Pennsylvania Bank Consents to $1.5 Million Assessment for Failing to File Required Suspicious Activity Reports Regarding Transactions by Bank Insider
On February 27, 2015, the Financial Crimes Enforcement Network (FinCEN) assessed a $1.5 million civil monetary penalty against the First National Community Bank of Dunmore, Pennsylvania (First National, or the Bank) for willful violations of the Bank Secrecy Act (BSA). FinCEN alleged in its assessment – to which the Bank has consented – that the Bank failed to file suspicious activity reports (SARs) regarding transactions involving proceeds from the infamous “Cash for Kids” scandal in northeast Pennsylvania, despite the presence of several “red flags” and the apparent dictates of the Bank’s own policies and procedures.
Generally, banks and other financial institutions must file SARs on transactions that involve $5,000 or more when they know, suspect, or have reason to suspect that a transaction involves, or is intended to disguise, funds from illegal activities. Banks must maintain policies and procedures to identify suspicious activity as part of their anti-money laundering (AML) compliance obligations. FinCEN’s recent assessment provides insight into what FinCEN views as potential indicators of suspicious activity that require further investigation and the filing of SARs. Although the First National case involves unique facts, it provides a fascinating example of the tensions that can arise when a bank “insider” potentially engages in suspicious activity.
As is now well known, two former Pennsylvania state court judges, Michael Conahan and Mark Ciavarella, have been convicted of abusing their judicial positions to sentence thousands of juveniles to detention facilities in exchange for substantial kickbacks from the facilities’ operators. This scheme became known as “Cash for Kids.” What is less well known is that Mr. Conahan and Mr. Ciavarella allegedly used accounts at First National, where Mr. Conahan was a director, to disguise and launder the proceeds from their Cash for Kids scheme.
According to FinCEN, the pair’s activities at First National “displayed red flags that should have alerted [the Bank] to potential illicit activity and caused it to file SARs.” These red flags included:
- Multiple transactions were conducted by Mr. Conahan, Mr. Ciavarella, and a company that the pair controlled, Pinnacle Group of Jupiter, LLC (“Pinnacle”) in large, round dollar figures, frequently on the same day. According to FinCEN, First National had internal controls to identify these sorts of transactions but did not review the transactions or file SARs on them.
- Receipt in 2007 of a law enforcement subpoena requesting information regarding Mr. Conahan, Mr. Ciavarella, Pinnacle, and related entities. According to FinCEN, the presence of a law enforcement subpoena should have indicated that additional scrutiny of the accounts and accountholders was merited. Although the Bank’s BSA compliance officer responded to the subpoena, the officer nonetheless “failed to file a SAR on any of the accounts referred to in the subpoena despite numerous other red flags on the accounts,” a presumed reference to the large, round figure transactions.
- Between 2004 and 2005, Mr. Conahan’s and Mr. Ciavarella’s respective incomes “nearly quadrupled,” a development that FinCEN believes would have been detected if the Bank “review[ed] the accounts and documents in [its] possession related to the individuals and accounts identified in the subpoena.” Although the facts underlying this red flag are unclear from the assessment, FinCEN apparently is referring to increases in the individuals’ account balances. It also is unclear from the assessment whether, in the absence of the subpoena, FinCEN would have considered the Bank to have been on sufficient notice to undertake such a review of the individuals’ incomes.
These identified red flags reflect that FinCEN expects financial institutions to scrutinize the accounts and activities of accountholders that are the subject of law enforcement subpoenas in order to determine whether a SAR should be filed. Further, ensuring ongoing compliance with an institution’s own policies and procedures regarding SARs is essential, especially in potential conflict of interest transactions. Although FinCEN’s assessment does not discuss this issue, a bank may encounter unique obstacles in pursuing its own AML protocols when the conduct involves a director or other influential insider.
According to FinCEN, First National also should have identified the following transactions as suspicious and filed SARs regarding them.
- Pinnacle secured a purchase money mortgage on a condominium from First National. Twelve weeks after the purchase, Pinnacle refinanced the mortgage with First National based on an apparent substantial increase in the condominium’s value. This refinancing was a “full cash out refinancing,” permitting Mr. Conahan and Mr. Ciavarella to receive the entire payment in cash. The substantial increase in the condominium’s valuation in such a short period of time, coupled with the fact that that the increase permitted Pinnacle’s owners to take out cash, allegedly raised the possibility that the transaction was used to move or disguise illicit proceeds.
- The condominium generated rental income that FinCEN has characterized as “disproportionately high,” explaining that “the amounts of the rental payments made to Pinnacle’s account at a third-party institution reflected a disproportionately high rental income of over $70,000 per month compared with the value of a three-bedroom condominium purchased for only $800,000.” (emphasis added) However, the assessment by FinCEN does not explain how First National knew or should have known the amount of rental income that Pinnacle received through deposits at a third-party institution. Moreover, identifying the rental income as suspicious would have required the Bank to undertake several steps successfully: ascertaining the value of the condominium (information to which the Bank had access as the mortgagee); understanding that the payments at another institution were rental payments for the same condominium; comparing the value of the rental payments in relation to the condominium’s purchase price; and realizing that the comparison suggested possible criminal conduct. The plausibility of any bank accurately undertaking such a detailed analysis in the ordinary course of its BSA compliance is unclear.
Despite the potential practical difficulties in identifying the suspicious nature of the transactions, it appears that if the Bank had undertaken a more rigorous investigation and risk assessment of Mr. Conahan’s, Mr. Ciavarella’s, and Pinnacle’s accounts in accordance with the Bank’s own internal compliance controls, many of the transactions at issue might have been identified and SARs might have been filed. Although the precise reasons for the Bank’s compliance failures remain unclear from the assessment, one potential cause – as previously noted – is the fact that First National’s BSA compliance personnel were obligated to operate in a conflict of interest situation, given that Mr. Conahan was a bank director. Despite the fact that a SAR (and information that would reveal the existence of a SAR) is confidential and cannot be disclosed except as authorized by statute or regulation, any compliance personnel investigating potentially suspicious activity of a bank director, his company, or related entities will be placed in a very difficult situation if trying to determine by themselves whether a SAR should be filed. As reflected by this recent enforcement action by FinCEN, the institution ultimately will pay the price if internal conflicts of interest prohibit the adequate functioning of AML procedures.
Disclaimer: this E-Flash does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this E-Flash without first seeking the advice of counsel.
Disclaimer: This post does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this post without first seeking the advice of counsel.