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How Banks Are Fighting Money Laundering

Hundreds of millions are being spent to comply with new regulations. Will those investments pay off?
By Jeff Bounds |

North Texas banks are jettisoning customers and lines of business as they scramble to deal with a dizzying array of rules aimed at fighting money laundering. Beyond stiff monetary penalties that regulators can impose for compliance issues in this area, banks are spending hundreds of millions of dollars to get their systems in line with the rules.

Local industry execs are also watching warily as a former compliance chief at Dallas-based MoneyGram wages a court fight against the U.S. Treasury Department’s attempt to fine him $1 million and bar him from working in financial services. That stems from Thomas Haider’s alleged compliance failures at the money-transfer company on money-laundering rules and laws.

Meanwhile, banks have largely pulled out of the U.S. border area with Mexico, because the risk of severe money-laundering penalties outweighs the benefits of serving that region’s customers, who often favor cash—the form of currency also preferred by drug cartels and terrorists.

Mounting risks and expenses in regulatory areas like money laundering are driving the smallest Texas banks into mergers and acquisitions, according to Vernon Bryant, president of Fort Worth-based Southwest Bank. In 2009, the Lone Star State had 373 banks with $150 million or less in assets. Today, that number has shrunk to 189—a 49 percent drop. “The biggest part of that is compliance in all areas,” Bryant says. “Unless you have at least $250 million in assets, you don’t have enough size to do it.”

In the 1920s, mobster Al Capone ran a Chicago empire that took in an estimated $100 million a year from illegal activities like bootlegging, prostitution, and gambling, according to the International Bar Association. To hide the illegal transactions that produced his revenue, Capone used a series of businesses to “launder” his money, or make it appear to have come from legitimate sources.

Capone was hardly the first—or last—U.S. criminal to launder funds. But Congress waited until 1986 to make it a federal crime, rather than an element of a separate criminal act. Banks were first brought into the fight at the dawn of the war on drugs in the 1970s, when the Bank Secrecy Act gave Treasury authority to require them to keep records to trace money laundering—notably by compelling reporting of $10,000-plus transactions. After 9/11, Congress used the Patriot Act to criminalize the financing of terrorism, significantly driving up compliance costs for banks.

Every bank in Texas has at least one employee dedicated to money-laundering compliance.

This past May, the burdens on U.S. banks intensified when the Financial Crimes Enforcement Network (FinCEN) gave them until May 2018 to begin turning over the names of people who are ultimate owners of certain accounts, regardless of what shell companies, trusts, or intermediaries account holders might use to hide their identities. Information Treasury gleans through the new “know-your-customer” rules is then shared with other U.S. and foreign agencies, in an effort to prevent tax evasion.

Every bank in Texas has at least one employee dedicated to money laundering compliance, according to John Heasley, executive vice president at the Texas Bankers Association. “Some have as many as 20,” he says.

Compliance doesn’t come cheap. Southwest Bank spends roughly $500,000 annually just on matters related to money laundering, according to Bryant. Its compliance tab on all regulations last year was $1.6 million. “In 2005, when I was at another bank that was the same size we were last year, we spent $400,000 on compliance,” Bryant says.

At BOK Financial, an Oklahoma financial services firm, spending on money laundering compliance has reached the high seven figures—a three-fold increase from 2010, according to executive vice president Norm Bagwell, who oversees the company’s regional banks across eight states, including Dallas’ Bank of Texas. That seven-figure number does not include $32-billion-asset BOK’s investments in technology and other infrastructure related to money laundering compliance. “We are on the other side of the issue at this point,” Bagwell says. “Risk management has become a ‘value-added’ part of the business.”

Regulators’ ‘Punitive’ Approach

Expense aside, many industry execs and experts worry about the hard-line approach that U.S. regulators have taken in examinations and enforcement of money laundering regulations. Compared with its counterparts in the United Kingdom and Hong Kong, the United States has taken the “most strict and punitive approach” to enforcement, according to a recent white paper from business consultancy Protiviti.

In July 2015, for example, Citigroup agreed to pay $140 million in penalties for weaknesses in money laundering compliance at its Banamex USA unit, even though regulators did not identify any instances of criminal behavior, according to a scholarly article from three attorneys at the law firm Dorsey & Whitney. Citigroup simultaneously shuttered Banamex’s three branches in Houston, San Antonio, and Los Angeles, ending “one of the oldest banks serving the U.S.-Mexican border,” the article notes.

“It’s not necessarily the monetary fine that’s expensive” in cases like these, says Shaun Creegan, managing director in Protiviti’s New York office. “The remediative actions that banks must take to get out of enforcement actions can cost hundreds of millions of dollars for consecutive years.”

As a result, banks across the board are “de-risking,” or dropping customers who engage in activities that regulators consider “high risk,” even when those activities are legal. JPMorgan Chase, the second-largest bank in North Texas by deposits, has dropped or restricted “tens of thousands” of client relationships across its operation to reduce its money-laundering exposure, according to a recent letter to shareholders. Southwest Bank has had to end relationships with 17 customers who used money services, an activity that regulators consider high-risk behavior.

Account closures are a big concern at banks that serve Latinos and other ethnic minorities that use cross-border services, such as wiring money to relatives in other countries. “De-risking international customers can cause those clients to lose their ability to conduct legal financial transactions,” says Bill Perotti, chief risk officer at San Antonio’s Frost Bank, which has 14 North Texas locations. “This can create a backlash from financial institutions, governments, and business people in foreign countries.”

Regulations: Effective or Not?

All of this begs a question: Are the benefits of the government’s money laundering regulations worth the risk and expense that banks must shoulder to comply? “The banks have had the protected privileges of the industry. With these privileges come responsibilities,” says William Byrnes, a professor at Texas A&M’s law school in Fort Worth. He adds that imposing penalties on compliance personnel personally “absolutely” can be appropriate. Simply fining an institution without holding staffers responsible can encourage bad behavior internally. “The employee collects the paycheck and bonuses, and when it’s time to settle up, someone else pays the tab,” Byrnes says.

But Perotti notes that hard-to-find compliance pros may shy away from bank employment out of fear that they could face fines for their mistakes. “I don’t know of another area where they can come back and go after entry-level people or officers personally,” he says. “It makes no sense.”

Regulators are obligated to do “regulatory impact analyses” to determine how best to achieve the laws that Congress creates, Byrnes said. “When the costs outweigh the benefits, regulations should evolve.”   

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