Wachovia: When the Bank Capped the Warnings

The Wachovia money laundering case included a $50 million civil penalty from the Office of the Comptroller of the Currency over failures in the bank’s anti-money laundering controls. The Justice Department said the bank failed to monitor more than $420 billion in transactions with Mexican currency exchange houses effectively for potential money laundering. The Financial Crimes Enforcement Network’s civil assessment describes a bank that limited the warnings its systems generated to fit the staff available to review them. For an insider who has watched a compliance backlog become a reason to turn down the monitoring, that is the heart of this case.

The Justice Department announced the resolution on March 17, 2010. Under its deferred prosecution agreement, Wachovia accepted responsibility for the conduct described in the accompanying factual statement. The criminal information charged a willful failure to maintain an anti-money laundering program from May 2003 through June 2008. The separate civil assessment describes what went wrong inside the controls.

How the Money Moved Through Wachovia

Casas de cambio are currency exchange houses. The Justice Department’s announcement of Wachovia’s deferred prosecution agreement describes how the bank gave its Mexican exchange-house customers several ways to move dollars into and through U.S. accounts. They could send wire transfers to recipients around the world. They could collect physical dollars in Mexico and have the cash transported to the United States for deposit.

They could also deposit checks and travelers’ checks drawn on U.S. banks. Pouch deposits delivered the instruments to the bank, while remote deposit capture let customers send deposit information electronically. The same correspondent relationship could therefore carry a wire, a shipment of currency or a check image. Each needed monitoring suited to what was moving.

In the same announcement, the Justice Department said Wachovia knew other U.S. banks had stopped doing business with the exchange houses over drug-money concerns. Other banks gave up that business. Wachovia expanded it.

The Justice Department’s announcement of the deferred prosecution agreement also connected the money to the trafficking business itself: millions of dollars passing through Wachovia were used to buy airplanes for narcotics operations. Authorities seized more than 20,000 kilograms of cocaine from those airplanes. The banking failures helped finance the means of moving the drugs.

What Is Correspondent Banking in AML?

Correspondent banking lets a financial institution use another institution’s accounts and services to receive deposits, make payments and process transactions. At Wachovia, the anti-money laundering problem reached beyond the exchange house whose name appeared on the account: other businesses used that relationship to reach the U.S. financial system.

The Financial Crimes Enforcement Network’s civil assessment describes Mexican centros cambiarios, dollar exchangers and money remitters operating through the casas de cambio. This is nested access. A bank looking only at its direct customer can miss the businesses whose money that customer is moving.

The assessment says evidence of those nested accounts was readily visible in Wachovia’s own customer files, yet the bank failed to detect and review them for suspicious transactions. It also identifies gaps in business descriptions, owner identification and expected activity, and says key compliance officials could not readily obtain the enhanced due diligence files.

Even a high-risk rating did not reliably change the treatment, according to the assessment. The Financial Crimes Enforcement Network found that certain foreign money transmitters rated high risk or very high risk did not receive monitoring and diligence proportionate to that risk. The bank could recognize the category without doing the work the category called for.

Remote Deposit Capture Left Checks Outside the Monitoring

Wachovia’s remote deposit capture service let casas de cambio deposit checks electronically. The Financial Crimes Enforcement Network identified a basic anti-money laundering failure: the bank did not add the computer coding needed to include those deposits in its supplemental check monitoring. The assessment dates implementation of the deposit service to May 2005.

The assessment describes a product that went into use without the corresponding monitoring: over two years, Wachovia inadequately monitored approximately six million checks worth nearly $47 billion received through remote deposit capture.

According to the assessment, the bank discovered the lapse during an internal investigation into sequentially numbered commercial checks from a customer of one of its foreign correspondents. It subsequently filed numerous late suspicious activity reports involving travelers’ and commercial checks.

For someone who works on payment systems, the detail is concrete. A product can be processing deposits while the system intended to scrutinize those deposits does not include them. The question is whether the transaction reaches the review at all.

What Are the Red Flags for AML Transaction Monitoring?

The Financial Crimes Enforcement Network’s Wachovia assessment identifies sequentially numbered travelers’ checks, round-dollar cash transactions, consecutive-day transactions and activity inconsistent with a customer’s business. Those signals called for scrutiny of the payments and the business behind them.

How Wachovia Capped Its Alerts to Fit Its Staff

The Financial Crimes Enforcement Network found that Wachovia capped alerts to accommodate its available compliance personnel. The agency found little evidence that the bank had tested whether that workload fit the risk. In that account, the bank made the warnings fit the staffing instead of making the staffing fit the warnings.

