Fincrime Briefing: House approves cannabaking bill, death in Danske bank scandal, OFAC dings U.K. bank, and more

By Brian Monroe
bmonroe@acfcs.org
September 26, 2019

 

Quote of the Day: “To know what you know and what you do not know, that is true knowledge.”Confucius 

In today’s ACFCS Fincrime Briefing, the U.S. House approves a critical piece of legislation to help banks offer services to legal marijuana businesses, former head of Danske Bank Estonia found dead, OFAC fines British bank servicing the Middle East $4 million for Sudan failings – a fraction of penalty after U.K. regulator intercedes, and more. 

Please enjoy this unlocked story, part of the many benefits of being an ACFCS member. 

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!

Cannabanking

House approves Marijuana Banking Bill in historic vote, paving way for cannabis, compliance collaboration 

The House of Representatives passed a standalone marijuana reform bill for the first time in history on Wednesday, opening the door for the ability to for banks to serve dispensaries in states where cannabis is legal – creating new opportunities but also fresh financial crime compliance challenges.

The chamber advanced the legislation—which would protect banks that service the cannabis industry from being penalized by federal regulators—in a vote of 321-103.

All but one Democrat voted in favor of the bill. Republicans were virtually split, with 91 voting for the legislation and 102 opposing it.

For six years, lawmakers have been pushing for the modest reform, which is seen as necessary to increase financial transparency and mitigate risks associated with operating on a largely cash-only basis—something many marijuana businesses must do because banks currently fear federal reprisal for taking them on as clients.

The Secure and Fair Enforcement (SAFE) Banking Act is sponsored by Rep. Ed Perlmutter (D-CO). It cleared the House Financial Services Committee in March and was officially scheduled for a floor vote in recent weeks. 

While the House has approved historic cannabis amendments in the past, including one this summer that would protect all state marijuana programs from federal intervention, those have had to be renewed annually. 

This is the first time a standalone reform bill was approved in the chamber, and the policy will be permanently codified into law if the Senate follows suit and the president signs it.

“If someone wants to oppose the legalization of marijuana, that’s their prerogative, but American voters have spoken and continue to speak and the fact is you can’t put the genie back in the bottle. Prohibition is over,” Perlmutter said on the floor. “Our bill is focused solely on taking cash off the streets and making our communities safe and only congress can take these steps to provide this certainty for businesses, employees and financial institutions across the country.”

Many have viewed the banking proposal as the first step on the pathway to ending federal cannabis prohibition, and it’s consistent with an agenda outlined by Rep. Earl Blumenauer (D-OR) last year through which he suggested that committees advance incremental marijuana reforms under their respective jurisdictions, leading up to the eventual passage of a full legalization bill.

That said, while the vote signals that the House has a clear appetite for reform, it remains to be seen if the Republican-controlled Senate will approve the banking bill. 

Apparently anticipating that conservative lawmakers might not support the legislation as it passed out of committee, Perlmutter moved to add amendments last week that were designed to broaden its GOP appeal.

Those provisions include clarifying that hemp and CBD businesses would also be protected and stipulating that federal regulators couldn’t target certain industries such as firearms dealers as higher risk of fraud without valid reasoning, (via Marijuana Moment). To read the full text of the bill or history of Congress actions, please click here

Monroe’s Musings: The movement to legalize cannabis at the state level has meant a vexing conundrum for the banking sector and the very risk-averse anti-money laundering (AML) compliance professionals trying to detect and prevent financial crime. 

At issue: How can a bank take money for a business that is legal at the state level when, federally, those selfsame actions could be viewed as the very definition of money laundering?

This story points out that there is a whole new world of risks opened when banks choose not to allow this type of risk in the door in the first place. That means cannabis-based businesses are generating, moving and shouldering at-times eye-watering amounts of cash. 

Not surprisingly, they are also easy prey for criminals, resulting in some deadly clashes between thieves and security personnel. 

