Last month, Global RADAR chronicled a potential joint decision from the Office of the Comptroller of the Currency (OCC) and the U.S. Federal Reserve to publicly reprimand Citigroup Inc. – America’s fourth largest bank by total assets – for longstanding failures in improving its risk management systems and procedures. These deficiencies have left the bank and the greater U.S. financial system susceptible to the potential influx of dirty funds from around the world. Needless to say, the past several weeks have brought significant turmoil to a group already in a state of significant uncertainty following a recent retirement announcement by longtime company CEO Michael Corbat. Adding insult to injury, Citigroup is now facing a massive $400 million in regulatory penalties as they look to endure a massive blow to their reputation and their bottom-line.

In September, Citi made the surprising announcement that CEO Michael Corbat – who has held this position since October 2012 – would be retiring at the relatively young age of 60, naming his successor as sitting Citi CEO of U.S. Consumer and Commercial Banking Jane Fraser. The move, which becomes effective in February of 2021, makes Fraser the first woman to lead a major United States bank. While many expected Fraser to eventually succeed Corbat, the abrupt nature of his decision still caught many across the U.S. financial sphere by surprise, let alone his colleagues at Citi. However, it was not necessarily the transition of power itself that raised questions, but rather the timing of the transition. Citigroup was just coming off a wire transfer scandal in which they lost $900 million that was mistakenly sent to cosmetics giant Revlon Inc. Bloomberg, citing a statement released by the lender, notes that the individual tasked with processing the transfer failed to manually select the correct systems option. The Bloomberg piece continues, adding that “instead of paying just the interest, it says the individual failed to prevent the entire principal on the loan from being repaid, landing the lenders with 100 times what they were due to receive.”⁵ While the financial services staple has been able to recoup a portion of the wired money to date, they have since filed a lawsuit seeking the repayment of the hundreds of millions of dollars that remain outstanding. The trial is set to begin on December 9^th, 2020. Nevertheless, this “clerical error” has raised questions in regards to the potential systemic nature of the company’s failures with respect to maintaining adequate checks and balances.

The questionable timing of Corbat’s retirement seems all the more egregious since the news that Citigroup was facing the aforementioned compliance crisis emerged.  The Office of the Comptroller of the Currency (OCC) and the Federal Reserve ultimately issued enforcement actions against Citibank to overhaul its data protection, risk management, and compliance controls. Citibank has agreed to pay the $400 million fine to the U.S. Treasury to settle these charges and agreed to the demands of “broad and comprehensive corrective actions to improve risk management, data governance, and internal controls” as well as revamp their management of sensitive data and upkeep with regulatory reporting requirements.⁴ The Federal Reserve also hit Citigroup with a cease and desist order, calling for the New York-based institution to submit plans on exactly how they plan to keep company executives accountable for oversight in regards to compliance with federal legislation moving forward. The Fed also is demanding a detailed outline of how the bank will be improving their data quality, due diligence, and monitoring of suspicious activity. Citigroup has stated their “disappointment” with their performance and pledged to invest $1 billion to completely overhaul their risk management department – however that commitment isn’t as heartfelt when considering the OCC has basically ordered them to make these long overdue changes. The OCC has also mandated that the bank assemble a compliance committee consisting of five board members to oversee this enormous undertaking while submitting periodic reports to the regulator on their progress.⁶

Rumors will continue to circulate regarding the role of Citi’s improprieties in forcing Corbat’s hand. Many have already begun to speculate whether Corbat’s advanced knowledge of the bank’s shortcomings led to his decision to jump ship rather than weather the impending compliance storm. While we can only speculate at this time, it appears that new chief executive Jane Fraser likely faces a significant uphill battle in righting the ship for Citigroup in the months to come.

