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FinCEN/OCC BSA Enforcement Effort Targets Bank's Failure to File Suspicious Activity Reports
By Webb McArthur

The Financial Crimes Enforcement Network (FinCEN) last month assessed a $1.5 million civil money penalty against First National Community Bank (FNCB) of Dunmore, Pennsylvania, for willful Bank Secrecy Act (BSA) violations. The Office of the Comptroller of the Currency (OCC), FNCB's prudential regulator, assessed a concurrent $500,000 civil money penalty for related BSA violations. Financial institutions should take note of this case as part of their continual efforts to improve their BSA anti-money laundering (AML) compliance.

The violations relate to the so-called "Kids for Cash" scandal, a judicial corruption scheme in which two former Pennsylvania judges, Michael Conahan and Mark Ciavarella, sentenced juveniles over a four year period (2005 to 2009) to terms at two for-profit youth detention facilities in which they had a financial interest. To accomplish this, Conahan, who was on FNCB's board of directors, controlled accounts through which he processed the kickbacks from the detention facilities. Conahan eventually pled guilty in 2010 to conspiracy, fraud, and racketeering charges, and the next year Ciavarella was convicted on 12 counts after a jury trial.

The OCC issued a cease and desist order two months after Conahan's plea, directing FNCB to correct deficiencies in its BSA and AML compliance efforts, as no Suspicious Activity Report (SAR) had been filed by FNCB for any transaction through which Conahan laundered the kickbacks. The BSA requires financial institutions to establish AML programs and file SARs for transactions with an aggregate value of more than $5,000 where the institution "knows, suspects, or has reason to suspect" that the transaction is suspicious. Suspicious transactions include those that involve funds derived from illegal activities or are conducted to disguise funds derived from illegal activities, are designed to evade BSA reporting or recordkeeping requirements, have no business or apparent lawful purpose, or are not the sort in which the customer would normally be expected to engage - and the bank knows of no reasonable explanation for the transaction after examining the available facts, including background and possible purpose of the transaction. For purposes of this requirement, transactions that banks should monitor include deposits, withdrawals, transfers between accounts, exchanges of currency, loans, extensions of credit, or purchases or sales of any stock, bond, certificate of deposit, or other monetary instrument or investment security, or any other payment, transfer, or delivery.

Nearly 5 years later after the convictions for the "Kids for Cash" scandal, the FinCEN Assessment noted several red flags in the transactions that should have prompted the filing of SARs. They include:

  • A law enforcement subpoena for information on Conahan and other individuals and entities;
  • Activity involving large, round-dollar transactions, often occurring on a single day, which were not, contrary to FNCB's policies and procedures requiring escalation, reviewed;
  • An abnormal volume of activity compared to account balances;
  • A substantial reported increase in the value of a condominium purchased by an entity over a short period of time;
  • A full cash-out refinance of the condominium within 12 weeks of purchase;
  • A nearly quadrupling of Conahan and Ciavarella's incomes over a year, purportedly a result of rental income from the condominium;
  • The fact that payments to Conahan and Ciavarella from the condominium account far exceeded the reported value of the condominium, the entity's only payment-generating asset; and
  • As a result, the fact that the condominium rental earnings were disproportionate in comparison to the reported value of the condominium.

The Assessment also noted that FNCB did not conduct any analysis or risk-rating on any of the accounts in question. FNCB admitted it failed to file SARs on transactions related to the scheme.

Financial institutions should examine their compliance programs to ensure that institutions will detect red flags, such as those noted by FinCEN and the OCC in this case, and file SARs as required by the BSA. In particular, institutions should ensure their programs encompass all accounts with relevant BSA transactions. When developing or augmenting their BSA and AML compliance programs institutions should also heed the following advice from the FinCEN BSA/AML Compliance Advisory issued in August of 2014, ("Advisory to U.S. Financial Institutions on Promoting a Culture of Compliance," available at http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2014-A007.pdf):

A financial institution can strengthen its BSA/AML compliance culture by ensuring that (1) its leadership actively supports and understands compliance efforts; (2) efforts to manage and mitigate BSA/AML deficiencies and risks are not compromised by revenue interests; (3) relevant information from the various departments within the organization is shared with compliance staff to further BSA/AML efforts; (4) the institution devotes adequate resources to its compliance function; (5) the compliance program is effective by, among other things, FINCEN ADVISORY 2 ensuring that it is tested by an independent and competent party; and (6) its leadership and staff understand the purpose of its BSA/AML efforts and how its reporting is used.

Webb McArthur is an associate in the Hanover, Maryland office of Hudson Cook, LLP. Webb can be reached at 410-865-5424 or by email at wmcarthur@hudco.com.

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