Fincrime Briefing: DOJ charges UM professor with laundering, Austrac set to penalize Westpac on AML failings, child exploitation links, and more

By Brian Monroe
bmonroe@acfcs.org
November 19, 2019

Quote of the Day: “Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition.” – Steve Jobs, former chairman, chief executive officer and co-founder of Apple Inc.

In today’s ACFCS Fincrime Briefing, DOJ charges University of Miami professor who lectured on money laundering and corruption in Latin America with money laundering, Austrac looking to penalize Westpac on 23 million AML breaches, failing to uncover, report on child exploitation red flags, and more. 

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Want to talk about industry trends, story ideas or get published? Feel free to reach out to ACFCS Vice President of Content Brian Monroe at the email address above. Now, on to more sweet sweet content! 

MONEY LAUNDERING

DOJ charges well known professor, author of books on money laundering, corruption with money laundering tied to Venezuelan graft scheme  

Federal prosecutors have charged a longtime University of Miami professor, author and speaker considered an expert in money laundering and corruption in Latin America with laundering nearly $3 million related to a bribery scheme pilfering funds from public works projects in Venezuela.

The U.S. Department of Justice (DOJ) detailed the money laundering charges against Bruce Bagley, 73, author of the book, “Drug Trafficking, Organized Crime, and Violence in the Americas Today,” and a figure who has been widely quoted by mainstream media outlets in pieces about the money laundering networks of drug cartels in Latin America. 

In a further irony, federal prosecutors note that it was the very red flags he often spoke about related to financial crime, including large, unexplained wires tied to regions of the world at a higher risk of financial crime and corruption, that tripped anti-money laundering (AML) systems and led to Bagley getting on the radar of investigators – along with the bank itself closing his account due to the suspicious nature of the hefty transactions. 

In a 12-page indictment prosecutors state that Bagley, a professor of international studies at the University of Miami for more than 30 years, opened up an account at an unnamed bank for a company he controlled in November 2016, leaving it nearly dormant for a year with “minimal activity” until November 2017, when deposits soared into the millions of dollars. 

In short order and at a rapid clip, Bagley began receiving monthly deposits of “hundreds of thousands of dollars” from bank accounts in Switzerland and the United Arab Emirates owned by an unnamed figure referred to in court documents simply as the “Colombian.” 

The scheme took on a familiar pattern, say prosecutors, with the foreign banks sending him some $200,000 a month, and Bagley then pulling out 90 percent in a cashier’s check made payable to a second unnamed individual – with the other 10 percent being kept as a “commission” for himself and sent to his personal account, in some cases under the guise of “sham contracts.” 

The indictment states that these weighty transactions kept coming even after Bagley and the unnamed co-conspirator discussed at least twice the “fact that they were moving [the Colombian’s] funds and that the funds represented the proceeds of foreign bribery and embezzlement stolen from the Venezuelan people.”  

Court documents also state that Bagley knew definitively the wire he received was tied to corruption and money laundering – because law enforcement told him. 

The final wire was “represented by law enforcement to Bagley to have derived from bribery and public corruption in Venezuela,” opening the door to the possibility that he may already be cooperating with authorities in a bid to identify and indict those bigger fish in the corruption and laundering network. 

These transactions were also not done at arm’s length with Bagley attempting to physically distance himself from “Individual-1,” according to court records, noting that they would visit the bank together, eventually receiving more than $2.5 million from the Colombian’s overseas accounts in less than a year.  

While allegedly engaging in money laundering, the aberrant money movements captured the attention of AML staff at the Florida bank involved, with the institution eventually deciding to “shut down” the account for “suspicious activity.” 

In response, Bagley opened a second account in Florida, this time not in the name of a company, but in his own name, where, he received half a million dollars in less than two months, (via DOJ).

Monroe’s Musings: This case has professionals in the AML space atwitter. Others agape, maybe even agog.  

It has made all the rounds on major news sites, with pundits humorously stating that the reason Bagley was so good at lecturing and teaching on money laundering and corruption in Latin America – in some cases even teaching the very same law enforcement agencies that eventually potentially investigated him – was that he was actively engaging in financial crime himself. 

The answer to that question, of course, has yet to be revealed. But what is also unknown is if Bagley has been working with investigators at some level since the start. In interviews Bagley has, thus far, seemed unfazed by the allegations, stating he is not worried. Only time will tell if that will change. 

But if it does come out that a university of Miami professor lived a double life lecturing on AML compliance and money laundering techniques, and then used that as cover to move and launder money because he believed no one would ever suspect him, I fully expect that to become a very popular Netflix series. 

