Laundering Mileston Reached as Two Mexican Banks Convicted

05/01/1999

Two Mexican banks, Bancomer and Banca Serfin, pleaded guilty to criminal money laundering charges that arose from the conduct of its employees during Operation Casablanca and agreed to pay a combined total of $14.6 million in fines.

The Commissioner of the U.S. Customs Service, Raymond Kelly, whose agency constructed the case, calls it a "major milestone in American justice." In Operation Casablanca, two of Mexico's largest banks, Bancomer, S.A., and Banca Serfin, S.A., on March 30 did something no two banks had ever done. They pleaded guilty, in the same case, to criminal money laundering charges that arose from the conduct of relatively low-level employees. They agreed to pay a combined $14.6 million in fines and forfeitures and serve a three year term of probation. A third Mexican bank, Confia, S.A., which was also indicted in May 1998 in the Casablanca cases in Los Angeles, agreed to a civil settlement and forfeited $12.2 million in exchange for dismissal of criminal charges.

Die cast by judge's rulings

The die was cast for the banks when their motions seeking severance of their trial from that of the individuals, who are also accused of money laundering, and dismissal of the indictment for "outrageous government conduct" and other grounds were denied by federal district Judge Lourdes Baird. A trial with the individuals would have increased their risk of conviction because of the effect the cumulative evidence would have on the jury.

Bancomer and Serfin must still face a Federal Reserve administrative proceeding required by law for any financial institution found guilty of money laundering (Title 12, USC Sec. 3105(I)). Although the sanction could be the "death penalty" in the U.S., there appears to be an implicit agreement that they will be allowed to continue operating here if they implement the reforms they have promised.

Sobering message for 11 other banks

The tough resolution of the criminal cases against the banks sends a sobering message to the 11 other banks caught up in Casablanca, a 30-month undercover investigation. They still face various types of legal actions by the U.S. for the conduct of their employees, including forfeitures, Federal Reserve Board cease and desist orders and civil money laundering penalty lawsuits by the same Los Angeles U.S. Attorney's Office that is prosecuting the criminal cases and handling the bulk of the other Casablanca matters. Some 30 bankers who were employed by the 14 banks were also indicted for money laundering. Only six have not pleaded guilty and they face trial. The others who worked out plea agreements will be sentenced shortly.

Many laundering problems in U.S. for foreign banks

The conviction of the Mexican banks continues a long history of bad experiences foreign banks have had in the U.S. on money laundering and Bank Secrecy Act grounds. They far outnumber domestic banks in the cases that have been brought against them for money laundering-related violations.

The plea agreements between Bancomer and Serfin and the U.S. government are not soft. In addition to the $14.6 million they must pay, which includes $500,000 each in criminal fines arising from the guilty pleas, the banks are placed on probation for three years and required to institute reforms in their money laundering controls to the satisfaction of the Federal Reserve Board and to cooperate "in any court proceeding" the government specifies. The 14 banks, including those not indicted, have spent additional millions of dollars in fees in the defense of the cases.

Incalculable reputational cost

Probably the highest cost they incur is the stigma that attaches from being known forevermore as a bank that was convicted of money laundering. The Federal Reserve and other bank regulators call that "reputational harm," which was a prime reason for their issuance of the aborted Know Your Customer regulations that encountered so much opposition from banks. There is no way to calculate the reputational cost in lost business, lost image, lost stock value and lost top employment candidates.

Full confession

The Bancomer and Serfin plea agreements are each accompanied by a comparable set of documents that filed with the court. One of them, a stipulated "Statement of Facts," establishes the necessary factual basis upon which the court is permitted to accept a guilty plea. Both banks pleaded guilty to one count of the indictment, admitting responsibility for the crime of money laundering. Serfin acknowledged that its branch manager laundered drug proceeds through its Tijuana branch and its correspondent bank accounts in the U.S. He did this by opening accounts in fictitious individual and corporate names, by permitting the deposit through wire transfers of drug funds into those accounts and by issuing bank drafts drawn on U.S. correspondent bank accounts and then transmitting them to the U.S.

Bancomer admitted that three "branch-level" employees laundered drug funds using fictitiously-named accounts through its Los Angeles agency and Cayman Islands subsidiary, Mercury Bank & Trust, Ltd.

Bank higher-ups cleared

Both statements says "there is no evidence that... senior management or any officer or member of its board of directors or of any parent or subsidiary or affiliate... had knowledge of, or was involved in, this money laundering activity."

Both say the employees' activities were "in violation of the bank's anti-money laundering policies and procedures," although they are acknowledged to have "acted within the scope of (their) employment and with an intent to benefit the bank."

The statements recite extensive steps the two banks took upon learning of the actions of their employees, including the hiring of outside experts to determine whether bank higher-ups were involved in money laundering. Their report, shared with bank regulators, concluded that none were.

The statements conclude: "The bank deeply regrets the illegal conduct of its now former employee.... The bank accepts, and... fully acknowledges, its responsibility for the illegal conduct of that former employee. The bank takes this matter very seriously and is committed to combating money laundering."

The papers filed in court in connection with the guilty plea included a "stipulation and consent to forfeiture... and final judgement" and the plea agreements.

Oversight or good lawyering?

An odd distinction in the two agreements gives Serfin a small advantage. In the Bancomer case, the U.S. will keep the interest that was earned on the entire $16.3 million in the year since that amount was seized. But in Serfin the U.S. will keep only the interest that was earned on the $4.2 million that is forfeited, not on the $9.6 million that was initially seized.

Deterrent effect

Los Angeles U.S. Attorney, Alejandro N. Mayorkas, said the guilty pleas are "the culmination of the government's efforts to hold the banks responsible for the past conduct of their employees...." Thom Mrozek, spokesman for the office, called it "a tremendous victory for our office" with an "invaluable the deterrent effect."