USA / Puerto Rico - Banco Popular takes massive forfeit over lax money laundering controls

"Banks are our first line of defense against money launderers, drug dealers and even terrorists who would attempt to abuse our financial institutions," said Assistant Attorney General Chertoff. "Banks that disregard their duty to conduct adequate due diligence and report suspicious financial activities allow themselves to be exploited for criminal purposes. Today"s agreement recognizes that Banco Popular has been forthright in accepting its responsibility."

But that still meant a "civil penalty" of USD21.6 million, of which USD20m will go to cash strapped FinCEN - although it is not at all clear how much of that they will be allowed to keep or how much of it will be set against its next budget claims.

According to the Department of Justice, "The charges and the deferred prosecution agreement filed today arose out of transactions conducted by and through Banco Popular between June 1995 and June 2000. During this time, several unusual or suspicious transactions were conducted in connection with certain accounts at Banco Popular." Perhaps more significantly for many financial institutions: "Although the bank filed Suspicious Activity Reports (SARs) on these accounts, they were untimely or, in some cases, inaccurate."

The quality of reporting is something that is gaining considerable currency in financial intellegence units around the world. Increasingly, the information required is more than a simple note of the transaction details.

In one series of transactions, says the Justice department, Roberto Ferrario Pozzi deposited approximately $20 million in cash into a Banco Popular account from June 1995 to March 1998. Deposits were made to the account by Ferrario and employees of Phone Home - a phone card, long distance and money transmission service - often in paper bags or gym bags filled with small-denomination bills. It was in the mid 1990s that Silkscreen Consulting first warned pre-paid telephone card operators of vulnerabilities to laundering in this way. FinCEN issued a warning about this risk in 2001 and the reporting requirements for US Money Services Businesses include pre-paid services providers. According to the Department of Justice, despite the suspicious nature of the deposits, the bank did not investigate and file timely and complete SARs reporting the activity. These late filings, the absence of supplementary SARs and the errors in the SARs that the bank did file hindered law enforcement"s ability to initiate investigations on these accounts in a timely manner, resulting in the laundering of millions of dollars of drug proceeds through these accounts. Ferrario was indicted in December 1998 for money laundering in connection with certain deposits to Banco Popular and was sentenced to 97 months imprisonment in 2002.

It is, of course, a question of serious doubt as to whether, if the reports had been filed on time or were complete, whether the FinCEN systems of the time woud have been capable of producing information upon which law enforcement officers would have been able to act. Indeed, the production of such reports was not - and arguably remains - a less than central part of FinCEN's functions.

"The lengthy U.S. Customs/IRS investigation into Banco Popular de Puerto Rico established that millions of dollars worth of drug proceeds were laundered through this bank over a period of several years," Customs Commissioner Bonner says. "In some cases, gym bags full of cash were literally brought into the bank for deposit by money launderers. Despite its legal obligation to report these suspicious transactions to the government in a timely manner, Banco Popular, in some cases, chose not to report these transactions until years after the fact - and did so only after learning about the U.S. Customs/IRS investigation into the bank."

FinCEN Director James Sloan, who came to FinCEN after the events complained of, says ""Most banks and other financial institutions throughout the United States have excellent programs in place to help ensure that they are not vulnerable to illegal exploitation and their record of BSA compliance is extremely good. However, the American people have a right to expect that when an institution violated the trust of its account holders and its responsibility to preserve the integrity of its operations, it will face public scrutiny and severe penalties."

The failure to report until after it was learned that there was an investigation has direct application in the legal regimes in other countries where the filing of a report "as soon as reasonably practicable" and on the accused's "own initiative" may form the basis of a defence. Clearly, the Banco Popular reports were neither "as soon as reasonably practicable" nor "on its own initiative."