Florida CU Nets $300K BSA Fine
The $3.6 million North Dade Community Development Federal Credit Union of Miami Gardens, Fla., admitted it willfully violated Bank Secrecy Act requirements and failed to comply with the USA Patriot Act regulations for five years by improperly handling transactions from known high-risk areas such as Mexico, Central America and the Middle East.
According to a civil assessment order issued Nov. 25 by the U.S. Dept. of Treasury's Financial Crimes Enforcement Network, as a result, the credit union received a $300,000 fine.
The anti-money laundering failures occurred from 2009 to 2014 and involved 56 money services businesses, FinCEN said.
When CU Times contacted Beverly Coffey, CEO of North Dade, she declined to comment.
During a one-year period, the small credit union handled hundreds of millions of dollars in wire transfers to foreign bank accounts of money services businesses located in Mexico and Israel. It also processed deposits in excess of $14 million in U.S. cash physically imported into the country on behalf of nearly 40 Mexican currency exchangers, according to FinCEN.
“These MSBs were located outside of its geographic field of membership and were engaged in high-risk activities, such as wiring millions of dollars per month to high-risk foreign jurisdictions,” FinCEN said.
“For instance, in 2013 alone, the total transaction volume through North Dade by MSBs included $54.8 million in cash orders, $1.01 billion in outgoing wires, $5.3 million in returned checks, and $984.4 million in remote deposit capture,” FinCEN added.
In 2009, North Dade contracted with a third-party vendor, which was an MSB, to provide financial services to other MSBs, including check cashing stores and currency exchangers, FinCEN said.
By 2013, MSB activity accounted for 90% of North Dade's total annual revenue, the agency said.
“This was not the expected business behavior of a small credit union like North Dade and led to substantial BSA compliance failures and violations,” FinCEN said.
Paying the $300,000 fine could deliver a devastating blow to the small credit union, according to some compliance experts.
“While still remaining a well-capitalized credit union after the fine is paid, I’m concerned about the remaining equity,” according to Jim Vilker, vice president of professional services at CU*Answers, a data services CUSO in Grand Rapids, Mich.
In the wake of the investigation, North Dade experienced a significant loss of other operating income.
“In 2013, the credit union's other operating income totaled almost $950,000 and to date, it is only $37,000, which has resulted in an operating loss for the year, Vilker said.
Due to the lack of compliance, North Dade has also suffered in other ways, he added.
“The compliance risk and subsequent cost was the main focus, but the credit union has sustained other intangible losses, especially loss of reputation,” Vilker said.
The credit union's board has decided to not comment on the matter at this time, according to attorney Ed Reisinger of Birmingham, Ala., who is representing North Dade.
Read more: Credit union had a history of BSA troubles ...
The NCUA cited the credit union for many of the BSA violations in a cease-and-desist issued Sept. 6, 2013.
The agency ordered North Dade to take specific measures such as establishing criteria to identify high-risk accounts and to file timely suspicious activity reports.
The regulator declined to comment on whether North Dade took the required steps.
“NCUA, of course, cannot comment on the supervision of a credit union,” NCUA Public Affairs Specialist John Fairbanks said. “A review of publicly available Call Report information will show how the credit union's business model moved from expanding membership and lending to generating fee income.”
Some industry insiders have questioned whether federal examiners could have done more to detect or deter the allegedly illegal activity, but Fairbanks defended the agency.
“(The) NCUA is continually working to make its examination process keep pace with the industry, including shifting resources to areas of greatest potential loss and putting more specialist examiners in the field,” he said.
North Dade's $300,000 fine came with a warning from federal officials that risky MSB customers are flocking to smaller financial institutions because big banks have increased scrutiny.
“When a small institution opens its doors to the world, takes on greater risks than it can manage, and puts profits before [anti-money laundering] controls, bad actors are bound to take advantage,” FinCEN Director Jennifer Shasky Calvery said in a press release announcing the penalty.
