The New York Department of Financial Services has ordered Mega International Commercial Bank of Taiwan to pay a $180 million penalty and install an independent monitor for violating New York’s anti-money laundering laws.  

The fine is part of a consent order entered into with the New York Department of Financial Services (DFS) in which Mega Bank agreed to take immediate steps to correct violations, including engaging an independent monitor to address serious deficiencies within the bank’s compliance program and implement effective anti-money laundering controls.

“DFS will not tolerate the flagrant disregard of anti-money laundering laws and will take decisive and tough action against any institution that fails to have compliance programs in place to prevent illicit transactions,” Financial Services Superintendent Maria Vullo said in a statement. “The compliance failures that DFS found at the New York Branch of Mega Bank are serious, persistent and affected the entire Mega banking enterprise and they indicate a fundamental lack of understanding of the need for a vigorous compliance infrastructure. DFS's recent examination uncovered that Mega Bank’s compliance program was a hollow shell, and this consent order is necessary to ensure future compliance.”

A recent DFS examination uncovered the AML violations at Mega Bank, finding that the bank’s head office was indifferent toward risks associated with transactions involving Panama, recognized as a high-risk jurisdiction for money-laundering. Mega Bank has a branch in Panama City and another in Panama’s Colon Free Trade Zone. DFS’s investigation identified a number of suspicious transactions running between Mega Bank’s New York and Panama branches. 

According to DFS, the investigation also determined that a substantial number of customer entities, which have or had accounts at several other Mega Bank branches, were apparently formed with the assistance of the Mossack Fonseca law firm in Panama. As Compliance Week previously reported, Mossack Fonseca is one of the law firms at the center of the formation of shell company activity, possibly designed to skirt banking and tax laws worldwide, including U.S. laws designed to fight money laundering.

Among the findings of the DFS investigation:

The BSA/AML officer for the New York branch, who was based at the bank’s Taiwan headquarters, and the branch’s chief compliance officer both lacked familiarity with U.S. regulatory requirements. In addition, the chief compliance offer had conflicted interests because she had key business and operational responsibilities, along with her compliance role.

Compliance staff at both the head office and branch failed to periodically review surveillance monitoring filter criteria designed to detect suspicious transactions. Also, numerous documents relied upon in transaction monitoring were not translated to English from Chinese, precluding effective examination by regulators.

The New York branch procedures provided virtually no guidance concerning the reporting of continuing suspicious activities; had inconsistent compliance policies; and failed to determine whether foreign affiliates had in place adequate AML controls.

The action against Megan Bank “highlights the importance of DFS’s new risk-based anti-terrorism and anti-money laundering regulation that require regulated institutions to maintain programs to monitor and filter transactions for potential BSA/AML violations and prevent transactions with sanctioned entities,” according to DFS. The regulation, which takes effect on Jan. 1, 2017, requires regulated institutions to submit an annual board resolution or senior officer compliance finding confirming steps taken to ascertain compliance with the regulation.

Under the consent order, Mega Bank will install an independent consultant within ten days of the selection by NYDFS to implement changes to its policies and procedures and immediately address compliance deficiencies at the New York branch. The order also calls for the bank to engage an independent monitor within thirty days of its selection by DFS for two years to conduct a comprehensive review of the effectiveness of the branch's compliance program.

The independent monitor will also commence a transaction and OFAC Sanctions Review to determine whether transactions inconsistent with or in violation of the OFAC Regulations, or suspicious activity involving high risk customers or transactions were properly identified and reported from 2012 to 2014. The monitor will be selected by and report directly to DFS.

Broader implications

The DFS action against Mega Bank is notable in many respects: “First, it shows that under its new leadership, DFS will continue to be an aggressive regulator of the anti-money laundering laws,” says Matthew Schwartz, a former federal prosecutor for the Southern District of New York and now a partner at law firm Boies, Schiller & Flexner. “The $180 million fine against Mega Bank represents a substantial penalty for a first violation.” 

Second, Schwartz adds, DFS has explicitly cited Mega Bank’s conduct as justifying its new transaction monitoring rules, which go into effect in January. In addition to the bank’s alleged failure to properly monitor suspicious transactions, DFS found that Mega Bank’s chief compliance officer was not U.S.-based and had little familiarity with U.S. AML requirements. Under the new regulations that take effect next year, chief compliance officers or other senior employees or board committees would have to personally certify to the bank’s compliance. 

Lastly, the case against Mega Bank is “one of the first, if not the very first, cases linked explicitly to the Panama Papers,” Schwartz notes. “This will certainly not be the last such case, and it proves that regulators and law enforcement are looking closely at that leak not only to identify alleged money launderers, but also to identify the banks through which they act, which should come as no surprise.”

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