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Fincrime Briefing: Is TI’s CPI upside down, OCC hands down record fine against former Wells exec in fake accounts scandal, ‘Green crimes,’ and more

The skinny:

“The secret is not to give up hope. It’s very hard not to because if you’re really doing something worthwhile, I think you will be pushed to the brink of hopelessness before you come through the other side.” – George Lucas

In today’s briefing, contrarian argues the Corruption Perceptions Index should be read in reverse, OCC fines former Wells head more than $17 million, goes after top risk and control execs, a look at rise of “Green Crimes,” analysis of country compliance effectiveness, 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!
Well Fargo Signage


Is Transparency International’s Corruption Perceptions Index, the annual exercise ranking how regions grapple with graft, upside down?

Transparency International released its 2019 Corruption Perceptions Index (CPI) Thursday, echoing many of its conclusions in recent years, with many of shiniest countries gleaming like a Nordic mountaintop, while other countries in Africa and the Middle East stayed firmly entrenched as cellar dwellers, broken by the yoke of bribery.

But the latest results of this latest iconic list beg the question: Should we look at the ten cleanest countries on the CPI to see where the next mega-FCPA settlement will come from?

Companies from the five highest-ranking “very clean” countries on the 2019 CPI (Denmark, New Zealand, Finland, Singapore, Sweden) have collectively paid $2.49 billion in FCPA penalties since FCPA enforcement began.

Widening that lens, companies from the ten cleanest countries (Denmark, New Zealand, Finland, Singapore, Sweden, Switzerland, Norway, Netherlands, Germany, Luxembourg) have paid a total of $5.43 billion over the same period.

Since 1980, all companies combined from anywhere have paid $17.24 billion in 239 FCPA enforcement actions.

That means companies based in the five cleanest countries have been responsible for 14.4 percent of all FCPA fines. Companies headquartered in the top ten cleanest countries were responsible for 31.5 percent of all FCPA settlements.

Put another way, the cleanest five percent of the world’s countries have been responsible for nearly a third of all FCPA penalties.

The CPI’s number five country, Sweden, has had a string of high profile FCPA cases. Last year, Swedish telecom Ericsson agreed to pay the DOJ and SEC over $1 billion in the second biggest FCPA enforcement action ever.

In 2017, another Swedish telecom, Telia, paid $965 million to settle FCPA charges, the third biggest FCPA enforcement action.

Germany’s Siemens paid $800 million in 2008, and Holland’s VimpelCom paid $795 million in 2016, to resolve FCPA violations.

As the FCPA Blog has said before, apparently a country’s rank on the CPI isn’t always a good predictor of how companies will behave when they do business overseas. In fact, there may be a negative correlation. Companies from the cleanest countries may behave the worst when they land on foreign shores.

There have not been any FCPA settlements involving companies from the bottom ten countries on the CPI.

The CPI is a methodological wonder, to be sure. We’re big fans of it. But looking at the numbers, the CPI also appears to be an unintended indicator of where the next giant FCPA settlement will come from, (via the FCPA Blog). To read the full Corruption Perceptions Index, click here.

Monroe’s Musings: These annual lists, whether it’s the CPI, the Basel AML Index or others, are helpful, don’t get me wrong. And a lot of work goes into them. But they can also be a bit misleading.

How so? Take a gander.

Denmark, for instance, is not as spotless as it appears.

In late 2018 the country stated it plans to strengthen its financial regulator to make it better able to fight money laundering, as the country’s largest bank, Danske Bank, has been embroiled in a major scandal causing aftershocks in the Nordic and Baltic regions and the European Union.

The scandal involves some 200 billion euros ($230 billion) in payments through Danske’s Estonian branch between 2007 and 2015, many of which the bank said in a prior report it thinks are suspicious.

The scandal has led the bank’s former chief executive Thomas Borgen to resign and almost halved Danske Bank share price since February, along with authorities in Denmark essentially kicking the bank out of the country.

