Hypothetical:
NEGT Bank is a large, depository institution in the United States which facilitates transactions and holds correspondent accounts for foreign persons and financial institutions. NEGT Bank has a simple, off-the-rack anti-money laundering (AML) policy. NEGT does not conduct due diligence on its foreign agents, and its employees are not adequately trained to recognize high-risk or suspicious transactions.
As a result, NEGT Bank facilitated transactions for IKSO, a shell company for an Iranian entity on the Specially Designated Nationals list, which was falsifying transactions in order to make them appear as if they were not for the benefit of an SDN, and Rory’s Island Shipping Co., a company profiting by moving drugs across international borders through foreign agents. When discovered, NEGT Bank filed Suspicious Activity Reports (SARs) 2.5 months after the transactions were detected.
Key Considerations:
AML Policies and Procedures
As a depository institution, NEGT Bank falls under the Bank Secrecy Act (BSA) definition of “financial institution” and is required to comply with AML program regulations administered by the Financial Crimes Enforcement Network (FinCEN). The BSA and its implementing regulations require financial institutions to develop, implement, and maintain a written AML program appropriately tailored to its operations and the related risks, and at a minimum must:
- provide for a system of internal controls reasonably designed to ensure ongoing compliance;
- designate an individual or individuals responsible for assuring day to day compliance with the program and BSA requirements;
- provide training for appropriate personnel, including training in the detection of suspicious transactions; and
- provide for independent review to monitor and maintain an adequate program.
Because NEGT Bank conducts transactions on behalf of foreign agents using its correspondent account, NEGT Bank must implement and maintain specific risk-based procedures and controls reasonably designed to identify and minimize the likelihood of money laundering in these transactions. In this particular case, screening and due diligence on the ownership of IKSO and Rory’s Island Shipping Co.
Additionally, FinCEN has stated that financial institutions conducting these types of transactions must take reasonable steps to guard against the flow of illicit funds, or the flow of funds from legitimate sources to persons seeking to use those funds for illicit purposes. NEGT Bank may be subject to penalties for failing to conduct reasonable, risk-based due diligence on foreign agent locations and counterparties.
Suspicious Activity Reporting
Under FinCEN regulations, NEGT Bank is required to file a SAR no later than 60 calendar days from the initial detection of a transaction that NEGT Bank knew, suspected, or had reason to suspect:
- involved funds derived from illegal activity;
- was intended or conducted in order to hide or disguise funds or assets derived from illegal activity, or to disguise the ownership, nature, source, location, or control of funds or assets derived from illegal activity;
- was designed, whether through structuring or other means, to evade any requirement in the BSA or its implementing regulations;
- served no business or apparent lawful purpose, and NEGT Bank knew of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or
- involved use of the NEGT Bank to facilitate criminal activity.
NEGT Bank ultimately discovered the transactions involving IKSO and Rory’s Island Shipping Co. use of funds derived from illegal activities and the efforts to disguise ownership and control of the funds. However, because it delayed the filling of an SAR by over 60 days from the discovery of the transactions, NEGT Bank may be subject to penalties by FinCEN.