INSIGHT-After BNP, U.S. targets range of firms in crackdown on illicit money flows

Tue Jul 1, 2014 5:28pm EDT

(Adds background on other probes, makes clear in paragraphs two and five that Citigroup's Banamex USA is being investigated)

By Aruna Viswanatha

WASHINGTON, July 1 (Reuters) - BNP Paribas' guilty plea and agreement to pay nearly $9 billion for violating U.S. sanctions is part of a larger U.S. Justice Department shift in strategy that is expected to snare more major banks and other firms across the financial food chain.

Two other major French banks, Credit Agricole and Societe Generale, Germany's Deutsche Bank AG , and Banamex USA, the U.S. arm of Citigroup Inc's Mexican banking group Banamex, are among those being investigated for possible money laundering or sanctions violations, according to people familiar with the matter and public disclosures.

The Justice Department and other U.S. authorities, including the Manhattan District Attorney, are probing Credit Agricole and Societe Generale for potentially violating U.S. economic sanctions imposed against Iran, Cuba and Sudan, one of the sources said.

Credit Agricole and SocGen have disclosed that they are reviewing whether they violated U.S. sanctions. SocGen said in its latest annual report that it is engaged in discussions with the Treasury Department's Office of Foreign Assets Control over potential sanctions violations.

SocGen and Credit Agricole declined to comment on Tuesday.

Another source said the Justice Department's bank integrity unit is deep into a probe of whether Citigroup's Banamex USA operation failed to police money transfers across the U.S.-Mexico border. Citigroup has said it is cooperating with the inquiry, which also involves the Federal Deposit Insurance Corp. Citigroup spokeswoman Molly Meiners declined comment.

Separately, Citigroup is investigating an alleged fraud involving $565 million in loans at Banamex and as a result of that has fired a dozen employees.

Prosecutors have also investigated potential sanctions breaches at Deutsche Bank, according to people familiar with the probe, though it is unclear how far that has progressed. The bank said in its last annual report that it had received requests for information from regulatory agencies and is cooperating with them. It did not immediately respond to a request for comment.

The timing of any possible legal action or related settlement negotiations is unclear.

The pipeline of cases has built up as U.S. prosecutors have pivoted from focusing on specific criminals to also vigorously pursuing the financial institutions that move money for them.

At the heart of this effort is a 12-prosecutor Money Laundering and Bank Integrity Unit within the Justice Department that was created in 2010. It handled the investigation into BNP for U.S. sanction law violations, primarily involving Sudan deals, as well as large money laundering and sanctions cases in recent years against HSBC Holdings Plc, ING Bank N.V. and others.

Leslie Caldwell, who leads the criminal division at Justice Department, said in an interview that the unit has its sights set on a range of firms potentially involved in illicit money flows.

"I think that we'll probably see other financial institutions, regional banks, maybe some smaller banks, and I think we're also going to be seeing, as we have already started to see, more online activity," Caldwell said during an interview on Friday, speaking of cases in the pipeline.

She declined to name specific firms or confirm any particular investigations.

Regulators and other authorities have also increased their attention on money-laundering risks. The U.S. Securities and Exchange Commission is probing Charles Schwab Corp and Bank of America Corp's Merrill Lynch brokerage over whether they missed red flags of illicit money flows. Agents of the U.S. Internal Revenue Service's criminal enforcement unit recently traveled to Macau to examine U.S. casinos' operations for anti-money laundering concerns.

BANK SECRECY ACT

Historically, prosecutors have used money laundering laws to go after low-level money mules, said Caldwell, in reference to lower-level employees and others who were not playing critical roles in instigating or allowing the money laundering.

The Justice Department about five years ago decided to switch tactics and to more aggressively exploit the Bank Secrecy Act, which dates back to the 1970s, and was expanded to include criminal penalties in the wake of the Sept. 11, 2001 attacks.

The law, which requires financial institutions to have robust anti-money laundering programs, was little used for criminal prosecutions until the Money Laundering and Bank Integrity Unit - known internally as "mlbiu" - was created in 2010 to focus on enforcing it.

"This is a way to attack that problem in a much bigger and more effective way," said Caldwell, a prosecutor for 17 years who was confirmed to her current post in May. "The old-school way of attacking money laundering ... really didn't get at the problem, which was that many banks did not have adequate controls in place to prevent those transactions from happening."

The shift has put the financial industry on watch, after prosecutors failed to land high-profile criminal cases stemming from the financial crisis and turned their attention to other types of criminal activity within the financial industry. Banks have responded by hiring thousands of new compliance experts and spending millions of dollars to improve their programs.

"I would put the investigation of financial institutions for laundering proceeds of official corruption pretty high on the list of risks," said Michael Dawson, who coordinates the global compliance practice at the consulting firm Promontory Financial Group. "After you look at the sanctions cases, official corruption looms large as a risk on the horizon."

MOVING DOWN THE FOOD CHAIN

As the unit finishes a series of money-laundering and sanctions cases against some of the world's largest banks, prosecutors fear that criminals have shifted to using mid-level financial institutions and other types of companies that may not have the controls that large institutions now have.

Sources said the unit is increasingly investigating actors across the two dozen types of companies covered by the Bank Secrecy Act. Among the sectors covered by the act are broker-dealers, jewelry and auto dealers, casinos, insurance companies, and shipping companies.

The Justice Department has already gone after a handful of such institutions, including check cashers in Brooklyn, Philadelphia and Los Angeles that assisted healthcare fraudsters by failing to report $50 million in transactions, and money transfer company MoneyGram whose agents were allegedly involved in $100 million in fraud schemes targeting the elderly. MoneyGram agreed to forfeit $100 million and enter a deferred prosecution agreement over the conduct in November 2012. It said at that time that it takes compliance seriously and had created a new anti-fraud program.

Virtual currencies have also emerged as a major focus, in the wake of the unit's 2013 indictment of digital currency exchange Liberty Reserve, its founders and other employees who allegedly helped criminals launder more than $6 billion in proceeds.

Attorneys from the Justice Department's asset forfeiture and money laundering section, which oversees the mlbiu unit, have also worked closely with a new FBI unit to help trace the assets of corrupt foreign leaders, traveling to Ukraine to help recover assets allegedly stolen by former President Viktor Yanukovich's government.

Those efforts could also unearth information about which banks may have looked the other way to move proceeds of corruption, or may not have had required procedures in place, sources said. (Reporting by Aruna Viswanatha, Additional reporting by Maya Nikolaeva and Matthias Blamont in Paris; Editing by Karey Van Hall, Martin Howell, Anna Willard and Lisa Shumaker)

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