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Lies, Money Laundering and Banks

Image courtesy idea goI was reading Matt Taibbi’s recent article in Rolling Stone Magazine titled Why Isn't Wall Street in Jail? and it got me thinking. Boy, the financial services industry has sure been vilified of late - the financial crisis, bankers helping high net worth clients avoid taxes, insider trading, and ponzi schemes.  There couldn’t be anymore to add to the list – right?

Actually – there is another one that has been overlooked. It rears its ugly head every so often but usually doesn’t command the attention of the general public. It’s called money laundering. Money laundering has a specific definition but I will use the term money laundering more broadly to not only include legitimizing criminal proceeds, but also to include terrorist financing and sanction breaches (i.e., assisting companies from countries like Iran and North Korea conduct business).

A Beautiful Day in the Neighborhood Bank

By law, banks and other covered financial institutions must have programs in place to combat money laundering. These are called Anti-Money Laundering (AML) programs and are usually managed by a bank’s compliance department. When a bank fails to comply with anti-money laundering laws, they are subject to civil money penalties (in only one case was a bank subject to criminal prosecution). One would think that non-compliance is a rare event, but as you can see from the list below, non-compliance is frequent.




December 2010

Bank Hapoalim Ltd

USD $2.1 Million

October 2010

HSBC North America
McLean, Virginia

upwards of USD $500 Million


August 2010

Royal Bank of Scotland Group
United Kingdom

USD $9 Million Fine

June 2010

Pamrapo Savings Bank S.L.A., a wholly-owned subsidiary of Pamrapo Bancorp Inc.,  Bayonne, N.J.

USD $1 million civil money penalty

May 2010

(now named Royal Bank of Scotland, NV)

USD $500 million
deferred prosecution agreement

April 2010

Pamrapo Savings Bank S.L.A., a wholly-owned subsidiary of Pamrapo Bancorp Inc.,  Bayonne, N.J.

USD $5 million civil money penalty

March 2010

(Subsequently purchased by Wells Fargo)

USD $50 million civil money penalty

USD $110 million forfeiture

October 2009

Gold & Silver Reserve, Inc. Melbourne, FL

USD $2.95 million

September 2009

Barclays Capital Securities Ltd and Barclays Bank PLC United Kingdom

USD $3.9 million

August 2008

DPWN Holdings (USA), Inc. and DHL Express (USA), Inc. (collectively “DHL”)

USD $9.5 million

August 2008

Australia and New Zealand Bank Group, Ltd.
Melbourne, Australia

USD $5.75 million

April 2009

Doha Bank
New York Branch

USD $5 million

February 2009


USD $780 million

January 2009

Lloyds TSB Bank Plc

USD 350 million

April 2008

United Bank for Africa
New York Branch

USD $15 million concurrent civil money penalties

January 2008


Sigue Corporation and Sigue, LLC
San Fernando, CA

USD $12 million civil money penalty

USD $15 million civil forfeiture

Deferred Prosecution

September 2007

Union Bank of California
San Francisco, CA

USD $21.6 million civil forfeiture

USD $10 million concurrent civil money penalty

August 2007

American Express Co.
Miami, FL and Salt Lake City, UT

USD $55 civil forfeiture

USD $10 civil money penalty

Deferred Prosecution

January 2007

Bank of America
Charlotte, NC

USD $3 million civil money penalty

December 2006

Beach Bank
Miami Beach, FL

USD $800,000 civil money penalty

December 2006

Foster Bank
Chicago, IL

USD $2 million civil money penalty

October 2006

Israel Discount Bank of New York

USD $12 million civil money penalty

September 2006

Bank of America
Charlotte, NC

USD $7 million fine

August 2006

Western Union Financial Services, Inc.
Denver, CO

USD $3 million civil money penalty

May 2006

Liberty Bank of New York

USD $600,000 civil money penalty

April 2006

BankAtlantic Corp.

USD $10 million forfeiture

March 2006

Edward E. Street

Tonkawa Tribe of Oklahoma

USD $1.5 million civil money penalty

USD $1 million civil money penalty


December 2005

Oppenheimer & Company, Inc.

USD $2.8 million civil penalty

December 2005

ABN AMRO Bank, N.V. 

USD $80 million fines and penalties

December 2005

Israel Discount Bank

USD $25 million civil money penalty

November 2005

Bank of New York

USD $38 million penalty

October 2005

Banco de Chile

USD $6 million civil money penalty

August 2005

Arab Bank, Plc
New York branch

USD $24 million civil penalty

July 2005

Gulf Corporation
Miami, Florida

USD $700,000 fine

February 2005

City National Bank

USD $750,000 fine

February 2005

J.P. Morgan Chase & Co.

USD $2.1 million fine

January 2005

Riggs Bank

USD $41 million fine

December 2004

Madison, Wisconsin

USD $100,000 civil fine

October 2004

AmSouth Bank Birmingham, Alabama

USD $10 million civil money penalty

USD $40 million civil forfeiture

Deferred Prosecution

September 2004

Citibank, N.A. Japan

Citibank, N.A. Japan was punished by having licenses withdrawn for four offices engaged in private banking

September 2004

Bank of Ireland Plc

GBP £375,000 fine

USD $672,000 fine

July 2004

Morgan Stanley

USD $2.2 million fine

May 2004


USD $100 million civil money penalty

May 2004

Riggs Bank

USD $25 million civil penalty

April 2004

Raiffeisen Zentralbank Österreich

GBP £170,000 fine

March 2004

Hudson United Bank

USD $5 million fine

January 2004

Bank of Scotland

GBP £1.25 million fine

December 2003

Abbey National Bank

GBP £2.3 million fine

USD $3.5 million fine

October 2003

Delta National Bank & Trust Company

USD $950,000 forfeiture

August 2003

Northern Bank (Northern Ireland-based unit of National Australia Bank Ltd)

