QEarlier this month, Manhattan District Attorney Robert Morgenthau said his office was investigating some Venezuelan and Panamanian banks for allegedly providing Iranians access to the US financial system in violation of international sanctions against Iran over its nuclear program. A ‘mainstream’ international bank is expected to reach a settlement within 30 days over the accusations, according to media reports. Do Morgenthau’s actions reflect a case of anti-money laundering safeguards working well, as supporters of his probe suggest? Should international banks worry about global politics increasingly affecting their operations? What improvements could be made to the US role in regional antimony laundering efforts?
AMichael Diaz, Jr., a member of the Financial Services Advisor board and managing partner at Diaz, Reus & Targ, LLP in Miami: "Morgenthau’s actions, although commendable,are another example of shuttingthe barn door after the horse has alreadyleft the stable. Once again, this is a sadexample of how information, untimelyused, can have unintended consequenceson financial institutions. The Bush administrationreceived reports of the alleged‘axis’ between Cuba, Venezuela, Nicaraguaand its potential nexus to radical Islam andIran at least as early as 2002. Money laundererseverywhere want and need access tothe US financial system. That is no secretto the US regulators and law enforcementagencies. The use of OFAC-busting techniquessuch as ‘nesting’ (whereby bannedcountries and their financial institutionsindirectly obtain access to the US financialsystem) to launder funds is also not novel.From the North Korea-Delta Bank case, tothe current US government initiatives inthe Venezuela-focused Rosemont andAndorra DEA and Treasury investigations,money laundering is here to stay andbanks have no choice but to remain vigilant. As is often the case, however, banksbecome the unintended whipping boysof government inertia and uniformedbank regulators. If you really want tocombat money laundering, especiallyfrom OFAC-banned nations, our intelligenceand law enforcement agenciesneed to cull, vet and share informationin a timely way with bank regulators andthe financial institutions they supervise.A better educated banker or bank regulatormakes the best safeguard and tool incombating money laundering."
AEdward L. Monahan, Jr., a member of the Financial Services Advisor board and a director of Price water house Coopers in Boston and Miami: "During the past 20 years, US financialinstitutions have developed sophisticatedsystems to prevent money launderingand use of the US financial system tofinance acts of international terrorism.The US Treasury Department’s Office ofForeign Assets Control imposes controlsand administers economic sanctionsagainst foreign countries and regimeswhich threaten the security of the US.Domestic and foreign financial institutionsin the US must fully implementOFAC sanctions. The interactionbetween government policy and financialinstitutions is evident in the activeuse of anti-money laundering and antiterroristtechnology to curtail the accessof Iranian banks to money center banksin the US. In January, the ManhattanDA’s office reached a deferred prosecution agreement with the Lloyds TSB forviolations of OFAC sanctions related totransactions with Iran. The current investigation of Venezuelan andPanamanian banks operating in the UShighlights the importance of lawenforcement as a deterrent to regulatoryviolations. Both international as well asdomestic banks in the US are required tomaintain strong internal controls to preventthe execution of sanctioned activitiesand fraudulent conduct within theUS financial system. As an instrument ofgovernment policy, such sanctions areonly applied to extreme cases, most oftenfor circumstances in which internationalfunds transfers may be linked to nationalsecurity threats or drug trafficking. AsMr. Morgenthau has said in testimony tothe US Senate, regulations can have limitedimpact in the absence of strict, swiftand comprehensive enforcement."
ADavid Landsman, executive director of the National Money Transmitters Association in Great Neck, N.Y.: "There arebasically two things government can doto fight money laundering: regulate andprosecute. Threatening to prosecute abank is not a safeguard, but rather could be seen as a failure of safeguards.Prosecution is a backstop, retrospectivein nature, as opposed to regulationwhich is intended to prevent wrongdoing(or at least catch it early) by lookingahead and setting up rules to follow. Themain question we first must ask ourselvesis whether there is somethingmore we could be doing in regulatingfinancial institutions, so Mr.Morgenthau will not have to bring thesecases in the first place. If a bank or itsemployees have deliberately evaded lawsthat are meant to stop money launderingand criminal activity, as Mr.Morgenthau’s most recent case alleges,one has less sympathy for the bank, andwe can move ahead quickly to gaugewhat level of corporate responsibilityexists. But Mr. Morgenthau’s investigationsover the years have mostly involvedprogram violations—which are moreproperly the realm of regulators, so theseare the ones with the more troublingimplications. These investigations havealso consistently involved a foreign element,and this is where the action will bein the future. What are a bank’s ‘know your-correspondent’ responsibilitieswhen dealing with financial institutionsfrom another country? FinCEN is nowproposing a rule that would declare allforeign-located money transmitters subjectto US requirements by virtue of thefact that they have a US-based bankaccount from which they make paymentsto third parties in the US. Thesedefinitions, trends and pressures willmake the ‘know-your-customer’ and‘know-your-correspondent’ tasks of USbanks more and more difficult as timegoes by, when dealing with foreign financialinstitutions."
ATom Haider, a member of the Financial Services Advisor board and a St. Paul, Minn.- based consultant on government relations and regulatory compliance issues: "It is interesting that theManhattan district attorney is leadingthis investigation rather than the USattorney. One would normally expectfederal authorities to lead an investigationinvolving international sanctions. Itcertainly adds confusion to any financialinstitution’s compliance efforts whenthey must be concerned with localauthorities enforcing federal laws. Thishas happened on several occasions in thepast when state attorneys general havesought to enforce federal anti-moneylaundering laws. Such actions can lead toinconsistent interpretations of federallaws and challenging compliance issuesfor regulated entities. It is difficult to saywhether Morgenthau’s actions indicateanti-money laundering safeguards areworking well. In the past couple of years,we have not seen as many large moneylaundering fines as those imposedagainst US financial institutions in thepreceding five years. No doubt that’spartly due to compliance improvementsmade by US institutions. But it may alsoreflect reluctance by federal officials toadd to the problems that financial institutionshave been dealing with. It wouldnot be surprising, however, to see federalofficials once again go after financialinstitutions for weak anti-money launderingcompliance, including sanctionsviolations. This stepped-up enforcementcould be driven by the actions of a localprosecutor like Morgenthau, as well asthe perception conveyed by FederalReserve Chairman Ben Bernanke thatthe financial crisis has ended. If that isthe case, then one could expect US-basedfinancial institutions, as well as foreignbanks with US operations, to comeunder closer scrutiny."