Promontory Financial Group Describes a New “Risk-Based” Approach to Anti-Money Laundering

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In light of the recent Standard Chartered Bank flap, Saturday’s report that Deutsche Bank is under investigation for similar behavior, and today’s report that RBS (as well as two other banks, one of which is Sumitomo Mitsui) is as well, I want to look at an article on Anti-Money Laundering enforcement a Promontory Financial Group exec, Michael Dawson, published in American Banker just one week before NY’s Superintendent of Financial Services, Benjamin Lawsky, filed an order against SCB alone.

Around the same time Dawson was writing this, remember, his company was involved in a review of SCB’s laundering of Iranian funds that would show a tiny fraction of the total exposure that SCB would ultimately admit to. That is, Dawson’s comments probably provide a glimpse into what PFG was seeing not just in Citibank and Commerzbank enforcement actions, which he discusses, but also in SCB. And it might help to explain why other regulators were so intent on crafting an SCB settlement based on just $14 million in violations rather than $250 billion.

Dawson reports seeing a change in recent AML/BSA enforcement actions, away from a “rules-based approach” toward a “risk-based approach.” He suggests that regulators are demanding not a broad-based examination of the scope of AML violations, but instead more targeted information about who posed the biggest risk laundering money and what they were doing.

Instead of requiring expensive reviews of extended periods of time for a broad range of potential suspicious activity, the latest enforcement actions emphasize a risk-based approach to AML compliance, with several of the actions requiring a risk assessment or enhancements to an existing assessment.

[snip]

The level of specificity required is noteworthy and includes, among other things, detail on the volumes and types of transactions and services by country or geographic location as well as detail on the numbers of customers that typically pose higher BSA/AML risk. The actions also require a more holistic approach, requiring the results of the bank’s Customer Identification Program and Customer Due Diligence program to be integrated in the risk assessment. [my emphasis]

This sounds like the regulators are interested not in discovering how banks are complicit in money laundering, but rather using the banks to get details on key people who money launder and the tactics just those key people (terrorists, cartel kingpins, mean Iranians) use. (Note, I think something similar, but even more significant, happened last year when JPMC got busted for trading with Iran, but no one seems to remember that happened.)

After making these broad statements about the general direction of AML enforcement, Dawson distinguishes between what the Office of the Comptroller of the Currency is requiring and what the Fed is. OCC has not only shortened the period which it requires banks to examine problematic behavior, but it has also permitted banks to conduct their own reviews (which seems to have Dawson worried about losing the business of providing such services for banks).

Where the OCC required lookbacks, it asked for risk-based, targeted reviews, rather than comprehensive look-backs that were sometimes found in earlier enforcement actions. The recent actions either specify a shorter look-back period than has been specified in the past or, in the case of the Citibank action, no explicitly specified period, subject to the ability of the regulator to expand the look-back depending on the results of the more limited period.

Also, the OCC actions allowed the institutions to conduct the review themselves and either do not explicitly mention an independent consultant or limit the role of the independent consultant to “supervising and certifying” the look-back.

The OCC, at least, doesn’t sound like it’s doing “smarter” enforcement, but rather doing lax enforcement. Remember, though, that OCC got a newly-confirmed Comptroller during this period, who talked aggressively at the recent Permanent Subcommittee on Investigations hearing on HSBC’s egregious AML problems–though that talk partly echoed what Dawson has to say about “flexibility” and a “holistic” approach.

Meanwhile, according to Dawson, the Fed doesn’t seem to be offering quite as much flexibility. Dawson describes the Fed employing this new risk-based approach, but it is still requiring longer reviews (though not all that long, at 16 months) and outside consultants to complete the reviews.

The Fed, in its action against Commerzbank requiring a lookback, also showed some flexibility. Read more →

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DOJ Corporate Settlement Dealer Takes Over at FinCEN

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In February, here’s what Jennifer Shasky Calvery said in testimony before a House Subcommittee.

