[Post updated June 2019] The title of this post “Money Laundering, Drug Trafficking & Whistleblower Awards” sounds like a John le Carre´ novel. When we mention the story involves Mexican drug cartels, one can also easily see a James Bond movie adaptation. It is a real-life story, however, and involves the U.S. subsidiary of Rabobank pleading guilty to criminal conspiracy and paying a $368 million fine. Under a 1989 law, bank insiders who report money laundering violations such as those involved in this case are eligible for an award of up to $1.6 million.
Rabobank Indicted in Money Laundering Scheme
Rabaobank NA is a California based bank. At the time of the indictment it had over 100 branches in the United States. It is the United States affiliate of Coöperatieve Rabobank U.A., a Netherlands based financial services company employing almost 50,000 people and having assets of $681 billion.
Two of Rabobank’s U.S. branches are in Imperial County near the Mexican border. Banks along the border are at greater risk for being used by drug dealers, drug cartels and narcoterrorists. Rabobank branches located in Calexico and Tecate saw hundreds of millions of dollars of suspicious transactions come through the bank with few questions asked. (More on that below.)
Banks Secrecy Act and Anti-Money Laundering
All U.S. banks and foreign banks with locations within the United States are required to comply with the Bank Secrecy Act (“BSA”). That law is designed to detect and prevent money laundering. Under the BSA, banks must report any transaction when someone deposits $10,000 or more in cash. There is nothing illegal about depositing large sums of cash, but Treasury agents may ask questions and want to know why. (So called “structured transactions” are also reportable meaning you can’t make multiple deposits of $9,999.99 and not expect to get a knock on your door.)
When someone deposits a reportable amount of cash, banks must fill out a Currency Transaction Report. These go to the Financial Crimes Enforcement Network commonly referred to as “FinCEN.” That agency is part of the Treasury Department and its agents are considered law enforcement officers.
The Bank Secrecy Act also requires banks to file Suspicious Activity Reports. There are hundreds of pages of regulations on what constitutes a suspicious activity and banks are required to know those regulations. Most drug dealers are smart enough not to bring in a suitcase full of cash. Everyone knows that will be reported.
These Currency Transaction Reports and Suspicious Activity Reports (called CTR’s and SAR’s respectively) go to FinCEN but it is the bank regulators that make sure that the banks are complying with the regulations. In other words, the bank regulators make sure that the banks report suspicious transactions while FinCEN and other law enforcement agencies investigate the people behind those transactions.
In the case of Rabobank, their regulator is the Office of the Comptroller of the Currency.
If the banks are filling out the forms correctly, then FinCEN has what it needs to investigate. It is the Comptroller of the Currency (called the “OCC”) and their staff of thousands of bank examiners that make sure the banks are properly complying with the Bank Secrecy Act and its anti money laundering regulations.
The regulations don’t stop with simply filling out currency forms. Banks also have a legal obligation to conduct due diligence on their customers.
The OCC conducts routine audits of banks. The National Credit Union Administration has similar duties with respect to credit unions.
Their primary job is to make sure the banks are safe and properly taking care of depositors, but they also must sure that our banks are not being used to launder money for drug cartels, terrorist organizations and organized crime. For example, there is a big push right now to prevent our banks form laundering money for ISIS, Iran and North Korea.
When the OCC determines that a bank isn’t complying with anti-money laundering (also called AML) regulations, it can offer corrective guidance or impose enhanced oversight and control. If problems continue or are severe, regulators can issue cease and desist orders. In extreme cases, the agency can recommend criminal prosecution or revoke the bank’s charter.
Rabobank – A History of Money Laundering Problems
In 2006, Rabobank was sanctioned for its noncompliance with the BSA and its AML regulations. That sanction was in the form of a Memorandum of Understanding.
Two years later, Rabobank still wasn’t in compliance which resulted in a Formal Agreement in 2008.
The bank as part of these sanctions agreed to beef up its monitoring and investigations unit. That was Rabobank’s term for its internal compliance team. Banks are required to monitor and investigate what is happening with their customers.
