Texas Bank fined for failure of Due Diligence Program

It's not enough to avoid risky behavior in your own business, it's important to take the time to check on your business partners, vendors, and even clients to be sure they aren't engaging in risky behavior either.  Federal regulators with the Financial Crimes Enforcement Network (FinCEN) recently fined a small Texas bank for violations of the Bank Secrecy Act for a failure to conduct requisite due diligence and a lack of controls on foreign accounts. Essentially they didn't check out their depositors ahead of time and didn't monitor their activities once they had opened accounts.

Lone Star National Bank was fined $2 million dollars, though an earlier $1 million penalty the bank had already paid will credited toward that total. This case is interesting because FinCEN found no indication of actual money laundering; rather they noted suspicious activity involving a Mexican depositor, and found that Lone Star had not put in place adequate controls to serve foreign clients. The FinCEN assessment says "Without sufficient internal controls or experienced BSA staff, the Bank engaged in high-risk foreign correspondent banking services without conducting appropriate due diligence, and without adequately monitoring and reporting suspicious activity." This underscores the need to conduct due diligence on foreign clients.

The document goes on to say:

‍Lone Star consistently failed to collect and analyze information necessary to assess each customer’s risk and to develop and implement specific customer risk profiles. Lone Star failed to identify the intended purpose of the customer’s account, the anticipated activity within the account, the nature of the customer’s business, the types of bank products and services used by the customer, and geographic indicators of risk.

‍In this case even though there's no specific indication that any funds were actually laundered by the depositor in question, simply not having an adequate program in place was enough to trigger a fine.

While this particular case involves the banking industry, which has it's own specific set of regulations, the lessons here are applicable to any industry. It is essential that businesses conduct due diligence on their potential clients, and be able to show that they have done so. It is all too easy to take on a new client without asking too many questions. But if something goes wrong with that client, you could end up being liable for not looking into their background before starting up a business relationship with them. In some industries, as with banking, simply not having an adequate program in place may itself be a violation, even if no other crime is shown to have taken place.

A good due diligence program can hopefully help you spot potential problems ahead of time so you can avoid dangerous client relationships. But it can also help provide some defense if a client turns out to have committed a crime. You want to be able to show regulators that you did everything you could to avoid problems ahead of time, and not just after problems started. Smith Brandon International can help you set up a comprehensive Due Diligence program and help make sure you have a Foreign Corrupt Practices Act compliance program in place. Make sure you know who your clients and vendors are before you start working with them so you can take adequate precautions for you business.

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