How Embezzlement Undermines AML in Banking Systems

Embezzlement happens when someone in a position of trust, like an employee or manager, secretly takes money or property they are responsible for. This can occur in both small businesses and large financial institutions. In Anti-Money Laundering (AML), embezzlement is a crime that needs to be identified quickly because the stolen funds are often disguised through various financial transactions to hide the crime.

The person committing embezzlement often tries to cover their tracks by manipulating records, transferring money between accounts, or even making false reports. Financial institutions are required to detect these unusual activities, and they often use transaction monitoring systems to flag suspicious behavior. These systems track patterns that might suggest embezzlement, such as frequent small withdrawals, sudden changes in account balances, or transactions that don’t match the individual’s normal behavior.

Regulatory bodies like the Financial Action Task Force (FATF) emphasize the need for robust internal controls and vigilant oversight to prevent employees from taking advantage of their positions to steal funds. Many countries have strict laws and regulations that make embezzlement a serious criminal offense, and financial institutions are required to report any signs of it through Suspicious Activity Reports (SARs).

Example:

TD Bank has reached a historic resolution by pleading guilty to multiple violations of the Bank Secrecy Act (BSA) and money laundering offenses, agreeing to pay $1.8 billion in penalties. These charges stem from the bank’s persistent failure to maintain an effective anti-money laundering (AML) program, resulting in widespread illicit activities that went unnoticed for years.

Key Issues:

1. Inadequate AML controls: The bank’s AML systems were severely underfunded and outdated. Despite facing known risks, TD Bank allowed its internal controls to become ineffective, which opened the door for money laundering operations to flourish. This included several cases where illicit transactions involving drug cartels and other criminal groups were processed without being flagged.
2. Massive monitoring gaps: Between 2014 and 2022, TD Bank failed to monitor an alarming 92% of its total transaction volume, including critical forms like ACH transactions and checks. This lack of oversight resulted in over $670 million in illicit transactions passing through the bank undetected, including funds funneled through shell companies and other illicit networks.
3. Internal misconduct: Employees played a significant role in facilitating these illegal activities. They allowed large cash deposits and processed transactions for criminal organizations while deliberately avoiding red flags and bypassing required reports.

Consequences:

• Unprecedented penalties: TD Bank faces a $1.8 billion settlement, which includes a $1.4 billion criminal fine and a $452 million forfeiture.
• AML reforms: As part of the resolution, TD Bank must now hire an independent compliance monitor to oversee the revamping of its AML program over the next three years (starting 2024).
• Regulatory collaboration: The resolution was coordinated with key regulatory bodies such as the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Financial Crimes Enforcement Network (FinCEN).

Key Takeaways for AML Compliance:

• The case underscores the grave consequences of poorly executed AML programs. When banks fail to properly monitor and report suspicious activities, they effectively open the door to financial crime.
• Deficient systems not only harm a bank’s reputation but also place it at risk of being complicit in global money laundering schemes. For example, TD Bank’s failure to detect suspicious transactions made it a go-to institution for criminal actors involved in drug trafficking and money laundering.
• Despite receiving partial credit for its cooperation, the bank did not get full leniency, as it failed to escalate AML concerns promptly, highlighting the need for banks to act swiftly when irregularities arise.