She added, “It is of great concern that North Dade failed to even review the 314(a) requests it received.”
“These are time sensitive requests that, by their very nature, are intended to further criminal investigations into significant money laundering and terrorist financing activities.”
North Dade improperly relied upon the third-party vendor's compliance activities, FinCEN said.
“For example, one individual, connected to over 60% of the businesses banking with North Dade, conducted transactions between January 2010 and August 2013, that resulted in 2,036 currency transaction reports being filed for cash withdrawals,” the agency said. “However, North Dade never identified this customer as being potentially high-risk or reviewed his activities.
Greed seemed to be a factor, according to FinCEN.
“The substantial revenue generated by the vendor's program appeared to outweigh any consideration by North Dade of associated risks and appropriate compliance measures,” the agency said.
Even though independent audits in 2012 identified money laundering and terrorist financing risks at North Dade, the cooperative did not perform a risk assessment until November 2013, FinCEN said.
Read more: How to avoid BSA fines ...
What could North Dade Community Development Federal Credit Union have done to avoid a $300,000 fine for Bank Secrecy Act violations?
“As flagged by FinCEN, North Dade should have designated a person responsible to oversee BSA compliance,” attorney Martin Kenney, an anti-money laundering expert, said. “However, you first have to have compliance to oversee.”
“By all accounts, in this case, there was none,” he continued. “This sounds like a case of hear no evil, see no evil, or the ostrich sickness – sticking one's head in the sand.”
North Dade could have engaged a professional to design and install a near bullet-proof compliance program, Kenney said.
“It didn't and that's why we have this textbook example of how not to do it when it comes to abiding by [anti-money laundering and know your customer] and due diligence principles.”
Kenney, who was the keynote speaker at the Association of Certified Fraud Examiners’ 25th Annual Global Fraud Conference and received the association's 2014 Cressey Award for his lifetime achievement in the detection and deterrence of fraud, said credit unions must practice extreme caution in dealing with high-risk accounts such as money services businesses.
There has been a surge in illicit activity at smaller community banks and credit unions, as larger banks such as Barclays PLC or HSBC move away from providing services to MSBs, said Kenney, who is managing partner of Martin Kenney & Co. Solicitors, a British Virgin Islands-based firm specializing in international fraud.
“North Dade was working with high risk locations far beyond its field of membership and body of knowledge,” he added. “North Dade is most unlikely to be alone in that.”
Failing to adhere rigorously to AML standards can mean financial ruin if penalties dig in to liquidity.
For credit unions, a standard off-the-shelf compliance program is unlikely to ensure effective compliance, he said.
“Each financial institution offers different products and has a different customer base,” he said. “A compliance program must be specifically tailored to meet the needs of the institution. As those needs change, the compliance program will need to be reviewed and adapted.”
It's vital for staff to be trained to recognize and respond to red flags, Kenney said.
Smaller credit unions such as North Dade often have bigger challenges in achieving BSA compliance, according to Randy Thompson, CEO of TCT Risk Solutions (formerly TCT Inc.), a balance sheet and risk management CUSO based in Eagle, Idaho.
“Quite often compliance falls on the shoulders of the CEO/manager who is already managing a multitude of items in running their shop,” Thompson said. “This creates a double problem because, as the CEO focuses on compliance, other important duties may receive inadequate attention.”
If a credit union is unable to appoint an staff member to oversee compliance, the institution's leaders should reach out and ask for help for their fellow credit unions or look for a shared resource with compliance expertise, Thompson said.
“Consistent attention, coupled with the application of shared resources, can create a compliance program that works and protects the credit union and its members,” he explained.
The NCUA and Federal Financial Institutions Examination Council provides many tools and audit questionnaires to assist with compliance, Thompson said.
“Doing annual in-house pre-audits will help you find the holes in your BSA/AML compliance program, so you can correct issues before they become a violation,” he explained.