While the bank did add more people to its compliance team, prosecutors say that the bank “precluded and suppressed investigations” by its compliance team. Unfortunately, this is something we see again and again. Banks will hire compliance teams but then insure they won’t be effective.
Common methods of making sure these compliance efforts fail can include:
- Sending the compliance function to an offshore contractor that knows its ability to keep the contract is tied to turning a blind eye on violations,
- Not providing the compliance teams with proper training or tools
- Disregarding the findings of these teams
Why would banks do these things? Money! The bank needs deposits to make money. And high risk depositors typically pay higher fees.
Rabobank used an approved monitoring software to look for suspicious transactions. The software alerted bank compliance analysts to hundreds of millions of dollars in transactions coming through Rabobank’s Calexico and Tecate branches. These were “transactions by customers and through accounts seemed to be ‘High-Risk’ and that [Rabobank] knew were suspicious, as similar transactions had been the subject of prior SARs filed by [the bank]. These High-Risk customers and accounts included those controlled and managed by Mexican businesses, nonresident aliens, and U.S. based accountholders who transacted hundreds of millions of dollars in untraceable cash, sourced from Mexico and elsewhere into Rabobank accounts.”
The Justice Department says that by June of 2010, the bank knew that not only were these transactions reportable, they say the bank knew that certain transaction in “were indicative of international narcotics trafficking, organized crime and money laundering.” Those transactions, of course, should have been reported on SAR forms.
What makes the Rabobank case especially interesting is that awareness of the potential money laundering went all the way up the banks’ chain of command to the bank’s Bank Secrecy Act and Anti Money Laundering coordinator, a person who had until recently worked for the government and had examined Rabobank while employed by the OCC. (Remember that Rabobank had been reprimanded by the OCC a couple years prior for lax anti money laundering controls.)
There is often a revolving door between the banking industry and regulators. Here, it looks like Rabobank blatantly hired the very examiner who had been critical of the bank’s AML efforts. Did they do that hoping that he could keep his former colleagues at bay? If that was there plan, it didn’t work!
Here Comes the Cash!
After the Mexican government put strict cash controls policies in place to fight money laundering, cash really started pouring into the Rabobank border branches. If the cartels couldn’t deposit their money in Mexico, they would deposit it two blocks away at the Calexico branch of Rabobank.
The front line compliance staff at Rabobank knew what was going on. But that didn’t seem to stop the money from coming in. (Drug dealers won’t keep depositing in a bank that is properly filing currency and suspicious transaction reports. They don’t want the feds to know where their money is!)
The government said that to prevent the bank’s AML analysts from doing their job, management at Rabobank simply made their job impossible. They placed artificial time constraints on the bank’s AML staff such that they would not have enough time to do a meaningful check on all the cash coming into the bank.
Things were so bad that a single customer in Calexico was able to conduct over $100,000,000.00 in suspicious transactions without a single suspicious activity report being filed. Another customer withdrew $7.3 million in $9,500 increments, an obvious sign of illegal “structuring” without a single report being filed.
In August 2011, a compliance officer reported internally that the accounts of one of the bank’s customers was seized pursuant to a court order and that the account holder was suspected of being a major drug smuggler and money launderer. Management did nothing for 10 months.
In December of 2012, the bank hired a consultant to perform a confidential evaluation of the bank’s BSA and AML program. The results were not good. Prosecutors say that the bank’s own consultant warned that its anti-money laundering program had “obvious deficiencies”, insufficient compliance staff and a broken corporate culture.
When a senior manager warned that Rabobank was in danger of criminal prosecution, she was placed on administrative leave two days later. While on leave, that manager wrote to member of the board of directors. Prosecutors say she was terminated shortly afterwards.
We believe that someone inside blew the whistle. Later during a routine OCC examination, the agency would ask for a copy of the consultant’s confidential report. Part of the conspiracy indictment against the bank is that one of the same executives that fired the manager who was repeating the consultant’s warnings lied to the OCC and denied the existence of the report.
