Bank of New York Pays $38 Million for Bank Secrecy Act Violations

By CATHERINE TOMASKO, ESQ., Andrews Publications Staff Writer

The Bank of New York will pay $38 million to avoid prosecution in two federal courts for alleged
violations of the Bank Secrecy Act following investigations into fraud and money laundering by
employees and customers, prosecutors said.

The bank's settlement and non-prosecution agreement arose from parallel criminal investigations by
the U.S. attorneys for the Eastern and Southern Districts of New York.

The investigations concerned money laundering through the unlicensed transmission of billions of
dollars via BNY accounts and a fraudulent escrow account scheme that was not reported to authorities
as suspicious activity, according to a joint Nov. 8 announcement by Roslynn R. Mauskopf, U.S.
attorney for the Eastern District of New York, and Michael J. Garcia, U.S. attorney for the Southern
District of New York.

In connection with the settlement, BNY admitted that it did not have an effective
anti-money-laundering program and failed to report evidence of suspected criminal conduct as
required by the Bank Secrecy Act, Mauskopf and Garcia said.

Under the terms of the agreement, the bank will pay $26 million to the government and $12 million to
victims of the escrow account fraud. The settlement is one of the largest ever paid by a financial
institution in the United States, according to prosecutors.

BNY will also enact internal reforms to ensure compliance with anti-fraud and anti-money-laundering
mandates and will be monitored by an independent examiner. If the bank complies with the terms of
the agreement for three years it will not be prosecuted, Mauskopf and Garcia said.

The settlement arose after investigators from Garcia's office, together with the FBI and Internal
Revenue Service, determined that two accounts at the bank's branch at One Wall Street in Manhattan
were being used to launder funds from Russia.

The accounts, which were held in the names of Benex International Co. and BECS International LLC,
were opened in 1996 by customer Peter Berlin with the assistance of his wife, Lucy Edwards, a BNY
vice president, prosecutors said.

The accounts were used in connection with an illegal money-transferring business run by an unnamed
bank in Moscow and an unnamed company in Queens, N.Y. Prosecutors said employees in Queens, acting
on instructions from Moscow, would make wire transfers of funds each day out of the Benex and BECS
accounts using electronic banking software provided by BNY.

The transfers allowed Russian citizens and businesses to move funds out of Russia without paying
customs duties and taxes to the country's government, prosecutors said. A total of $7 billion passed
through BNY, according to Garcia.

BNY was accused of failing to conduct due diligence on the Benex and BECS accounts. Bank employees
thought the companies were in the import/export business but this belief was never verified, Garcia
said.

In addition, some BNY executives knew that the companies acted as money transmitters but did not
inquire as to whether they held licenses to do so, prosecutors said.

Prosecutors claimed the bank did not adequately monitor activity in the Benex and BECS accounts even
though the accounts produced the highest fees for the Wall Street branch. Investigators learned that
when employees inquired about performing a money-laundering review, they were informed by a manager
that the bank did not have an automated system to review the accounts and a manual review would not
be practical given the volume of activity by the companies.

Following the investigation, in February 2000 BNY signed an agreement with the Federal Reserve and
the New York State Banking Department under which the institution promised to correct deficiencies
in its anti-money-laundering program. The agreement also required BNY to conduct enhanced due
diligence and suspicious-activity reporting.

Prosecutors said that in spite of this agreement, fraudulent activity continued at BNY.

The investigation conducted by Mauskopf's office revealed that between 1991 and 2002, BNY managers
and staff at a branch in Island Park, N.Y., signed fraudulent escrow agreements for RW Professional
Leasing Services Corp., a customer that arranged financing for leases of medical equipment.

Prosecutors alleged that BNY was obligated by the terms of the escrow agreements to set up accounts
and act as an agent for the banks that were financing the leases. However, BNY did not establish the
escrow accounts, according to prosecutors.

The fraudulent escrow account scheme operated for more than 10 years and continued during the time
BNY was obligated by the terms of its February 2000 agreement with regulators to conduct increased
due diligence, prosecutors said.

Executives at the Island Park branch ignored Bank Secrecy Act reporting requirements and did not
file a "suspicious-activity report" about the escrow accounts, Mauskopf said. In addition,
prosecutors said the bank did not file a SAR even though it learned of the escrow scheme and
estimated that its potential liability from the fraud could reach $72 million.

BNY did file a SAR in July 2002 but the document was inaccurate and incomplete, Mauskopf added. The
bank's failure to report the suspicious activity allowed the fraud to continue and allegedly caused
other financial institutions to suffer losses of close to $18 million.

In addition to paying the settlement, BNY will cooperate with ongoing investigations into the
schemes, prosecutors said.

-- Andrews Publications
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