AML Sanction: It's a "Learning Moment" for HSBC

Kevin Sullivan on Why Banks Need to Improve AML Programs

Former police investigator Kevin Sullivan feels passionately about anti-money laundering programs. So much so that he has a message to critics who think AML programs are just about shuffling paper

"It is easy to forget and/or never really truly understand why this is such an important issue if you only see anti-money laundering as a paperwork detail," Sullivan says. "Just look at what is going on at the border currently; you have got the drug lords and their gangs who are absolutely running wild."

And how do the drug lords finance their activity? Money laundering.

"I don't mean to speak on some sort of moral high horse here, but there is much more to this AML stuff than just shuffling papers across a desk, and it is really not an issue of Big Brother looking over the average guy's shoulder," Sullivan says. "This stuff cuts to the very fabric of who we are as Americans and the future of our children and our country. And if we are able to put a damper on the means to commit and/or continue the various organized criminal activities, then that must be our combined focus to do."

In an exclusive interview on AML news and trends, Sullivan discusses:

Sullivan is a former Investigator with the NY State Police and was the state investigations coordinator assigned to the NY HIFCA El Dorado Task Force in Manhattan. He has more than 20 years of police experience. Sullivan possesses a Masters in Economic Crime Management and is both a certified anti-money laundering specialist and certified anti-money laundering professional. He is also the director of AMLtrainer.com, and he has led several webinars on AML policy and investigations.

HSBC Cease & Desist Order

TOM FIELD: So, Kevin, the big news recently was the cease and desist order against HSBC. What is the significance of this? It sounds so big - cease and desist.

KEVIN SULLIVAN: Yeah, it does kind of sound Hollywood movie-ish, like the Terminator and the cease and desist man, but basically what it is: The regulators are saying that HSBC had an inadequate AML compliance program. The significance of this can be looked at from a couple of different perspectives.

From a regulatory point of view, an exam of the bank was completed, and there were several deficiencies that they found, such as inadequate staffing, inadequate procedures for closing alerts, inadequate monitoring of correspondent accounts, inadequate collection of customer due diligence information and inadequate responses within the PEP accounts.

From an internal bank perspective, there are going to be many changes in the procedures, and in addition to that a few shekels will be spent updating the program, no doubt heads will roll, and sacrificial lambs will be offered to the banking gods.

And finally, a fine will probably be coming down the pike, and a rumor that I hear is that the fine will probably be quite significant in scope.

FIELD: So, Kevin, what does it mean? What has to cease and desist?

SULLIVAN: What it really means is that HSBC was creating a substantial risk for money laundering and/or terrorist financing. It means that in addition to any potential forthcoming fines, HSBC will have to expand and spend some serious energy and quite a few greenbacks in revamping their policies and their procedures.

Further, it sends a message to all financial institutions that the government is pretty darn serious about this anti-money laundering stuff.

FIELD: So, Kevin, as an investigator and as a trainer, you have been around anti-money laundering for a long time. How common are such actions as the cease and desist order and what really is the underlying cause?

SULLIVAN: Well, regulatory actions against financial institutions are not uncommon at all. But, again, I guess that depends on one's perspective. There are various types of regulatory actions. Some of them are civil penalties, you have corrective directives, you have the cease and desist (also known as the C & D Order) and you have terminations - there I go back into that terminator cease and desist movie again.

But among all the various regulating authorities and also the Department of Justice, there is no shortage of enforcement actions. However, if you consider the sheer numbers of the thousands of financial institutions across the U.S., and there are probably only a couple hundred regulatory actions of varying sizes and degrees, so you do the math yourself; is that common or is that uncommon? I guess that depends on what side of the fence you are sitting on.

But as for the cause of these actions, they are all unique to each institution. However, I would say the common denominator is some form of a lack of proper AML and BSA compliance procedures.

AML Compliance

FIELD: So, Kevin, what is the advice to banking institutions of any size regarding their own AML compliance practices?

SULLIVAN: Well, every AML director, manager, head-cheese, big boss, man with the big hat or whatever you want to call them, the guy in charge and his executive staff should be reviewing all major regulatory actions. There are just problem situations that can be ongoing, and/or they could be developing at each and every financial institution, whether it is the one across the street, whether it is the one next door to you, or whether it is yours. Because usually what happens in one has got a good chance of happening in another one. These are not so unique that they never happen to another institution again.

So I would think that you should take this time, and to borrow a phrase from the President, this should be "a learning moment." Take the time to review and to analyze the issues involved in a major action such as this one we see here at HSBC, and use that to conduct your own look back and see how well your institution stacks up.

Cross-Border Funds Transfers

FIELD: Kevin, another topic entirely; recently FinCEN proposed a rule that would lower the threshold from $10,000 dollars to $1,000 dollars on reporting cross-border transfers. What is the threat here that FinCEN is starting to get ahead of?

SULLIVAN: As a retired law enforcement guy myself, I am loving this, because this basically will assist law enforcement as many of the core criminal activities, such as narcotic trafficking, human trafficking, terrorist financing, they all have some type of international financial element.

