have been nearly a dozen state and federal enforcement actions and penalties against domestic and foreign banks for failing give proper attention and oversight to their foreign correspondent accounts, including adequate due diligence at the outset, monitoring in the interim and SARs when aberrant activity surfaced.  

Missed ‘known and public’ information

In the case of Lone Star, the suspicious activity with the foreign bank included 63 bulk cash deposits of U.S. currency, followed by 73 outgoing wire transfers to other foreign banks, in many cases with the date of the transfer imprinted into the value of the wire transfer. Lone star terminated the account with the foreign correspondent in 2011.

As well, over a four-year period, the bank missed filing more than 170 suspicious activity reports (SARs), worth more than $130 million, including failing to identify at account opening that the president and owner of the foreign bank Lone Star was dealing with had a checkered past.

The information on the unnamed individual was “well known and public,” according to FinCEN, adding that the person had to pay civil penalties to the U.S. Securities and Exchange Commission in resolving allegations of securities fraud.

“Lone Star should have collected and analyzed this information prior to account opening,” FinCEN stated in the action.

After a lookback of customers and transactions, more suspicious activity came to light.

A total of 1,827 customer relationships were reviewed for the period from June 1, 2011 through May 31, 2013, resulting in the filing of 161 more SARs, with 69 related directly to cash structuring and 92 related to other types of suspicious activity.

These 161 SARs “represented approximately $131 million in previously unreported suspicious activity,” according to FinCEN.

While not mentioned, other publications have stated part of the problems for Lone Star relate to a high-ranking Mexican government official.

U.S. prosecutors have accused Tomas Yarrington Ruvalcaba, the former Tamaulipas governor and Matamoros mayor, of using hidden associates to lie and dupe local banks into obtaining loans with illicit Gulf Cartel money, according to a 2013 indictment pending in U.S. District Court in Brownsville, highlighted by the Valley Morning Star.

Yarrington, according to prosecutors, primarily used accounts with First National Bank, a defunct Edinburg-based bank chain. Investigators also pointed to other accounts linked to the fugitive former governor at Inter National Bank, Wells Fargo Bank and Lone Star National Bank, according to the report.

In January 2007, one of Yarrington’s co-conspirators created a Lone Star Bank account under the name SPI Ling and applied for a $3.05 million loan for a real estate development on South Padre Island, according to the indictment highlighted by the Valley story. In May 2008, a Lone Star account under that name received a $100,000 wire deposit from Mexico.


Correspondent banking conundrum

More state and federal regulators are penalizing domestic and international banks for failures tied to properly risk ranking, monitoring and filing SARs on foreign correspondent activities. Here is a list of banks regulators have hit with penalties or formal orders with a correspondent banking component:

Bank                           Penalty                       Regulator (s)              Home              Date

Lone Star Bank           $0 (order)                    OCC                            Texas               April 2015

China Construction     $0 (order)                    Fed, NYDFS               China               July 2015

Industrial Bank           $ (order)                      Fed, NYDFS               Korea              March 2016

Mega Bank                  $180 million                NYDFS                       Taiwan            August 2016

Ag Bank of China       $0 (order)                    Fed                             China               Sept. 2016

Ag Bank of China       $215 million                NYDFS                       China               Nov. 2016

Merchants Bank          $7 million                    FinCEN, OCC             California        Feb. 2017

Deutsche Bank            $41 million                  Fed                              Germany         June 2017

Habib Bank                 $225 million                NYDFS                       Pakistan           August 2017


Inconsistencies arise

Initially, according to the order, the foreign bank indicated that the “source of the U.S. bulk currency was from extensive foreign exchange operations from United States/Mexico border regions.”

But that changed quickly.

“However, after the account had been operating for several months, the Foreign Bank stated that, at that time, it was actually selling more U.S. dollars than it was buying at these border regions, and the U.S. bulk cash deposited at Lone Star had always been coming from Mexico City.”

In another example, Lone Star’s BSA Officer indicated that the cash shipments to Lone Star “were attributable to remittances from the United States sent (via money transmitters) to family members residing in Mexico, who then used funds to repay consumer microloans.”

But that didn’t make sense, according to FinCEN.

“Money transmitters in Mexico, especially those operating in rural areas, rarely provide their customers with U.S. dollars,” according to the order. “And there was no indication from the Foreign Bank that the microloans that it offered to consumers were payable in U.S. dollars.”

Lone Star also failed to adequately investigate increasing cash deposits of U.S. dollars and unusual wire activity.

The transactions “raised serious red flags given the Mexican Ministry of Finance’s…June 2010 announcement of AML regulations designed to restrict the amounts of physical cash… denominated in U.S. dollars that Mexican banks may receive,” meaning that a Mexican bank seeing its U.S. dollar deposits rise after that time should have been an anomaly.

AML improvements, authority

Lone Star is a community bank located in Pharr, Texas, only a roughly 15-minute drive to the Mexican border. The bank has $2.2 billion in assets, 28 branches, and 655 employees. The Bank is a subsidiary of Lone Star National Bancshares, Texas, Inc., a bank holding company.

Since the OCC and FinCEN penalties, the Bank improved its AML program in nearly every area.

It has “expended additional resources to enhance its independent testing, implement sound customer due diligence programs, and update its AML program,” according to FinCEN, including negative news searches, a part of routine account opening procedures.

The bank also established independent senior management and board level committees to strengthen and oversee the AML program. In addition, Lone Star expanded its overall BSA compliance staff and established new training initiatives to reduce compliance deficiencies. 


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