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Enforcement Roundup: OCC hits Rabobank CCO with $50,000 penalty on AML, Finra, SEC follow suit

Friday, May 25, 2018   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org
May 25, 2018

In our latest Enforcement Roundup, the chief regulator of the country’s largest and most complex banks levies a rare individual penalty against a former chief compliance officer and the top enforcement bodies for the U.S. securities sector follow suit, a trend that could bode ill for counter-financial crime professionals.

The actions by the U.S. Treasury's Office of the Comptroller of the Currency (OCC), Securities Exchange Commission (SEC) and Financial Industry Regulatory Authority (Finra), highlight a persisting issue that has bedeviled many foreign banks when it comes to creating stout anti-money laundering (AML) programs.

A tension that will come as no surprise to industry insiders: Clashes between U.S.-based compliance officers who found alarming issues that needed to be fixed, but when they raised the issues, foreign boards and top management chose to ignore, overrule and generally give these loudly-voice concerns short shrift.

The actions also have key lessons for financial institutions, including:

·         Human target: For large banks, particularly foreign banks, these institutions must realize that your domestic AML programs are a major target for federal examiners and the Financial Crimes Enforcement Network (FinCEN), the country’s financial intelligence unit. U.S. regulators have hit several foreign banks in Asia, the Middle East and Europe with actions due to their domestic weaknesses, so in the eyes of examiners, institutions have already been put on notice.

·         Cultural norms: The OCC, SEC and Finra actions also speak to failures in creating a “culture of compliance” and having a strong “tone at the top,” two regulatory focal points that have liberally peppered recent enforcement actions. What to do? Wherever the home country is based, these institutions should realize they may need to retool U.S.-based compliance departments to prove that the program is adequately staffed, is replete with expertise and program concerns are escalated and evaluated by top executives.

·         Transparency, trust: Another lesson, particularly in the OCC action, is that when AML officers are weighing the pros and cons of how much information to give examiners – either through internal analyses or gathered by external consultants – err on the side of transparency. Yes, that might mean the remediation is more pricey and timetable lengthened, but at least the regulator won’ t find what they would consider a bold lie, gaining solid foothold to distrust the bank with the result potentially being bringing more serious charges.


OCC levies rare $50,000 individual penalty against former Rabobank CCO for concealing AML weaknesses, tarrying on timetables

The OCC handed down a $50,000 penalty against former Rabobank Chief Compliance Officer Laura Akahoshi and prohibited her from working in financial institutions in a compliance capacity due to systemic failures in reporting AML data and actively concealing program weaknesses from federal examiners. To read the full report, click here.

The OCC stated that Akahoshi, a former OCC examiner herself, made “false statements” and “concealed bank documents” from examiners who found issues with the California operations of the Dutch bank as far back as 2012.

The OCC action states one unnamed former CCO raised concerns to top bank officials, but was not believed and eventually overruled by bank management. The bank eventually placed the officer on “forced leave” before becoming the individual became a whistle-blower for the OCC.

Akahoshi took over for that executive and eventually worked with other bank staff, in and out of the compliance department, to draft a response to the OCC’s concerns.

The bank worked with a consultancy during this period, with with the remediation team uncovering issues that backed up the OCC’s finding of violation and that of the former CCO. But the bank's response to the OCC never divulged the existence of the audit report, causing examiners, and later federal investigators, to believe the bank had tried to lie and hide evidence.

The bad month continued for Rabobank this week as well, when a U.S. District Court Judge in California sentenced the California operations of one institution to two years of probation, along with a half-million dollar fine as part of the previously-negotiated $368 million forfeiture related to obstruction charges, lying, tarrying and actively obfuscating a federal regulatory inquiry by the OCC.

The government announced the agreement in February.

To read ACFCS coverage of the original action, click here. To read the DOJ action, click here and the OCC action here. In imposing the sentence, Judge Jeffrey Miller noted that Rabobank’s conduct essentially amounted to “stiff-arming the OCC, and completely failing in its responsibility to its customers and the nation.”


SEC, Finra hit penny stock pinchers with millions in penalties, fines AML officer for proactively furthering fraud

The SEC and Finra teamed up to take down two broken broker-dealers engaging in penny stock frauds and related pump-and-dump dastardly doings.

To read the SEC actions, click here. To read the Finra action, click here.

The SEC settled charges against broker-dealers Chardan Capital Markets LLC and Industrial and Commercial Bank of China Financial Services LLC (ICBCFS) for failing to report suspicious sales of billions of penny stock shares, a fraudulent activity reaching epidemic proportions in trading spaces.   

