Hefty penalty against Penn bank for AML

The US Treasury’s $1.5 million penalty against a Pennsylvania community bank for deficiencies in its anti-money laundering program and failing to make the connection to a broader corruption case is strong evidence banks should widen their transactional lens for financial crimes.

The joint penalty handed down last week by the Financial Crimes Enforcement Network (FinCEN) and the Office of the Comptroller of the Currency (OCC) against the First National Community Bank of Dunmore (FNCB) is required reading for financial crime compliance officers trying to get a clearer glimpse of what examiners expect from their programs.

The core issues that brought on the penalty, and raised the general ire of federal examiners, surround the institution’s failure to file reports on large and suspicious transactions spanning a five-year period tied to two former Pennsylvania judges, Michael Conahan and Mark Ciavarella, and realize the individuals were engaged in judicial corruption.

In the scheme, the men “misused their positions as judges to profit from, among other things, sending thousands of juveniles to detention facilities in which they had a financial interest,” according to FinCEN, noting that Conahan was also on the bank’s board of directors and was clearly controlling many of the accounts in question.

The bank missed a panoply of red flags evincing suspicious activity, according to FinCEN, and didn’t file a suspicious activity report (SAR) on the accounts until after Conahan’s first guilty plea in 2009.

The red flags were aplenty, including one coming from law enforcement officials themselves. The action stated that in 2007 investigators sent the bank a subpoena for information on Conahan and related accounts, individuals and entities, yet the bank chose not to conduct further analysis or even update the relevant risk rankings.

In addition, FinCEN stated that the bank saw aberrant activity in the accounts as early as 2005 involving “many large, round-dollar transactions often occurring on a single day,” and a general “abnormal volume of activity compared to account balances.”

To disguise the proceeds, Conahan tried to make it appear as if the funds originated from a company he created, Pinnacle Group of Jupiter, LLC, formed for the sole purpose of purchasing a condominium jointly with a co-conspirator.

Moreover, the bank should have been able to put the pieces together because transactional data and documents in its possession revealed an “unusual and substantial reported increase in the value” of the condo and, after only three months, the group initiated a full cash-out refinancing, issues that should have warranted further bank reviews, FinCEN said.

Beyond that, the bank should have noticed from 2004 to 2005, Conahan’s and Ciavella’s incomes “nearly quadrupled,” chiefly tied to the supposed rental income from the condo, even though the rental payments far exceeded the value of the property. At one point the monthly rent was $70,000 on a three-bedroom condo valued at only $800,000.

Despite not getting the SARs in time, though, authorities later garnered a conviction against Conahan.

In 2011, a federal district court judge in the middle District of Pennsylvania sentenced him to more than 17 years in prison and ordered him to pay nearly $900,000 in restitution to the state for accepting some $2.6 million in personal payments in connection with the scheme involving the construction, operation, and expansion of juvenile detention centers.

“The criminal case affected the lives of thousands of children and parents,” said FinCEN Director Jennifer Shasky Calvery, in a statement. “Banks have a duty to spot suspicious activity and to report it. Law enforcement relies on this valuable information. FNCB’s failure to file timely suspicious activity reports may have deprived law enforcement of information valuable for tracking millions of dollars in related corrupt funds.”

Taken together, the action makes it clear that banks should worry about more than just what accounts could be at a higher risk for money laundering.

Banks should analyze customers, at account opening and monitoring on an ongoing basis, for potential risks on a broad array of crimes, including corruption, human trafficking and others.

As well, though not formally required in the interagency exam manual, banks must be more wary of customers with current or past ties to high-ranking political positions, domestic or foreign, as they can more easily parlay prior political victories, glad-handing and hobnobbing into business-related graft.

Most notably in the action, and something not to be missed, is that examiners feel financial crime risks extend to everyone within and associated with the bank, including board members.

Banks should never give white-glove treatment to a board member exhibiting strange transaction patterns. That is something, as in this case, which can ensnare a bank in a costly and embarrassing investigation.