Reuters: Regulatory News: U.S. probing money laundering in check processing

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U.S. probing money laundering in check processing Apr 23rd 2012, 20:19 By Carrick Mollenkamp and Brett Wolf April 23 | Mon Apr 23, 2012 4:19pm EDT 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, Uta-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. Link this Share this Digg this Email Reprints

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