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THE WASHINGTON PERSPECTIVE: ENFORCEMENT IS ON THE RISE

Michael VolkovTitle(202) 263-3288MVolkov@mayerbrown.com

November 3, 2010

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AAG Lanny Breuer of the US Justice Department’s Criminal Division

• October 19, 2010 speech at Money Laundering Enforcement Conference

• Aggressive new efforts to prosecute banks and other financial institutions for money laundering and other financial crimes.

• Trying to Recreate FCPA Enforcement Model Based on Large Fines, Individual Prosecutions, and Self Reporting

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Warnings to Financial Institutions

• AAG Breuer warned banks by highlighting several recent prosecutions where financial institutions– ignored anti-money laundering compliance

– failed to devote sufficient resources to their Bank Secrecy Act and anti-money laundering programs

• Since 2002, the Justice Department has prosecuted at least 15 different banks – among them Lloyds, Credit Suisse, Wachovia, and Barclays.

• In the last three years banks have forfeited nearly $1.5 billion dollars. –

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New Criminal Enforcement Initiatives:New Money Laundering and Bank Integrity Unit• Focus On

– financial institutions, including their officers, managers, and employees;

– professional money launderers who sell their services to criminal organizations; and

– those engaged in using the latest and most sophisticated money laundering techniques

• Staff will be “prosecutors and lawyers from the banking industry.”

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The Kleptocracy Asset Recovery Initiative

• Target and Seize foreign corruption proceeds.

• The Asset Forfeiture and Money Laundering Section will lead it with the Office of International Affairs and the Fraud Section.

• To recover assets on behalf of countries victimized by high-level corruption, building on the FCPA.

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Enhanced Enforcement Against Bank Individuals

• Executives and Officers will be targeted if they “cheat, deceive or defraud”.– June 2010: indicted Lee Bentley Farkas, the former chairman

of Taylor, Bean & Whitaker Mortgage Corporation, one of the largest private mortgage companies in the United States.

– July 2010: Two Vice Presidents of Integrity Bank, a $1 billion financial institution, pleaded guilty to various crimes, including insider trading of Integrity stock, conspiracy to provide bogus loans in exchange for cash bribes.

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Encouraging Cooperation

• AAG Breuer urged banks and individuals to come forward and fully cooperate in order to earn “meaningful credit”.

• Many options are available to the Justice Department short of prosecution when a banking entity has been truly cooperative: no charges may be brought at all, deferred prosecution agreement or non-prosecution agreement, sentencing credit, or a below-Guidelines fine.

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Case Example: Barclays Bank

• In May 2006, Barclays voluntarily disclosed to the Office of Foreign Assets Control four transactions that violated U.S. sanctions. – Barclays conducted a limited internal investigation and terminated

all banking relationship with banks subject to U.S. economic sanctions, and banks headquartered in sanctioned countries.

– In 2007, after a comprehensive internal investigation, Barclays shared the results of its internal investigation with federal and state prosecutors and regulators.

– The case was resolved through a deferred prosecution agreement, a forfeiture of $298 million, and compliance by the bank for a period of two years.

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Small and Large Banks

• Pamrapo Savings Bank, a small community bank in New Jersey that pleaded guilty for failing to file CTRs and SARs related to approximately $35 million in illegal and suspicious transactions, including more than $5 million in structured currency transactions.

• Wachovia, which admitted in March in a deferred prosecution after admitting to allowing at least $110 million of drug proceeds to flow unimpeded through its accounts.

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Sanctions

• Credit Suisse admitted to systematically evading – over the course of a decade – U.S. sanctions against Iran, Sudan, Burma, Libya, and Cuba.

• Credit Suisse set up a system to deceive the United States by disguising its U.S. dollar clearing on behalf of countries that the United States had banned from our financial system.

• Stripped out the word “Iran” from payment messages, substituted code words for Iranian customer names, and hand-check payment messages from Iran to ensure that they had been formatted to avoid U.S. sanctions filters.

• Credit Suisse even trained the sanctioned entities how to avoid automated filters at U.S. banks.

• As part of a deferred prosecution agreement with the Justice Department relating to this conduct, Credit Suisse forfeited $536 million dollars to the government.

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What You Can Count On for the Near Future?

• Criminal Indictments of Banks -- Large and Small -- Will Increase

• Criminal Indictments of Executives and Officers Will Increase

• More Assets Will Be Seized

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What Can You Do?

• Re-Examine and Improve AML, Bank Secrecy and OFAC Compliance Programs.

• Increase Compliance Resources.

• AAG Breuer warned financial institutions. – to set up “an effective compliance program to detect and report

suspicious activity means accruing significant expenses for technology, personnel, and training”.

– financial institutions cannot cut corners on compliance:

• having a compliance program that works is worth it.

• failure to adopt and maintain a real compliance structure will have serious consequences.

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HSBC: Recent Enforcement Actions Provide a Basic Checklist

• Senate Permanent Subcommittee on Investigations Referred HSBC for federal investigation for money laundering and Bank Secrecy violations.

• Criminal investigation is ongoing and will result in significant penalties.– resulted in civil and criminal enforcement actions.

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HSBC: Federal Reserve and Office of Comptroller of Currency

• OCC and the Federal Reserve required HSBC BankUSA to take significant corrective actions to improve itsAnti-Money Laundering compliance program.

• 30 days to submit a plan to strengthen oversight of business risk management.

• HSBC must (1) "employ a permanent full-time" regional compliance officer for risk management; and (2) retain an outside consultant approved by the Fed to review it compliance program.

• HSBC is still under criminal investigation by the Justice Department.

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HSBC: Specific Deficiencies in Compliance Program

• Did not have a designated compliance officer, and combined the legal and compliance functions into one office.

• Poor suspicious activity reporting.

• Weak monitoring of bulk cash purchases and international funds transfers.

• Slow and inaccurate customer due diligence concerning its foreign affiliates.

• Slow risk assessment with respect to politically-exposed persons and their associates.

• Controls were insufficient to screen customers and parties to various transactions.

• Processed alerts from its own internal monitoring system slowly because of lack of manpower.

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Wachovia Bank: $160 million

• Wachovia Bank entered into Deferred Prosecution Agreement and paid $160 million for failure of its controls to prevent drug traffickers from laundering $420 billion in drug money.

• Wachovia accounts took in at least $373 billion in wire transfers that were made from Mexican exchange accounts.

• $4 billion in bulk cash was shipped from Mexican exchange accounts to Wachovia

• Wachovia also operated a "remote deposit capture" service that took in another $47 billion.

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Wachovia Compliance Program Deficiencies

• Financial institutions must maintain anti-money laundering compliance programs and policies that are adequate to identify, analyze and report suspicious activity.

• Wachovia failed– to conduct appropriate customer due diligence by delegating most

of this responsibility to business units instead of compliance personnel.

– to monitor high return rates for remotely-created checks and report suspicious wire transfer activity from the processors’ accounts.

• Wachovia spent $42 million to improve its compliance program.

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What Needs to Be Done

• Protect and Prevent Potential Costly Investigations and Prosecutions

• Aggressive Techniques Will be Used– Undercover officers

– Search Warrants

– Wiretaps

– Consensual Recordings – Telephone and Meetings

• Compliance Programs Must be Improved

• Relationships Must be Maintained and Improved with Regulators and Law Enforcement