By Carrick Mollenkamp and Brett Wolf
April 23 (Reuters) – U.S. bank regulators increasingly are
cracking down on an obscure corner of the multibillion-dollar
payments processing sector because security gaps are leaving
banks exposed to money laundering from drug cartels and
terrorists.
Regulatory oversight has forced banks such as Citigroup Inc
and HSBC Holdings Plc to hire more staff, conduct
reviews and invest in better technology to identify suspect
transactions and bolster their defenses against abuses of
financial systems, including electronic check processing.
The chief concern: Weaknesses in check clearing. Banks
accept massive numbers of scanned checks that are more difficult
than wire transactions to screen for suspicious activity.
It also is easier for banks to mine data in wire
transactions for suspect activity than imaged checks because
information can more easily be extracted from wires.
In recent years, banks and customers have used electronic
images of checks to process payments instead of paper checks in
an procedure known as remote deposit capture.
The technology allows a check-cashing business in a foreign
country to scan a bundle of checks and deposit them at a U.S.
bank. The entire process can take just seconds and avoids the
hassle of transporting physical checks overseas.
But regulators are concerned that electronic check
processing could be exploited by money launderers. Drug cartels,
for example, could turn to exchange houses in Mexico to scan
images of travelers checks or money orders.
Here is how a money laundering transaction might work,
according to regulatory experts:
A Mexican drug cartel uses cash from drug sales in the
United States to buy travelers checks. The checks are then be
transported back to Mexico via a shipment or smuggling and
scanned at an exchange house known as a casa de cambio.
The exchange house then sends the scanned checks
electronically, via remote deposit capture, to its account at a
major bank in the United States. Money then is wired from the
U.S. account to a legitimate company that unknowingly does
business with the cartel.
In October, the Financial Crimes Enforcement Network, a
Treasury Department bureau, highlighted risks associated with
customers using the technology.
Earlier this month, the Office of the Comptroller of the
Currency identified a number of anti-money laundering
deficiencies at Citigroup, including a self-reported monitoring
gap that resulted in the bank failing to file, in a timely
manner, legally required reports of suspicious activity that
moved through the bank’s remote deposit capture business.
The transactions were tied to foreign financial institutions
that moved money through Citigroup, according to the consent
order. Citigroup said it has fixed all the problems identified
by the OCC, or is fixing them now. The regulatory order did not
identify any specific instances of money laundering or terrorist
financing. A Citigroup representative declined comment.
Regulatory focus on bank security can drive up expenses at a
time when many banks are looking to cut costs.
Compliance costs at a U.S. unit of HSBC more than doubled to
$295 million in 2011 compared with $104 million in 2010,
according to a February regulatory filing.
While some of that was related to foreclosure issues, the
increase primarily was related to anti-money laundering
expenses. The U.S. unit in 2010 was told by the OCC to increase
monitoring systems to police suspect transactions. The extra
costs come as the bank is pulling back globally from many
markets to cut expenses.
The OCC, the U.S. Justice Department and the New York
Attorney General have over the last two years examined how U.S.
banks might inadvertently process Mexican drug money or funds
tied to sanctioned countries such as Iran.
A LONG TRAIL
U.S. enforcement officials have cited four banks for
security gaps in the check system since 2010: HSBC, Citigroup,
Wachovia Corp – now part of Wells Fargo & Co – and Zions
Bancorp.
In 2010, Wachovia, which Wells Fargo bought in 2008, agreed
to pay $160 million as part of a money-laundering investigation.
The Justice Department said some $40 billion moved through the
bank from foreign correspondent accounts using remote deposit
capture.
The deposits, made between 2005 and 2007, included travelers
checks and money orders and were not monitored for money
laundering. A Wachovia representative declined comment.
A U.S. unit of HSBC also was cited in 2010 for weaknesses in
remote deposit capture in a consent order issued by the OCC.
HSBC spokesperson Robert Sherman said the bank has improved
monitoring of remote deposit capture as part of a commitment to
“the highest level of compliance capability.”
Sherman said the improvements include better transaction
monitoring.
In 2011, Zions, a Salt Lake City, Utah-based bank, was hit
with an $8 million civil penalty by the OCC and the Treasury
Department’s Fincen. According to the OCC, Zions developed a
remote deposit capture program “that enabled customers to
deposit imaged items electronically from remote locations and
marketed the product to high risk customers in 2006 and 2007.”
According to the consent order, Zions failed to adequately
monitor $5.4 billion in processing that was offered to foreign
clients, including Mexican money-service businesses, in 2006 and
2007. A Zions representative declined comment. The bank
previously has said it takes “seriously” its responsibility to
adhere to anti-money laundering regulations. Zions quit foreign
correspondent banking in 2008.
A 2004 U.S. law called the Check Clearing for the 21st
Century Act allowed banks to process the images instead of paper
checks. In the past, paper checks had to move from the point of
deposit to the bank that pays them, forcing banks to build a
vast infrastructure to pick up and process physical checks.
The law also enabled consumers to deposit checks
electronically by, for example, taking photos of a check with
their phones and sending them to the bank.
Regulatory investigations are not focused on consumer
electronic banking, but instead on situations where large
numbers of checks are processed in bulk.
