Michael LeFontaine, the former chief operational risk officer and chief compliance officer of U.S. Bank National Association, was fined US $450,000 by the Financial Crimes Enforcement Network of the US Department of Treasury for his role in the bank’s capping of suspicious activity alerts generated by the bank’s monitoring system from January 2005 through May 2015.

In February 2018, four federal regulators imposed out-of-pocket sanctions on US Bancorp totaling US $613 million for alleged noncompliance with its anti-money laundering obligations from 2011 to 2015. The regulators were the US Department of Justice, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and FinCEN.

The regulators claimed that, during the relevant time, the bank failed to maintain an adequate staff level to conduct anti-money laundering oversight and capped the number of alerts generated by its AML surveillance system to accommodate the inadequately sized staff. This, alleged the regulators, caused the bank not to identify many potential AML issues and not to make many required suspicious activity reports. (Click here for additional background in the article “Bank Sanctioned US $613 Million for Capping Number of Suspicious Activity Reports” in the February 25, 2018 edition of Bridging the Week.)

FinCEN claimed, in its current enforcement action, that Mr. LeFontaine failed “to take sufficient steps to ensure that the Bank’s compliance division was appropriately staffed to meet regulatory expectations.” Moreover, charged FinCEN, two AML officers expressed concerns to Mr. LeFontaine that the bank’s surveillance system was “inadequate” because caps were imposed to limit alerts. One AML officer sent Mr. LeFontaine two memos with this warning – in December 2009 and April 2010 – and another, new AML officer expressed similar concerns to Mr. LeFontaine by the end of 2012. FinCEN indicated that Mr. LaFontaine did not respond adequately to information brought to his attention. Although FinCEN acknowledged that Mr. Lafontaine sought and received funding to upgrade the firm’s AML surveillance system, it said these actions “were inadequate to correct the deficiencies.”

Mr. LaFontaine admitted to the facts set forth in FinCEN’s determination and consented to the financial penalty.

Compliance Weeds: Applicable law and FinCEN rules require broker-dealers and other covered financial institutions (banks, Commodity Futures Trading Commission-registered futures commission merchants and introducing brokers and Securities and Exchange Commission-registered mutual funds) to file a SAR with FinCEN in response to transactions of at least US $5,000 which a covered entity “knows, suspects, or has reason to suspect” involve funds derived from illegal activity; have no business or apparent lawful purpose; are designed to evade applicable law; or utilize the institution for criminal activity. (Click here for a helpful overview of anti-money laundering requirements for broker-dealers, including SAR requirements. Click here for a similarly helpful compilation of AML resources for members of the National Futures Association.)

Additionally, covered institutions might also have to file SARs following cyber-events. (Click here for background in the article “FinCEN Issues Advisory Saying Cyber Attacks May Be Required to Be Reported Through SARs" in the October 30, 2016 edition of Bridging the Week.) 

In July 2017, Electronic Transaction Clearing, Inc., a registered broker-dealer, agreed to settle charges brought by the Financial Industry Regulatory Authority that it failed to consider whether to file SARs, as required, in response to red flags of possible suspicious conduct as well as for other violations. According to FINRA, ETC did not file such reports even after it restricted trading by certain of its customers after 30 instances where the firm identified problematic conduct, including prearranged trades or trading without an apparent economic reason. ETC agreed to pay a fine of US $250,000 to resolve FINRA’s charges. (Click here for background regarding FINRA’s charges in the article “Clearing Firm’s Failure to File Suspicious Activity Reports in Response to Red Flags Charged as Violation of FINRA Requirements” in the March 26, 2017 edition of Bridging the Week.)

Previously, in August 2015, FINRA fined Aegis Capital Corp. US $950,000 for selling unregistered penny stocks and related supervisory violations, and suspended and fined two individuals – Charles Smulevitz and Kevin McKenna – who served successively as chief compliance and anti-money laundering officers for the firm. According to FINRA, Mr. Smulevitz and Mr. McKenna failed to “reasonably” detect and review red flags of potentially suspicious transactions. As a result, they did not make a “reasoned determination whether or not to report the suspicious transactions to the Financial Crimes Enforcement Network … by filing a Suspicious Activity Report … as appropriate.” (Click here for further details in the article “FINRA Fines and Suspends Two CCOs for Supervisory and AML Violations” in the August 14, 2015 edition of Bridging the Week.)

Covered financial institutions should continually monitor transactions they facilitate, ensure they maintain and follow written procedures to identify and evaluate red flags of suspicious activities and file SARs with FinCEN when appropriate.

Moreover, covered institutions should ensure that problematic transactions identified by non-AML personnel (e.g., compliance staff) that may violate legal or regulatory standards are evaluated by AML personnel to determine whether a SAR should be filed with FinCEN. Indeed, the more complete a ledger a firm can maintain of potential problems identified across otherwise separate surveillance functions, the more likely a firm will be able to recognize and act holistically when it possesses multiple red flags.