By Brian Monroe
November 10, 2016
New York’s state banking regulator penalized the domestic operations of one of China’s largest banks $215 million for willful violations of financial crime compliance laws, in an enforcement action more aggressive and critical than a non-monetary federal action issued less than two months ago.
The New York State Department of Financial Services (NYDFS) levied the penalty against the local branch of the Agricultural Bank of China on Friday for a wide array of “intentional” anti-money laundering (AML) failings, including falsifying dollar clearing activities tied to sanctioned entities in Russian and China and attempting to silence a compliance whistleblower.
The DFS investigation “discovered intentional wrongdoing, including actions by bank officials to obfuscate U.S. dollar transactions conducted through the New York Branch” that could be violations of AML rules or tied to entities blacklisted by the United states.
As a result, the bank must engage an independent monitor to review past transactions over an 18-month period, but will also stay with the institution for the next two years to perform a broad-based review of overall compliance operations and the current remediation plan, reporting those findings directly to the regulator.
The Bank also “silenced and severely curtailed the independence of the Chief Compliance Officer (CCO) at the New York Branch, who tried to raise serious concerns to Branch management and conduct internal investigations regarding suspicious activity, leading the CCO to ultimately resign.”
The New York action comes on the heels of a Federal Reserve non-monetary enforcement order against the bank issued in September. That order did not mention any of the more serious allegations of purposely hiding transactions to risky regions or illicit entities, and the quashing of internal issues brought up by the institution’s top compliance cop.
In the Federal Reserve cease-and-desist order, it took a more neutral, measured tone, requiring the bank to bolster its financial crime compliance program, particularly around the depth of due diligence tied to customer risk assessments, correspondent banking connections and affiliate oversight.
While in most instances regulators attempt to coordinate on enforcement actions and monetary penalties, in some cases, a state body can be free to act more independently because it won’t have to consider as many foreign policy implications as its federal counterpart, said Jeff Sklar, managing director of SHC Consulting Group in Bellmore, NY.
The NYDFS “doesn’t care what anyone thinks,” he said. “They have their own agenda. A state regulator doesn’t really have as much at stake as the federal government does with these international banks and foreign countries.”
More policy considerations, implications at the federal level?
Conversely, a federal regulator may have to take a more thoughtful, cautious approach and, even looking at the same pool of information, release an enforcement order, rather than a monetary penalty. Federal agencies typically must coordinate with other agencies for a high-profile action, an initiative likely lengthened during a time of transition in Washington, D.C. in the midst of a presidential election, Sklar said.
But the issues found by DFS examiners were of particular concern because they had told the bank to make changes and improvements in prior exam cycles, suggestions that were largely blown off by the institution, according to penalty documents.
State examiners uncovered that Agricultural Bank of China had “conducted U.S. dollar clearing in rapidly increasing volumes since 2013 through foreign correspondent accounts,” even after the regulator told the institution not to do so until it improved compliance operations.
The bank “willfully ignored” DFS warnings and dollar clearing transactions by the Bank at the New York Branch “skyrocketed in 2014 and 2015, creating an untenable risk at a time when the Bank was not able to satisfy even basic compliance requirements.”
In penalty documents, examiners stated as example that, during the period of January to July 2014, the branch processed an average of 148 daily dollar-clearing transactions, amounting to approximately $26 billion for the period.
In contrast, just a year later, for the period of January to July 2015, the volume grew to an average of 330 daily transactions, totaling approximately $72 billion for the period.
As a result, the branch “created an untenable risk by failing to meet compliance requirements and causing…an ‘unmanageable’ backlog of nearly 700 transaction monitoring alerts that needed to be investigated fully.”
Moreover, the bank employed “non-transparent and evasive transaction methods,” including sending secretly coded messages through the Society of Worldwide Interbank Financial Telecommunication (SWIFT) system that “masked the true parties to a transaction and avoided screening by DFS.”
These moves did not go unnoticed by the branch’s CCO.
But when the CCO attempted to bring the coded SWIFT messages to the “attention of bank management in the Fall of 2014, the CCO was told to refrain from communicating with regulators and was effectively silenced.”
And rather than staying in a bank that has no “culture of compliance” and a weak “tone at the top,” according to Sklar, the unnamed person resigned.
“Having lost the ability to comply with the law and do the job required, the CCO eventually resigned from the Bank in May 2015,” according to the action. “The CCO’s departure was followed by the resignation of much of the remaining compliance staff in August 2015.”
Message to banks: listen to your compliance team
In a clear message to the rest of the financial crime compliance community, the New York regulator is stating that when a compliance officer, particularly the CCO, makes recommendations, the person should not be disregarded or worse, Sklar said.
For top executive support to be so non-existent that a compliance officer must tender her resignation, particularly on issues that examiners have brought up in the past, is something that will bring a speedy and harsh enforcement response, he said.
“Senior management teams need to listen to their compliance people,” he said. “Had they listened to internal communication of their CCO, a lot of this doesn’t happen,” or the penalty figure is significantly smaller, Sklar said.
The New York operations of other Chinese banks have also come under more regulatory scrutiny in recent years.
In July 2015, The Federal Reserve and New York State Banking Department cited the Construction Bank of China, the country’s second largest, for deficiencies across its AML program and issues related to properly responding to law enforcement and other requests for information.
In the latest order against the Agricultural Bank of China, it also notes several key red flags that were disregarded, including:
- Dollar transactions remitted by a Turkish Bank customer for its Afghan Bank client which is known by the U.S. Treasury Department for its associations with a Hawala network having associations with narcotics traffickers and illicit cash flows; and
- Certain invoices involving China and Russia appeared to be counterfeit or falsified, while other documents suggested U.S. dollar trades with Iranian counterparties – including documentation indicating dollar transactions were made for the benefit of a sanctioned Iranian party – information that had been omitted from the SWIFT wire messaging.
“DFS will take swift and appropriate action when our investigation finds egregious conduct and intentional circumvention of a regulated bank’s compliance program,” said Financial Services Superintendent Maria Vullo.
“The failure of a strong compliance program at the New York Branch of the Agricultural Bank of China created a substantial risk that terrorist groups, parties from sanctioned nations, and other criminals could have used the Bank to support their illicit activities.”