The potential for high-ranking banking officials to face criminal and civil penalties, as well as hefty fines, has the industry intensifying its efforts to combat money laundering and terrorism financing.
In June, the New York State Department of Financial Services, which regulates some of the world’s largest banks, announced it adopted an anti-terrorism and anti-money laundering regulation that requires regulated institutions to maintain programs to monitor and filter transactions for potential Bank Secrecy Act and anti-money laundering violations and prevent transactions with sanctioned entities, according to a news release.
The final rule, which takes effect Jan. 1, requires regulated institutions annually to submit a board resolution or senior officer compliance finding confirming steps taken to ensure compliance with the regulation.
Senior officers who file incorrect or false annual certifications could face potential civil or criminal penalties.
“The certification requirement raises important considerations and risks for senior compliance officers who now face personal liability, and may be subject to criminal penalties,” said Lauren J. Resnick, a partner of the law firm of BakerHostetler and a former U.S. Attorney for the Eastern District of New York.
The new regulations reflect some of the best practices in many financial institutions nationwide, according to Christian Focacci, co-founder and chief information officer of TransparINT, an anti-money laundering technology startup.
“It is very possible that some of the new regulations outlined in the NYDFS rules become adopted by other state or federal level regulators,” he said.
Last September, U.S. Deputy Attorney General Sally Yates authored the Yates Memorandum, a new policy initiative by the U.S. Department of Justice to hold corporate officials personally accountable for noncompliance with federal regulations dealing with anti-money laundering and anti-terrorist financing.
Jimmy Gurule, a law professor at the University of Notre Dame in Indiana and an internationally known expert on terrorist financing and anti-money laundering, said the new DOJ policy has many in the banking industry taking extra notice.
“Now there’s fear that bank executives, members of the board of directors and other high-level officials could find themselves under indictment and, if convicted, could go to prison. There’s a lot at stake,” said Gurule, who has held a variety of high-profile public law enforcement positions, including serving as undersecretary for enforcement for the U.S. Department of Treasury and assistant attorney general in the Department of Justice.
Increasing the emphasis on individual accountability for corporate wrongdoing is well-intended but impractical, said Robert G. Rowe, vice president and associate chief counsel, regulatory compliance, American Bankers Association.
Each bank or financial institution looks at its own programs and customer bases to develop a risk profile. Making company officials potentially liable for compliance violations, Rowe said, is “very prescriptive and it takes away the flexibility to let each bank adapt to its own particular circumstances. There is no way one manager can make sure their employees are doing exactly what they should be doing. It’s a standard that is unrealistic.”
Concerns financial institutions face regarding terrorist financing risks include protecting against reputational damage and maintaining business operations, according to experts.
“Terrorist financing risks pose unique challenges for compliance and transaction monitoring,” Resnick said. “For example, unlike money laundering, terrorist financing transactions often involve low monetary amounts. Also, a small denomination payment made to a charitable organization, for example, may not raise a red flag if it is consistent with the purpose of the account.”
“The major concern facing banks regarding terrorist financing is that in many cases it does not take very much money to fund terrorists.” Focacci said. “This makes it extremely challenging for banks to detect because the account activity appears very similar to what one would expect from a normal checking or savings account. Many recent attacks were conducted on a budget of thousands, or even hundreds of dollars in some cases.”
Another concern is internal, according to Albert Goldson, executive director of Indo-Brazilian Associates LLC, a New York City-based global advisory firm.
“There’s an extreme shortage of qualified and experienced finance professionals to monitor the growing number of suspicious transactions, a situation compounded by the high personnel turnover due to industry M&A [mergers and acquisitions] and layoffs,” he said.
Banks also want to prevent money laundering and terrorist financing to avoid stiff penalties.
“In 2012, HSBC’s fine was $1.9 billion and more recently PNB Paribas, the French-based bank, was fined $8.9 billion,” Gurule said. “So it matters whether the bank is in compliance with its legal obligation to prevent money laundering and terrorist financing.”
Measures for banks to take include screening companies and individuals against sanctions, most wanted and other high-risk lists; searching media to identify high-risk associates; and assessing all risks, including potential terrorist financing risks, based upon business, types of products, accounts offered and client base, according to experts.
A risk-based compliance and transaction-monitoring program must be tailored to the company’s risk profile, said Resnick.
“Knowing your customer is important and institutions should implement robust customer identification and verification processes, as well as consider monitoring public sources and online data in a manner commensurate with the risk,” Resnick said.
“Compliance oversight and risk assessment should be adaptable to the jurisdictions where customers reside and do business,” she added. “Institutions should also account for spelling variations and misspellings of names and entities when running automated searches through sanctions screening software. Ongoing monitoring and follow-up on red flags, maintaining records, and reporting suspicious activity as required by law will also assist law enforcement in the fight against terrorist financing.”
Still, staying a step ahead of terrorists is a major problem. When terrorists find it difficult to do business at financial institutions, they will find an alternative means to move money that is not as heavily regulated.
The challenge for law enforcement is to not be reactionary, but to be “ahead of the curb, to kind of anticipate where the terrorists are going to be moving and how they will be concealing their funds and moving their funds and so forth,” Gurule said.
“It’s very difficult and very challenging, but it has to begin with making it a priority,” he said. “And we’re seeing that by the way.”
Freelance writer Robin Farmer contributed to the writing and research of this article.