Category Archives: Banking

New York DFS Pursues $630 Million Fine Against Bank for Alleged Anti-Money Laundering and Sanctions Compliance Failures

By Brad S. Karp, H. Christopher Boehning, Jessica S. Carey, Michael E. Gertzman, Roberto J. Gonzalez, Richard S. Elliott, Rachel Fiorill and Karen R. King

On August 28, 2017, the New York State Department of Financial Services (“DFS”) announced a “Notice of Hearing and Statement of Charges” that seeks to impose a nearly $630 million civil penalty against Habib Bank Limited and its New York Branch (“the Bank”) based on allegations of persistent Bank Secrecy Act/anti-money laundering (“AML”) and sanctions compliance failures.[1] A hearing is scheduled for September 27, 2017 before Cassandra Lentchner, DFS’s Deputy Superintendent for Compliance. The Bank – the largest bank in Pakistan – has contested DFS’s allegations and indicated that it plans to challenge the penalty and surrender its DFS banking license, thus eliminating its only U.S. branch.  DFS also issued two related orders, which (1) expanded the scope of a review of prior transactions for AML and sanctions issues, that was already underway under the terms of an earlier consent order; and (2) outlined the conditions under which the Bank could surrender its DFS banking license, including the retention of a DFS-selected consultant to ensure the orderly wind down of its New York Branch.

The severity of the language and proposed penalty in DFS’s statement of charges reflects the large number and extent of alleged compliance failures at the Bank, which DFS claims persisted for more than a decade, despite agreements with DFS and the Federal Reserve Board of Governors (“Federal Reserve”). According to DFS, these failures are “serious, persistent and apparently affect the entire [Bank] enterprise” and indicate a “dangerous absence of attention by [the Bank’s] senior management for the state of compliance at the New York Branch.”

This enforcement action illustrates that a DFS-regulated institution’s failure to show steady progress in remedying identified concerns can have significant and franchise-threatening consequences. We describe the enforcement action in more detail below, including the numerous compliance failures alleged by DFS. Continue reading

A “Wells Fargo” Briefing for the Audit Committee

by Michael W. Peregrine

The Board’s audit committee is well advised to receive an update on the risk and compliance lessons from the recent Wells Fargo sales practices controversy. The general counsel, teaming with the chief risk & compliance officer, would be well suited to deliver this update. As well-chronicled in the recently released special investigative report (“Report”), the “20/20” lessons from the controversy transcend the financial services industry, to offer value to corporate boards across industry sectors. These lessons demonstrate how matters of organizational structure, corporate culture, and risk identification and reporting can coalesce in undisciplined circumstances to create significant corporate exposure. In several respects, these lessons prompt comparisons to the conclusions reached by investigative counsel in the GM ignition switch controversy of 2014. This comparison may help underscore the basic risk oversight message to the audit committee; i.e., that these issues have arisen in several of the largest U.S. companies and may arise again without proper supervision. Continue reading

An Alternative to Clawbacks: William Dudley’s 2014 Proposal for Deferred Compensation at Financial Institutions

by Carmi Schickler

In the wake of its fraudulent account scandal, Wells Fargo announced in April 2017 that it would claw back additional compensation from former CEO John Stumpf and former head of community banking Carrie Tolstedt. All told, the total amount of clawed back compensation at Wells Fargo has now reached $180 million.

However, such clawbacks remain the exception rather than the norm. Unlike most financial firms, Wells Fargo has a particularly powerful clawback policy on its books. Furthermore, the Wells Fargo clawbacks only occurred almost three years after the Board of Directors became aware of the malfeasance, and only in response to intense shareholder pressure against the Board of Directors.

As John Coffee and others have pointed out, extreme incentive compensation has led to many of the financial industry scandals that we have seen in recent years. Even the possibility of clawbacks does not seem to be changing the corporate culture in large financial institutions. As a result, it may be time to reconsider a stronger alternative to clawbacks: more widespread use of deferred compensation. Continue reading

Personal Liability for Compliance Officer in MoneyGram Settlement: Powerful Motivator or Chilling Deterrent?

by Erin Schrantz, Anouck Giovanola, and Justin Spiegel

On May 4, 2017, the U.S. Attorney’s Office for the Southern District of New York (“SDNY”) and the Financial Crimes Enforcement Network (“FinCEN”) announced the settlement of civil claims brought under the Bank Secrecy Act (“BSA”) against the former Chief Compliance Officer of MoneyGram International, Inc. (“MoneyGram”), Thomas Haider, stemming from MoneyGram’s failure to implement and maintain an effective anti-money laundering (“AML”) program or to timely file suspicious activity reports (“SARs”).[1]  The settlement represented the resolution of the first-ever suit filed by the federal government against an individual compliance officer in the finance industry,[2] and is likely to add fuel to increasing anxiety regarding the Department of Justice’s (“DOJ”) willingness to hold corporate executives liable for compliance failings. Continue reading

