Anti-Money Laundering
JUNE 2004
Federal Bank Regulators Act Against Riggs Bank
for BSA and AML Violations
Last month, the Office of the Comptroller of the
Currency (OCC), Federal Reserve Board (Fed), and
Financial Crimes Enforcement Network, a bureau of
the United States Department of the Treasury
(FinCEN), all took regulatory actions against Riggs
Bank N.A. together with its holding company and
“Edge Act” subsidiary. The actions stemmed from
violations of the Bank Secrecy Act (BSA) and related
deficiencies in anti-money laundering (AML)
program compliance. The regulators cited Riggs for
its “systemic failure to comply with its obligations
under the Bank Secrecy Act.” In particular, the
regulators noted lax controls concerning accounts
affiliated with the governments of Saudi Arabia and
Equatorial Guinea. Among other requirements, the
orders require Riggs to pay a fine of $25 million due
to the failures of its AML compliance program.
Since 1987, the OCC has required each bank it
supervises to have a BSA compliance program. The
USA Patriot Act extended that requirement, and by
2002, each bank needed to establish an AML program
to combat money laundering and terrorist financing.
Each bank, savings association, and operating
subsidiary of a bank or savings association must
have an effective AML compliance program.
The OCC had noted issues in Riggs’s BSA
compliance program beginning in 1997, and by its
January 2003 examination, the OCC found serious
deficiencies. As a result, in July 2003, Riggs entered
into a consent order with the OCC to improve its
AML compliance program and its compliance with
the BSA.
2004 OCC ORDER
The OCC determined that Riggs had not fulfilled the
terms of the July 2003 consent order and that Riggs
continued to have serious deficiencies in its AML
program. As a result of those findings, Riggs and
the OCC entered into two new consent orders on
May 13, 2004.
One order calls for the bank to pay a civil money
penalty in the amount of $25 million. The order
outlines the findings that are the basis of the
imposition of the fine. Many of those findings
necessitate the mandated corrections described
below, including:
n
the bank’s internal controls were, and continue
to be, seriously deficient;
n
the internal controls did not identify or address
the BSA-related risks at the bank that related to
products or accounts that the bank should
have viewed as high risk;
n
Riggs did not adequately implement its due
diligence program related to high-risk areas;
n
the bank did not collect sufficient information
about its foreign private banking customers;
n
due to the poor record keeping, Riggs omitted
disclosure of several accounts in response to
requests from government agencies;
n
audits did not review all the necessary areas,
contained flawed testing, and did not uncover
the severity of weaknesses in BSA compliance;
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n
management ineffectiveness in overseeing
compliance with the BSA;
n
an ineffective training program that did not
comply with the July 2003 OCC order;
n
a failure to investigate suspicious activities;
n
a failure to file required suspicious activity
reports (SARs);
n
a failure to monitor suspicious activity
pertaining to the accounts of the Saudi Arabian
embassy or the country of Equatorial Guinea;
and
n
overall systemic deficiencies in bank policies
and oversight.
The OCC claims that these findings demonstrate that
Riggs was deficient in all four required elements of an
AML compliance program: internal controls,
independent testing, appropriate training, and having
a person responsible for overseeing implementation
of the program.
The second OCC order requires specific steps for
Riggs to correct deficiencies in its internal controls.
Specifically, the order requires Riggs to:
n
determine whether the skills of management
and staff need improvement;
n
develop a methodology for verifying that the
bank documents, files, and maintains all
information that the BSA requires;
n
review the accuracy of all SARs and Currency
Transaction Reports (CTRs) filed between
January 1, 2001 and April 30, 2004;
n
verify and correct incomplete or inaccurate
books and records;
n
review all bank accounts in the Embassy and
International Private Banking areas that Riggs
identifies as high risk;
n
adopt written, comprehensive internal control
policies applicable to the bank’s relationships;
n
prepare a written report on the staffing levels
and skills required to fulfill the requirements of
the order;
n
perform mandatory background checks on all
relationship managers at least once every three
years;
n
subject the ten largest deposit and loan
relationships with the bank to greater scrutiny;
n
declare a dividend only with prior notice to the
OCC;
n
implement an internal audit program sufficient
in scope, testing, and documentation; and
n
require that its board of directors (or a
committee thereof) ensure that the bank takes
immediate actions to remedy deficiencies cited
in audit reports.