Other banks, including Swedbank, have been dragged into the mire, with bank controls, regulators and even EU authorities getting their feet held to the collective fire.

And, yes, while corruption and money laundering risk are not always interlinked at the country level, one can beget the other, as corruption opens the door to all areas of financial crime.

And reverse engineering that thought, a massive money laundering scandal rocking your region may mean much more corruption under the surface than a broad ranking index can adequately uncover and measure.  


Wells Fargo’s Ex-Chief Fined $17.5 Million Over Fake Accounts

The Skinny:

  • John Stumpf and two other former executives were fined Thursday, and Wells Fargo’s chief federal regulator said it would seek penalties against five others.
  • Stumpf, the former chief executive of Wells Fargo, agreed to a lifetime ban from the banking industry related to the bank’s fake accounts scandal and related underlying toxic sales culture.
  • The penalty against Stumpf, more than $17 million, is the largest individual fine the OCC has ever levied, even larger than those handed out in historic AML penalties.

When big companies do wrong, it’s rarely the big boss who pays the price. But that changed recently related to one of the country’s largest banks.

On Thursday, Wells Fargo’s former chief executive John G. Stumpf was fined $17.5 million — the largest individual fine in the history of the bank’s main federal regulator — for his role in a toxic sales culture that foisted unwanted products and sham bank accounts on millions of customers.

In settlements with the Office of the Comptroller of the Currency (OCC), Mr. Stumpf also agreed to a lifetime ban from the banking industry, and two other former senior Wells Fargo executives — a chief risk officer and a chief administrative officer — agreed to lesser fines and restrictions on their work in the industry.

Five others, including a former head of Wells Fargo’s retail banking operations, were also charged by the regulator.

In a damning 100-page legal filing, the agency offered fresh details about the bank’s relentless pressure on employees to meet its unrealistic goals, which included “hazing-like abuse.” Many employees said they felt they had only two options: Cheat or get fired.

Employees at one branch said they had been told to hit their targets or they would be “transferred to a store where someone had been shot and killed.”

A veteran of the 1991 Persian Gulf war wrote in a letter to Mr. Stumpf that he had found his time in a war zone less stressful than working at Wells Fargo. From 2011 to 2016, the bank fired more than 8,000 people for sales records it deemed subpar.

“The bank had better tools and systems to detect employees who did not meet unreasonable sales goals than it did to catch employees who engaged in sales practices misconduct,” the regulator said in legal filings that contained a number of redactions.

The settlements were a rare instance of personal consequences for those at the highest echelons of the banking industry.

Even though the biggest American banks paid billions of dollars to settle civil cases stemming from their mortgage activities in the lead-up to the 2008 financial crisis, anti-money laundering and sanctions stumbles and other culture failures, their chief executives have typically not given up a penny to federal bank regulators.

Mr. Stumpf’s fine, while record setting, is not the largest penalty being sought by the regulator in the case. It wants to impose a $25 million fine on one of his subordinates: Carrie L. Tolstedt, Wells Fargo’s former head of retail banking.

Mr. Stumpf, in a sworn statement to the Office of the Comptroller of the Currency, blamed Ms. Tolstedt and others for what he acknowledged was “systemic” misconduct throughout the bank. A 2017 investigation by Wells Fargo’s board blasted Ms. Tolstedt for creating a sales culture that fostered fraud, and Mr. Stumpf for turning a blind eye to it.

Ms. Tolstedt, who left the bank in 2016, is fighting the regulator’s civil charges. Her lawyer, Enu Mainigi, said in a statement that Ms. Tolstedt had “acted with the utmost integrity” and would be vindicated by “a full and fair examination of the facts.”

Wells Fargo’s conduct erupted into public view in late 2016, setting off a crisis that continues to reverberate more than three years later. Mr. Stumpf, the bank’s chief executive since 2007, was quickly ousted.

His successor, Timothy J. Sloan, resigned last year after failing to quell the bank’s turmoil.