Under AML rules, broker-dealers are required to file Suspicious Activity Reports (SARs) for transactions suspected to involve fraud or with circuitous and odd transactions without an apparent lawful purpose, something that would come to light with properly tuned transaction monitoring systems and informed AML anaylsts. 

In the case, from October 2013 to June 2014, Chardan, an introducing broker, “liquidated more than 12.5 billion penny stock shares for seven of its customers and ICBCFS cleared the transactions,” according to the SEC, highlighting the trading sector’s often complex investment chains, where many individuals are involved, but none responsible for, or committed to, AML. 

Chardan failed to file any SARs even though the transactions raised red flags, including similar trading patterns and sales in issuers who lacked revenues and products, which could be viewed as another AML failure: lax due diligence and risk scoring at the front end results in failing to report aberrant activities even when thy are found.

Compounding matters, the SEC “found that ICBCFS similarly failed to file any SARs for the transactions despite ultimately prohibiting trading in penny stocks by some of the seven customers.”

“As gatekeepers to the securities markets, brokerage firms, including clearing firms, must take their anti-money laundering obligations seriously,” said Marc Berger, Director of the SEC’s New York Regional Office.  “The failure to file SARs in the face of numerous red flags is unacceptable.”

The firms faced charges including breaching AML and recordkeeping rules, but the biggest bombshell in the document: Chardan’s AML officer, Jerard Basmagy, was not just making honest mistakes, but “aided and abetted and caused the firm’s violations.” 

In the settlement, the SEC is requiring Chardan to pay a $1 million penalty, ICBCFS to pay $860,000, and Basmagy individually to pay $15,000. 

Both firms consented to censures and, along with Basmagy, to cease and desist from similar violations in the future. Basmagy also agreed to industry and penny stock bars for a minimum of three years. 

On the Finra side, the regulator hit ICBCFS with a $5.3 million penalty and is also requiring the firm to be scrutinized for further issues by an independent compliance consultant due to extensive AML failures through all four prongs of the program.

The major problems started in late 2012, when ICBCFS began clearing and settling equity transactions, a business avenue that quickly exploded – but was not matched with increased surveillance or mitigation controls.

“Within a few months of launching its new business line, ICBCFS took on thousands of new customers, many of whom began purchasing and selling millions of dollars’ worth of penny stocks,” according to Finra, noting that the payoff to turn a blind eye to fraudulent actions was hefty, in the hundreds of millions of dollars.  

From January 2013 through September 2015, ICBCFS “cleared and settled the liquidation of more than 33 billion shares of penny stocks, which generated approximately $210 million for ICBCFS’s customers,” but at the same time, the firm failed to strengthen any area of the AML program.

Moreover, Finra found that prior to June 2014, ICBCFS had no surveillance reports that monitored potentially suspicious penny stock liquidations, and did not require its employees to document their review of the surveillance reports it did have in place, a common program for smaller securities firms that attempt to handle transaction monitoring manually.

Some of the AML programs at the firm also appeared deliberate and intentional, including:

  • Writing policies and procedures, including red flags for fraud, but not following them.
  • Assigning arguably the most important piece of an AML program, SAR writing, to a person who didn’t exist.
  • Even when employees did find evidence of a potential penny stock scheme, they didn’t document, escalate or otherwise actually file the SAR with FinCEN.

While Finra has been more aggressive in recent years of handing down AML penalties against individuals, and a few times against compliance staffers, the federal banking regulators and FinCEN have been treading lightly.

The most high-profile action against an individual settled roughly one year ago.

In the widely-watched case between the U.S. Treasury and a lone compliance officer facing a $1 million individual penalty and lifetime debarment, the person negotiated a $250,000 settlement and three-year injunction.

Since the case dropped in 2014, it had been a flashpoint issue in financial crime compliance, federal regulatory and investigative circles.

Critics argued that the former compliance officer for MoneyGram, Thomas Haider, was made a “scapegoat” by the company as his requests to drop fraudulent agents were overruled by higher-ranking executives.

Some believed that the U.S. government unfairly targeted him for a rare statement-making penalty to shock other AML compliance professionals into line.

Others, however, stated that targeting a compliance officer with a penalty was actually making the wrong statement and could start an exodus of bright, talented and experienced financial crime compliance professionals to leave the field altogether to take positions at companies and in industries without the persistent specter of individual penalties hovering out there in the ether of the compliance universe. 


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