On February 27, 2015, the Financial Crimes Enforcement Network (“FinCEN”) announced a $1.5 million civil penalty against the First National Community Bank of Dunmore, Pennsylvania (“FNCB”), arising from FNCB’s admission that it violated the Bank Secrecy Act (“BSA”) by failing to detect and report suspicious financial transactions. The penalty is concurrent with a $500,000 penalty and remedies imposed by the Office of the Comptroller of the Currency for related BSA violations.

This penalty highlights the government’s continued and ongoing focus on financial institutions’ potential role in facilitating money laundering, and those institutions’ compliance with the BSA. The FNCB penalty follows similar recent enforcement actions against a casino and a securities broker-dealer.

SAR Reporting Requirements

The BSA requires financial institutions to establish and implement policies to detect and prevent money laundering, effectively imposing upon financial institutions the role of gatekeeper to the U.S. banking system. Among other requirements, the BSA requires banks to file suspicious activity reports (“SARs”) for transactions with an aggregate value of more than $5,000 if the bank knows, suspects, or has reason to suspect that the transaction is “suspicious.” suspicious transactions include:

  • Funds derived from illegal activities, or conducted to disguise funds derived from illegal activities
  • Transactions designed to evade the reporting or recordkeeping requirements of the BSA, or
  • Transactions that have no business or apparent lawful purpose, or are not the sort in which the customer would normally be expected to engage, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including background and possible purpose of the transaction

The Scheme

In 2009, Michael Conahan, a former judge from the Luzerne County Court of Common Pleas (Pa.), pleaded guilty in federal court to conspiring to impede the IRS in the collection of federal income taxes. Mr. Conahan and another judge used their positions to gain profits by sending juveniles to detention facilities in which they had a financial interest. Between 2003 and 2007, the judges concealed approximately $2.6 million in revenue through Pinnacle Group of Jupiter, LLC, an entity created by the judges to purchase a condominium. Mr. Conahan served on FNCB’s board of directors and controlled accounts at FNCB that he used to process funds from his illicit scheme. Ultimately, Mr. Conahan was sentenced to 210 months imprisonment, and the Pennsylvania Supreme Court overturned approximately 4,000 juvenile convictions.

The Red Flags

FNCB did not file any SARs related to Mr. Conahan’s accounts until after Mr. Conahan’s first guilty plea in 2009, and only at the behest of an OCC examiner. In its Assessment of Civil Money Penalty, FinCEN identified multiple instances where FNCB failed to detect or adequately report suspicious transactions. FinCEN identified several red flags that should have been detected, investigated, and reported by FNCB, including:

  • Receipt of a law enforcement subpoena
  • Large, round-dollar transactions often occurring on a single day
  • Abnormal volume of activity compared with the account balance
  • Unusual and substantial reported increase in the value of the condominium over a short period of time
  • Full cash-out refinancing out of the condominium just 12 weeks after purchase
  • Dramatic (4x) increase in income over a one-year period
  • Rental payments that were disproportionate to the value of the property ($70,000 per month in rental payments in comparison with a $800,000 purchase price)

FinCEN Director Jennifer Shasky Calvery commented on FNCB’s involvement in Mr. Conahan’s illicit scheme, stating: “The criminal case affected the lives of thousands of children and parents … Banks have a duty to spot suspicious activity and to report it. Law enforcement relies on this valuable information. FNCB’s failure to file timely suspicious activity reports may have deprived law enforcement of information valuable for tracking millions of dollars in related corrupt funds.”

Conclusion

The deficiencies outlined in the FNCB announcement and other recent FinCEN settlements reflect the concerns articulated by FinCEN in its August 11, 2014, Advisory to U.S. Financial Institutions on Promoting a Culture of Compliance. There, the agency encouraged financial institutions to strengthen their AML programs by educating staff and leadership as to how their BSA reports are used, facilitating the flow of information between departments within an organization (particularly with compliance staff), and enlisting leadership’s “demonstrable support” for a robust compliance department sufficiently autonomous to address risks arising from the business line. While a “culture of compliance” cannot eliminate the risk of enforcement actions, its value to the regulators should not be understated