Months before the bank’s troubles became public, Mr. Stumpf exercised all of his vested stock options, turning them into shares worth tens of millions of dollars that he owned outright.

Wells Fargo later clawed back his unvested stock awards and some of his retirement payout, costing him $69 million but still leaving him in possession of an enviable fortune.

Further repercussions are still possible for Wells Fargo’s former leaders: The Justice Department is continuing an investigation.

Even if Thursday’s fines are the last word in regulatory action, they were an unusual flexing of federal enforcement at the highest reaches of banking, (via the New York Times). To read the full 100-page OCC legal filing, click here.

Monroe’s Musings: As I have mentioned several times in recent months, this case was a huge deal and continues to cause headaches for Wells Fargo – an insider fraud that eventually led to many of the institution’s top risk, control and compliance officials to be axed, not just bloodletting at the executive leadership level.

The not-so-subtle meaning for financial crime compliance professionals: For you to be truly “woke” as the millennials say, you had better take the insider threats at your institution just as seriously as you do external threats that could strain your AML systems with instances of possible money laundering, fraud, sanctions busting and other fincrimes.

As well, AML officers should better ally themselves with the bank staffers working to uncover insider frauds and abuses, as in the eyes of some regulators, financial crime compliance teams must have eyes searching inward, as well as outward.


Green crimes present financial crime compliance, law enforcement investigation challenges that can ‘no longer be ignored’

One out of every 10 trees harvested are felled illegally. In some places for example in Central and West Africa it’s as much as 90 percent, according to a recent panel discussing the challenge for financial crime compliance professionals in identifying and reporting on “Green Crimes,” where criminals monetize the illicit trade of wildlife and natural resources.  

Going further, an estimated one in five fish caught globally is fished illegally, with the waters around Sub Saharan Africa, particularly affected with one in four fish caught illegally.

At the same time, around two Rhinos are killed every day, as are 35 elephants and 250 Pangolins.

These are not just acts of great vandalism. They are actions carried out for financial gain, and are stripping the developing world of precious assets, worth in Sub Saharan Africa around $50 billion, amounting to almost a third of criminal revenues from the region or 3 percent of Sub Saharan African GDP.

That robs governments of potential revenue amounting to $10 billion or 25 percent of Foreign Aid provided to the Region, (via John Cusack).

Monroe’s Musings: These illicit funds, soaring into the tens of billions of dollars annually for certain regions, must, and do, touch the formal financial system, giving anti-money laundering officers a chance to intercede, interdict and report on potential instances of criminals monetizing their abuse of the natural world.

These counter-crime teams should consider strengthening their training and understanding of where these “green crimes” are taking place and better understand related financial red flags to better arm their institutions to see the nuances rising to the fore in their transaction monitoring systems to create timely intelligence for law enforcement, safeguarding innocent creatures and protecting nature itself.


Proceeds of Crime and GDP – Are we comparing apples to oranges?

The Skinny:

  • This piece by eminent thought leader Jim Richards argues that comparing illicit dollars generated in a country compared to its GDP is not the best measure of fincrime effectiveness.
  • Rather, the anti-money laundering regime in a country should be judged by comparing illicit financial flows generated versus the overall financial throughput of a region, which for the U.S. alone is in the quintillions of dollars.
  • In such a comparison in the U.S. for example, that equates to some very telling figures for regulators to consider: For every one billion dollars of money flowing through the US financial system, seven dollars are criminal proceeds.

The Estimate for US Money Laundering – $300 billion a year, or 2% of GDP

The 2015 National Money Laundering Risk Assessment – available at 2015 NMLRA – estimated that the total amount of criminal proceeds generated in the United States was approximately $300 billion, or 2% of gross domestic product (GDP).

$300 Billion in Criminal Proceeds – How Much is Reported by Financial Institutions?

