Wells Fargo is not the only Minnesota-connected big bank bashed recently for bad behavior.
A federal regulator this month fined a former U.S. Bancorp (USB) executive in connection with the bank’s lax money laundering-prevention practices that let a multimillion-dollar payday-loan fraudster run amok while warnings of USB underlings were ignored for five years. That earned USB a stunning $613 million fine in 2018 to settle charges it ‘‘willfully’’ failed to maintain safeguards to prevent money laundering.
And regulators warned USB they would prosecute if the bank screwed up again. It was a big black eye for a bank lauded as an industry leader in performance and ethics.
U.S. Bancorp’s anti-money laundering (AML) program to protect against terrorists and fraudsters was inadequately staffed and supervised and the bank “concealed its wrongful approach” from regulators for years, according to Geoffrey Berman, the U.S. attorney for the Southern District of New York.
USB managers ignored red flags flown by a since-jailed customer in Missouri named Scott Tucker. From 2008 through 2012, he generated hundreds of millions in profits from his “fraudulent payday-lending scheme,” using numerous “sham bank accounts” to conceal his identity.
This month, the U.S. Treasury went after a former USB executive, further evidence that federal regulators are increasingly targeting culprits on executive row after doing little to pursue the malfeasance that contributed to the Great Recession of 2007-2009.
The Treasury’s Financial Crimes Enforcement Network (FinCEN) this month assessed a $450,000 civil penalty against Michael LaFontaine, former chief operational risk officer at U.S. Bank, for failure to prevent violations of the Bank Secrecy Act.
USB used automated transaction monitoring software to spot potentially suspicious activity, but improperly capped the number of alerts, limiting the ability of law enforcement to target criminal activity, according to regulators. In addition, the bank failed to staff the compliance function with enough people to review even the reduced number of alerts, enabling criminals to escape detection.
USB declined to respond to an e-mail inquiry about the March development. LaFontaine, who consented to the Treasury finding against him and U.S. Bank, declined to comment.
“LaFontaine was warned by subordinates and regulators that capping the number of alerts was dangerous and ill-advised,” said FinCEN Director Kenneth Blanco in a statement. “His actions prevented proper filing of many , which hindered law enforcement’s ability to combat crimes and protect people.”
LaFontaine received internal memos from staff saying that significant increases in Suspicious Activity Report volumes, law enforcement inquiries and closure recommendations created a situation where the AML staff was “stretched dangerously thin,” according to FinCEN. USB brass looked the other way for five years.
For example, the bank admitted to “willfully” failing to report in a timely fashion that customer Tucker had used USB to launder more than $2 billion of proceeds from an illegal payday-lending scheme
Bentley Anderson, a former general counsel of what is now RBC Wealth Management and who has defended other financial institutions in parallel civil and criminal investigations, has studied the case.
“The fact that USB never reviewed what Tucker was doing, while he used the bank to process his payments, is a shocking statement about the lack of risk management controls at the bank, and about the bank’s senior management’s failure …’’ Anderson said in an e-mail.
Anderson noted that the bank’s agreement was designed to keep USB brass on their toes. It includes a two-year term in which the government could prosecute USB for any of the deferred charges, if the Department of Justice believes that the bank has engaged in similar misconduct, or if any of the statements made by the bank in its settlement negotiations with the government turns out to be false or misleading.
USB has since invested $200 million-plus to improve safeguards. That included increasing its compliance staff by 156% to 540 full-time employees.
Tucker was sentenced earlier this year to 16 years in prison for illegally charging customers up to 1,000% interest rates and concealing his operations from regulators.
Correction: A previous version of this article misstated some terms of the company’s agreement with the Justice Department.