ICBC New York ordered to boost AML Safeguards

15 March 2018 Bachir El Nakib (CAMS), Senior Consultant Compliance Alert LLC

A U.S. bank regulator has ordered Industrial and Commercial Bank of China and its Manhattan branch to correct alleged deficiencies in its anti-money laundering and sanctions compliance programs, authorities said Tuesday.

Industrial & Commercial Bank of China Ltd., the world’s biggest lender, has been ordered by the Federal Reserve to bolster its protections against money laundering.

The Fed found “significant deficiencies” in safeguards at the Chinese bank’s New York branch, the U.S. regulator said on Tuesday. The signed enforcement cease-and-desist order issued by the Federal Reserve Board of Governors did not require the Chinese banking giant to pay a fine. It suggested a main concern for regulators was U.S. dollar clearing activity. The company agreed to submit plans to fix its compliance programs within 60 days, the Fed said. No financial penalty was imposed.

ICBC failed to properly report suspicious activity and comply with the Bank Secrecy Act, the U.S. law meant to combat money laundering. The Fed ordered the bank to establish a system that properly assesses risks associated with products and customers -- including “politically exposed persons.”

The company also must hire an outside firm to review its dollar-clearing activity in the latter half of 2016 “to determine whether suspicious activity involving high-risk customers or transactions” was properly flagged.

ICBC, with a market capitalization of $356 billion and assets well over $3 trillion, has almost 400 overseas branches in more than 40 countries. The New York branch opened in 2008.

The bank’s New York office didn’t immediately respond to a request for comment.

The order requires the bank's board to take "effective" control and oversight necessary to ensure the New York branch complies with the Bank Secrecy Act and rules issued by the U.S. Treasury's Office of Foreign Assets Control (OFAC).

The bank also must take a number of remedial actions, including hiring qualified personnel, conducting training, and properly managing risk via bolstered internal controls and customer due diligence.

A need to better address the money laundering and sanctions risk associated with certain "high-risk" services – including correspondent banking and the banking of politically exposed persons – is highlighted in the order.

It specifically obliges ICBC to put in place "enhanced monitoring and investigation criteria and procedures to ensure the timely detection, investigation, and reporting of all known or suspected" illicit activity. A focus of the procedures should be "transactions conducted through foreign correspondent accounts and trade finance related transactions."

The order requires the bank to hire a third-party firm to conduct a transaction review, commonly known as a "look back," to identify any suspicious U.S. dollar clearing transactions that went unreported between July 2016 and December 2016.

As Chinese banks have expanded operations around the world in recent years, they have faced considerable scrutiny regarding their anti-money laundering practices.

Other Chinese banks have faced sanctions by U.S. regulators, including Agricultural Bank of China, which in 2016 was targeted by a similar Fed order and fined $215 million by New York’s banking watchdog over allegations that it tried to obscure dollar transactions by Russian, Chinese and Middle Eastern clients. In December 2015, the Fed directed Bank of China Ltd. to overhaul its anti-money-laundering controls, just as it had in July 2015 for China Construction Bank Corp.

Last year, Spanish authorities began probing the European management of ICBC in Luxembourg while investigating the alleged laundering of hundreds of millions of euros through the bank's Madrid branch.

Spain has launched an investigation into the European management of the Industrial and Commercial Bank of China (ICBC) in Luxembourg as part of a widening probe into the alleged laundering of hundreds of millions of euros through the Chinese banking giant's Madrid branch.

A Reuters investigation in July revealed Spanish prosecutors were poised to explore the role of ICBC Luxembourg in the alleged money laundering scheme following the arrest of seven ICBC executives in Madrid in February last year, including branch manager Liu Wei and the general manager of the bank's European division, Liu Gang.

The Spanish High Court said on Monday it had approved a request from the anti-corruption prosecutor's office to investigate ICBC's European headquarters for the alleged crime of money laundering.

High Court judge Ismael Moreno ruled that ICBC's Europe board must name a representative and a lawyer to be summoned to appear before the court.

"ICBC Luxembourg was aware at the time of the way ICBC Spain was operating, and the Luxembourg headquarters provided it with internal audit services," the ruling said. The Luxembourg unit of ICBC holds the lender's European Union bank licence and is responsible for supervising the Madrid branch.

According to the court ruling, ICBC Europe could face a fine, asset seizures or dissolution if found guilty.

Chinese Foreign Ministry spokesman Geng Shuang told a regular press briefing on Tuesday that ICBC had played a positive role in promoting financing cooperation between China and Spain.