ENFORCEMENT

Westpac violated Australian AML rules more than 23 million times, failed to oversee, report on accounts potentially tied to child exploitation 

Australia’s top financial crime compliance regulator has initiated formal penalty proceedings against one of the country’s largest banks for extensive and longstanding financial crime compliance failings, more than 23 million breaches of law in total, involving some $11 billion, some tied to child sexual exploitation. 

Australia’s Transaction Reports and Analysis Centre (Austrac), this week applied to the Federal Court of Australia for civil penalty orders against Westpac Banking Corporation (Westpac) tied to “serious” and “systemic non-compliance” with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). 

Austrac is alleging Westpac contravened the AML/CTF Act on more than “23 million occasions,” chiefly tied to its oversight of international funds transfers (IFTs) and their related movements through corresponding banking portals, particularly those exhibiting red flags indicative of child exploitation.  

Westpac failed to “carry out appropriate due diligence on customers sending money to the Philippines and South East Asia for known child exploitation risks,” during a roughly five-year period from the mid to late 2000s, regions widely known to be at a higher risk for human trafficking and child sexual exploitation risks. 

At issue as well is that Westpac was aware of the child exploitation risks relating to low-value payments involving those regions made through one of its systems, LitePay, since 2013 but had not adequately addressed the monitoring and oversight gaps until June 2018. 

Austrac detailed several key failings, including: 

1. Not appropriately assessing and monitoring the ongoing money laundering and terrorism financing risks associated with the movement of money into and out of Australia through correspondent banking relationships. 

2. Westpac has allowed correspondent banks to access its banking environment and the Australian Payments System without conducting appropriate due diligence on those correspondent banks and without appropriate risk assessments and controls on the products and channels offered as part of that relationship.

3. Not reporting over 19.5 million International Funds Transfer Instructions (IFTIs) to Austrac over nearly five years for transfers both into and out of Australia. The late incoming IFTIs received from four correspondent banks alone represent over 72% of all incoming IFTIs received by Westpac in the period November 2013 to September 2018 and amounts to over $11 billion dollars. 

4. IFTIs are a key source of information from the financial services sector that provides vital information into AUSTRAC’s financial intelligence to protect Australia’s financial system and the community from harm.

5. Not passing on information about the source of funds to other banks in the transfer chain. This conduct deprived the other banks of information they needed to understand the source of funds to manage their own AML/CTF risks.

6. Not keeping records relating to the origin of some of these international funds transfers.

7. Not carrying out appropriate customer due diligence on transactions to the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks. Westpac failed to introduce appropriate detection scenarios to detect known child exploitation typologies, consistent with Austrac guidance and their own risk assessments.

In documents related to the court request, Austrac details critical failures to monitor a dirty dozen of customers exhibiting behaviors and engaging in transactions “consistent with child exploitation typologies.”

These typologies relate to “customers with no apparent family ties to the Philippines/south-east Asia, frequently remitting small sums of money to multiple beneficiaries in the Philippines/south-east Asia within short timeframes,” Austrac said in its statement of claim.

Moreover, Austrac states that the bank missed flagging these transactions with overt ties to potential exploitation for years. 

 In all, the regulator states Westpac failed to scrutinize more than 3,000 payments totaling nearly half a million dollars, even though many of the customers repeatedly travelled to the Philippines or other destinations in south-east Asia, regions that are known hubs for child exploitation and trafficking.

According to potential penalty calculations, Westpac faces a maximum fine in the hundreds of trillions of dollars, but likely would face a figure spanning in the hundreds of millions of dollars, similar to what another banking rival paid last year for broad AML failings. 

In 2018, the Commonwealth Bank of Australia paid Austrac $700 million – the largest ever such penalty against a corporate in the country – to settle a high-profile action involving extensive AML failures involving eye-popping financial figures and more than 50,000 individual breaches of compliance regulations, (via Austrac).

Monroe’s Musings: Australia, still reeling from the record CBA penalty, is working to bolster its AML oversight of banks more broadly. It has already gotten the banking industry’s attention with a hefty, detailed U.S.-style penalty approaching U.S. heights at nearly $1 billion.

This action is also further evidence that CBA may not be an isolated occurrence, a dynamic that could put Austrac under more pressure to uncover AML program failings at institutions before they, as in this case, miss transactions that are tied to a major human trafficking, child exploitation, fraud or money laundering case. 

Australia is also still in an enhanced follow-up process to improve weaknesses in its 2015 Financial Action Task Force mutual evaluation report, with the country achieving progress in critical areas tied to engaging newer technologies and oversight of higher risk countries, non-profits and countering terror financing – so look for the current uptick in AML enforcement to continue. 