Rabobank Pleads Guilty to Conspiracy Charge
On February 7, 2018 Rabobank pleaded guilty to criminal conspiracy. As part of the plea deal the bank agreed to pay a $368.7 million fine.
We believe the bank is guilty of money laundering. They were instead charged with conspiracy to hide the consultant’s report. So why the high fine for such a minor offense and why did the bank skate on a money laundering charge? Those are great questions.
Had the bank pleaded to a violation of the Bank Secrecy Act, the bank would have lost its charter. Thousands of people would be without a job and many more forced to scramble and fine new accounts. Instead, the government negotiated a plea which involved a very large fine for a relatively minor offense. In return, Rabobank was able to keep its doors open. The government realized that a bank with 100+ branches shouldn’t be shut down for the actions of two branches.
A Justice Department spokesperson said after the guilty plea, “The integrity of our financial system depends on prompt reporting by banks and other financial institutions of suspicious, potentially criminal transactions, and on these entities’ truthfulness and transparency with their regulators.”
A Rabobank director said after the bank was founded guilty, “Rabobank is fully committed to conducting business with the highest levels of integrity, which includes strict compliance with all applicable laws, regulations, and standards in each of the markets and jurisdictions in which it operates.”
Of course, Rabobank said that after the last two sanctions as well.
Although Rabobank must cough up $368 million, that fine is still much smaller than the $1.9 billion money laundering fine imposed against HSBC in 2012.
Other Banks Implicated in Money Laundering and Narco Terrorism
HSBC has received the largest fine to date, $1.9 billion. Prosecutors say it was known in the Mexican drug world as the place to launder money. And before that it was Wachovia Bank. That money laundering scheme may have involved tens of billions of dollars.
Danske Bank is the latest big bank in the news. Although not tied to narcoterrorists in Mexico, it is believed that the bank helped launder $235 billion of “iffy funds.”
These cases seem to happen over and over again. Rolling Stone magazine says the HSBC money laundering operation was “so brazen that the NSA probably could have spotted them from space.”
Drug dealers would literally walk into an HSBC branch with boxes of money. The lead HSBC prosecutor said people could enter certain branches and “deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows.”
Banks Secrecy Act, AML & Whistleblower Awards
Bank employees and others with inside information about money laundering or illegal bank activities may be eligible for an award. The Office of the Comptroller of the Currency has the legal authority to pay awards but rarely uses that authority. The Justice Department does pay whistleblowers, however.
Justice is very aggressive on money laundering cases and frequently pays awards under a 1989 law called FIRREA (the Financial Institutions Reform, Recovery and Enforcement Act). That law allows prosecutors to pay awards of up to $1.6 million. (FIRREA awards of that size are common.)
To qualify for an award, you must possess inside information about significant illegal behavior by a bank.
The law was originally used in the wake of the 1980’s savings and loan crisis to prosecute bank officers who looted their own banks. Back in the day, it was common for small banks to issue big and risky loans to officers or members of the board. When the banks failed, it was innocent depositors and taxpayers who were forced to bear those losses.
Today, the law is used to prosecute the banks themselves. A bank that turns a blind eye to money laundering can be prosecuted under FIRREA.
Prosecutors like the law because it has a long 10-year statute of limitations and a lower burden of proof. Whistleblowers like the law because it pays cash awards.
The SEC can also pay whistleblowers in money laundering cases. And their awards have no caps.
Some may be thinking what does the SEC have to do with banks and money laundering. The answer is plenty. Most banks are public companies or are owned by a public holding company. When public shareholders are involved, companies have an obligation to keep adequate books and records and make full disclosures to investors. We suspect most don’t admit in their annual 10-K reports!
Interested in learning more? Visit our FIRREA Bank Misconduct information page*. Ready to speak with a lawyer? Contact us online, by email () or by phone at (414) 704-6731. All inquiries are kept strictly confidential and protected by the attorney – client privilege. There is no fee or obligation for consultations.
*We have plenty of money laundering stories, just use the search feature of our blog.
MahanyLaw – America’s Money Laundering and Bank Secrecy Act Whistleblower Lawyers