FINCEN ORDER
The Department of the Treasury has the authority to
implement the BSA by regulation. It works through
FinCEN to do so. While each of the federal bank
regulatory agencies examines for BSA compliance
and enforces compliance with BSA and AML
standards, FinCEN also has BSA enforcement
authority over all financial institutions. In this case,
when the OCC examined Riggs for compliance with all
applicable laws, including the BSA, it found
violations of the BSA, and the OCC referred those
findings to FinCEN. FinCEN then took enforcement
action against Riggs, in addition to the enforcement
action taken by the OCC.
On May 13, 2004, FinCEN also issued an order
assessing a civil money penalty against Riggs in the
amount of $25 million. This penalty is concurrent
with the OCC’s penalty, and Riggs will satisfy both
penalties with one $25 million payment.
FinCEN found willful violation of the AML program
requirement. Before the July 2003 order, as discussed
above, Riggs was deficient in implementing an AML
program that would respond to the types of
suspicious conduct that Riggs potentially faced.
When the OCC entered into the consent order with
Riggs in July 2003, it also referred the BSA violations
to FinCEN for a determination by FinCEN of whether
it should impose a civil money penalty for the BSA
violations. FinCEN found that Riggs’s failure to
establish an adequate AML program that would allow
it to meet its SAR and CTR reporting requirements,
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despite knowing the requirements to do so in law and
in the previous consent order, demonstrated a
“reckless disregard of its obligations under the
BSA.” Because Riggs failed to correct its
deficiencies and allowed additional violations of the
BSA to occur after the July 2003 consent order,
FinCEN assessed the civil money penalty.
Other FinCEN findings that support its imposition of
the monetary penalty include:
n
deficient designing of an AML program based
on the risks of Riggs’s business;
n
inadequate internal controls to ensure ongoing
compliance;
n
similar risk matrices in different divisions that
did not recognize the risks associated with
particular lines of business;
n
weak and improperly implemented customer
due diligence program;
n
failure to employ account opening and
customer information collection procedures;
n
missing customer due diligence information;
n
improper handling of government subpoenas
and requests regarding account holders to
ensure that the bank investigated potential
suspicious activity;
n
lack of internal controls in its largest banking
relationship;
n
failure to implement an adequate system for
independent testing;
n
audit scope that did not include (i) areas with
money laundering vulnerabilities, (ii) BSA
compliance, or (iii) the suspicious activity
reporting process;
n
failure by the person with overall responsibility
for BSA compliance to monitor and report
suspicious activity;
n
weak training;
n
failure to file or delinquent filing of 33 SARs
representing $98 million in suspicious
transactions;
n
not providing accurate information on six
CTRs; and
n
failure to correct deficiencies identified by the
previous consent order with the OCC.
FEDERAL RESERVE BOARD ORDER
Although the Fed does not have jurisdiction over
Riggs, the Fed regulates Riggs National Corporation,
Riggs’s holding company, and Riggs International
Banking Corporation, an Edge Act corporation that is
a wholly-owned subsidiary of Riggs (RIBC).
The Federal Reserve Bank of Atlanta had previously
advised RIBC of deficiencies in its compliance with
AML obligations and the Currency and Foreign
Transactions Reporting Act. Although Riggs has
decided to close RIBC, until its operations cease,
RIBC and Riggs National agreed with the Fed that the
consolidated organization should be operated in a
safe and sound manner. To ensure its safe and
sound operation, on May 14, 2004, Riggs National
and RIBC consented to the issuance of a Cease and
Desist Order by the Fed (Order) to address the AML
program deficiencies. Among the principal parts of
that Order were Fed requirements that Riggs National
and RIBC strengthen board of directors oversight,
improve risk management practices, upgrade RIBC’s
system of internal controls, develop a customer due
diligence program for RIBC, draft a program to ensure
compliance with OFAC regulations, and not declare
or pay any dividends without Fed approval.
