2010 Ushered in New Compliance Duties, Record Fines but Few Resources, Say Professionals


Regulatory pressure grew on financial institutions in 2010 though few compliance departments saw an increase in budgets or resources in the wake of an 18-month recession, say industry professionals.

While the slew of layoffs and poor earnings that afflicted financial institutions in 2009 seemed to have largely abated, funding for anti-money laundering (AML), counterterrorism financing, sanctions enforcement and Foreign Corrupt Practices Act (FCPA) compliance programs remained roughly static, according to individuals at an array of financial institutions and consultancies.

But unlike in 2009, compliance departments in 2010 saw "a flurry of new rules and new proposed rules" from the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN), said Jim Richards, executive vice president and Bank Secrecy Act officer at Wells Fargo & Co. in San Francisco.

"The bar keeps getting raised," said William Fox, global anti-money laundering and economic sanctions executive at Bank of America and a former director of FinCEN. "Even during an economic downturn, regulatory expectations are increasing."

The finalized rules and new proposals came as the total number of bank enforcement actions for AML and non-AML compliance violations soared in comparison with 2009. Regulators issued 598 enforcement actions in the first six months of the year-a 52 increase from the same period in 2009, according to ComplianceAdvantage.com data.

That the upper echelons of bank management may not have considered Bank Secrecy Act compliance a top priority in the past year is not lost on government officials, according to FinCEN Director James Freis.

"Anti-money laundering and terrorist financing is a cost center, so unlike business areas within the bank that generate profits, compliance may have had trouble generating focus for their efforts in the past year," he said.


In addition to FinCEN regulations and proposals, financial institutions had to contend with the passage or enforcement dates of several new laws.

Perhaps foremost for banks was the Wall Street Reform and Consumer Protection Act in July. A massive piece of legislation that mandated a host of new capital requirement and lending rules for financial institutions, as well as the restructuring of the U.S. regulatory system and closure of the Office of Thrift Supervision, the law also created a yet-to-be-launched whistleblower program that would reward reporters of fraud up to 30 percent of penalties exceeding $1 million.

Passed over four years ago, the Unlawful Internet Gambling Enforcement Act (UIGEA) went into effect for banks in June despite a bevy of bills meant to overturn the online gambling ban and numerous enforcement deadline delays. Under the law, financial institutions must identify and block transactions tied to illegal online gambling Web sites and their users.

In March, lawmakers passed the Hiring Incentives to Restore Employment Act, which included a provision that requires foreign banks to disclose details on their U.S. client accounts or pay a 30 percent withholding tax on transactions tied to any relevant transactions. The Treasury Department has yet to issue regulations on the law, which is set to get into effect in 2013.

Many U.S. financial institutions will also have to contend with a new U.K. anti-bribery law passed in October, according to Ellen Zimiles, head of global investigations and compliance for Chicago-based Navigant Consulting. The law, which takes effect in April, prohibits companies operating in Britain from bribing foreign officials to win business.

The law also goes beyond the requirements imposed by the U.S. Foreign Corrupt Practices Act (FCPA), said Zimiles. "The outlawing of facilitation payments makes the recent UK adoption of anti-bribery measures much more restrictive than the FCPA," she said.


2010 won't be remembered as a good year for tax cheats. After nearly a year of legal wrangling, Swiss lawmakers agreed in June to allow UBS AG to turn over data on more than 4,000 of its U.S. clients suspected of defrauding the U.S. Internal Revenue Service. The unprecedented agreement between U.S. officials and the bank secrecy jurisdiction followed a 2009 deferred prosecution agreement in which UBS paid $780 million for helping nearly 52,000 Americans avoid paying taxes on $15 billion in assets.

While most of the U.S. investigations have centered on individuals, Justice Department said on Dec. 21 that it had reached a non-prosecution agreement with Deutsche Bank AG that included a $553 million fine. The German bank helped U.S. clients report over $29 billion in bogus tax benefits between 1996 and 2002, according to the department.

The investigation stemmed from an earlier investigation of how KPMG LLP and other consultancies created 15 tax shelters meant to circumvent IRS reporting requirements. KPMG paid $456 million in 2006 to U.S. authorities for its involvement in the tax evasion scheme.


The year also saw the acceleration of trends that began before 2009: the merging of AML efforts with sanctions enforcement and anti-fraud controls, said Richards.

"One of the biggest trends over the last 18 months is the general compliance convergence of AML and global sanctions, of domestic and international AML programs, whether it's cross-border bulk cash, wire transfers, cash letters, global correspondent banking or the sanctions piece," he said.

Increasingly, financial institutions have had to consider whether to implement an "organizational" or "operational" convergence, said Richards. "You have to decide if the fraud guys will merge with the AML, or if you will just coordinate through one channel," he said, adding that banks will likely increasingly use AML tools to identify other crimes, including suspected human trafficking.


Not all of the news for financial institutions was bad from a compliance perspective. The AML efforts of small MSBs, for example, markedly improved in 2010, according to Jeff Sklar, managing director of SHC Consulting Group in Bellmore, NY.

"Ancillary companies, like grocery stores that you would never imagine were an MSB, are seeing a lot more in terms of compliance," he said. "That's nice to see."

But while fewer MSBs had to contend with "bank discontinuance" in 2010, "everyone is sitting on the edge of their seat trying to find out what FinCEN is going to do about stored value," said Sklar.