Several high-profile settlements have been inked in recent years; in December 2012, HSBC (NYSE:HSBC) settled allegations that it transferred billions of dollars of illicit funds for sanctioned nations like Iran and enabled Mexican drug cartels to move money illegally with a penalty of $1.9 billion. Dutch bank ING (NYSE:ING) settled its own money laundering charges with a $619 million fine in June of 2012; Lloyds (NYSE:LYG) reached an agreement with the Manhattan district attorney’s office and the Justice Department in January 2009 to pay $350 million in fines for accepting funds from Iranian and Sudanese clients; U.S. regulators fined Credit Suisse (NYSE:CS) $536 million in December 2009; and Barclays (NYSE:BCS) agreed to pay $298 million to settle charges that it accepted client payments from Cuba, Sudan, and other countries under U.S. sanctions.
JPMorgan Chase (NYSE:JPM) has also been told to strengthen its money laundering safeguards, and that is one reason the bank is limiting international transactions, which carry heightened risk of money laundering. Most recently, JPMorgan made a so-called deferred prosecution agreement with U.S. Attorney Office for the Southern District of New York which will suspend a criminal indictment for JPMorgan’s violation of the 1970 Bank Secrecy Act, a federal statute that requires financial institutions to assist government agencies in detecting and preventing money laundering, tax evasion, or other criminal activities.
In return for the deferred prosecution of the bank’s failure to maintain an effective anti-money-laundering program, the company was required to overhaul its controls against money laundering and sign a “statement of facts.” That document detailed the financial relationship between Bernie Madoff and the bank, including the fact that JPMorgan did not file a suspicious activity report after it was warned by another institution involved in the investor’s banking that Madoff was check kiting. This deferred prosecution agreement came on top of a non-tax-deductible payment of $1.7 billion that will be forfeited through the Department of Justice.
Banks have tightened their money laundering controls following the Justice Department’s probes into these financial institutions, but regulators are still finding problems in the banks it continues to investigates. “I think [banks] still need to do more,” Mythili Raman, the acting assistant attorney general who heads the Justice Department’s Criminal Division, told the Journal. “It’s not as if our enforcement actions are over. There’s more to come, and that suggests to me that there are still banks that haven’t gotten the message.”
As part of the federal government’s efforts to eradicate money laundering, the Justice Department is holding the financial institutions that handle the illicit funds responsible. That means banks are under greater pressure from regulators and law enforcement to tighten their money laundering controls.
As JPMorgan’s deferred prosecution agreement with the Manhattan’s District Attorney’s Office indicates, government agencies are increasingly bringing cases under the Bank Secrecy Act, which requires financial institutions to ensure a client’s money has not come from criminal activity. Originally, the Bank Secrecy Act was “a hook where the federal government could go in and go after drug dealers etc.,” as Asheesh Goel, co-chairman of the anticorruption and international risk practice at law firm Ropes & Gray LLP., told the Journal, meaning that law enforcement could prosecute specific individuals or institutions that allegedly helped drug dealers or mobsters launder money. But, “now what we’re seeing is money laundering enforcement for money laundering enforcement’s sake,” Goel added.
The new focus of regulators on money laundering enforcement means banks need to understand the source of their clients money, which is both a challenge and an expense. Additional money laundering enforcement could also fundamentally change the industry. “It creates this awkward situation where instead of being more inclusive and bringing entities into the banking system where the records are available for law enforcement when they need them, banks are now saying ‘we are not going to offer these products and services,’” Rob Rowe, a vice president at the American Bankers Association, explained to the publication. “Then it goes underground or offshore, and law enforcement no longer has access to the information.” Plus, banks do not always have the ability to figure out if a client’s money is illicit or if their business is illegitimate.
Still, Raman told the Journal that the Justice Department’s goal is not to prosecute an institution each time illegally gained funds enter the financial system, but rather to identify a pattern of problematic behavior. “We’re not looking for one-offs,” she said. “We need to show a willful violation of their duties to ensure that there’s an effective compliance program in place.” If banks scrutinize customers more carefully, money laundering can be made more difficult in the United States, she added. “When I say we want the institutions to harden themselves against these threats, it’s because at the end of the day we don’t want, as a country, our U.S. dollars to be the way that criminal proceeds are flowing through and across the world,” Raman said.
Alongside the Justice Department, the Office of the Comptroller of the Currency, which oversees the largest national banks, has begun linking any inadequacies in an institution’s anti-money-laundering controls to its formal ranking of the institution’s management. Those rankings can later form the basis for enforcement actions or hamper a bank’s ability to raise capital.
Follow Meghan on Twitter @MFoley_WSCS