MONEY MATTERS SHIRLEY YAM
Money Matters
by

Can Agricultural Bank of China rein in its errant New York branch?

PUBLISHED : Friday, 11 November, 2016, 9:33pm
UPDATED : Friday, 11 November, 2016, 10:52pm

A sexual harassment lawsuit directed at its general manager; a whistle-blower discrimination claim by an ousted compliance officer; a US$215 million fine for failure to check money laundering involving Russia, Yemen and Afghanistan.

Operations at the Agricultural Bank of China‘s New York branch had been repeatedly cited for problems, but nothing had been done to address them.

Not until a tall, beautiful and blonde former chief compliance officer of the branch laid out all the details in open court in a US$8 million law suit.

Now, the New York State Department of Financial Services (DFS) is demanding, on top of the fine, a plan from the bank’s board to “enhance oversight” of the branch.

That includes a senior official with appropriate expertise and active involvement to oversee the branch, and a direct reporting line between the board and the compliance officer.

China’s four major state-owned banks have had their hands slapped by US and European regulators for money laundering issues. Yet ABC is the only one to have its governance questioned.

It isn’t surprising, given the facts revealed by a consent letter signed by the DFS and ABC, and according to US court documents.

ABC opened its New York branch – its first and only US outlet – in August 2012. Since 2013, its core business has been to convert foreign funds into US dollars and then distribute those funds to customers worldwide.

Profitable, but with obvious regulatory risks.

In its first examination in 2014, the DFS located inadequacies in the bank’s system for monitoring money laundering, asked for immediate remedies, instructed the bank to keep the business at bay and warned of disciplinary actions if there were no improvements.

The advice was in vain.

ABC’s New York branch grew its dollar clearing transactions from US$26 billion in the first seven months of 2014 to US$72 billion by 2015.

No improvement was made other than the hiring of an 18-year veteran Natasha Taft to head its compliance team.

Within a month into her new job, Taft was tipped off by her team of a strange pattern in the branch’s wire transfer messages with other financial institutions done via an electronic communication network.

About 20 to 30 per cent of the transactions that were filed as bank-to-bank transfers carried unidentified numeric codes that began with “OC” or “BP”.

Taft believed many of these were in fact customer-bank transfers which should have been filed under a different category. This required customers’ identification, which would then be subject to screened against money laundering.

Her staff also discovered unusually large round-sum transfers between Chinese trading companies and firms in Russia and Yemen. There were also falsified invoices on transactions between China and Russia, as well as documents linked to a sanctioned Iranian party.

Taft reported all these to the branch’s general manager Yu Ming, who disagreed with her assessment, and stopped authorising any further requests by her for information to the head office.

In November 2014, Taft wrote to the Federal Reserve Bank of New York about her concern. Three months later, the regulator responded in a letter to the bank’s president in Beijing demanding the filing of the branch’s transactions under the right category.

One would assume this would have set off some alarms at the head office. It didn’t.

Instead, Yu barred Taft from communicating with regulators, trimmed her power and put her under the supervision of the bank’s chief financial officer. Taft left, as did her compliance team. A temporary consultant was appointed as her replacement.

In July 2015, regulators came on-site to discover not only an “unmanageable” backlog of nearly 700 alerts that need investigation, but also that most of the problems identified in 2014 had persisted.

The headquarters should have been alerted after this examination. Yet, the DFS said last Friday “many, if not all,” of the problems “remain unremediated.”

“Head Office and senior management did not adequately monitor remediation of the prior examination deficiencies,” the DFS said.

All these were kept private until Taft took ABC to court, suing her former employer for sexual harassment and whistle-blower discrimination. In September, Taft withdrew her claims, without saying whether a settlement had been reached.

Now ABC’s president Zhao Huan has signed a commitment to improve the bank’s compliance.

Should one expect a fresh start?

The short answer is that Taft’s former manager Yu remains the general manager of the New York branch. The bank’s Beijing office did not respond to emailed questions by the South China Morning Post for comment.

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