These staggering amounts of money in the hands of some of the worst criminal elements create a terrifyingly vicious cycle – money enables [the crooks] to corrupt the economic and political systems in which they operate, thereby allowing them to consolidate and expand their power and influence, which gives rise to more opportunity to commit crime and generate revenue.

Mind you, I’m cherry picking a quote from testimony about Transnational Crime Organizations. But it shows the blindness DOJ (and the Administration generally) have had as they try to repurpose their counter-terrorism tools to combat transnational crime: to some extent, what’s true of drug cartels is also true of the banks that have escaped prosecution even while doing as much damage as the drug cartels.

And yet we never get around to prosecuting our own transnational criminal organizations, the banks.

It’s worth keeping in mind, now that Shasky Calvery takes over at Treasury’s FinCEN, the part of the Agency that makes sure corporations are complying with reporting requirements of suspected financial crimes.

Read more →

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Good Thing Obama Kept that Iraq AUMF Lying Around

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Remember how both Congress and the Administration refused to repeal the Iraq AUMF?

Maybe they wanted to have it to hang over Nuri al-Maliki’s head for the time when Iraqis were discovered helping Iran evade sanctions? The NYT reports that Elaf Islamic Bank–which Obama called out last month–is just one of a number of Iraqi institutions helping Iran bust our sanctions.

The little-known bank singled out by the United States, the Elaf Islamic Bank, is only part of a network of financial institutions and oil-smuggling operations that, according to current and former American and Iraqi government officials and experts on the Iraqi banking sector, has provided Iran with a crucial flow of dollars at a time when sanctions are squeezing its economy.

[snip]

In announcing that he was “cutting off” Elaf Islamic Bank, Mr. Obama said it had “facilitated transactions worth millions of dollars on behalf of Iranian banks that are subject to sanctions for their links to Iran’s illicit proliferation activities.”

[snip]

Iraqi banking experts said last week that the bank was still allowed to participate in the Iraq Central Bank’s daily auction at which commercial banks can sell Iraqi dinars and buy United States dollars. These auctions are a crucial pathway for Iranian access to the international financial system.

It’s an interesting predicament for the Administration. At the same time as they’re systematically taking out Iran’s allies and/or implicating them as expansively as they dare, they’re in a bit of a pickle with Iran’s closest geographic ally, the one with the biggest oil reserves.

Which may explain why James Risen (with Duraid Adnan) is reporting this story. Sure, he has written some of the key financial flow stories in the last decade. But he’s not exactly in good grace with this–or any recent–Administration. And the whole story reads like one that the Administration–which hasn’t found a Syrian or Lebanese insinuation they wouldn’t magnifiy–doesn’t want reported.

The Obama administration is not eager for a public showdown with the government of Prime Minister Nuri Kamal al-Maliki over Iran just eight months after the last American troops withdrew from Baghdad.

That sheepish tone continues through the rest of the article.

Consider. The one country were Obama can’t engage in the same kind of hardass approaches as he has elsewhere (at least not before the election) is helping Iran to flout sanctions. Obama can’t admit the truth–that Iran won the Iraq War. If he does, the neocons will accuse him of withdrawing prematurely. If he takes a hard stance, I might no longer be the one person talking about the extant AUMF.

And yet Iraq seems to be a key hole in the sanctions.

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You Don’t Suppose All These Dictators Have Been Looting with SCB’s and HSBC’s Help?

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It happens every time. Around about the time it becomes clear a corrupt Middle Eastern dictator will fall, but before he has actually fallen, the press begins to report on the hunt for the money the dictator looted from his country. There was the “discovery” of Hosni Mubarak’s up-to $70 billion in February 2011. And reports, in March 2011, of the up to $200 billion that Moammar Qaddafi looted.

And today,

Even as the war in Syria rages and Bashar al-Assad clings to power, the race to find the regime’s vast—and mostly hidden—fortune is already underway. Experts say al-Assad and his associates have amassed as much as $25 billion through investments in banks, state industries and other concessions, and has stashed the money in offshore tax havens and in investments across the Middle East.