"China always requires Chinese banks overseas to operate according to law. We hope Spain can appropriately and fairly handle the relevant issue according to law, and earnestly guarantee the relevant Chinese financial institution's lawful rights."

The Reuters' investigation drew on thousands of pages of confidential case submissions and interviews with investigators and former ICBC employees to show how a long running investigation into alleged Chinese organised crime networks eventually led Spanish police to mount an early morning raid on ICBC's Madrid branch on Feb. 17 last year.

At the core of the ICBC case is the relationship between the bank and a group of clients from Spain's thriving Chinese business community. These Chinese clients are alleged to have accumulated mountains of cash, much of it from avoiding duty and tax on the sale of consumer goods imported from China.

Spanish judicial officials told Reuters that between 2011 and 2013, ICBC's Madrid branch transferred about 225 million euros to China, most of it for suspected criminal networks. These networks also sent funds via money transfer firms in Spain and by smuggling large amounts of cash by road to other European countries from where it was transferred to China.

In response to the Reuters' investigation, a spokesman for ICBC in Europe said in July the bank was a "law-abiding company" and had cooperated with Spanish authorities. The case file, he said, was sealed by the court so the bank could not comment.

U.S. authorities have sharpened their focus on Chinese banks as Washington has sought to tighten the financial noose around North Korea as it seeks to pressure the country to abandon its nuclear program.

Earlier in 2017 the U.S. Treasury targeted a Chinese bank over purported ties to North Korea, new sanctions risk emerges

The U.S. moved to sever action on a Chinese bank from the global financial system over concerns it was a conduit for illicit North Korean financial activity. The move signaled the United States is no longer willing to tolerate the actions of Chinese entities that support Pyongyang and plans to mete out punishment in the form of financial sanctions to alter behavior.

A former senior Treasury and White House official Juan Zarate declared to Thomson-Reuters:

 "I think this is significant, not because of the effects of this singular action, but because it is, I think, the opening salvo of a broader campaign to pressure North Korea through the Chinese financial system. It begins to lay the groundwork for an isolation of Chinese actors that are facilitating illicit North Korean activity,"

Treasury's Financial Crimes Enforcement Network (FinCEN) employed a seldom-used USA Patriot Act Section 311 authority to label the Bank of Dandong an institution of "primary money laundering concern," thereby effectively excising it from the global financial system. 

While Treasury's action is technically a proposed rule rather than a final, binding rule, in practice it is a signal to banks around the world that they should immediately sever ties to Bank of Dandong. Banks are likely to do so rather than risk the loss of access to the U.S. financial system.

"The Department of the Treasury is committed to protecting the U.S. financial system from North Korean abuse and maximizing pressure on the Government of North Korea until it abandons its nuclear and ballistic missile programs," Treasury Secretary Steven T. Mnuchin said in a written statement. "While we will continue to seek international cooperation on North Korea, the United States is sending an emphatic message across the globe that we will not hesitate to take action against persons, companies, and financial institutions who enable this regime."

Treasury's Office of Foreign Assets Control (OFAC) also blacklisted two Chinese nationals and one Chinese company over their ties to Pyongyang. The blacklisted entity is Dalian Global Unity Shipping Co Ltd and the individuals are Sun Wei and Li Hong Ri, both of who reportedly are linked to North Korean banks that aid the regime's illicit activity.

Bank of Dandong did not respond immediately to a request from Reuters for comment. A staff member at Dalian Global Unity would not comment on the sanctions and subsequent calls to the firm's office in Dalian went unanswered.

Chinese banks "on notice," better due diligence needed to address risk

Treasury's action puts Chinese banks "on notice for either direct or indirect risk to North Korea," said Zarate, now chair of a consultancy, The Financial Integrity Network. In other words, Chinese banks not only must avoid direct exposure to the North Korean regime, but would be wise to conduct due diligence necessary to ensure they are not serving peers with ties to the North Koreans.

"The big Chinese banks don't want to be caught with their hand in the cookie jar with respect to North Korea any more than an American or European bank," he said.

"The banks will have to ensure that the banks they have correspondent relations with are not acting on behalf of the Chinese bank. It will be carefully implemented and watched closely by regulators.

Treasury's action was only the latest taken by the U.S. government against a Chinese entity suspected of aiding North Korea. Earlier this month, the U.S. Justice Department filed a civil complaint seeking the forfeiture of more than $1.9 million held by Mingzheng International Trading Limited, a China-based company that prosecutors said was a front used to launder money for sanctioned North Korean entities.