Weekly Roundup

Crypto-Exchange, Owners Charged With Money Laundering

 On October 1^st, the Commodity Futures Trading Commission (CFTC) charged popular cryptocurrency exchange BitMEX with failing to prevent money laundering and offering its customers in the United States illegal derivative trading services. In total, five corporate entities related to the platform and three individuals that own and operate the exchange – Arthur Hayes, Ben Delo and Samuel Reed – were charged with violating the U.S. Bank Secrecy Act (BSA) and conspiracy to violate said legislation by failing to implement even the most rudimentary of anti-money laundering and know your customer (KYC) procedures and safeguards. The CFTC is seeking disgorgement of any illicit gains to cover restitution for customers that may have been negatively affected by their actions. BitMEX’s platform is reported to have “received more than $11 billion in bitcoin deposits and made more than $1 billion in fees, while conducting significant aspects of its business from the U.S. and accepting orders and funds from U.S. customers.”²

Forbes, citing Acting Manhattan U.S. Attorney Audrey Strauss, writes that the individuals charged were found to have flouted their obligations to maintaining cross-border financial security and “undertook to operate a purportedly ‘off-shore’ crypto exchange while willfully failing to implement and maintain even basic anti-money laundering policies”, showing little remorse for their wrongdoing in this regard.³

Yet Another Swiss Bank Facing Money Laundering Backlash

 The Swiss Financial Market Supervisory Authority (FINMA), Switzerland’s financial regulator, recently announced that national financial firm Banca Credinvest breached anti-money laundering regulations related to their dealings with clients in Venezuela. Reuters writes that as part of the  investigation by FINMA initiated in 2018, Banca Credinvest has been tasked with verifying the proper implementation of AML controls, specifically with regards to the management of potentially high risk relationships. the bank has agreed to “rapidly withdraw from all client relationships with a connection to Venezuela and may not accept any new high-risk clients (e.g. politically exposed persons) for three years or until all measures have been implemented and reviewed at a later stage.”⁷

FINMA is also probing potential ties between the small financial institution and Venezuelan state-owned oil and gas company Petróleos de Venezuela, S.A. (PDVSA). Swiss banks, including Credit Suisse, Compagnie Bancaire Helvetique (CBH), Lugano’s Banca Zarattini and several others, are believed to have played a major role in the laundering of suspect funds related to the oil firm.

California Con-Man Charged With Fraud Tied to PPP Loans

California resident Attila Colar, a man with a lengthy history of defrauding local government’s throughout the state in recent years, has been charged with attempting to pilfer $22 million from the Paycheck Protection Program (PPP). Colar, who has been formally charged with bank fraud, reportedly submitted nine PPP loan applications, including three for a nonprofit organization coined All Hands on Deck that he founded to offer services to individuals released from prison. He was ultimately successful in his exploits, receiving $1.1 million from the government after submitting one of these applications. Fox News writes, prosecutors said Colar “falsified payroll tax documents to make it look like he was paying employees in excess of $22 million, when there were no W2 forms to back up the claim.”¹ In 2015, Colar was convicted and sentenced to five years imprisonment for submitting fraudulent documents in an effort to win lucrative security contracts with Alameda County, the Los Angeles Department of Water and Power and the Housing Authority of the City of Los Angeles.¹

The Paycheck Protection Program was created to help keep small businesses afloat during pandemic-related shutdowns by providing these entities with significant cash-flow assistance via 100% federally guaranteed loans backed by the Small Business Administration (SBA). The funds, totaling over $650 billion in total funding following its expansion by the Paycheck Protection Program and Health Care Enhancement Act, were to be used to cover “payroll costs” including employee salary, wages and commissions, employment benefits and state and local taxes assessed on compensation. If convicted, Colar faces up to 30 years in prison in addition to a financial penalty of $1 million.

Citations

1. Betz, Bradford. “California Man Convicted of Defrauding Local Governments, Charged with Trying to Steal $22M from PPP Loans.”Fox News, FOX News Network, 5 Oct. 2020.
2. “CFTC Charges BitMEX Owners with Illegally Operating a Cryptocurrency Derivatives Trading Platform and Anti-Money Laundering Violations.”CFTC, 1 Oct. 2020.
3. Koffman, Tatiana. “BitMex Charged With Failing To Prevent Money Laundering.”Forbes, Forbes Magazine, 2 Oct. 2020.
4. Lane, Sylvan. “Citigroup to Pay $400 Million Fine over Risk Management, Compliance Lapses.” MSN News, 8 Oct. 2020.
5. Martinuzzi, Elisa. “Citigroup’s $900 Million Revlon Loan Error Is Still Perplexing.” com, Bloomberg, 25 Aug. 2020.
6. Nicodemus, Aaron. “Citigroup Fined $400M for Compliance, Risk Management Failures.” Compliance Week, 8 Oct. 2020.
7. “Swiss Watchdog Says Banca Credinvest Breached Money Laundering Rules.” Reuters, Thomson Reuters, 6 Oct. 2020.