GBP £1.25 million

August 2003

Western Union

USD $5 million fine

May 2003

Mirage Casino

USD $5 million fine

April 2003



March 2003

Western Union

USD $3 million fine

January 2003

Banco Popular de Puerto Rico

USD $21.6 million forfeiture

Deferred Prosecution

December 2002

Broadway National Bank, of New York

USD $4 million fine

December 2002

Royal Bank of Scotland Plc  

GBP £750,000 fine

December 2002

Western Union

USD $8 million fine

December 2002

Credit Suisse First Boston International

GBP £4 million

USD $7.3 million

Source: http://amlcft.com/cases.htm#Recent_Major_Fines_and_Penalties

This list contains a “who’s who” of the world’s major financial institutions (note, these are only the banks who had public consent orders issued. There are hundreds of others that never become public).  In addition, it appears that some heavy fines were levied. Why would all these institutions have failures in their program?

The Definition of a Good Customer

The answer is simple: crooks make good customers. It sounds counter-intutive but it’s true. Most people think that money launderers are two-bit crooks – like a local bookie trying to clean money from a small gambling operation. But the crooks that launder money are much bigger. They include dictators/despots, drug lords, and human traffickers and much of their money is derived from human misery – in other words - blood money. But how, you may be thinking, are these good customers? Simple: money launderers are willing to lose up to 50% of their proceeds to fees, commissions, taxes, etc. to ensure clean money. This makes sense because without legitimate funds managed by banks, a crook cannot do much with literally billions of dollars in cash. Banks also like money launderers because of their large deposits. In other words, launderers also provide liquidity. The United Nations Office on Drugs and Crime found evidence that the liquidity provided by money launderers during the financial crisis saved a number of banks.

The Blame Game

So who is to blame? Are the compliance teams at banks failing to detect this? Of course not. The compliance teams for the most part are doing everything they can – it’s the bankers who are to blame.  If a money launderer is a bank’s best customer, then the bank will find ways to continue to accommodate them.  Some may say this is speculation – but it is true. Let’s use Wachovia (now part of Wells Fargo) as a case in point.  Between 2004-2007, almost 400 billion of unmonitored funds were moved to money service businesses (think the check cashing place) in Mexico. To give you a sense of magnitude, this is approximately 1/3 of Mexico’s gross domestic product.  This illicit activity did not go undetected. The head of compliance at Wachovia became aware of this unusual movement of funds and brought it to the attention of Wachovia executives – who promptly told him to keep quiet and sought ways to fire him. This behavior from bank executives is not the exception, but the rule. Compliance departments, like risk management departments during the financial crisis, are just for window dressing.

The Regulatory Slap on the Wrist

But at least the regulators did their job by identifying the problem and making the bank pay for its failures. Well, not really.  Let’s again use the example of Wachovia to try to quantify the cost/benefit. We know that approximately 400 billion in funds were moved. Let’s assume a very conservative estimate of 1% (or 4 billion) was derived from criminal activity. It was probably much more but for the sake of argument, we will use 4 billion. Let’s say that 25% (or 1 billion) went to fees, commissions, etc. Wachovia was fined and forfeited 160 million. Let’s guess that internal remediation of these issues (lawyer fees, accountant fees, consultants) cost the bank another 40 million. The total cost to Wachovia was 200 million with income of 1 billion. So net, Wachovia made 800 million in profit. Not bad.

Fixing the Problem

Money Launderers are indeed a bank’s best customer – which of course, is not good for everyone besides a few bankers. So how can we fix the problem? To fix the problem, we need to understand the current disincentives.

  1. Reputational Risk: This is often used as a reason why banks would not want crooks as customers. It just looks bad and can tarnish a bank's reputation. Let me ask you – do you know of anyone who stopped banking with Wachovia because of this? Was Wachovia’s stock price affected when the news was announced? I think you know the answer. And suppose there is a chance of reputational risk of banking with a crook. When this happens, as history has shown us, a bank will self-report when the kimono is opened. The recent cases of Gaddafi and Mubarek are a good example. There is nothing inherently wrong with the heads of state as your customer, but when they derive their income from thievery and pain - that’s when it violates law and human conscience.
  2. Civil Money Penalties (including fines and forfitures: As we saw earlier, the losses are not commensurate with the profit. As the list of non-compliant banks clearly shows, the cost/benefit is so unbalanced that some institutions are repeat offenders.

To fix the money laundering problem, like truly fixing the root issues of the financial crisis, we need to eliminate banker incentives and address regulatory independence.

  1. Civil money penalties must significantly exceed the profits made.
  2. Bankers need to go to jail - it's that simple. As the saying goes “Let the engineer sleep under the bridge”.
  3. Stricter independence requirements between bankers and regulators must be implemented. Like most industries, there is a metaphorical incestuous relationship between banks and regulators.  It is not uncommon for former regulators to work for institutions or financial service advisory firms and vice versa.

I am not confident that any of these problems will be fixed. There is no strong will or motivation from our politicians within our branches of government – some of whom are money launderers themselves. Even those institutions that hold themselves up to the highest ethical standards are not immune (hint: the Vatican). So continue to monitor the news wire, it is just a matter of time before your neighborhood bank will make the headline.

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