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Popular’s penalty to serve as lesson for all financial institutions

Feds determined to root out money laundering


January 23, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

Top federal authorities have chosen to make Banco Popular’s admitted past failures to report suspicious financial activities--along with their consequences, namely the largest-ever penalty imposed on any bank anywhere for not filing such reports--an example for financial institutions nationwide.

The penalty imposed by the U.S. Treasury Department’s Financial Crimes Enforcement Network (Fincen) was deemed satisfied by Banco Popular’s payment of $21.6 million to the U.S. government as part of a deferred prosecution agreement. The agreement was reached following a lengthy federal investigation of transactions conducted by and through Banco Popular between June 1995 and June 2000.

The most notorious transactions uncovered by the investigation involved Roberto Ferrario Pozzi, an Italian national currently serving an eight-year prison term for his participation in a heroin trafficking and money laundering ring. The ring, which was broken up by federal authorities in December 1998, smuggled heroin into Puerto Rico, distributed it, and subsequently laundered the proceeds through the U.S. financial system.

Ferrario Pozzi was the owner of Phone Home, a long-distance calling and money remitting company in Old San Juan, and one of the principal businesses used by the drug ring to launder its illegal proceeds. Between June 1995 and March 1998, Ferrario Pozzi deposited approximately $20 million in cash into his account at Banco Popular’s Old San Juan branch.

Since April 1996, all U.S. banks have been required to submit Suspicious Activity Reports (SARs) to Fincen whenever one or more transactions aggregate $5,000 or more and the bank knows or suspects a transaction involves, or is conducted to conceal, funds derived from illegal activities or which may be used to evade a law or a reporting requirement. The SARs are considered a critical tool in federal law enforcement efforts to investigate and prosecute cases.

"Banks that disregard their duty to conduct adequate due diligence and report suspicious financial activities allow themselves to be exploited for criminal purposes," said Michael Chertoff, U.S. Assistant Attorney General and head of the U.S. Department of Justice’s criminal division. "Banco Popular has been forthright in accepting its responsibility."

In light of Banco Popular’s subsequent remedial measures and its willingness to acknowledge responsibility for its actions, the federal government has chosen to recommend to the court that any prosecution of Banco Popular on the criminal charge of failing to report suspicious financial activity be deferred for 12 months, and eventually dismissed if the bank fully complies with its obligations.

"The good news is that we’ve now put this behind us," a chastened Richard Carrion, Popular’s chairman, president & CEO, told CARIBBEAN BUSINESS. Puerto Rico’s banking industry leader said that since the incidents came to light, Popular has initiated a comprehensive and vigorous effort to combat any use of its operations to launder money. "I can’t conceive of there being a bank that pays more attention to this issue than we do," Carrion said.

"Money Laundering Alert," an industry newsletter, said Washington regulators appear to crack down hardest on financial institutions that serve or are based in Latin America, but take little action against Wall Street or stateside institutions.

Popular Inc.--a $31.8 billion financial institution with 196 branches in Puerto Rico, operations in over 40 U.S. mainland states, and more than 10,000 employees--received suspicious deposits of $20 million over three years and was fined a penalty of $21.6 million. However, Broadway National Bank, a much smaller New York City bank with about $80 million in assets, failed to report $123 million in suspicious cash deposits during a two-year period and was only fined $4 million. It would seem that quantity deposited at a two-branch Manhattan bank over two years would arouse much more suspicion than $20 million deposited at a giant bank like Popular over three years.

What’s more, Lehman Brothers of New York never notified the government of a client’s suspicious activities in a similar case and suffered no penalty or other government action. In fact, it only began cooperating after the government served it with a grand jury subpoena for its records. Both of these cases took place following the post-9/11 tightening of money laundering rules.

Similar cases also occurred at Citibank in Mexico City, which handled more than $100 million in suspicious transactions, and at New York-based U.S. Trust Corp., which paid only $10 million in fines to settle regulators’ allegations that its internal controls were inadequate.

In response to the federal investigations, Banco Popular made numerous enhancements to its compliance program, including:

  • Thirteen employees were assigned to a new department administering Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance.
  • Enhanced BSA and AML training was provided to all employees.
  • Know-your-customer policies were significantly revised.
  • Banco Popular purchased state-of-the-art software to detect suspicious activity in all accounts.

Puerto Rico financial institutions continue to be under intense scrutiny, as San Juan remains one of four designated "High-Intensity Money-Laundering & Related Financial Crimes Areas" (Hifcas) nationwide. The designation in 2000 resulted in the formation of a multi-agency federal-commonwealth task force that continues to investigate financial crimes, mainly those dealing with SARs filed by financial institutions.

Financial institutions in Puerto Rico have also had to contend with developments in the wake of post-9/11 concerns over terrorist network financing. The USA Patriot Act of October 2001 made 52 amendments to the Bank Secrecy Act, including expanded and more stringent reporting requirements.

This Caribbean Business article appears courtesy of Casiano Communications.
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