The Largest Broker-Dealer AML Penalty Ever - UBS, FinCEN Leadership Changes, and the Future of SAR Reporting

This week on This Week in AML, John Byrne and Elliot Berman examine FinCEN's record-setting $125 million enforcement action against UBS, the largest civil money penalty ever imposed against a broker-dealer for Bank Secrecy Act violations. They discuss what made the case significant, the consequences of repeated compliance failures, and the lessons financial institutions should take from the enforcement action.

The conversation also covers FinCEN Director Andrea Gacki's departure for Citibank and what the appointment of Acting Director Jenna Casanova could mean for future enforcement priorities.

John and Elliot then explore Senator Ron Wyden's report on financial institutions' handling of Jeffrey Epstein-related accounts, including proposed changes to suspicious activity reporting requirements and concerns about SAR confidentiality. They also review Capital One's defense of account closures tied to AML obligations and the broader debate surrounding claims of "debanking."

Internationally, the hosts discuss the FCA's planned overhaul of transaction reporting requirements in the UK, ongoing challenges in accessing beneficial ownership registries across the European Union, and Transparency International's push for stronger global anti-corruption measures.

The Largest Broker-Dealer AML Penalty Ever - UBS, FinCEN Leadership Changes, and the Future of SAR Reporting - Transcript

Elliot Berman: Hey, John. How are you today?

John Byrne: I'm good, Elliot. They used to talk about the dog days of August, but obviously as we start this month, there's still activity globally as well as domestically, and we have a few things to highlight. I will start with a enforcement action, a civil money penalty against UBS by FinCEN.

When we talk in general about the reduction of enforcement actions potentially, this is a pretty dramatic announcement for a number of reasons. So it was announced a couple days ago, $125 million civil money penalty, and it's for willful violation of the BSA. And this is according to FinCEN, the largest penalty ever imposed against a broker-dealer.

This is the second enforcement action against UBS. There was one back in December of 2018 when they had their first consent order, but there's a whole series of things that they failed on. Customer due diligence and particularly in connection with services to high-risk customers with ties to Russia and Latin America.

It requires them to work with a third party to do a look back. What other things did you see in this enforcement action that warrant us calling out?

Elliot Berman: I think as you mentioned, the most important part here is this is a repeat violation, and that is unusual in my experience. Not that people clean it up and it's all fixed, no problem. But this goes back eight years, and they still haven't gotten it right. There were 50,000 foreign wire transfers that were not properly monitored. That's a big hole in your system. I can't say it's a full systemic failure, but this is pretty serious stuff, and it's across a wide realm of things that should be built into their operations as a broker-dealer.

John Byrne: Yeah, and I would say that the other thing that drove this besides the obvious decisions to not report was what it involved illicit finance issues with cartels, Russia, Iran, and Venezuela, which this administration still cares about in terms of penalizing issues there.

So I think that's the other part of this. If it had been other countries, who knows? But clearly the deficiencies and the fact that this is the second time clearly shows the willful aspect of this that was probably, I don't want to say easy to prove but certainly drove FinCEN's decisioning there.

Elliot Berman: I agree with that.

John Byrne: Sticking with the Treasury bureau, the head of FinCEN, Andrea Gacki it's been announced that she's leaving to become the global head of sanctions at Citibank.

She moved to FinCEN as director back in 2023 after a long stint at OFAC. This is the second time that Citi has taken a former director of FinCEN. Ken Blanco left FinCEN a few years ago and spent some time at Citibank. And actually, our good friend Rick Small, way back before 9/11, left the Federal Reserve.

His first job in the private sector was with Citibank. And he was instrumental back then at Citi in working with the financial sector in responding to 9/11. Something that we will be talking about later this month with our good friend Dennis Lormel as he looks back on 25 years since 9/11. In any event, Citibank has a history of getting government officials into their institution.

The replacement is in acting capacity. The person's name is Jenna Casanova. She's currently a senior advisor at TFI. She is by trade a CPA and has the CFE designation. That's all that I know at this point. And again, according to reporting, she is in acting capacity, so we'll see whether or not that becomes a permanent position or does FinCEN or Treasury post this job as they've done in the past seeking other potential applicants.

Elliot Berman: Treasury in its announcement highlighted that acting Director Casanova had previously worked on enforcement actions and was one of the leads in the case that led to the $1.3 billion fine against TD Bank.

