Industrial Bank of Korea: The Compliance Officer Asked for Help and Got Overtime

Industrial Bank of Korea agreed to a $35 million New York regulatory penalty alongside its AML DPA over an anti-money laundering failure that enabled Iran sanctions violations. Under the deferred prosecution agreement, the bank admitted violating the Bank Secrecy Act by leaving its New York branch without the staff, training and automated transaction review it needed. Its compliance officer had repeatedly told management what was wrong. The payments kept moving while the reviews fell months behind.

The Justice Department announced the agreement on April 20, 2020. The admitted program failure ran from at least 2011 through at least 2014. For someone inside a bank, the striking part is how ordinary the decisions were: whether to hire another experienced person, whether to replace manual review, and what to tell the government after prohibited transfers surfaced.

What Is Correspondent Banking in AML?

Correspondent banking lets a financial institution use another bank to receive deposits, make payments or process transactions. At Industrial Bank of Korea, the New York branch provided that service for customers of the bank in Korea. The New York Attorney General’s account describes a South Korean government-owned bank with a single U.S. branch, in New York.

That branch was a point of access to the U.S. banking system. The customers could be in Korea while their payments passed through New York. The branch’s ability to review those payments therefore mattered well beyond its own office: the bank’s admitted account describes prohibited transfers processed through both its branch and other U.S. financial institutions.

How the Iran-Linked Transaction Channel Worked

The transaction channel began with Korean-won accounts held by the Central Bank of Iran. As the New York Attorney General explained, private Korean businesses could use that arrangement for permissible trade with Iran. The accounts had a commercial purpose, and the scheme used trade paperwork to exploit it.

The bank’s admitted Statement of Facts, summarized in the Justice Department’s announcement, describes how participants used that channel between January and July 2011. They set up shell companies in Korea, Iran and elsewhere, arranged sham trade transactions and submitted fictitious documents to Korean banks, including Industrial Bank of Korea. The documents supported transfers from the Central Bank of Iran’s won accounts into Korean entities’ accounts.

The next steps changed both the currency and the destination. Participants converted the funds into U.S. dollars, then sent the dollars through U.S. financial institutions to accounts they controlled or for their benefit. The Justice Department described the transfers as violations of U.S. sanctions against Iran.

The paperwork and the payments tell different parts of that story. The supposed trade explained why money should leave the won account. The conversion and onward transfers showed where it went. Inside the bank, the people handling trade documents and the people reviewing dollar payments could see different parts of the same transaction chain.

What Are the Red Flags for AML Transaction Monitoring?

At Industrial Bank of Korea, the red flags for AML transaction monitoring were a review backlog, repeated requests for experienced staff and a manual process management knew was inadequate. The bank’s admitted Statement of Facts describes warnings from both its own compliance officer and outside regulators.

In 2010 and 2011, the New York branch had only one compliance employee. The officer asked the branch manager and the bank’s compliance committee for an automated transaction review system. The officer also formally requested another professional compliance employee.

Management first proposed interns. It ultimately assigned an IT employee to help part-time while keeping that employee’s IT responsibilities. The person had no compliance experience. The branch had supplied another pair of hands without supplying the expertise the officer had requested.

By March 2011, the officer estimated that catching up enough to meet regulatory expectations would take about six months. The request was again for experienced anti-money laundering staff. The branch manager authorized overtime for the officer and the IT employee instead.

After the prohibited transactions surfaced, the officer sent another warning to head-office leadership. The Justice Department reproduced this sentence from the memorandum in its account of the criminal case:

That sentence puts the decision where it belonged. The person responsible for reviewing transactions had told the people controlling resources that the work could not keep up. The bank’s admissions connect those management decisions to the late detection of suspicious payments.

The Payments Moved Faster Than the Reviews

According to the admitted Statement of Facts, the New York branch identified the transactions as unlawful more than five months after they began passing through the bank. By then, the bank had processed more than $1 billion in the prohibited transactions. The delay concerned money already moved, not merely a queue of payments awaiting approval.

The same account shows how slowly the bank improved the review process after discovery. The bank began selecting an automated-system vendor in August 2011. The system went into operation in January 2013, but external-auditor validation did not follow until 2014. The branch did not hire even a second full-time compliance employee until October 2014. The Justice Department said the broader deficiencies persisted for years, even after a February 2016 agreement with regulators to correct them.

Management could point to activity while the work needed to detect suspicious transactions remained behind.

A similar gap between stated and working controls appears in the New York banking regulator’s August 2014 order concerning Standard Chartered. The regulator found monitoring scenarios that did not match the bank’s rulebook, contained errors or were incomplete, together with failed testing. A description of a monitoring program tells only part of the story. The people operating it know whether it works as described.

What the Bank Reported to OFAC

The bank’s admitted account also describes an incomplete disclosure after the transactions were identified. The New York branch filed a suspicious activity report concerning approximately $10 million in transactions processed through that branch. In August 2011, it disclosed those transactions to the Treasury Department’s Office of Foreign Assets Control. Industrial Bank of Korea never self-reported its involvement in the remaining $990 million to that office.

What did the bank examine, and how much of that activity did it tell the government about? An insider may know where those accounts diverge.

What the Bank Admitted Under Its DPA

Industrial Bank of Korea accepted responsibility under its deferred prosecution agreement by agreeing that the Statement of Facts was accurate. The federal criminal charge concerned the willful failure to establish, implement and maintain an adequate anti-money laundering program at the New York branch.

The state actions were separate. The New York Attorney General resolved its investigation through a non-prosecution agreement. The Department of Financial Services addressed the branch’s Bank Secrecy Act and anti-money laundering deficiencies through its own consent order, carrying the state regulatory penalty described at the start of this page.

The Justice Department identified failures to disclose the full extent of the prohibited transactions, preserve relevant electronic evidence and correct the program’s deficiencies promptly. The internal decisions mattered both before the payments were detected and after the bank knew about them.

Whistleblower Rewards for Bank Sanctions and AML Failures

Bank insiders with evidence of anti-money laundering or sanctions violations may qualify for a reward through the AML and sanctions whistleblower award program. That program is separate from the False Claims Act. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Our whistleblower experts assess the conduct your evidence shows and the program that fits it.

Our whistleblower experts build cases around records such as staffing requests, backlog memoranda and the transaction analysis behind a disclosure. The bank’s admitted account shows why those records matter: they connect what management knew with what it chose to do.

You Know What Management Was Told

If you saw a bank leave transaction reviews behind or disclose only part of a prohibited payment flow, talk with our whistleblower experts about the decisions behind it. We build the case with you around the warnings, the transfers and management’s response, and bring in AML and sanctions whistleblower lawyers who understand correspondent banking. We stay beside you as that inside knowledge becomes a case.