This Post at a Glance:

  • FinCEN imposes $2 million penalty against community bank
  • Bank failed to conduct appropriate due diligence related to Mexican customer
  • Small banks, other financial institutions need to recognize obligations under Bank Secrecy Act

On October 27, 2017, the U.S. Financial Crimes Enforcement Network (FinCEN) announced a $2 million fine against Lone Star National Bank, an independent community bank in Texas, for “willfully violating” anti-money laundering (AML) requirements of the Bank Secrecy Act (BSA).  FinCEN, which is part of the U.S. Treasury Department, has a primary role in safeguarding the U.S. financial system against money laundering and other illicit uses.

FinCEN: Lack of Due Diligence Leads to Bank Secrecy Act Violations

According to FinCEN, Lone Star accepted a Mexican bank as a customer without conducting any significant due diligence on the bank or its owner.  FinCEN asserted that, if diligence had been conducted, Lone Star would have discovered the owner’s alleged involvement in securities fraud.  FinCEN also determined that Lone Star had opened and operated other high-risk accounts without conducting appropriate due diligence.

This is a problem under the BSA.  Under the regulations issued to implement the BSA, U.S. financial institutions must perform due diligence and, in some cases, enhanced due diligence, with regard to correspondent accounts established or maintained for non-U.S. financial institutions and private banking accounts established or maintained for non-U.S. persons.

Bank Secrecy Act Compliance Necessitates Policies to Avoid Money Laundering Activities

According to FinCEN, the Mexican bank moved hundreds of millions of U.S. dollars in suspicious bulk cash shipments through the U.S. financial system in less than two years.  FinCEN asserted that the movement of such large amounts of money should have alerted Lone Star of the need for greater scrutiny.  Yet according to FinCEN, Lone Star never verified the accuracy of the Mexican bank’s assertions as to the source of funds, account purpose, or anticipated activity.

The BSA implicitly acknowledges that huge amounts of money flow through the U.S. financial system every day.  Correspondingly, financial institutions are required to establish appropriate, risk-based policies designed to enable them to detect and report known or suspected money laundering activities.  According to FinCEN, Lone Star failed to ask even obvious diligence questions to the Mexican bank and did not follow up on inconsistencies in the answers to the few questions it did ask.

Lone Star has apparently gotten the message.  In announcing the penalty, FinCEN acknowledged that Lone Star has now ended its problematic correspondent banking activities.  FinCEN also highlighted the fact that Lone Star has engaged outside consultants to conduct independent testing and to focus on customer due diligence and reviews of suspicious activity.

Key Takeaway #1: Size Does NOT Excuse Financial Institutions from Complying with the Bank Secrecy Act

Especially for community and other local banks, the Lone Star matter serves as a valuable reminder that small size is not a defense to financial crimes under the BSA or other U.S. laws.  FinCEN specifically stressed that Lone Star’s size did not excuse its failure to comply with the BSA.

The action against Lone Star is also a useful reminder to those financial institutions that are covered by the BSA but are not banks.  For example, certain broker dealers and commodities traders are considered to be “covered financial institutions” under the BSA, and thus, have the same diligence obligations as Lone Star.

Key Takeaway #2: Maintain Robust Policies and Procedures to Avoid BSA and other AML Violations

This action provides more evidence that the U.S. government is continuing to aggressively enforce its AML and other financial crimes laws.  (See here for another penalty FinCEN announced earlier this year.)  There is no indication this enforcement initiative will change any time soon.  Banks and other financial institutions need to act accordingly, and ensure their policies and processes are adequate to meet BSA standards and protect against money laundering.

The author would like to thank Nicole Giles, a Bass, Berry & Sims legal intern based in our Washington, D.C. office, for her assistance in drafting this post.