We don’t know. But what is interesting about the 2015 National Money Laundering Risk Assessment figure of $300 billion in estimated proceeds of criminal activity, is that it may be reasonably close to the total amount reported in Suspicious Activity Reports.

Although FinCEN has not (yet) provided total amounts reported in Suspicious Activity Reports and Currency Transaction Reports, some anecdotal evidence (based on off-the-record discussions with people in the industry) suggests that the average depository institution (bank and credit union) SAR reports approximately $250,000 in suspicious activity, and the average money services business (MSB) SAR reports approximately $35,000 to $40,000.

And I’ll guess that all other filers’ SARs average $50,000 each. Using 2018 SAR totals:

Banks:                          975,000 SARs @ $245,000     ~$239 billion

MSBs:                            875,000 SARs @ $35,000       ~$ 31 billion

All “other” filers:          275,000 @ $50,000                 ~$ 14 billion

The grand total: $284 billion

And if we assume that some of the activity reported in Currency Transaction Reports (CTRs) is, in fact, the proceeds of criminal activity, we could arguably add another $36 billion (18 million CTRs @ $20,000 each with 10% “dirty money”).

The total reported by financial institutions in the US is then roughly $320 billion. So US financial institutions may be doing a pretty good job at reporting suspicious activity!

Total Suspected Proceeds of Crime Reported in the US: ~$320 billion. Estimated proceeds of criminal activity in the US: ~$300 billion.

Proceeds of Crime and GDP – Are We Comparing Apples to Oranges?

There is another flaw in comparing the amount of criminal proceeds to global (or national) gross domestic product, or GDP.

GDP is a measure of the total final value of everything produced. Its components include personal consumption expenditures, business investment, government spending, and exports less imports (and there is nominal GDP and real GDP, with the latter factoring in inflation).

A better measure of the effectiveness of the financial system in identifying, interdicting, and reporting criminal proceeds would be to compare the total amount of criminal proceeds flowing through the financial system to the total amount of funds flowing through the financial system.

The US Financial System – Two Quintilian Dollars A Year

The 2015 National Money Laundering Risk Assessment (pages 35 and 36) estimates that the total amount of FedWire, CHIPS, ACH, debit card, and cash transactions moving through the US financial system in a year is approximately two Quintilian dollars.

Converting those daily amounts to annual amounts gives us a total of approximately two Quintilian dollars. Of that, $300 billion is criminal proceeds. Therefore, criminal proceeds make up approximately 0.00000007% of the total amount moving through the American financial system.

The US Government’s National Money Laundering Risk Assessment believes that for every one billion dollars of money flowing through the US financial system, seven dollars is criminal proceeds.

The private sector participants in the US financial system are subject to a regulatory regime that requires them to have complex systems, processes, and programs that collectively cost tens of billions of dollars, if not hundreds of billions of dollars, to develop, operate, and enhance.

And the administrative and criminal penalties for failing to have reasonably effective AML programs can be severe.

The American anti-money laundering regime – which is now in its fiftieth year – has been built to identify and report the seven dollars of criminal activity out of every one billion dollars of total activity that flows through that financial system.

It is critical that the public and private sectors continue to work together to not only make this regime as effective and efficient as possible; but perhaps because of the daunting task that the private sector has been given – to detect and report the 0.00000007% of activity flowing through the system that is criminal proceeds – the regulatory agencies that examine them for compliance with the regime’s rules and regulations should focus less on how those institutions comply with the rules, and more on how well those institutions provide actionable, timely intelligence to law enforcement, (via Jim Richards).

Monroe’s Musings: This story is absolutely incredible. Jim, the AML sage, mage and compliance bard of our time, has framed the current challenges of the sector in a way I have never seen before – and I have been doing this nearly 14 years.

This analysis points out some sobering figures that bring into relief how far we have come as an AML sector, or conversely and depending on the contextual viewpoint – GDP vs. overall financial flows – how far we have to go to increase fincrime efficiency and effectiveness to identify the illicit funds propping up criminal networks.

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