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Bank of New York Pays to Avoid Criminal Charges

The U.S. Attorneys for the Eastern and Southern Districts of New York began investigations of Bank of New York's actions in two separate criminal cases as early as 1998. Nine of the principals involved (including two former bank officers) have been indicted, tried, and convicted.

Since the start of the investigations, for nearly seven years, the directors, officers and staff at Bank of New York (BNY) have cooperated with the investigations, revised policies and procedures, realigned parts of the organization, and retrained staff members, all under the most intense regulatory, audit, and investigatory scrutiny. For all of that time, BNY has known that the bank itself could be prosecuted for its involvement. On November 8, 2005, the banking industry heard the "other shoe drop" when the Eastern District U.S. Attorney's office announced that Bank of New York (BNY) had agreed to a total of $38 million in penalties to avoid prosecution for its involvement in these cases.

The penalties and the publicly-released Agreement between BNY and the U.S. Attorneys provide another series of convincing arguments for all bankers to review and enhance their systems for detection, investigation, and reporting of criminal or suspicious activities.

The Southern District case involved money laundering and unlicensed transmission of billions of dollars originating in Russia through BNY accounts to transferees around the world. The Eastern District investigation involved fraudulent loan applications supported by hundreds of phony escrow agreements signed by BNY officers, resulting in losses of millions of dollars by lenders across the country. Twelve million dollars of the BNY payments are earmarked to reimburse those lenders.

The Agreement includes BNY's admission of involvement in the two schemes, and recites a list of allegations by the U.S. Attorneys offices for which the bank admits culpability. Key among the charges are those of failing to recognize, investigate, and report the criminal and suspicious activities that occurred quite literally "under BNY management's nose."

Summarized below are the principal admissions of guilt made by BNY in its Agreement signed November 4, 2005, along with the significant undertakings agreed to by the bank to improve its detection and reporting of suspicious and criminal activities.

BNY Admission BNY Remedial Action Aided and abetted RW Professional Leasing Services Corp. (PLS) by providing bogus escrow agreements used by PLS to file spurious medical equipment loan applications with other U.S. banks. Formation of management committee, headed by BNY president, to review actions of 67 involved employees; not to rehire either any employee dismissed because of the PLS matter or any disciplined employee who later resigned. Knowingly failed to file required SARs on learning of its employees' involvement in the PLS fraud activity.

  • New "Head of Law Enforcement and Investigations" senior position in Legal Division to respond to law enforcement inquiries and coordinate SAR filings. Has direct line to BNY CEO when needed.
  • Augmenting staff in Legal Division and creation of structure for handling reports of suspicious activity.
  • Monthly meetings between Legal Division, Corporate Security and Global Compliance to coordinate investigations and reporting of suspicious activity, and to clarify policies to eliminate and jurisdictional hurdles impeding timely SAR filings.
  • Training of Legal Division employees on detection and reporting of suspicious activities.
  • Publication of new bank policies addressing the detection, investigation and reporting of suspicious activity; use of and signature of non-bank forms for customers; file maintenance and retention; review of new business accounts; documentation approval; and civil and criminal incident reporting and investigation.
  • Legal Division will share with the (new) SAR Control Unit all information evidencing criminal activity upon learning of that activity.
  • Enhanced tracking of responses to subpoenas.
  • Training of branch and supervisory personnel on reporting incidents involving dissemination of false information to financial institutions. Failed to implement an effective anti-money laundering program, and in so doing, aided and abetted the operation of an unlicensed money transmitting business and the unlawful operation of a foreign bank.
    • Failed to implement a method of analyzing wire transfers of its customers for potential money laundering
    • Failed to "conduct due diligence" on two customers, Benex International Co., Inc., and BECS International Corp., LLC, to understand the nature of those businesses and the activity in their accounts at BNY
    • Failed to review the wire transfer activity in the accounts of those two customers
    • Failed to make an effort to determine whether the activity in the accounts required either a money transmittal license or a license to operate as a branch or agency of a foreign bank under New York or federal law
  • New audit procedures for retail branches, with
    • scrutiny of most profitable and most active accounts
    • emphasis on compliance with "Know Your Customer" procedures
    • attention to personnel training, turnover, proficiency
    • shift to risk-based approach
    • involvement of Global Compliance Department in assessing level of compliance with bank policies, exposure of unusual services provided to customers
  • Regular meetings between Corporate Security and branch managers to catch problems early
  • Targeting of problem branches for remediation and follow-up review
  • Retail Banking Task Force to oversee improvement efforts
  • Enhanced review of each retail branch's top five client relationships, with focus on funds transfer activity. Reviews will verify the existence of these clients.
  • Include investigation of top three counterparties to transactions of customers being reviewed by BNY's Anti-Money Laundering Oversight Committee in those reviews. The actual existence of the counterparties will be verified. Oversight of the Agreement Hiring of Independent Examiner by US Attorneys Offices (for up to three years) at BNY expense (with input by financial regulators) to review suspicious activity reporting procedures, AML practices, and adherence to the Agreement.

    BNY's Agreement includes a waiver of attorney-client privilege and several other standard rights of defendants should BNY fail in any significant undertaking to which the bank agreed. Not surprisingly, there is a stipulation that the criminal cases against the bank can be reinstated -- with any lapsed statutes of limitations on prosecution waived -- if the bank defaults on its promises. None of the bank's federal or state regulators was a party to the agreement, and any of those regulators could impose additional sanctions on the bank. The U.S. Attorneys, however, agreed to share the contents of the Agreement with any regulator at BNY's request.

    Press Release from the U.S. Attorney for the Eastern District of New York

    Bank of New York Non-prosecution Agreement

    First published on BankersOnline.com 11/10/05

  • First published on 11/10/2005

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