I don’t mean to slight Eli Lake (or any of the other journalists linked) for reporting this. It’s important the world remember that these dictators rule by and for the looting of their countries. Indeed, Lake’s report is particularly useful in the way he maps out the industry that charges big fees to help bring looted money back to its rightful owners.

Finding the money is of keen interest to the modern-day treasure hunters who specialize in recovering the wealth of fallen dictators. Sometimes called financial intelligence or forensic accounting, the industry comprises lawyers, accountants, ex-spies, former law enforcement investigators and even some retired journalists, all of whom look at the unrest in Syria as a business opportunity. Some firms charge several thousands of dollars per hour for the sleuth work of a team of six to eight investigators. Others get paid a “success fee,” a small percentage of the overall haul.

It’s just that few people ever want to talk about the looting that goes on–often with the assistance and for the profit of American and/or European banks–while it’s occurring.

Which is one of the reasons why the flap over Standard Chartered is so interesting. It revealed that most of the regulators overseeing our sanctions and money-laundering enforcement really wanted SCB to reach a settlement on transactions that SCB now admits represent just a fraction of a percent of the affected transactions. And that’s just the Iranian transactions; it doesn’t include the Libyan transactions that Benjamin Lawsky alluded to in a footnote of the report.

And while there’s no evidence in the DFS report that SCB was helping Assad loot his country, the Carl Levin-led investigation into HSBC describes several examples of HSBC evading sanctions so as to keep its Syrian business even after sanctions were imposed. In particular, there’s the way HSBC apparently decided it wouldn’t tell the Office of Foreign Asset Controls about the trust relationship its Cayman Island affiliate had with Rami Makhlouf, whom Lake singles out as a key Syrian target of the loot-hunters.

Another account involving an individual on the OFAC list was housed at HSBC Cayman Islands. On February 21, 2008, a Syrian businessman by the name of Rami Makhlouf was placed on the SDN list by OFAC. One week later, HSBC Cayman Compliance personnel contacted HBUS to report that HSBC Cayman Islands currently held a trust relationship with Mr. Makhlouf and to inquire as to “what actions if any HSBC Group has taken in relation to the above mentioned individual.” An HBUS Compliance officer asked the Cayman Compliance officer for more information about the Makhlouf accounts, and the head of HSBC Cayman Compliance responded: “The Trust is administered by HSBC Geneva. We raised concerns with this client in August 2007 however we were assured by David Ford that the relationship had been reviewed at a Group level and a decision had been taken to continue with the relationship.” Ultimately, HBUS determined that it did not have any connection to Mr. Makhlouf and did not need to report any information to OFAC.

Maybe the loot-hunters should ask HSBC and SCB where Qaddafi and Assad put their money? Maybe that’s what they bill out at such high rates to do?

The thing is, we can only point to these details because SCB and HSBC, because of Lawsky and Levin’s efforts, have undergone more transparency than all the other banks helping dictators strip their country’s wealth.  Regulators apparently want to keep us from knowing how much purportedly respectable banks help these dictators to shore up their own power and loot their countries. Moreover, they only want to penalize these banks for a tiny fraction of the business they do with these dictators even after they’ve been sanctioned.

It’s as if the regulators wanted to permit this kind of looting to happen, only to acted surprised at the sheer scope of the looting after the dictator’s demise.

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Another Week, Another Bankster with Impunity

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This week, the bankster who will avoid all legal accountability is MF Global and its CEO Jon Corzine. So says the NYT.

While I’m disgusted by that news, I’m not shocked. I’ve grown used to the guarantee that top banksters are immune from all laws.

What I’m interested in is how NYT conveys their news.

First, note what crime they claim MF Global might have committed: fraud. Not theft.

After 10 months of stitching together evidence on the firm’s demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people involved in the case.

I guess if you said “theft” then you couldn’t suggest the money just disappeared–poof!–rather than got taken to pay off the company’s own obligations.

Plus it’d be a lot harder to accomplish the article’s other main objective, besides reporting yet another Get Out of Jail Free card. While the story seems to have been seeded by people in Preet Bharara’s neighborhood to set the expectation that he would once again fail to bring charges against a bankster, the NYT seems intent on rehabilitating Corzine’s reputation. Consider that they dedicate paragraphs 6 and 7 portraying the tragic plight of a multi-millionaire with a cloud hanging over him.