John Byrne: Staying with financial institutions in the US, there's been a couple of stories in the past week that relate to the reporting of suspicious activity. So one of them is Senator Ron Wyden from, Oregon, released a report just on his behalf. As we said in the past, when reports get issued by congressional offices or committees and they're not bipartisan, not that you need to be necessarily skeptical, but it's unfortunate because Elliot and I have been around long enough to remember when reports were issued by both sides of the aisle on issues like this.

In any event, Senator Wyden - has a lengthy report, it's over 65 pages, and he's calling it Looking the Other Way: How Wall Street Banks Enabled Jeffrey Epstein's Sex Trafficking. And he goes through in detail a number of emails and information related to suspicious activity reports and names a number of institutions who have publicly already denied that they acted inappropriately regarding SAR reporting and closing accounts.

The only thing I'll mention, all these things are worth taking a look at, but he's got some recommendations toward the end of his report that, those of us in the AML industry will obviously have views on. Looks like he may draft legislation, unclear whether he would get support from his own party, let alone the other side of the aisle.

But there are a number of recommendations in there including increasing penalties for financial institutions that don't file suspicious activity reports in a, quote, "timely manner." And I think that's more than problematic. We know there's time issues with SAR reporting, but the bottom line is there's been almost, a 35-year debate on when exactly potential unusual or legal activity is determined by a bank and then they file.

So the question of in my view, fining banks for lack of timeliness, I think will have the opposite effect of whether or not banks even file. I think that's more than problematic. So those enhanced penalties, I see that as problematic. Also, he wants mandatory reporting once you exit a relationship with high-risk clients. Again, how do you define all that?

So long-winded way of saying, I certainly don't think some of these recommendations are practical, we should obviously take a look at what a member of the Senate has disclosed in a particular report, and if he does introduce legislation, what the support or opposition might be.

Elliot Berman: The challenge for me is the report is entirely through the lens of looking at what banks did or didn't do or could have done with 20/20 hindsight with regard to the relationships with Epstein. And while I'm a big fan of lessons learned, reverse engineering from a certain set of facts something that applies much more broadly strikes me as problematic.

So this might be a piece of what you would go and do if you wanted to change the rules about suspicious activity reports and the reporting process. But to do it through a single lens, I think is not going to serve the underlying purpose of SARs.

John Byrne: And, we've always maintained the importance of the protection of SAR confidentiality, and the notion that a member of the House or Senate can get access to these SARs and do reports based on that, I think that's not how this SAR process was intended. And once you do that or make access available even to a member of Congress I think that's a problem for filers going forward

Elliot Berman: Yes.

John Byrne: The other big news this week was Capital One in a motion to dismiss a case brought by the Trump organization over the closure of bank accounts back in 2021, filed a motion Friday in federal, Florida federal court. Their lawyers wrote that the bank's own filings and the Trumps' business allegations, quote, "Make clear that Capital One closed plaintiff's accounts for anti-money laundering reasons," close quote. This is a situation where a major financial institution is standing up and saying, "This is not accurate."

What we did was clearly within the parameters of what financial institutions are required to do when they make decisions regarding the risk appetite, then the risk-based issues, and whether or not activity by customers can potentially cause illegal activity." I think this is gonna continue to be an interesting debate.

In one of the stories about this, a separate motion filed Capital One did ask the court to keep sealed a portion of one exhibit that contains information protected under BSA with employee names, customer account numbers, and unrelated compensation details, which I totally agree with.

This is important what's gone on here. I've said before, I think the whole notion of de-banking characterized by this administration is inaccurate at best. And I'm cheering on Capital One for what they are doing here. We have not yet as of this recording, heard from the national trade associations their view on this. I would just say, where are you on this one?

Elliot Berman: From a procedural perspective, it's good to remember that this lawsuit has been dismissed once before with leave to amend. So this motion to dismiss is a motion to dismiss the second amended complaint. The first dismissal involved the judge providing a narrow time window for limited discovery by the plaintiffs against Capital One to gather information.

And in reading the defendant's motion their position is that the discovery didn't discover anything different than what was in the first complaint and the first amended complaint. We'll see.

John Byrne: What's going on outside the US, Elliot?

Elliot Berman: FCA in the UK is overhauling transaction reporting. Some of this is a cost savings. It's taking certain types of foreign exchange derivatives and out of the reporting requirements after analyzing that they are not at risk for money laundering. It's also looking at other instruments certain equities, bonds, and things like that and taking them out of the reporting requirement again because of the nature of the financial instruments and then and doing a few other things.

The goal here, I think, is to make reporting more useful, so taking some of the noise out of the system, and to reduce the cost to the industry for reporting that hasn't been useful. The changes will go into effect on the third of April of 2028, so this is not an immediate thing.

