The Industrial Bank of Korea (IBK) and its New York branch will pay a total of $86 million in criminal and civil penalties to resolve both federal and New York State charges for numerous, systemic sanctions compliance failures that allowed more than $1 billion to be illegally transferred to the government of Iran in violation of U.S. sanctions.

On Monday, the New York State Department of Financial Services (NYDFS) announced a consent order against IBK and fines of $35 million to New York State for violations of New York Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) laws. “Industrial Bank of Korea until recently failed to demonstrate sustained improvement in its compliance with New York and federal anti-terrorism and anti-money laundering laws,” said Superintendent of Financial Services Linda Lacewell. “With this consent order, DFS is holding IBK accountable for ensuring full continued compliance with the law and its vigilance against unlawful activity.”

In 2011, an examination by NYDFS found that IBK, from 2010 to 2019, failed to maintain adequate policies and procedures for BSA/AML compliance, as well as failed to maintain an effective transaction monitoring system, among other problems. As a result, IBK failed in 2011 to capture and prevent a $1 billion fraud on the bank and its New York branch.

Among those specific compliance failures described in the consent order:

IBK’s New York branch had an antiquated monitoring system. The 2011 examination revealed the New York branch “did not have in place policies and procedures that would enable the bank, for instance, to verify the identity of each customer who conducted business with the branch.” Additionally, the bank’s transaction monitoring system was monitored manually and, as warned, “the bank’s transaction monitoring system was unable to identify transactions that deviated from expected customer activities.”

Compliance was ignored. The examination findings were foreshadowed in a May 2010 memo, in which the branch’s then-deputy general manager and compliance officer (DGM-CO) advised a senior manager that “the bank needed to increase compliance staff or update the bank’s antiquated software system because the existing system caused unreasonable delays in the branch’s BSA/AML manual review process, which according to the DGM-CO, were cumbersome.”

Poor internal controls. In January 2011, Kenneth Zong, a U.S. naturalized citizen, opened a small-business account at an IBK branch located in South Korea. Zong allegedly posed as a small business owner who claimed to be engaged in wholesale services, investment consulting, and trade. “Instead, according to an indictment filed in the District of Alaska, Zong allegedly created phantom purchases through companies Zong controlled to exploit the rules surrounding IBK’s restricted account,” the consent order states.

Zong also allegedly conspired with unnamed co-conspirators to circumvent U.S. sanctions laws by creating fictitious contracts, bills of lading, and invoices to convince Korean banking regulators and banks, including IBK, that Iranian companies owed Zong monies for goods that did not exist. As a result, according to NYDFS, IBK transferred funds from its restricted account into Zong’s IBK account in Korean Won, and Zong then disbursed the monies in U.S. dollars to individuals and entities located globally in the amount of over $1 billion from February 2011 through July 2011. Most of these transactions cleared through financial institutions located in New York, including the New York branch and at least one other Department-regulated bank, the consent order states.

Compliance deficiencies continue

These compliance deficiencies and internal control failures resulted in a written agreement that IBK entered with DFS and the Board of Governors of the Federal Reserve System in 2016. In the agreement, IBK acknowledged that bank examinations had identified deficiencies in the New York branch’s compliance and risk management programs and agreed to remediate these deficiencies.

That was not, however, what occurred. “Subsequent safety and soundness examinations found that the branch’s compliance with the written agreement and New York’s anti-money laundering laws and regulations had declined even further,” the agency said.

For example, a 2017 target examination found that IBK, among other things:

  • Used stale data to tune its transaction monitoring system;
  • Relied on testing scenarios that did not produce productive alerts;
  • Relied on a suspicious activity monitoring program that was unable to flag multiple scenarios within one alert;
  • Lacked sufficient documentation to support closure of alerts, particularly for transactions processed on behalf of the bank’s home office;
  • Lacked effective management oversight over the compliance program;
  • Conducted inadequate independent testing; and
  • Failed to adequately document the disposition of OFAC alerts.

Additionally, the consent order states, the bank appointed a new BSA compliance officer in 2016 who had “no prior experience in that role and limited experience with transaction surveillance and AML audit testing. Department examiners noted that the BSA compliance officer was not qualified or experienced to lead the Branch’s need to revamp its compliance program to meet the requirements of the Written Agreement.” It was not until a 2019 examination that the bank was found in compliance with the written agreement.

Under the NYDFS consent order, IBK must submit to DFS written plans to further revise its BSA/AML compliance program and enhance its customer due diligence program. IBK must also submit ongoing quarterly reports on any changes to the branch’s BSA/AML compliance program and IBK’s governance structure and supervision.

Federal action

On the same day NYDFS announced its settlement with IBK, New York Attorney General Letitia James announced her office, too, had resolved its six-year investigation into the bank’s practices. That investigation, led by the New York Attorney General’s Office (NYAG) and the U.S. Attorneys’ Office for the Southern District of New York (SDNY), similarly revealed IBK’s deficient AML compliance program enabled Zong and the companies he owned and/or controlled to illegally transfer more than $1 billion for the Iranian government using financial institutions located in New York.

As part of the agreements, IBK will forfeit $51 million. The NYAG said it has resolved the investigation with a non-prosecution agreement, while SDNY has resolved its investigation with a deferred prosecution agreement.