While the government’s findings would remove the darkest cloud looming over Mr. Corzine — the threat of criminal charges — the former Goldman Sachs chief is not yet in the clear. Read more →

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By “Cooperative Investigations” Does WSJ Mean “Protection Money”?

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The WSJ has a funny response to the Standard Chartered Bank settlement. Aside from the predictable claims that Benjamin Lawsky, the NY Superintendent of Financial Services, played hardball to advance his political career, it suggests Lawsky upset a system of “cooperative investigations” that NYC’s District Attorney has in place.

These columns have long supported tough enforcement of Iran sanctions, including efforts by the Manhattan District Attorney and U.S. Treasury against foreign banks. The D.A.’s office has sanctioned four banks in recent years, extracting $1.8 billion in settlements and defining new standards of behavior.

Other cooperative investigations have long been underway, and Mr. Lawsky’s main contribution seems to have been to jump the queue so he could get a big publicity score. He told the D.A.’s office he was going public the night before his announcement and he only told the feds on the same day.

This seems to be the central pique of the editorial. Lawsky “jumped the queue,” which sounds an awful like a queue of regulators in line to get payouts from banks so they can look the other way from money laundering. Is that the problem here? Lawsky violated the DA’s turf, and took what the DA believed was his office’s rightful payment, and oh by the way also exposed the underlying Get Out of Jail Free industry that seems to be the service for which the DA and other regulators have gotten these payments in the past?

Are all the attacks on Lawsky about him taking fines that other regulators had planned on receiving? About money going to NY state, rather than NYC?

Mind you, to paint this as a “cooperative investigation,” the WSJ has to ignore several facts.

  • SCB did not, as WSJ claims, rat itself out to regulators in 2010. On the contrary, in early 2009, law enforcement authorities came to it.
  • Much of the underlying fraud (which WSJ seems to believe is not illegal) happened at a time when SCB was operating under a Written Agreement mandating certain behaviors because of past money laundering violations. Indeed, SCB lied to regulators about its Iranian transactions to get the Written Agreement lifted in 2006.
  • SCB has moved all its Office of Foreign Asset Controls compliance to Chennai and–as with its past efforts to evade regulations–the Chennai office does not communicate on these issues with the NY office. Moreover, SCB’s process still seems to allow for the same methods to process transactions of sanctioned individuals.

Of course, had WSJ admitted to these facts, it would have had to acknowledge that the “new standards of behavior” the DA’s office has put in place includes ongoing efforts to evade money laundering laws.

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Standard Chartered Bank Admits Promontory’s Estimates of Its Iran Business Were Wrong

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Standard Chartered just settled with NY’s Superintendent of Financial Services. The settlement–for $340 250 million and a monitor of SFS’ choosing–is less than some reports said the settlement might have been.

But here’s the detail I’m most interested in:

The New York State Department of Financial Services (“DFS”) and Standard Chartered Bank (“Bank”) have reached an agreement to settle the matters raised in the DFS Order dated August 6, 2012. The parties have agreed that the conduct at issue involved transactions of at least $250 billion. [my emphasis]

Just a .14% fine, so not that big. But an admission that the scope of the fraud and the Iran business really did amount to $250 billion.

I find that interesting for two reasons. First, because it’s going to cause all kinds of headaches for the folks at Treasury who would like to let SCB off easy but ordinarily base settlements on the amount of the underlying activity.

More importantly, for me, because it demonstrates what a sham the Get Out of Jail Free industry is. A former OCC head and his minions at Promontory Financial Group claimed to have added it all up and determined that SCB only hid $14 million of transactions from Iran. SCB now says that Promontory was wrong.

By orders of magnitude.

Granted, SCB–and most of the people who pay Promontory to soft-pedal their crimes and risk–tried not to admit it had gotten that estimate from Promontory. Going forward, I expect we’ll see Promontory’s clients hide their involvement even more.