CONCLUSION
In a press release announcing the agreements with
the banking regulators, Riggs affirmed its intent to
work closely with its regulators to complete and
maintain “an appropriate comprehensive compliance
infrastructure.” Separately, Riggs noted that it “has
been fully cooperative with all law enforcement
agencies” in the post-September 11 environment and
recognized the need to “also meet all of the
expectations of [its] regulators.”
In part based on the Riggs situation, the House and
Senate have held hearings this month on the
effectiveness of money laundering regulation. Top
committee members of both parties expressed
concern about BSA enforcement by regulators.
While congressmen recognized that the regulators
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have increased enforcement since September 11,
2001, they expected more to be done to ensure
current regulators are properly enforcing the BSA
and preventing terrorist financing.
Daniel Stipano, deputy chief counsel of the OCC,
admitted at a congressional hearing that the OCC
made mistakes in its oversight of Riggs’s BSA
compliance by failing to take sufficient regulatory
actions when previous examinations noted
deficiencies. Stipano emphasized, however, that the
Riggs case is not typical of overall OCC BSA
enforcement. John D. Hawke, Comptroller of the
Currency, told a Senate panel that, in response to the
Riggs matter, he had ordered a comprehensive review
of OCC oversight of national bank BSA/AML
compliance. Separately, William J. Fox, director of
FinCEN, encouraged greater communication between
his agency and the other federal bank regulators, and
James Gilleran, director of the Office of Thrift
Supervision (OTS), testified that the OTS has taken
recent enforcement actions to ensure that all savings
associations that it regulates- large and small- have
effective, risk-based BSA compliance programs.
The Riggs situation is unusual both because Riggs
served the embassy community in Washington, DC,
thus giving it a higher than usual concentration of
foreign customers, and because it was deemed to
have disregarded the earlier OCC consent order.
Even though the Riggs situation is somewhat unique,
all financial institutions, particularly large money
center banks with significant foreign customers,
should remain vigilant in their BSA and AML
compliance. Federal regulators continue to examine
for such compliance, and, considering recent
congressional interest, might be expected to enhance
their examinations for compliance with the BSA as
amended by the USA Patriot Act. (Note that the
Patriot Act authorizes Congress to resolve in the fall
of 2004 to sunset the portions of the Patriot Act
specifically applicable to financial institutions. We
have no evidence, however, that Congress is
considering such a resolution.)
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If you have any questions, please call Rebecca Laird,
(202-778-9038), Melanie Brody (202-778-9203), Sam
Ozeck (202-778-9085), or any other member of K&L’s
Financial Institutions Group.
REBECCA H. LAIRD
202.778.9038
rlaird@kl.com
MELANIE BRODY
202.778.9203
mbrody@kl.com
SAM A. OZECK
202.778.9085
sozeck@kl.com
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Kirkpatrick & Lockhart LLP offers diverse experience in issues relating to money laundering. We can help
banking and diversified financial services clients assess their risk, establish and review compliance practices,
investigate potential weaknesses, perform internal investigations, and respond to regulatory inquiries and
enforcement actions while being sensitive to the privacy of each client and their customers through an
effective attorney-client privilege relationship.
In addition, we have established a website dedicated to issues relating to anti-money laundering regulatory
and legislative developments. The website is located at http://www.kl.com/practices/
resources.asp?id=000002117003. In addition to outlining K&L’s enterprise-wide approach to assisting clients
with money laundering compliance issues, the website contains a resource center with over 100 carefully
selected links to various informational resources on money laundering. The resource center also includes a
library of prior K&L publications on money laundering.
We invite you to contact one of the members of our cross-disciplinary anti-money laundering practice team
for additional assistance. You may also send general inquiries to antimoney@kl.com.
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© 2004 KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED.