When trying to make sure you’re doing everything right from a regulatory
standpoint, some of the best object lessons come from financial institutions that
have run into trouble.
In a recent 32-page consent order, the Financial Crimes Enforcement Network
(FinCEN) imposed a $1.5 million civil penalty against Kingdom Trust, which is
headquartered in Sioux Falls, South Dakota, for “willful violations” of the Bank
Secrecy Act (or BSA).
“Kingdom Trust had virtually no process to identify and report suspicious
transactions, resulting in it processing over $4 billion in international wires with
essentially no controls,” said FinCEN’s Acting Director Himamauli Das. “This
enforcement action is an important statement that we will not tolerate trust
companies with weak compliance programs that fail to identify and report
suspicious activities, particularly with respect to high-risk customers whose
businesses pose an elevated risk of money laundering.”
Running Afoul of SAR Requirements
In addition to providing custody services to individuals with self-directed IRAs,
Kingdom Trust also provided account and payment services to foreign securities
and investment firms. Its customers included money-services businesses in Latin
America that FinCEN has determined had “elevated risks of money laundering.”
Financial institutions are required to file SARs (or suspicious activity reports) for
transactions over $5,000 and transactions that raise red flags.
The filing of SARs by Kingdom Trust has been described by FinCEN as “severely
underdeveloped and ad hoc,” resulting in SARs not being filed on time – and
sometimes not filed at all.
What’s more, those Kingdom Trust personnel with AML responsibilities
acknowledged that they had not fully understood federal SAR filing requirements.
A Few Key Takeaways
There are a few critical lessons to be learned from the mistakes that Kingdom
Trust made and from the steps it has agreed to take to strengthen its BSA
compliance going forward.
Here are a few:
Hiring qualified personnel is critical. Kingdom Trust’s deficiencies, according to FinCEN, were exacerbated by a failure “to recruit sufficient personnel with experience in AML compliance.” Kingdom Trust had only one compliance employee responsible for conducting a daily review of the prior day’s transactions to identify potentially suspicious transactions. When that AML compliance officer left in February 2020, responsibilities were transferred to a junior employee with other responsibilities and no prior AML/BSA experience. A new compliance officer was not hired until July 2020.
Make sure to deploy any transaction monitoring systems you have. While Kingdom Trust first began working with an outside vendor on the adoption of an automated transaction monitoring system in late 2017, it did not actually deploy the system until the fall of 2021.
Take your own guardrails seriously. One of the more startling of FinCEN’s findings is that Kingdom Trust had its own “watch list,” but it failed to file SARs on parties listed on that watchlist.
If you have problems, be proactive and disclose them to regulators. Coming clean isn’t easy, of course, but Kingdom Trust was faulted for failing to voluntarily disclose BSA violations to FinCEN.
When in doubt, hire an independent consultant for review. As part of the consent order, FinCEN mandated that Kingdom Trust hire a consultant at its own expense to review SAR filings from the period covered in the order to make sure that all SARs have now been properly filed. The independent consultant will also make recommendations for future compliance steps. In addition, another independent consultant is to be hired, also at Kingdom Trust’s expense, to review the financial institution’s entire AML program and implement recommendations made within this review.
Strengthen record-retention practices. Kingdom Trust agreed to retain all required records and documents under the FInCEN consent order for a period of six years after creation of the document—or longer, if mandated under applicable law.
In the consent order, FinCEN highlighted what Kingdom Trust did right as well as what it did wrong. For instance, the institution was given credit for providing “substantial cooperation to FinCEN throughout the course of its investigation.”