Still, this is a useful demonstration of how corrupt the Get Out of Jail Free industry is.

Update: Once again, I got my numbers wrong. The settlement is for $340 million.

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On the Press Release Sanctions against Hezbollah

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I have never doubted that Hezbollah and/or Iran could be behind the attack in Israeli tourists in Burgas, Bulgaria. Certainly, it is one of the few attacks blamed on one or the other in the last year that exhibited the competence we expect from Hezbollah.

That said, I’ve been struck by the vary careful insistence on the part of both Dianne Feinstein and John Brennan that they have seen no proof to link Hezbollah or Iran to the attack.

Israeli intelligence sources claiming to protect the very secret intelligence they are leaking have offered this claim as evidence.

Israeli intelligence has evidence of many telephone calls between Lebanon and Burgas in the two months before the bombing, according to a senior government official who spoke on the condition of anonymity because the information is classified, with the volume intensifying in the three days leading up to it.

But they are no more prepared to expose the details of their counterintelligence work publicly than the attackers are to claim responsibility. “We know the sources in Lebanon,” though not the identity of those on the other end in Bulgaria, the official said. “They shouldn’t know that we know the numbers in Lebanon.”

Nevertheless, in spite of the fact that it was otherwise sourced to press reports, this laughable press conference announcing the What’s-Old-Is-New sanctions against Hezbollah on Friday made no mention of the new claim; it discussed the ties between Hezbollah and Burgas this way:

And we are working to assess the facts and with our partners to discover who was responsible. And although the investigation continues, and we are not in a position to make a statement about responsibility, the attack does resemble Hezbollah’s plotting earlier this year.

They didn’t mention the calls–or even the A1 cutout report of the calls–at all.

Which is notable given that at least four journalists at the press conference asked what was new behind the sanctions on Hezbollah. Josh Rogin summarizes the absurdity of imposing sanctions on a group that is already under sanctions that have the same effect.

The Cable asked both officials if designating Hezbollah for sanctions, which freezes the group’s U.S.-based assets and bars Americans from doing business with Hezbollah, has any added concrete effect if done twice. They said the added effect is in the court of public opinion.

“It will put the group in a more difficult situation, and, I think, will make them think long and hard before they continue this campaign in which the Syrian people are being brutalized. So we do see very concrete benefits coming from this designation,” said Benjamin. “Whether they will be in the area of financial sanctions or not remains to be seen, but in terms of casting a bright light on what the group is doing, I think that’s vitally important.”

So the Treasury Department doesn’t have to actually do anything to enforce the new designation it wasn’t doing already, and Hezbollah doesn’t feel any additional direct pain.

In any case, this is what we’ve come to. Treasury Under Secretary for Terrorism and Financial Intelligence David Cohen admits that these sanctions are about exposing a purportedly new role from a terrorist organization that has pretty much played the role of supporting Syria for decades.

But the purpose of our designations, whether it’s the Hezbollah action today or any of our other designations under our authorities, is not solely focused on the immediate financial impact, but as Ambassador Benjamin just expressed, to expose the activity of the party that is being designated for the conduct that has led to the designation.

And yet–even as Adam Entous refuted the government’s claims based on WSJ’s reporting–the government refuses to offer no more than press reports.

I really can’t give you any greater detail than what we’ve put forward in the press release and in my statement this afternoon about the activities of Hezbollah in Syria.

[snip]

This is not a matter of idle speculation or press reports.

[snip]

I was just going to say, look, we’re obviously very sensitive here to issues of sources and methods and we’re not going to divulge anything that shouldn’t be divulged.

[snip]

I think we have put out as much detail as we are able to put out with respect to Hezbollah’s activity in Syria.

Our war by vacuous press release, all justified in the guise of protecting sources and methods, is rapidly losing all credibility.

It feels like the Iraq War campaign again.

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The Goldman Sachs Department of Justice™ Would Like to Apologize to Mr. Blankfein for the Inconvenience

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By now you’ve heard that Goldman Sachs will not be prosecuted for lying to its customers and having its CEO lie to Congress.