Other stories have pointed out that some smaller banks and credit unions are stepping out of their comfort zones to bank these types of businesses, while at the same time following AML guidance to file required suspicious activity reports (SARs) – even if no actual crime is suspected. 

Regardless of how a person feels about the broader question of federal legalization or de-scheduling of marijuana, something must be done to improve the safety of these businesses in states where they are legal, a foundation afforded other legal businesses despite personal preferences toward and feelings about them.  

Money laundering

Former Danske Estonia leader founder dead as German authorities raid Deutsche Bank related to widening money laundering scandal 

A former head of Danske Bank’s Estonian branch, which is at the center of inquiries into the world’s largest money laundering scandal, was found dead on Wednesday, just as German authorities raided Germany’s largest lender to scour for possible related information on fincrime trails and compliance failings.

Police in Estonia discovered the body of Aivar Rehe, who ran the Danish bank’s Estonian business between 2007 and 2015 and had been among those questioned as a witness in a probe by Estonian prosecutors, following a search which began last Monday.

Danske Bank, Denmark’s largest lender, is under investigation in several countries, including the United States, Denmark, Britain and Estonia, over suspicious payments totaling 200 billion euros ($220 billion) which were moved through its tiny Estonian branch during the period Rehe was in charge.

Rehe’s death is likely to complicate investigations into Danske Bank’s Estonian operation, including by U.S. authorities.

The former banker’s importance in investigating the case was highlighted by the fact that he had been quizzed, as a witness, by Estonian prosecutors.

Estonian police said that Rehe had not been seen since he left his home in Tallinn, Estonia’s capital, on Monday.

Estonian prosecutors confirmed that Rehe had been questioned as a witness, not a suspect, in a case opened in December last year against 10 former Danske Bank employees. This involves the alleged laundering of around 300 million euros.

The police said Rehe’s death would not be investigated.

Danske Bank’s is the largest in a series of European money laundering scandals, stretching from Latvia to Sweden.

And in a sign of the wider ramifications of the case, Frankfurt prosecutors said they had raided Deutsche Bank’s headquarters in the German financial capital in relation to Danske Bank. Deutsche Bank said it was cooperating.

Prosecutors said the period in question is 2014 to 2018, and that there was a suspect who worked at the bank during that period.

Deutsche Bank had alerted authorities to 1.1 million suspicious transactions, prosecutors said.

Prosecutors also said that a double-digit number of transactions, with a volume of 12.5 million euros, were either registered by Deutsche too late with authorities, or the bank should have blocked them from the start.

The Sueddeutsche Zeitung was the first to report the raid on Deutsche.

Deutsche Bank has previously faced issues over money laundering and the controls in place to prevent it.

Last year, dozens of police raided six Deutsche Bank offices in and around Frankfurt over money laundering allegations linked to the “Panama Papers.”

Germany’s financial market watchdog BaFin last year ordered Deutsche to do more to prevent money laundering.

In 2017, Deutsche Bank was fined nearly $700 million for artificial trades between Moscow, London and New York that could have been used for money laundering. An investigation by the U.S. Department of Justice is still ongoing, (via Reuters and Reuters).

Monroe’s Musings: The Danske Bank scandal continues to reverberate around the globe, with authorities now more aggressively scrutinizing other banks that had direct and other correspondent connections to Danske Bank. 

Key questions in these investigative inquiries: what due diligence they other linked banks do related to Danske Bank, what conclusions did these banks make about the massive suspect funds flows coming from Danske and, just as important, what did these other institutions report to domestic regulators and regional authorities? 

The answers to these questions will determine the severity of punishments from investigators and regulators in the United States, Germany, Europe and the Nordic and Baltic states which are currently having their regulatory reputation questioned by European and private-sector watchdog groups. 

Sanctions

After facing nearly $230 million penalty, BACB pays OFAC scant $4 million for sanctions failings after U.K. regulator states fine would have ‘disproportionate impact’ 

A United Kingdom-based bank facing hundreds of millions of dollars in sanctions penalties in the United States due to illicit dealings with Sudan made the rare move to ask its home country regulator for help to lower the fine – and it worked, dropping the financial hit from $229 million to less than $5 million. 

