Financial Sector Executives as Targets for Money Laundering Liability

Levying record-breaking fines and other punishments, government regulators have maintained a sharp enforcement focus over the past decade on banks and other financial institutions as potential enablers of money laundering activity. The complex web of existing AML laws and accompanying regulations require these institutions to monitor their operations for potential money laundering activity and report suspicious transactions and other customer behavior to government agencies. Consequences for violating AML laws could be disastrous for many institutions, as they may face crippling criminal and civil penalties for facilitating money laundering or for failing to monitor their operations properly for possible money laundering activity.

Within this heightened enforcement climate, a number of federal and state officials have been expressing frustration over noncompliant banks that receive “slap on the wrist” punishment with no jail time or fines for bank personnel. Critics argue that without the realistic threat of prosecution for individual wrongdoing, banks and their employees will continue to pay little heed to their AML obligations. In apparent recognition of these criticisms, federal agencies are shifting focus upon senior executives and other employees within financial institutions who fail to address adequately their institutions’ AML compliance deficiencies. Suggested initiatives at federal and state levels are surfacing that would penalize individuals within financial institutions for lapses in oversight and management when their institutions fail to comply with AML responsibilities.[1] Under some proposals, compliance officers and other executives could face individual liability for their banks’ insufficient AML programs, regardless of whether any money is actually laundered through those banks. New York State Superintendent of Financial Services Benjamin M. Lawsky captures the overall sentiment behind these initiatives in his recent remarks: “[R]eal deterrence . . . means a focus not just on corporate accountability, but on individual accountability.”[2]

Targeting Bank Executives with Personal Liability for Institutional AML Violations Is Misguided Policy

While holding financial institutions liable for their substantive AML misdeeds is widely understood as a fair and uncontroversial practice, determining whether to impose and allocate responsibility on individual actors within those institutions creates a number of complex quandaries. In my article, I examine the merits of government initiatives that assign personal liability for money laundering violations committed by institutions across the financial sector.[3] The article explores how the current set of personal liability initiatives contain troubling features that clash with corporate governance principles, raise problematic ethical issues, and could bring harmful effects to the financial services sector with repercussions beyond the industry.

For example, the initiatives could potentially ensnare vast categories of bank employees with personal liability for a wide range of AML bank shortfalls, which would likely leave government regulators perplexed in deciding what types of workplace conduct should warrant leveling personal liability charges and who in the corporate hierarchy should accordingly be charged. To illustrate, suppose a bank representative processes a transaction for a customer who is attempting to launder tainted money, but the bank employee makes an honest mistake in failing to recognize the suspicious nature of the transaction and does not file the required paperwork. Upper level managers and compliance supervisors who review the transaction could also fail to spot the suspicious elements of the transaction that warranted filing a government notice, and senior compliance officers and other senior executives may have approved and implemented suboptimal AML procedures that allowed a suspicious transaction to escape notice. Beyond sanctioning the bank, it is unclear whether bringing a personal liability action is justified against any and all of the involved employees for their various actions and omissions in this illustration.

Under these initiatives, compliance officers appear to be main targets for personal liability actions when their institutions violate AML laws, given the widespread view that these officers bear responsibility for AML operations within their institutions. While this perspective carries a certain degree of intuitive appeal, it nevertheless clashes with fundamental corporate governance principles and practices within the financial services sector, where shared responsibility and collective action predominate. AML-related compliance failures in financial institutions often arise from collective decision making across the institution, rather than from the efforts of a single employee or department. When an institution fails to meet its compliance requirements, regulators can quickly and conveniently point to compliance officers, but regulators’ ability to identify accurately the appropriate culpable parties may not be possible given the complex governance structures inherent in many institutions. Compliance officers and other employees should not be treated as scapegoats for the offenses of their employers. Moreover, if the goal of the initiatives is to promote greater institutional compliance with AML obligations, it is not at all clear that sanctioning any bank officers in accordance with the initiatives will lead to any positive changes in institutional AML compliance.

A Suggested Approach for Holding Financial Institutions and Their Agents Responsible for AML Violations

I propose an alternate approach to impose accountability for AML noncompliance in financial institutions at the corporate and individual levels. The approach avoids the counterproductive features within the personal liability initiatives currently favored by government proposals. Appropriately tailored corporate liability actions are the suitable means to address institutional AML violations, coupled with active self-policing and remedial measures with those financial institutions when the institutions fail to comply with their AML responsibilities. Certain penalty enhancing frameworks that are designated to decrease the likelihood of future violations, such as reputation-damaging fines and corporate governance structural reforms, should be implemented directly against financial institutions when those institutions fail to comply with their AML responsibilities.

Government agencies should reserve individual liability actions for those instances where personnel within the institution directly participate in money laundering activity or purposely disregard their AML responsibilities, leading to institutional violations. Such individual perpetrators should face criminal and civil liability upon proof of the individual’s direct participation, aiding and abetting, or acquiescence in the illicit activity, in line with conventional approaches for punishing corporate agents when they violate the law. Such an approach ensures from an ethical standpoint that those agents found liable are in fact morally blameworthy.

ENDNOTES

[1] See, e.g., H.R. 3317, 113th Cong. (2013); The Morning Risk Report: Lawsky Proposals Target Executive Liability, http://blogs.wsj.com/riskandcompliance/2015/02/26/the-morning-risk-report-lawsky-proposals-target-executive-liability/.

[2] http://www.dfs.ny.gov/about/speeches/sp150225.htm.

[3] Jeffrey R. Boles, Financial Sector Executives as Targets for Money Laundering Liability, 52 Am. Bus. L.J. 365 (2015).

The preceding post comes to us from Jeffrey R. Boles, Assistant Professor of Legal Studies in Business at the Fox School of Business at Temple University. It is based on his recent article, which is entitled “Financial Sector Executives as Targets for Money Laundering Liability” and available here.