By Scott Van Voorhis
When it comes to money laundering, the bad guys suddenly have the upper hand: Several foreign companies have come under intense scrutiny for their banking habits, as they are apparently able to move tens of millions of dollars through New York’s biggest banks undetected.
Federal prosecutors recently leveled a money laundering case against an Iranian government-owned shipping line for allegedly funneling $60 million through accounts at JPMorgan Chase, Bank of America and Citibank.
Under federal sanctions passed in 2008, the Islamic Republic of Iran Shipping Lines has been effectively barred from the global banking system. Known as IRISL, its ships have been used by the Iranian regime to illegally ship weapons around the world. And with some skillful use of shell corporations, the Iranian shipping line was able to evade controls at some of the world’s most sophisticated banks and get access to badly needed American currency, according to the case recently unveiled by prosecutors in New York.
The U.S. banks in question have been held blameless, with gaps in federal regulations likely providing a big loophole for the Iranian company to exploit, industry experts say.
The ugly headlines generated by the IRISL case and others like it, while painful, could be just the push needed to swing the pendulum back in favor of the banks in this cat-and-mouse game, replete with shadowy front organizations seeking to move cash around the globe for all sorts of nefarious purposes.
Faced with big federal fines and the threat of toxic, reputation-damaging publicity, banks are now scrambling to beef up their efforts to clamp down on money laundering activity.
“It is an uneasy situation for the banks,” said Harry Clark, co-head of Dewey & LeBoeuf’s International Trade Practice Group. “It is no doubt disconcerting for them to see this. They are always going to be looking over their shoulder, making sure no one will be pointing fingers at them.”
The massive money laundering scheme by Iran’s official shipping company got its start two years ago, in September of 2008.
The U.S. Department of the Treasury’s Office of Foreign Assets Control earmarked IRISL and 18 affiliated entities for helping import chemicals and other materials for use in Iran’s burgeoning missile and nuclear bomb programs. The designation effectively banned Iran’s shipping line from access to the U.S. financial system, a potential death blow since the world’s shipping industry runs on the American dollar.
As European banks continued to process transactions involving Iran’s shipping company, U.S. banks began blocking them. So IRISL responded with a tactic that, for a time anyway, proved surprisingly effective – creating a new generation of front companies and falsifying records to hide the interests and individuals behind them.
The scheme finally unraveled in June, when Manhattan District Attorney Cyrus Vance Jr. released a 317-count indictment of 11 corporations and five individuals.
The indictment paints a picture of brazen illegality, in which the names of ships and new front companies were invented on a whim by the Iranian shipping firm in a bid to evade sophisticated screening programs now used by the major banks.
“We have changed the names of all our ships into English names,” an IRISL manager wrote on February 23, 2009, according to the indictment. “We will be able to lease containers instead of [IRISL] containers for this traffic. So no trace of IRISL at all in documentation. Nonetheless our present agents will be doing the work.”
Tellingly, none of the banks which unwittingly processed the tens of millions in transactions for the front companies spawned by IRISL were charged in the indictments.
In fact, the indictment goes out of its way to exonerate the banks involved, noting U.S. banks use monitoring systems designed to vet all incoming and outgoing international wire transactions and “recognize suspicious or prohibited transactions.”
Still, it raises the question of how the world’s most sophisticated financial institutions could have been misled by the Iranians’ brazen techniques.
Julie Conroy McNelley, a senior analyst within Aite Group’s Retail Banking practice, believes one possible explanation may be found in a loophole in current federal banking regulations.
The now four-decade-old Bank Secrecy Act (see related article, page 22) bars banks from sharing customer data such as international wire transfers of funds. The rule stems from regulations designed to protect the privacy of consumers. These consumer protection rules, however, put banks at a disadvantage when it comes to stopping the bad guys, whether it’s front companies for nations like Iran or, for that matter, the Mafia.
If banks were able to pool their data, it would be easier to spot suspicious activity, McNelley notes. For example, the innocuous shipping outfit out of Singapore might look different if records showed a flurry of wire transactions taking place not just at one bank, but at several.
While banks continue to battle for fee income, there’s a natural temptation to look the other way when it comes to millions flowing through various accounts.
And while it was not an issue in the IRISL case, other recent money laundering cases have raised the question of negligence at some European banks, McNelley said.
The Federal Reserve recently issued a cease and desist order against the Royal Bank of Scotland, ordering the bank to beef up its anti-money laundering systems. RBS is required to submit a plan to the Fed on how it will strengthen top management oversight of its U.S. operations while demonstrating it will report in a timely manner “all know or suspected violations or suspicious transactions to law enforced and supervisory authorities.”
The Fed and the Office of the Comptroller of the Currency issued a similar edict last year to HSBC. Meanwhile, other banks, after facing similar probes by federal regulators, are now coughing up hundreds of millions in fines.
London-based Barclays is on the hook for nearly $300 million in fines after it acknowledged processing payments to the U.S. from clients in Sudan, Cuba and other countries from which banking transactions are severely scrutinized and limited. Lloyds Banking Group and Credit Suisse have anted up nearly $900 million more to the feds in separate settlements.
If the feds are hoping to scare the banking industry into compliance, then the crackdown and the mounting fines appear to be doing the trick, McNelley said.
She notes there has been a flood of proposals by the big banks looking to hire consultants to beef up their anti-money laundering systems.
The market for anti-money laundering software is expected to balloon from $515 million this year to $690 million by the end of 2015, or 9 percent growth a year, Aite estimated in a recent study.
“Anti-money laundering technology has enjoyed a fresh wave of demand across the globe over the last few years, driven by the convergence of increased regulation, high-profile regulatory enforcement actions, and next-generation technologies,” the Aite Group reports.
In fact, while money laundering can be difficult to stop when it involves determined and nefarious front organizations, there are steps banks can take to reduce their risks, McNelley says.
Given the propensity for front organizations and shell companies to constantly morph to avoid detection, banks have to make sure they are keeping up as well. Taking a look every two or three years is not going to cut it, she notes. Banks need to periodically review their anti-money laundering filters to make sure they are up to date and catching the right activity. Sophisticated data mining of a bank’s internal records and transactions can also help to uncover patterns that might not be apparent to the naked eye.
The latest anti-money laundering detection systems can analyze data along the lines of a social network, grouping companies and individuals that, to the naked eye, may appear to have not link, McNelley said.
Using “link analysis,” a bank might discover, for example, that 40 obscure small businesses all have a common tie with a single suspicious individual. It might not even be a name, but rather an address or a phone number that provides the link.
“It uses data patterns to create social networks among your customers,” she says.
Given the twin threats of massive federal enforcement actions and toxic publicity, the banking sector has decided it needs to spend whatever it takes to get ahead of the bad guys.
After all, the risk of winding up in the headlines tangled up with front organizations for unsavory regimes – or getting whacked with a half billion dollar fine – can be a powerful motivator.
“No corporation wants to have their name in the headlines facilitating money laundering,” McNelley said.■