Reported OCC action against Bank of China continues increased regulatory scrutiny

A yet-to-be released federal anti-money laundering enforcement action obtained by Bloomberg against Bank of China Ltd., will likely continue the trend of heightened regulatory scrutiny for foreign banks with extensive international correspondent connections, particularly those in China.

In a report published Wednesday, Bloomberg stated it had obtained a copy of an order by the US Treasury’s Office of the Comptroller of the Currency (OCC) against the Bank of China. The lender, one of the world’s largest, agreed to bolster policies for finding and reporting suspicious activity by its customers, improve its currency transaction monitoring procedures and shrink its vulnerability to financial crimes in its U.S. operations.

In recent years, domestic and federal regulators have expressed concern, and at times handed down formal enforcement actions and monetary penalties, tied to the oversight of financial institutions’ correspondent relationships, particularly if a US bank has ties to foreign banks in risky regions or a large foreign bank with an extensive correspondent network has a footprint in the United States.

Potential money laundering and corruption-tinged funds coming in through correspondent portals, particularly those with ties to risky regions known for graft, is the “regulatory focus du jour,” said a compliance officer at a large US bank.

“There are a lot of regulatory focal points right now, such as MSBs, politically-exposed persons and embassy banking, but we can’t just drop foreign correspondent relationships as easy as other risk areas,” said the person. “In some cases, we need them just as much as they need us.”

Bloomberg stated the unreleased report, signed last month by Chen Xu, head of the bank’s New York branch, mirrored deficiencies highlighted by the Federal Reserve in July in a separate action against another massive, state-owned Chinese bank, China Construction Bank Corp. The bank has operated in New York since 2009.

In the joint action by the Federal Reserve and New York State Banking Department, the regulators cited the Construction Bank of China, the country’s second largest, for deficiencies across the AML program and issues related to correspondent oversight, properly responding to law enforcement and other requests for information.

The Fed order called for stronger monitoring and investigative standards to ensure the “timely detection, investigation and reporting of all known or suspected violations of law,” including:

  • Proper monitoring of customer accounts and transactions, including through foreign correspondent portals.
  • Adequate escalation of possible suspicious activity, including what management signed off, who made decisions to escalate or not and any related data and documents.
  • That data and information is collected and aggregated across business lines and any identified data gaps are identified and have a timeframe to be corrected.

The action against Bank of China is yet another blight on the country’s broader war against financial crime and corruption and a new black mark against the institution itself.

Last year, prosecutors in Italy began going after Bank of China officials on accusations they were complicit in moving billions of dollars for clients involved in counterfeiting and prostitution.

Bank of China has global assets of about $2.5 trillion and is on the Financial Stability Board’s list of systemically important institutions, according to Bloomberg. Its five U.S. branches have about $63 billion in assets, according to government records, and largely serve Chinese companies.

It’s China’s “most international and diversified bank” — according to documents it filed with U.S. regulators — and is still majority-owned by the government, stated Bloomberg.

As well, it’s no surprise US authorities would be honing in on correspondent banking connections in recent enforcement actions.

In June, the US Treasury in two monolithic and historic documents, The National Money Laundering and Terrorist Financing Risk Assessments, specifically pointed to the nebulous nature of sub-entities entering through foreign correspondent relationships as a critical outstanding vulnerability, along with other issues, including the ease of opening shell corporations, the lack of related beneficial ownership information, international trading and third-party processing hubs.

U.S. investigators and regulators have alternated between domestic and foreign banks in recent years when chastising institutions for lax oversight of correspondent relationships, highlighting issues at HSBC in 2010 and later as part of a massive nearly $2 billion action in 2012.

U.S. authorities also cited correspondent issues in actions against Citibank in 2012, JPMorgan in 2013 and a more than $2 billion fraud-related penalty in 2014 and Standard Chartered in 2014. UK regulators have also issued formal actions for correspondent problems against banks based in Turkey and Switzerland.

Because many large enforcement actions in recent memory have highlighted poor correspondent oversight, there is more scrutiny about what institutions broadly are allowing through these relationships, what information is available on their customers’ customers and what is the soundness of the AML programs for the foreign banks involved.

At least for a domestic bank, though, there are limits to what information is available, said the compliance officer.

“At times, we don’t have information on the customer of customer,” said the person. “So we shouldn’t be held liable for information we can’t know. It’s almost like someone asking you for the individual history of the dollar bills that got into your hand.”