‘Deficiencies’ at Major Bank: Behind the Fed’s $186 Million Fine

The US Federal Reserve Board (‘the Fed’) announced on the 19th of July that it issued a fine to a major bank to the tune of $186 million for its slow progress in delivering on anti-money laundering (AML) deficiencies that the Fed had previously criticized the bank for in the mid-2010s. 

In this latest order, the Fed asserts that the bank’s problematic policies on money laundering have persisted beyond the problems highlighted in the previous decade.
 

Why Was the Bank Fined by the Federal Reserve? 

The penalty served to the bank comprised two parts. The first, which accounts for $140m of the total $186m levied, is for alleged sanctions violations and a failure to address deficiencies outlined in previously issued AML orders – particularly around transaction monitoring and Banking Secrecy Act (BSA) compliance. 

The second encompasses the other $46 million of the fine, which is related to the U.S. branch of the bank’s historical correspondent banking relationship another branch in a high-risk jurisdiction.

According to a consent order the Fed published in the summer of 2023, this latest fine is a result of “unsafe and unsound practices arising from governance and BSA/AML control failures”. 

What Went Wrong: Addressing AML ‘Deficiencies’

Following the issues previously identified by the Fed in 2015 and 2017 consent orders, the bank stated that it was committed to addressing shortcomings relating to its controls, stating its belief it was “well positioned to meet our regulators’ expectations.” 

As recently as September of 2022, the bank was warned by BaFin that it would be facing fines unless measures were taken to improve money laundering and terrorist financing prevention efforts.  

This, however, does not appear to have satisfied regulators’ concerns about the bank’s AML framework or compliance with U.S. sanctions. 

In a statement the bank, maintained that it remains “committed to maintaining robust risk management programs with a special emphasis on Anti-Financial-Crime and Compliance controls” and emphasized the historical nature of its offences.  

In response to this latest fine and the Fed’s displeasure, the bank has outlined its strategy for improvement which includes: 

• Extensive enhancements to client due diligence and transaction monitoring 

• Significant investment in controls since 2019 to enhance its effectiveness  

• Increasing the size of its global Anti-Financial Crime team by 25%, bringing it up to more than 2,000 employees 

Even with this continued investment into AML by the bank, the concern remains that its U.S. operations still lack the internal controls to mitigate its heightened compliance risk levels. 

Investment in AML controls is a good response to enforcement action from the Fed, but finding the right approach to satisfy regulators is no easy task. Increasing costs with linearly scaling resources may not be as impactful as automating the AML process across the entire ecosystem of the bank. 

With the commitments made by President Biden’s administration to crack down on repeat corporate offenders, white collar crime, and illicit finance in the U.S. – the bank needs to make rapid, demonstrable progress in its AML approach. 

How Can Banks Get It Right with Transaction Monitoring and Due Diligence? 

The Fed’s fine proves how challenging it is to consistently carry out due diligence and monitor high-risk clients across jurisdictions and business lines without a drastic review of siloed technologies and a realignment with policies. 

In this current regulatory landscape, banks must take a proactive approach to strengthen their compliance controls. Leveraging technology to streamline processes and gaining a real-time view of risk to enable more effective client due diligence in the detection and prevention of financial crime on a continuous basis. 

More attention must be paid to corporate governance, anti-money laundering controls, and inspection practices – or firms risk facing reputational damage and increasing fines. 

The Fed’s expectations are clear: the bank must improve its controls across U.S. operations. 

Explore how Fenergo helps banks manage compliance and reduce transaction monitoring risk