Fed tells Bank of Montreal to fight money laundering harder

NEW YORK Fri May 17, 2013 11:46am EDT

NEW YORK (Reuters) - The U.S. Federal Reserve Board said it has told Bank of Montreal to step up efforts to detect and prevent money laundering at the Canadian bank's Chicago branch.

The warning puts Bank of Montreal in a growing category of financial institutions under pressure to do a better job of adhering to strict U.S. requirements for identifying potentially illegal activity by their customers.

The Fed entered into a written agreement requiring Bank of Montreal to strengthen its compliance after a recent inspection by the central bank's examiners found deficiencies in Bank of Montreal's anti-money laundering program. The Fed made the agreement public on Friday.

A spokeswoman for the Fed declined to describe the problems it found, saying its policy prohibits discussion of specific institutions.

"Our remediation activities are well underway," said BMO spokesman Paul Deegan. "BMO is fully committed to the highest standards of regulatory compliance with Bank Secrecy Act/Anti-Money Laundering requirements and expectations in each of the jurisdictions in which we operate."

The agreement said the Fed found Bank of Montreal's Chicago branch "lacked effective systems of governance and internal controls to adequately oversee the activities of Bank of Montreal's U.S. operations with respect to legal, compliance, and reputational risks."

Banks operating in the United States, whether they are American or foreign, must closely monitor customer activity for signs of money laundering or other illegal acts. They must report unusual behavior in the form of "suspicious activity reports" to the U.S. Treasury Department.

The Treasury uses the reports - sharing them with the Federal Bureau of Investigation and other law enforcement agencies - to help track down criminals and terrorists.

The U.S. Treasury is currently building a system to more broadly share the banks' reports with U.S. spy agencies as well.

The anti-money laundering rules were first defined by the Bank Secrecy Act and later strengthened by the USA Patriot Act after the attacks of September 11, 2001.

Scrutiny of these programs may get tougher this year, according to an April 5 note by Fitch.

Citing heavy fines the U.S. levied against HSBC (HSBA.L) and Standard Chartered (STAN.L) for lapses in anti-money laundering controls last year, Fitch analysts predicted banks could spend more this year on anti-money laundering compliance.

"For customers of affected banks, tougher AML scrutiny will likely lead to longer transaction times, increased documentation requirements, and potentially higher fees," the analysts wrote.

JPMorgan Chase & Co and Citigroup (C.N) have also run into trouble recently with anti-money laundering requirements. JPMorgan (JPM.N) is under fire from another regulator, the Office of the Comptroller of the Currency, which expected to issue a "cease-and-desist" order - a more serious citation than the Fed's warning to Bank of Montreal - in the coming months.

The Fed told Citi in March to improve its money-laundering monitoring program.

(Reporting by Emily Flitter; Editing by Lisa Von Ahn and Peter Galloway)

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