The assessment also describes a unit clearing a backlog of approximately 5,000 cash alerts in 2008 without sending them for further suspicious-activity review. A further review of a 100-alert sample found that 85% showed indications of suspicious activity and should have received further evaluation. A closed alert was a reassuring entry in the system, even where the underlying transaction still needed attention.

The agency also found that management failed to explain its filtering thresholds, keep them under review or independently validate the monitoring system. Those are decisions about what the bank sees. An insider who understands the settings can explain a failure that the transaction history alone cannot.

Bulk Cash Reviews Followed Profit and Logistics

The Financial Crimes Enforcement Network found that Wachovia employees identified unusual volumes or mixes of bulk cash without bringing those anomalies to compliance or anti-money laundering investigators. Reviews by the business line concentrated largely on profitability and logistics. The cash received commercial attention while the laundering risk went without an adequate review.

From 2004 through 2008, the bank filed only one suspicious activity report concerning bulk U.S. dollars received from its foreign correspondent customers, according to the assessment. The Justice Department’s deferred prosecution announcement describes more than $4 billion in bulk cash moving from Mexican exchange houses to Wachovia accounts from May 1, 2004 through May 31, 2007. Billions in cash passed through that service; across all its foreign correspondent customers, the bank filed one report on bulk dollars.

The civil assessment also says Wachovia failed to respond adequately to warnings about large volumes of sequentially numbered travelers’ checks arriving in pouches from Mexico, beginning in December 2006.

These were different services with a common problem: information reached the bank without reaching an effective investigation. In his written parliamentary evidence, a former Wachovia anti-money laundering professional described making internal reports and later giving evidence to U.S. authorities in Miami.

Payment Processors Brought Another Warning Into the Accounts

Under its deferred prosecution agreement, Wachovia also admitted failures involving third-party payment processors for telemarketers. The Justice Department’s announcement of the agreement describes remotely created checks deposited on the telemarketers’ behalf. These checks carried a statement of customer authorization in place of the account holder’s signature.

Checks were often returned as unauthorized. In some accounts, returns exceeded 40% of deposited checks. Wachovia admitted that it failed to identify, detect and report suspicious transactions in the processor accounts. It delegated most customer diligence to business units, failed to monitor high return rates and failed to report suspicious wires from those accounts.

Remote deposit capture describes how a check reaches the bank. A remotely created check describes how the check is created and authorized. The case exposed failures in both, with the processor accounts giving bank employees another visible signal: customers disputing the withdrawals.

What Are Violations of the Bank Secrecy Act?

In Wachovia’s case, the Financial Crimes Enforcement Network determined that the bank violated requirements for an effective anti-money laundering program, foreign correspondent diligence and timely suspicious activity reporting. Its findings connect the missed transactions to staffing, testing and management decisions.

The assessment describes the unit responsible for monitoring foreign correspondent relationships as understaffed and lacking the expertise needed for its duties. It also says internal audit did not adequately test the relevant cash, check and correspondent-account controls. When auditors raised problems, management repeatedly failed to respond adequately, and internal audit failed to follow up on corrective action, according to the assessment.

The Financial Crimes Enforcement Network reported that a look-back review of Mexican exchange-house customers eventually produced more than 4,200 suspicious activity reports. Many were late, reducing their usefulness to investigators. The agency concluded that adequate controls could have caught and reported the activity earlier.

HSBC Also Let Staffing Drive Scrutiny

In the factual statement accompanying its December 2012 deferred prosecution agreement, HSBC admitted anti-money laundering staffing failures and keeping Mexico in its lowest risk category. The statement describes a staffing freeze intended to cut costs and improve return on equity. Staffing and risk ratings determine how much scrutiny a business receives, and both banks’ cases put those internal choices at the center of the story.

What a Bank Insider Can See Beyond the Alerts

The useful evidence connects the payments to decisions about which payments would be examined: customer files, product implementation, alert settings, staffing and responses to audit findings. Wachovia’s case gives each of those a concrete role.

The 2024 Wharton Initiative on Financial Policy and Regulation paper Anti-Money Laundering: Opportunities for Improvement argues that money laundering tends toward weak points in the system. Its explanation of what makes a channel attractive is particularly useful here:

Wachovia’s own case shows the practical opportunity created when a bank expands access to its services while leaving monitoring incomplete. Someone inside the bank may know exactly where the product, the customer information and the review stopped matching.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Treasury’s money laundering whistleblower program has its own award framework. We work through the program and evidence questions with you for the conduct you know.

You Know Why the Review Stopped

If you know which transactions your bank excluded, which alerts it capped or which audit findings management left unresolved, talk with our whistleblower experts about what happened inside the controls. We build the case with you, connect the money movement to those decisions and bring in money laundering whistleblower lawyers who understand correspondent banking and payment systems. We stay beside you as your inside knowledge becomes a case the government can pursue.