Enforcement Roundup: U.K. issues another historic penalty on foreign bank, two Fed actions, and more

By Brian Monroe
bmonroe@acfcs.org
February 9, 2017

In another historic first for the second week in a row, a British regulatory body has issued a landmark penalty of nearly $34 million against two units of a Japanese banking group, signaling more aggressive enforcement expectations on a broader array of compliance issues.

In the Thursday action, the country’s Prudential Regulatory Authority (PRA) issued a penalty of nearly 18 million pounds against the Bank of Tokyo-Mitsubishi UFJ Limited (BTMU) and a fine just under 9 million pounds on MUFG Securities EMEA plc (EMEA), tied to stonewalling domestic authorities.

The action stated the banking group was not forthright when U.K. examiners asked for help tied to a prior enforcement action by the New York Department of Financial Services (NYDFS). The action represented the first time the PRA has penalized a bank for gaps tied to openness and transparency and certain compliance-related systems, records and controls.

In November 2014, the NYDFS fined BTMU $315 million for “pressuring its consultant to water down a supposedly objective report on BTMU’s dealings with sanctioned countries, submitted to DFS, thereby misleading regulators.”

BTMU and EMEA “did not inform the PRA of the DFS action until after the DFS’ public announcement,” according to the U.K. regulator, adding that BTMU’s “inadequate systems and controls for the communication of relevant information contributed to this failure to be open with the PRA.”

The actions Thursday come on the heels of a prior, international seminal penalty last week.

Regulators in New York and the United Kingdom issued a landmark penalty totaling more than $600 million against Germany’s largest bank, a glimpse into the future of regulatory oversight where international cooperation extends to egregious financial crime compliance failings.

In the action, the New York Department of Financial Services (NYDFS) and the U.K.’s Financial Conduct Authority (FCA) issued penalties of $425 million and $204 million respectively for widespread and longstanding anti-money laundering (AML) failings at Deutsche Bank, chiefly tied to the laundering of some $10 billion out of Russia through a simple yet brutally effective securities scheme called “mirror trades” between 2011 and 2015.

The mirror trades typically involved a three-part system.

In the first step, a trader in Russia put in a trade through Deutsche Bank’s Russian branch to buy Russian Blue Chip stocks.

At roughly the same time, the same person or a co-conspirator used another company secretly owned by the group to place an order to sell the same amount of Russian stock through London.

The last step was the Deutsche Bank trading arm located in the U.S. in New York issuing U.S. dollars to the parties involved in both sides of the trade.

That penalty was the largest ever imposed by the FCA, or any predecessor agency. If not for a 30 percent discount for being forthright with the regulator and attempting an aggressive remediation plan, Deutsche Bank would had faced a fine of just under $287 million.

The FCA and PRA work together to regulate the U.K. financial system, with one the former focusing more on consumer protection and market integrity, while the latter gives more attention to the overall safety and soundness of banking entities.

In pair of actions, Fed targets U.S., foreign banks on staffing, risk assessments

Last month, the Federal Reserve issued a cease-and-desist order against Winston-Salem, NC-based BB&T Corp. for a host of AML issues, including key deficiencies in the areas of board oversight, staffing, expertise, systems and resources for compliance personnel, with particular attention given to customer risk ranking procedures, related monitoring and SAR filing.

As has been cropping in more AML actions and monetary penalties, the Fed also is requiring the bank to have more “accountability within all business lines and legal entities and their respective compliance functions,” a move to ensure that compliance procedures issued from on high are not shirked by institution power brokers, the profit-bringers.

BB&T also must ensure AML issues “are appropriately tracked, escalated, and reviewed by appropriate senior management,” to prevent smaller problems from going uncorrected for extended periods or time or certain higher-risk customers or suspicious transactions falling through the proverbial cracks, according to the eight-page order.

The Federal Reserve order follows a similar AML action by the Federal Deposit Insurance Corp. against BB&T released in December, according to the bank.

Also last month, the Federal Reserve turned its AML enforcement attention to the New York operations of a foreign bank, this time issuing a written agreement to improve critical compliance processes at Seoul, Korea-based Nonghyup Bank.

The order mirrored many of the issues brought up in the BB&T Fed action, but with more of an international flavor, such as requiring the branch to better understand international customers, correspondent portals and the risks of foreign countries.

The action also pushed for local AML staffers to have both the authority to enact compliance changes, the expertise to understand what should and could be done, but also had the explicit “responsibility of overseeing” that the branch’s compliance requirements on the financial crime front are “actively” carried out.

In rare AML penalty, SEC shows new teeth, focus on compliance officer oversight, liability

The Securities Exchange Commission (SEC) last month charged a New York-based broker-dealer, Windsor Street Capital, L.P. and John David Telfer, who acted as Windsor’s chief compliance and AML officer for three-years, with egregious and widespread AML failures.

The SEC alleged that the firm, formerly named Meyers Associates L.P., failed to file Suspicious Activity Reports (SARs) for $24.8 million in suspicious transactions, including those occurring in accounts controlled by two microcap stock financiers – an area already a key focus by the SEC and self-regulatory sister agency, the Financial Industry Regulatory Authority (Finra), tasked with the bulk of AML oversight duties – with conducting a pump-and-dump scheme.

In separate filings, many of the individuals involved agreed to forfeit a totally of nearly $10 million. To read the full order, please click here.