While banks are busy bracing for a host of expensive new reforms prompted by the financial crisis, they are coming under renewed pressure to comply with a crucial set of rules that never went away.
A spate of enforcement actions and big penalties this year for violations of anti-money-laundering rules and Treasury Department sanctions has served as a stark reminder of the government's compliance priorities, even as bank failures pile up and credit costs remain elevated.
It is no surprise to experts in the field that the big discoveries of rule violations have been concentrated in foreign banks such as Barclays Bank PLC and HSBC Holdings PLC. Non-U.S. institutions may be unaccustomed to the level of oversight that their domestic rivals have lived with under the Bank Secrecy Act, which was adopted in 1970 and amended in 2001 following the passage of the Patriot Act. Foreign banks also may have underestimated the degree to which even a small U.S. presence could become a source of risk.
But domestic banks have been challenged, too, to keep up their vigilance while management focus and budgets are stretched thin by the financial crisis.
Some domestic institutions may be tempted to become complacent, content to rely on systems that heretofore have been adequate and not looking around corners as much as they might have otherwise.
"Regulators have come back in, and they're finding deficiencies," said Michael Zeldin, head of the global anti-money-laundering and trade sanctions practice at Deloitte LLP and a former chief of the Justice Department's money laundering and asset forfeiture offices.
"Financial institutions that may have taken their foot off the gas in the anti-money-laundering area are now going to have to deal with the consequences of that."
And the consequences can be hefty.
In October, a U.S. subsidiary of HSBC was ordered by the comptroller of the currency to adopt a long list of procedures to comply with rules on cross-border transactions.
Barclays, Credit Suisse AG and the former ABN Amro NV were fined a combined $1.3 billion in the past 12 months, stemming from investigations into transactions conducted for clients from Iran, Sudan and other sanctioned countries.
Wells Fargo & Co.'s Wachovia Bank in March paid $160 million to settle charges of rule violations that allegedly helped Mexican drug cartels launder money.
The success that law enforcement agencies have had with money laundering investigations has emboldened prosecutors to pursue more cases in an area that historically had been left in the hands of bank regulators.
"I used to be a federal prosecutor, and it was so difficult trying to get prosecutors to investigate money laundering crimes," said Peter Djinis, a lawyer in Sarasota, Fla., who specializes in matters related to anti-money-laundering rules and the BSA. "It's different now. The federal prosecutors are paying a lot more attention … [and] they have not hesitated to bring criminal charges against banks they view as having defective programs" for monitoring accounts.
Regulators, too, are focusing on money laundering issues with renewed vigor.
Though examiners trained in anti-money-laundering issues never abandoned their posts, the entire orientation of the regulatory community was no doubt geared toward financial stability matters during the height of the financial crisis.
As then-Comptroller John Dugan told his agency's compliance supervisors in July 2008, "when risk increases in one area, we do change our emphasis and shift more of our resources to address the heightened risk. That's what we did when the BSA compliance risk increased, and that's what we will do as safety and soundness risk continues to rise."
But in the same speech, Dugan signaled that compliance supervision would remain a priority regardless of the broader financial environment. Comptroller's Office spokesman Kevin Mukri said that the agency has approached BSA and anti-money laundering exams with "a consistent application," and as Promontory Financial Group's Michael Dawson pointed out, examiners in this area of compliance "are not exactly fungible resources" that would be plucked suddenly from their milieu to focus on credit risks, fair lending or any other specialty.
Rather, it is the examiners' continuing experience with anti-money-laundering matters that may be accounting for some of the renewed focus on the issue, said Dawson, a former Treasury official who specializes in compliance risk management consulting at Promontory. "We've entered a second generation of anti-money-laundering risk management, characterized by more, and more sophisticated, regulatory and law enforcement stakeholders." In the decade since the Patriot Act was passed, examiners have been exposed "to a range of best practices, which helps them identify weaknesses in any one program."
One thing regulators and bankers themselves are finding is that incidents and deficiencies sometimes fall through the cracks because of the fractured nature of their monitoring technology.
"It's a hodge-podge of systems in most places," said Amir Orad, president and chief executive at NICE Actimize, a risk and compliance software maker. "I would say less than half [of the big banks] actually have something in place that is enterprise-wide" and can monitor transactions and accounts across the institution.
He said his clients are feeling more regulatory pressure in areas including clearing for international businesses, a trend that he has watched gather steam in the U.S. and in Europe as rising concerns about countries such as Iran and events such as the attempted bombing of Times Square in May underscore the purpose of regulations than can help track terrorist financing.
"It isn't that the regulations are different; it's the importance of their impact that has changed," Orad said.