Corporate Governance for Banking Institutions Is Different

by Paul L. Lee

Observers have often asked whether corporate governance for banking institutions, i.e., banks and bank holding companies, is (or should be) different from governance for other corporations.  The resounding answer from the bank regulatory authorities is that the governance of banking institutions is (and should be) different from the governance of other corporations because of the special credit and liquidity functions performed by banking institutions.[1]  These special intermediary functions have historically led to a highly regulated environment for banking institutions, which has directly affected governance processes.  The bank regulatory authorities maintain that the directors of banking institutions are responsible to a broader set of stakeholders than just shareholders.  The additional stakeholders include depositors (and indirectly the federal deposit insurance fund), creditors and the regulators themselves. Continue reading

Wells Fargo’s No-Contest Settlement: Leaving the Stage Coach with Broken Windows

by Daniel Alter

The Enforcement Action:

On September 8, 2016, the U.S. Consumer Financial Protection Bureau (“CFPB”), the U.S. Comptroller of the Currency (“OCC”), and the Los Angeles City Attorney (“LACA”) announced that they had settled regulatory enforcement and consumer protection actions against Wells Fargo Bank, NA (“Wells Fargo” or “Bank”),[1] the nation’s second largest bank.[2]  As disclosed by the CFPB’s investigation, the nature and scope of the Bank’s misconduct was truly astounding.

The CFBP found that, over the course of more than five years, thousands of Wells Fargo employees had:  (1) opened more than 1.5 million deposit accounts without client consent; (2) transferred funds between client accounts without client consent; (3) applied for almost 600,000 client credit cards without client consent; (4) issued client debit cards without client consent; and (5) enrolled clients in on-line banking services without client consent.[3]  As a result of these unauthorized and abusive transactions, the Bank charged customers approximately $2 million in fraudulent deposit-account fees and more than $400,000 in fraudulent credit-card related fees.[4]

This widespread client deception was not driven, however, by the relatively de minimis revenue that it generated for Wells Fargo.  Rather, the CFPB concluded that the Bank’s “employees engaged in [the misconduct] to satisfy sales goals and earn financial rewards under [the Bank’s] incentive compensation program.”[5] In all, Wells Fargo “terminated roughly 5300 employees” over five years “for engaging” in these schemes[6] – which is an astonishing number of dishonest personnel and nothing less than an internal compliance disaster. Continue reading

The Risks of De-Risking

by Julie Copeland and Mirella deRose

Over the past several years, financial institutions in the United States and abroad have increasingly engaged in a “slimming down” of their client base.  They have done so by deciding not to accept certain types of clients ranging from individuals engaged in specific industries –such as trade merchants, precious metal dealers or “politically exposed persons” (a term of art to be discussed below) – to whole categories of businesses or entities such as money service businesses, charities and foreign banks.  This trend, which is now commonly referred to as “de-risking,” has significant collateral consequences for those using the global financial network.This blog will discuss de-risking, its causes and consequences, and some of the solutions that have been proposed to address the unintended results of this practice.

Since the passage of the USA PATRIOT Act in 2001 in response to the September 11th terrorist attacks – some would argue even before that – regulators in the U.S. and elsewhere have singled out certain categories of individuals and entities that either are strictly forbidden to hold accounts with financial institutions or, more routinely, require enhanced reviews by the institutions in which the accounts are maintained.  The first category of accounts – those that are forbidden – includes entities such as “shell banks,” which are foreign banks without a physical presence in any country.  Pursuant to law, U.S. financial institutions may not maintain accounts for such entities. Continue reading

The Law of Large Numbers

by Andrew Hruska

All things come in cycles, and we are now far enough into the current cycle of corporate prosecutions and related regulatory enforcement actions to be able to reflect meaningfully on the amplification of major resolutions in the multi-billion dollar range.  Perhaps we are even able to discern some principles.  As lawyers handling government investigations, we are accustomed to having to derive principles in an important area of the law with undeveloped case law.  On some of the most important issues that lawyers both for defendant companies and for the government confront, there is very little neutral guidance as to appropriate outcomes.  Historically, the surest and most relevant guide has been to look to the major negotiated resolutions to determine the contours of the law on issues from sales of mortgages, to cartel conduct, to foreign corruption, to the extent of economic sanctions.  But those guides are becoming less and less helpful. Continue reading

Banking’s Cultural Revolution

by Geoffrey Parsons Miller

Among the reforms emanating from the global financial crisis, few are as enticing as the idea of improving the culture of banking.

Nearly everyone agrees that there was something wrong with attitudes and behaviors in the financial services industry in the years before the crisis. Nearly everyone also endorses the proposition that inappropriate risk-taking and disdain for regulation contributed to the excesses characteristic of those years. And there’s broad consensus that a respectful attitude towards risk management and compliance can help protect against another crisis. There’s a lot of merit in these ideas.

But whenever one observes this sort of piling on, it’s useful to ask what we’re missing. Continue reading

Compliance and Mortgage Fraud

by Frank Partnoy

Compliance and enforcement professionals will want to check out David Dayen’s new book, Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud. The book is a gripping, perhaps film-worthy account of the proliferation of foreclosure fraud in the aftermath of the financial crisis. Although Dayen is highly critical of the behavior of various banks, his account contains important data and details for anyone who wants to understand the problems associated with foreclosures in the aftermath of the financial crisis – even if one does not share his political views. Chain of Title is the most complete account I have read of the various defenses that have arisen in foreclosures actions brought by banks that could not establish that they held the underlying mortgage loans. Continue reading