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US Banker

Policing Banks: A Not So 'Popular' Way to Get Off the Hook. For Now.

BY Mark Bruno

March 3, 2003
Copyright © 2003
Thomson Financial, Inc. All rights reserved. 

It could have been the cash deposits brought into the branches in gym bags. Or maybe it was the day that a Banco Popular branch called on every teller to count $1 million in small bills. Or even the time a branch manager ordered an extra armored car to transport the funds of one of its "preferred" customers.

At least one of these episodes-said to have occurred often between 1995 and 1998-should have smacked of suspicious activity to a Banco Popular employee. But apparently it never did, and now Banco Popular is paying the price.

Banco Popular recently agreed to cough up $21.6 million to the federal government after admitting it failed to report money laundering activities accurately and in a timely matter. But the fine itself isn't going to be enough to get the bank off the hook.

In spite of $30 million belonging to convicted drug dealers moving through its Puerto Rico branches, Banco Popular, which has been under the thumb of the Federal Reserve Bank of New York since 2000, found a way to avoid a criminal investigation-perhaps. It cut a deferred prosecution agreement with the U.S.Department of Justice-a deal that requires the bank to remain under scrutiny until January 2004. If the bank exhibits model behavior, it could walk with only the $21.6 million fine. "Worst-case scenario there would be a filing of the crime," says Brunilda Santo de Alvarez, internal general counsel for Banco Popular.

For now, however, Banco Popular execs are likely pleased as punch. Barring any unforeseen events, the worst would be behind the bank. That would mean it can finally get on with its U.S. expansion strategy.

By mid-last year, the bank had begun courting non-Hispanic customers-a marketing first-as a means of growing its asset base. The agreement between the DoJ and Banco Popular meant buying its way into the market was out of the question. "It was a matter of priorities," says Santos de Alvarez. "There was nothing more important than making sure we met the requirements of the written agreement." With the agreement's completion, analysts expect Banco Popular's first purchase to be in either Florida, New York or Chicago.

Equity analysts say the fine the bank is paying over the next year should not hinder expansion. The fine is considered by many to be steep, but fair. "It speaks to what was going (on) with their internal and risk management controls," says Ileana Cervantes, an analyst with Fitch Ratings.

With so many instances of ignorance and alleged corruption cited, and no criminal charges filed or employees fired, many sources are left scratching their heads. "I've never heard of anything in this country like it before," says Alfredo Padilla, Puerto Rico's Commissioner of Financial Institutions. "It's very peculiar and not a typical agreement."

Banco Popular's deal and its good behavior could be the ticket to avoiding criminal charges. "A bank in this situation would want to over-compensate, and it seems they have been and will continue to do so," says Cervantes.

The DoJ didn't return calls. Experts say deferred prosecution agreements are often used to avoid lengthy trials. But some sources privately contend that Banco Popular president Richard Carrion, a former governor of the Federal Reserve Bank of New York, has friends in the right places-in Puerto Rico and on the Hill.

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