The discount for British Arab Commercial Bank (BACB) is even more magnanimous when you consider that the U.S. Treasury’s Office of Foreign Assets Control (OFAC) stated the total base penalty the relatively diminutive institution faced was just more than $381 million, an “egregious case” where the bank moved Sudanese-tinged funds worth nearly $191 million. 

At issue for the bank is that even though it has been around for nearly 50 years, it only has assets of $3.6 billion and revenues of $3.2 million, so a penalty just north of $230 million would eat up a significant percentage of assets of wipe out decades worth of revenues. 

“In consultation with BACB’s domestic regulator, the United Kingdom’s Prudential Regulation Authority, OFAC determined that the bank’s operating capacity was such that it would face disproportionate impact if required to pay the proposed penalty of $228,840,000.” 

OFAC it also took into consideration several other mitigating factors, including: 

  • BACB stated that it ceased engaging in the banned Sudanese transactions meant to circumvent U.S. sanctions conduct described below
  • The bank agreed to enter into a settlement agreement and bolster its compliance program in terms of systems, expertise, transaction screening and reporting. 
  • The bank agreed to a lengthy remediation and identified the individuals involved in the failings, including a member of the compliance team. 
  • It agreed to pay the $4 million penalty. 

OFAC stated the sanctions issues started nearly a decade ago, when between September 2010 and August 2014, BACB processed 72 bulk funding payments involving Sudan totaling $191 million.

In all, even though the bank did not have a U.S. presence, at that time the institution operated U.S. dollar (USD) accounts on behalf of at least seven Sudanese financial institutions, including the Central Bank of Sudan. 

It also wasn’t just making a passive mistake due to a lack of knowledge of U.S. sanctions. 

It had “actively solicited USD business from Sudanese banks, and processed these USD transactions via an internal book transfer process involving a nostro account maintained at a foreign bank (Bank A).” 

Nostro accounts are accounts that a bank holds in a foreign currency in another financial institution and are frequently used to facilitate foreign exchange and trade transactions, two areas at a higher risk for money laundering and sanctions issues.

These transactions were not processed to, or through the U.S. financial system and in OFAC’s eyes were meant to evade the sanctions screening filters employed by many large U.S. and foreign banks. 

In the case of BACB’s failings, the process to fund its USD nostro account at Bank B, however, “did involve transactions processed to or through U.S. financial institutions in apparent violation of U.S. economic sanctions administered and enforced by OFAC which prohibited U.S. persons, including U.S. financial institutions, from processing such transactions.”

BACB engaged in nested accounts to make it harder for U.S. institutions to uncover any ties for to Sudan or related entities.  

BACB established a USD nostro account in 2006, according to OFAC penalty documents, with a “non-U.S. financial institution located in a country that imports Sudanese-origin oil for the stated purpose of facilitating payments involving Sudan.” 

BACB built up and replenished this nostro account by “routing large, periodic, USD-denominated wire transfers into the account (i.e. bulk funding) from non-U.S. financial institutions in Europe.” 

The non U.S. financial institutions in Europe then “passed the USD-denominated transfers through banks in the United States for further credit to the USD nostro at the non-U.S. financial institution,” a dynamic that could create challenges for the banks involved to screen for blacklisted countries.  

Once the funds arrived in BACB’s USD nostro at this institution, BACB then instructed the institution to process individual payments – for example third-party payments – involving a variety of Sudanese parties, including Sudanese financial institutions. 

OFAC also noted a breakdown in bank anti-money laundering (AML) compliance policies and procedures, culture and expertise, stating that several BACB employees, including “certain managers and a member of the compliance team, were aware of this funding arrangement.” 

The evasion tactics, according to OFAC were intentional, hence the finding of an egregious failing. 

