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September 08, 2005

Bank of China Probed by US Investigators

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The WSJ reported this afternoon that Bank of China and two Macanese banks - Banco Delta Asia SARL and Seng Heng Bank - are under investigation due to alleged connections with North Korea which involve money laundering, counterfeiting, drugs, and arms sales.

Press reports connect the investigation, which has evidently been ongoing for several years, to the recent seizure of so-called "supernotes" (high-quality counterfeit US currency) in the US and Taiwan.

This is a repeat investigation for Delta Asia, which has been under the microscope for a decade. The WSJ article described Delta Asia as "a top candidate for being placed on a Treasury Department blacklist" of banks facilitating money laundering, which would deal a heavy and possibly crippling blow to the bank's business. Likewise, Seng Heng (no relation to Hang Seng), controlled by gambling tycoon Stanley Ho, will be looked at closely given Mr. Ho's close ties to the North Korean government.

Are the allegations true? While we have no direct knowledge, it would be incredible if banks in Macau have not been facilitating money laundering, given the amount of illicit cash that washes into the casinos and various less-savoury schemes in the territory. As for Bank of China, its internal controls have been so porous that it is easy to believe that some part of the bank was facilitating money laundering, if only unintentionally.

What are the prospective penalties? Stiff:

Penalties for money laundering and terrorist financing can be severe. A person convicted of money laundering can face up to 20 years in prison and a fine of up to $500,000.11 Any property involved in a transaction or traceable to the proceeds of the criminal activity, including property such as loan collateral, personal property, and, under certain conditions, entire bank accounts (even if some of the money in the account is legitimate), may be subject to forfeiture. Pursuant to various statutes, banks and individuals may incur criminal and civil liability for violating AML and terrorist financing laws. For instance, pursuant to 18 USC 1956 and 1957, the Department of Justice may bring criminal actions for money laundering that may include criminal fines, imprisonment, and forfeiture actions. In addition, banks risk losing their charters, and bank employees risk being removed and barred from banking.
Moreover, there are criminal penalties for willful violations of the BSA and its implementing regulations under 31 USC 5322 and for structuring transactions to evade BSA reporting requirements under 31 USC 5324(d). For example, a person, including a bank employee, willfully violating the BSA or its implementing regulations is subject to a criminal fine of up to $250,000 or five years in prison, or both. A person who commits such a violation while violating another U.S. law, or engaging in a pattern of criminal activity, is subject to a fine of up to $500,000 or ten years in prison, or both. A bank that violates certain BSA provisions, including 31 U SC 5318(i) or (j), or special measures imposed under 31 U SC 5318A, faces criminal money penalties up to the greater of $1 million or twice the value of the transaction.
- FFIEC Bank Secrecy Act Examination Manual (emphasis ours)

While the US can't revoke the charter of a foreign bank, it can revoke its license to operate in the US. Neither of the Macau-based banks has a branch or rep office in the US, so they are safe on that count, but BOC most assuredly does and so is vulnerable.

In addition, if US authorities prove their case to international regulators, they can effectively cut off rogue banks from access to the international finance system by preventing interbank transfers and payments, access to clearing, and correspondent banking.

Although regulators take this financial crime more seriously than almost any other (remember that even the very well-connected Riggs Bank ran afoul of the regulations and was forced into a sale), cutting-off BOC from international markets would be seen as a very aggressive diplomatic act. Unless there is much more to the story than has yet been revealed, this will not happen.

However, the bank will most likely be fined several hundred million dollars, and be restricted in its activities in the US for some time. It is certainly not good timing for BOC's planned IPO. I'm sure that RBS has its best anti-money-laundering team on a plane right now to see if they can help the situation.

As for the two smaller banks, they will be under heavy pressure to sell out lest they taint the entire market. I would not be suprised to see both merged into Hong Kong banks by year-end. A change of ownership (along with smaller fines) would probably propitiate US regulators, and the PBOC will (my guess) freely flay the small banks so as to demonstrate its bona fides and be able to cut a good deal for BOC, which is much more strategic to them.

Posted by The Banker at September 8, 2005 04:20 PM

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