CANNABANKING

House committee approves landmark bill legalizing marijuana at the federal level

The House Judiciary Committee approved a bill that legalizes marijuana on the federal level, removing it from Schedule 1 of the Controlled Substances Act, and, if enacted, removing a critical barrier to getting and keeping bank accounts. 

Some Republican members expressed concerns that the bill went too far and that it was unlikely to be taken up in the GOP-controlled Senate.

The House Judiciary Committee approved a bill Wednesday that legalizes marijuana on the federal level, removing it from Schedule 1 of the Controlled Substances Act.

The legislation, which passed 24 to 10, has a high chance of approval in the full House where Democrats control the chamber with 234 seats. It’s likely to face a tougher battle in the Republican-controlled Senate, where Majority Leader Mitch McConnell opposes marijuana legalization.

The legislation allows states to enact their own policies and gives them incentives to clear criminal records of people with low-level marijuana offenses. It also includes a 5% tax on cannabis products that would provide job training and legal assistance to those hit hardest by the war on drugs.

A majority of Americans support the legalization of marijuana, according to the Pew Research Center. The bill has more than 50 co-sponsors, according to Congress.gov. Backers of a Senate version of the legislation include, presidential contender Sen. Kamala Harris.

Only 11 states in the U.S. and the District of Columbia have legalized cannabis for recreational use. Medical marijuana, prescribed by physicians, is legal in 33 states and Washington, D.C.

The committee approval comes two months after the House passed legislation that would protect banks that serve marijuana businesses in states where the substance is legal.

The National Organization for the Reform of Marijuana Laws, also known as NORML, has called the legislation the “biggest marijuana news of the year,” (via CNBC).

Monroe’s Musings: This might not be the stone that forms the foundation of a new framework fueling cannabis legalization across the United States, but it is an important first step nonetheless.  

Why? The current hodgepodge patchwork of state laws and tepid attempts from federal regulators and watchdogs at bank-based account guidance for businesses in the space are not working. 

None of these efforts will ever be able to overcome the immovable object of cannabis being illegal at the federal level and any bank offering accounts and moving known marijuana-tinged funds could, at any point, be prosecuting for money laundering by federal investigators and then have its AML program shredded by regulators. 

Clearly, the only workable solution is for Democrats and Republicans to put aside their differences for the greater good, including the safety of individuals working at dispensaries flush with cash, and create a cannabis legalization regime that allows operations to work in a safe environment with proper regulatory oversight, bank support and law enforcement assistance.

COMPLIANCE

Danish watchdog orders Handelsbanken to boost AML efforts as Nordic banks come under more scrutiny after Danske Bank scandal

Denmark’s financial regulator has ordered the Danish unit of Swedish Handelsbanken to strengthen its anti-money laundering efforts and revise its risk evaluation, the watchdog said in a just-announced missive, more regulatory attention on a Nordic institution following the Danske Bank scandal, though the Swedish banking group has remained relatively unscathed. 

“The branch’s inherent risk of being misused for money laundering or terrorist financing is normal to high compared to the average of financial companies in Denmark,” the regulator said in a statement.

The Danish unit of Handelsbanken, the country’s fifth largest lender, was ordered to “revise its risk assessment,” since its current one failed to adequately consider its customer types and risks associated with its products, the regulator said.

“This in particular concerns the risk of the branch being misused for terrorist financing,” the regulator added.

Handelsbanken was further ordered to ensure ample control of know-your-customer processes and prevention of money laundering and terrorist financing.

Handelsbanken’s strategy of expanding west rather than east, primarily in Britain, mean it has not become embroiled in Baltic money laundering scandals that have engulfed Nordic rivals Danske Bank and Swedbank.

The bank said last month it seeks to cut costs after restructuring charges dragged down third-quarter earnings, (via Reuters). 

Monroe’s Musings: Nordic regulators are clearly worried about unearthing any and all ties to the Danske Bank scandal, where some $230 billion of suspect Russian funds flowed through the institution’s Estonian branch. 

But what is a new wrinkle is that a Danish regulatory would give extra scrutiny to a Swedish banking group that has, thus far, not had its name and reputation tarnished with ties to the Danske bank scandal. 

In short: Nordic financial watchdogs are likely taking a blanket approach – yes, risk-based, so institutions with correspondent ties to Russia or Danske itself, like Swedbank – so that all institutions will get a more rigorous level of AML review. 

The likely marching orders for Nordic, and Baltic in the near future, examiners: Leave no fincrime compliance stone unturned.