So, if you make cross-border financial transaction data, and now the acronym of course is CBFT for that. If you make CBFT data available that would provide law enforcement with information earlier, and usually at a much more critical stage of the investigation. So if we use the recent example of regulatory actions against Wachovia earlier this year and AmEx last year, they were both tagged by the regulators partly due to issues with what is referred to as the black market peso exchange (BMPE).

So being able to provide enhanced cross border financial transaction data in a more timely manner, or earlier manner, that would help ICE (Immigrations and Customs Enforcement) to look into a lot of that trade/finance crimes, and that would help identify new targets and particularly those who are suspected of engaging in trade-based money laundering by some type of international financial payments that appear to be a settlement for irregularly priced goods, which is pretty much the definition of trade priced financing.

FIELD: So I hear the law enforcement perspective is this is a good thing, but what is the impact on the banking institutions? I am envisioning more SARS, more reporting and for them, considering, there are more compliance headaches.

SULLIVAN: Yeah, look there is no doubt about it; there is going to be more work on their part. But, according to FinCEN, there efforts are only about 300 depository institutions and approximately 700 MSB's will actually be affected by this cross-border transaction ruling. I am sure that it will increase their operational costs as additional personnel will be required and associated new systems that go along with that, and of course as we have all been around long enough to realize what is called the Law of the Unintended Consequences, which means that there is always some sort of development and/or outcome that no one predicted and ultimately has to be reckoned with. So bottom line is yes it is going to cause a little more work for certain banks and institutions, absolutely.

The Importance of AML

FIELD: Well, Kevin, let's talk about what is new with you. You have been out of law enforcement for over a year now and you have got your training business going. What are you doing?

SULLIVAN: Let me just refer back to what you said on the impact for one second, if I can. I would just like to say one of the questions that I get a lot from people is "What is this all about, and why do we do this stuff?" I don't get that so much from law enforcement, and I don't get too many from bankers, but if you asked a regular guy on the street after he hears about some regulatory action that is going to take place at a big bank and he immediately starts thinking it's Big Brother and they ask the question: "Is this really necessary?" So let me focus on that for just a second if I could take your time on that.

You know, I have had the opportunity to see the effects of money laundering on both the front end and back end. In other words, before the financial institution sees it and after it leaves the financial institution. I have seen the crimes that create the dirty money, and I have seen the results of the handiwork of the criminals that committed them, and this is something that most people don't see. They only read about in the newspaper or on the internet.

So it is easy to forget and/or never really truly understand why this is such an important issue if you only see anti-money laundering as a paperwork detail. So just look at what is going on at the border currently. You have got the drug lords and their gangs who are absolutely running wild.

Look at the recent incident that happened last week or the week before in Texas, which was just an absolute microcosm for current events. The pirates shot and killed a man jet skiing with his wife, and they tried to kill her too. And then the Mexican police investigator who looked into it was also killed, and not only was he killed but he was decapitated, and his head was delivered to the police station.

Now I don't mean to gross out your audience, Tom, but this is reality, and this is the type of anarchy and lawlessness that is only a stone's throw away from us. So at some point this will cross into the U.S. What does this have to do with money laundering and is it really necessary? Yeah, it is, because how do you think these drug lords get the money that enables them to do what they do?

Now the quick answer is they deal drugs and they will launder money, and the more drug dealing, the more money laundering. The more money laundering, the more drug dealing and so on and so on. So I don't mean to speak on some sort of moral high horse here, but there is much more to this AML stuff than just shuffling papers across a desk, and it is really not an issue of Big Brother looking over the average guy's shoulder. This stuff cuts to the very fabric of who we are as Americans and the future of our children and our country. And if we are able to put a damper on the means to commit and/or continue the various organized criminal activities, then that must be our combined focus to do.

AML Training

FIELD: Well, that segue is nice for into what you are doing now because obviously you have got the compulsion from having been a money laundering investigator to now make it your profession in your private life.

SULLIVAN: Yeah, I love teaching. I love going out and training on AML and telling some stories and trying to draw bridges for people who may only see this as a paper issue and checking a box and moving paper from one side of the desk to the other. I like being able to bring to them why they do that and why it is important to check that box and why it is important to send this thing in to FinCEN and why it is important to do that.

It is very nice to see that light bulb moment when they sit in their chairs and they look up and they realize, "Oh that's why we do it." That is extremely refreshing to do. But right now, I just finally posted up on my website for the first time an e-training module, I am going more with the high-tech e-training stuff and I put up a module called BSA Training for New Hires.

Hopefully, this will be the first one of many, and I tried to making engaging and entertaining and all fun because I can't stand those boring speakers or boring webinars that so many of us have been a part of before. So I hope that by making it somewhat engaging that people will not only learn something from it, but they will remember it, and they will retain it, and they will be able to recite it back three weeks later, which is kind of the crux of the good adult learning process.

And with that I think I am also off to Australia in the next couple of weeks, so I am looking forward to that, but that is about all I am doing here on this end.





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