Experts: $4.5 million FinCEN penalty against small West Virginia bank

The US Treasury penalized a small West Virginia bank $4.5 million for “severe and systemic failures” in nearly aspect of its anti-money laundering program, including failing to accurately risk-rate customers, monitor them or report aberrant activity.

The Financial Crimes Enforcement Network (FinCEN) stated the Williamson-based bank, which has six branches and assets of just under $94 million, willfully violated its anti-money laundering (AML) obligations, by not adequately scrutinizing millions of dollars in structured and suspicious cash transactions that flowed through the operation.

The issue also highlights the challenges and disparities of the banking sector when it comes to financial crime compliance: If there are mammoth penalties against big banks with bigger budgets, more expertise and better resources for trouble perfecting customer risk assessments and transaction monitoring, smaller banks could be hit hard if their systems and personnel are judged by the same lofty standards.

The penalty against Mingo is concrete evidence that federal authorities are worried about the compliance programs of smaller banks, and the size is likely an attempt to send a message to other similar-sized operations, said Alma Angotti, a managing director in the Washington, D.C. office of Navigant, a consulting firm.

“I have seen a lot of regulatory interest in smaller and midsize banks,” said Angotti, who has more than 25 years of regulatory practice through senior enforcement positions at the Securities Exchange Commission, FinCEN and the Financial Industry Regulatory Authority, the securities’ sector’s chief self-regulatory body.

Those institutions in some cases can’t afford automated monitoring systems, or understand them if they have them, and may not be able to buy or create the complex methodologies involved in risk assessments, she said.

In the case of Mingo Bank, though, the bank failed in the most basic areas, along with those associated with vexing compliance complexity.

Between 2008 and 2013, the bank had “significant deficiencies in all aspects of its AML program,” including its internal controls, independent testing, training, and designation of a compliance officer with the requisite skill and resources to have oversight of such a program.

In addition, Mingo struggled to properly calibrate the financial crime risk of customers by not designating higher-risk entities as such or engaging in more scrutiny of those accounts, which would have more readily detected the “unusual currency transactions or suspicious activities in which these customers engaged,” according to FinCEN.

In addition, due to the extensive de-risking going on at large banks, there are many industries considered higher risk – domestic and foreign money services businesses, third-party payment processors and certain correspondent banking portals – that examiners and investigators are concerned are seeking accounts at smaller banks, Angotti said.

“There are fears that some of the business is getting pushed down to small banks,” she said, adding that the formal consent orders and monetary penalties seem to be “going down a level or two” and focusing on tinier institutions, but ones that have big deficiencies.

Conversely, it wouldn’t be fair to say that FinCEN or other federal authorities are picking on smaller banks because, in most cases, they are simply following where criminals go to launder their money, and then sending those tips to examiners, she said.

In one example cited in the action, the bank was aware of a high volume of unusual cash transactions conducted by a corporate customer, yet failed to file the requisite currency transaction reports (CTRs) or suspicious activity reports (SARs).

That customer conducted more than $9 million worth of structured transactions through Mingo’s Williamson Branch. As well, the manager of that branch, who is also the former Mayor of Williamson, was convicted in April 2014 of knowingly making a false statement to federal law enforcement agents during an investigation of that scheme to evade reporting requirements.

The size of the penalty gives the impression that Bank of Mingo’s compliance issues were “substantial and egregious,” said Ross Delston, a Washington, DC-based attorney and AML compliance expert.

That assessment is based on key details revealed in the action, such as the fact that the deficiencies were characterized as “willful,” there were multiple failures over a six-year period, and a corresponding failure to file more than 600 suspicious activity reports and ctrs and the institution did not make adequate improvements after a 2013 consent order, he said.

Being deemed a willful violation is “quite serious in the panoply of enforcement of federal violations,” Delston said, adding that the instrument of the “deferred prosecution agreement,” or DPA, which is typically reserved for larger institutions with massive program deficiencies, means the presence of criminal penalties.

“This case is yet another example, if at this late date, further examples are needed, of regulatory climate change causing more severe penalties than in the past,” he said. “If any bank, insurance company, mutual fund, broker-dealer, MSB or casino is not aware that FinCEN, the regulators and law enforcement are serious about BSA/AML violations, they’re not living in the 21st century. And that lack of awareness could cost them dearly.”