And then the European Commission, and you and I talked about this back when it happened. This is all about beneficial ownership registries and public access. And the the European Court of Justice made a decision in 2022 that took away unrestricted access to the registries.

The argument of the plaintiff in that case was that they had privacy rights , and that this trampled those rights. Then, the EU responded by introducing what's called a legitimate interest model to figure out who could have interest, and they put in place a structure where the 27 member states were supposed to take action.

We've now reached the point where the final deadline to take action was, last month after an extension from 2025, and now there are a number of countries who haven't done anything. So we have a very patchwork problem there and and the European Union has not taken the next step.

So we're into a uncharted water because we don't know whether they're gonna take additional action against the non-compliant states and how they're gonna harmonize it, which is their whole approach under AMLA more generally. But that's a significant problem. You've got some of the member states have reopened public access.

Some have reopened limited. Some have just stood pat where they were after the legal decision. So we'll have to see what happens there.

John Byrne: Transparency International, the UK posted an open letter that they sent to the newly appointed foreign secretary there, Ed Miliband. The foreign secretary's office and the government in general has delayed the International Illicit Finance Summit but pushed it to December, so they're still gonna have it.

So Transparency International had 76 civil society organizations in this open letter just making clear that while the summit having it, still having it needs to consider a number of issues that they want to recommend. They say that the postponement can't delay different actions needed to tackle corruption.

And so according to the letter they say that unless the UK itself gets its own house in order, we will fail to seize the opportunity to lead on a global stage. So it's just a two-page letter, but again, this is something that clearly a number of civil groups have talked about.

Reading from from portion of this here, they say the following: "As assets disappear into the global financial system, countries with low middle incomes are often left with the fewest resources to respond, while secrecy, tax loopholes and enablers in global financial centers continue to conceal the proceeds of corruption and crime."

Finally, property, key theme of the summit is bought by what they're calling corrupt politicians, kleptocrats and violent political groups to help entrench the very system that enabled their theft, and they call out a number of countries where properties gets purchased, including the US and South Africa and Thailand.

In, in any event these, these global groups, well-known headed by Transparency International, wanna be part of the summit, but more importantly, want to continue to press governments to make changes and improvements to anti-corruption wherever they might be.

Elliot Berman: I have one more in the US and that is Bank of America in their recent 10-K filing indicated they're continuing to discuss resolution of their 2024 consent order with the OCC for AML issues and the resolution, and this is what's new, the resolution may involve paying penalties. No amounts were cited, no timeline was cited. Some analysts are saying this is just an indication that they're actively trying to wrap things up. But we'll see. That consent order was late in 2024, so we're about a year and a half out, so they wanna probably put that one to bed.

John Byrne: And as we are recording this getting in the weeds with US politics, there are debates going on whether or not the nominated Attorney General Todd Blanche should be approved by the Senate. The only thing I'll reference is that it's getting a lot of play on two issues. One is, we talked about this, the anti-weaponization fund that Blanche proposed and the president supported, which would, if ever enacted, enable basically the rioters from January 6th to be compensated. Which would really turn that whole notion of weaponization on its head, and then also would give the Trump organization, the family, extended family, and all the various companies immunity from tax audits.

Now Blanche has said that the second part of what I just described would only be previous tax filings as opposed to anything going forward. Many on all sides of the aisle seem to think that despite it being quote, in writing that there are still ways around it. It's gonna be interesting to watch because obviously we care, we meaning the AML industry, about tax evasion issues and corruption.

So the question of whether or not you give blanket immunity for tax fraud is something that most people wouldn't be able to get. So this could be interesting to watch. They're supposed to go to the floor this week, so by the time you hear our conversation, that decision will have been made. It will bear watching going forward, of course, to see how this all shakes out.

Elliot Berman: Yes. So our August webinar is on risks related to virtual assets. It's gonna live stream on August 27th. I've got a great panel put together, and you can still register for that at our website. So please do that and join us. And John, I know you've got a couple things that you're working on. You wanna talk about those?

John Byrne: We have our catch up with Sara Beth Felix scheduled for next week, so we will interview Sara on her take on, I'm sure, UBS and some of the other issues. I'm also efforting an investigative journalist to talk to us about defense industry fraud issues that they've been working on. So we will hopefully get that conversation going next week sometime.

And as always, let us know if you want us to talk about a particular topic, issue, or person. We are more than happy to reach out.

Elliot Berman: Okay, John. You have a great week, and I will talk to you next week.

John Byrne: Take care.

Elliot Berman: You too. Bye-bye