Bank staff and compliance believed all Sudanese transactions, including the inflow of USD to its nostro account at the non-U.S. financial institution “would be processed outside the United States via funding from the BACB accounts in Europe, and understood how it would attempt to circumvent the U.S. sanctions regulations.”

“OFAC’s analysis of the transactional data confirmed a pattern of the bulk funding transactions, which were processed through the United States, corresponding to the third-party payments, which were not processed through the United States,” (via OFAC).

Monroe’s Musings: The creativity of banks to evade U.S. sanctions will never cease to amaze me. 

But this actually has several pieces that jumped out at me. First and foremost, I am incredulous, surprised, baffled, flummoxed and, well, flat out flabbergasted that BACB decided to go to its U.K. regulator to ask OFAC for a break – and the regulator actually DID it AND OFAC actually agreed to a massive discount. 

I have been covering this field for nearly 13 years and I have never seen this. Yes, I have heard that some smaller banks have used the asset defense as a defense at the negotiating table, but I have never heard of a bank using its home country regulator as a big brother to go take on the bully that is bothering you.  

Another point that should not be lost on compliance professionals reading this, even if you see a bank has a compliance team or has written policies and procedures, that doesn’t mean the institution is following them. 

And if the bank, as in this case, works with operations in the Middle East with a propinquity to Iran, Sudan and other blacklisted regimes, any bank dealing with them – corresponding banking is a common connection portal – had better engage in more aggressive scrutiny of the actual compliance team to determine if they are worth their salt. 

Lastly, being that this is yet another way a bank evaded sanctions to help Sudan, banks should reverse engineer this to see how they can uncover such a dynamic or ask questions to ferret out what other institutions and entities a correspondent or partner bank is engaging to ensure, as in this case, a bank is operating on behalf of Sudanese entities and later doling out U.S. dollars to off-limits third parties. 

Human trafficking winner scholarship profile

Scholarship Spotlight: Focus on victim protection, rather than prosecution, critical to building human trafficking cases, says Joseph Scaramucci

For Joseph Scaramucci, taking down criminals, following the money and saving victims is why he got into law enforcement in the first place more than 15 years ago – a calling that has in recent years become a mission to tackle the soaring scourge of human trafficking and change the focus of investigations from prosecuting victims to protecting them.

As a result, the Texas native and detective with the McLennan County Sheriff’s Office in the last five years has arrested more than 450 sex buyers, captured some 125 individuals suspected of human trafficking and related offenses and identified more than 230 trafficking victims. 

But he couldn’t have done it without intensively focusing on unraveling the complex and disparate human and financial sides of these of human trafficking networks – and aggressively sharing those best practices.  

“I think education is key to detection and prevention,” he told ACFCS. “For law enforcement and the justice system, to our citizens. Until people learn to be angry about the exploitation of other human beings, it makes it difficult for them to consider someone could be a victim of trafficking.”  

It was for Scaramucci’s drive, dedication and passion to share that ACFCS chose him as one of the recipients of the association’s inaugural Human Trafficking Scholarship Program. 

The selection process centered on individuals in roles combating human trafficking, an effort to share broad thought leadership on the issue as part of the association’s “Quarterly Focus” on human trafficking from April through June of this year. 

The scholarship offers complimentary registration for the Certified Financial Crime Specialist (CFCS) certification, the full suite of prep materials, and a year of membership in ACFCS.

After receiving more than 130 applications from professionals across 20 countries, ACFCS selected 15 recipients of its scholarship program. To view an ACFCS human trafficking resource page, click here

ACFCS in the most recent quarter had a focus on cryptocurrencies. 

To read more about the crypto initiative and find a list of useful resources, click here

To read about the recipients of the inaugural ACFCS Crypto Scholarship, click here

Those chosen for these scholarships submitted applications with compelling professional and often personal experience related to human trafficking – from running investigations and creating transaction monitoring rules, to advocating for legislation and working directly with survivors.

To read the full Scholarship Spotlight for Joseph Scaramucci, click here