“The department and investigative agencies ultimately concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time,” the department said.

Mind you, it’s not a surprise that Lloyd Blankfein wasn’t prosecuted. That’s because DOJ basically rewrote law in the last couple of years to make sure Scott Bloch, the former Special Counsel, would do no jail time for lying to Congress. As a result they’ve basically taken that inconvenient law off the books. As Congress continues to pursue DOJ for Fast and Furious, I’m sure that’s a comforting thought for some in the Department.

Still, let’s pretend for a moment that DOJ really didn’t believe they could prosecute this case.

That leaves us at a place where actual people are subject to the rule of law but corporations–because DOJ is simply helpless, helpless!! against those big bad corporations–are not. If DOJ really refuses to prosecute any corporations for the very same crimes they’re imprisoning actual people for, it needs to start considering how it is rushing our country headlong toward Banana Republic status. That is, if it can’t or won’t prosecute corporations but–perhaps to justify taking a salary until such time the prosecutors check out and join the corporations they’ve set free–still jails the little people, then DOJ has become just another cog in the machine slowly turning our great democracy into a NeoFeudal land.

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Making Orders of Magnitude of Fraud Disappear

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Yesterday, I wrote a post based on this Reuters story about how banks negotiated settlements that hid the greater part of their crimes (in this case, Standard Chartered Bank’s tampering with SWIFT to hide transactions for Iran). The key point I linked was how SCB used consultant Promontory to produce a report saying the amount of fraud affected only $14 million of transactions, rather than the $250 billion of transactions that NY’s Superintendent of Financial Services saw.

As part of a review the bank sought to give to regulators, Standard Chartered hired Promontory Financial Group, a Washington D.C. consulting firm run by Eugene Ludwig, who served as U.S. Comptroller of the Currency from 1993-98. Promontory was hired to review Standard Chartered’s transactions tied to Iran. The bank’s review ultimately settled on the figure of less than $14 million for improper transactions.

The numbers were so disparate, I even kept misstating how many orders of magnitude of difference the report hid. Ultimately, however, the Reuters article suggested that by paying Promontory to draw up this report, SCB hoped to avoid liability for over 99% of its tainted transactions–and since fines for settlements are based on those tainted transactions, it would have paid a tiny fraction in fines of what it could or should pay, too.

The Reuters article was a pretty damning picture of how the Get Out of Jail Free industry works.

And then, the most damning parts of the article disappeared (Update from Briinhild: the full story is back up). As Yves discovered later in the day yesterday, Reuters pulled those paragraphs of the story that described this whole process.

Now I decided to go have a look myself. Being on the vampire shift, I didn’t go looking until mid afternoon. And guess what, the story that was now at that URL was not the same story. Yes, there was a story on Standard Chartered. But the version that Marcy worked from was apparently the original, released at 00:28 AM, titled “U.S. regulators irate at NY action against StanChart.” I’ve loaded that version in a Word and put it up at ScribD, and am embedding it below. It’s 1766 words. Be sure to download it if you are interested in this topic

[snip]

But the juiciest bit is how it flags the astonishing difference between the $250+ billion in transactions that Lawsky and SCB’s sanctimonious claim of a mere $14 million in dodgy transfers came about. Recall the quote that Marcy extracted above, that the advisory firm Promontory, headed by former Comptroller of the Currency Gene Ludwig, conducted a review and “settled” on the $14 million total. Promontory has made a bit of a specialty of getting hired to do independent reviews for boards in rogue trader cases. It seems it has been using the name it developed there, plus the fact that it has many former staffers from the OCC and other regulators, to enable it to act as a big ticket fixer (note that while the article also mentions that Rodgin Cohen of Sullivan & Cromwell, long recognized as the top bank regulatory lawyer, has been engaged to represent SCB. That’s almost to be expected).

So why did the original story get disappeared?

While most of the reporting on SCB’s pushback has noted that it believes the money laundering only involves $14 million, not $250 billion, those stories didn’t disclose how SCB came up with that dramatically smaller number.

They paid for it. That’s how. But we’re not supposed to know that.

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