EXHIBIT 10.25
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
UNITED STATES OF AMERICA,
Plaintiff, No. C03-017(P6)
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v.
DEFERRED PROSECUTION AGREEMENT
BANCO POPULAR DE PUERTO RICO,
Defendant.
Defendant BANCO POPULAR DE PUERTO RICO (hereinafter, "BANCO
POPULAR"), a subsidiary of Popular, Inc., a Puerto Rico Corporation, by its
undersigned attorney, pursuant to authority granted by its Board of Directors,
the United States Department of Justice, Criminal Division (hereinafter, "the
United States"), the Board of Governors of the Federal Reserve System
(hereinafter, "the Federal Reserve"), and the United States Department of the
Treasury's Financial Crimes Enforcement Network (hereinafter, "FinCEN") enter
into this Deferred Prosecution Agreement (the "Agreement").
1. BANCO POPULAR shall waive indictment and agree to the filing
of a ONE (1) count information in the United States District Court for the
District of Puerto Rico charging it with failing to file suspicious activity
reports (hereinafter, "SARs") in a timely and complete manner, in violation of
Title 31 United States Code, Sections 5318(g)(1) and 5322(b).
2. BANCO POPULAR accepts and acknowledges responsibility for its
behavior as set forth in the Factual Statement attached hereto and incorporated
by reference herein as Appendix A (hereinafter, "Factual Statement").
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3. BANCO POPULAR expressly agrees that it shall not, through its
attorneys, board of directors, agents, officers or employees, make any public
statement contradicting any statement of fact contained in the Factual
Statement. Any such contradictory public statement by BANCO POPULAR, its
attorneys, board of directors, agents, officers or employees, shall constitute a
breach of this Agreement as governed by Paragraph 12 of this Agreement, and
BANCO POPULAR would thereafter be subject to prosecution pursuant to the terms
of this Agreement. The decision of whether any statement by any such person
contradicting a fact contained in the Factual Statement will be imputed to BANCO
POPULAR for the purpose of determining whether BANCO POPULAR has breached this
Agreement shall be in the sole discretion of the United States. Upon the United
States' notifying BANCO POPULAR of a public statement by any such person that in
whole or in part contradicts a statement of fact contained in the Factual
Statement, BANCO POPULAR may avoid breach of this Agreement by publicly
repudiating such statement within 48 hours after notification by the United
States.
4. BANCO POPULAR agrees that it shall: (a) provide to the United
States, on request, any relevant document, electronic data, or other object
concerning a Bank Secrecy Act matter in BANCO POPULAR'S possession, custody
and/or control. Whenever such data is in electronic format, BANCO POPULAR shall
provide access to such data and assistance in operating computer and other
equipment as necessary to retrieve the data. If such documents, data or other
objects are in overseas locations, BANCO POPULAR will make reasonable efforts to
make the items available to the United States; and (b) completely, fully and
timely comply with all legal obligations, record keeping and reporting
requirements imposed upon it by the Bank Secrecy Act, 31 U.S.C. ss.ss. 5311
through 5330
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and all Bank Secrecy Act implementing regulations, including, but not limited to
12 C.F.R.ss.21.21, 31 C.F.R.ss.103.11, 31 C.F.R. 103.18, 31 C.F.R. 103.22 and 31
C.F.R.ss.103.28.
5. As a result of BANCO POPULAR's conduct with respect to the
Ferrario and Vallejo accounts as set forth in the Factual Statement, the United
States has determined that it could institute a civil forfeiture action against
certain funds laundered through those accounts. BANCO POPULAR further
acknowledges that $21,600,000.00 was involved in transactions in the Ferrario
and Vallejo accounts, and that Ferrario and Vallejo were convicted in violation
of Title 18 United States Code, Section 1956 and 1957 and, therefore certain of
the funds that were deposited in such accounts are forfeitable to the United
States pursuant to Title 18, United States Code, Section 981. BANCO POPULAR,
recognizing that the United States could institute a civil forfeiture action
against at least certain of those funds, hereby expressly agrees to settle and
does settle any and all civil claims at present held by the United States
against those funds for the sum of $21, 600,000.00.
6. Based on BANCO POPULAR's conduct as set forth in the Factual
Statement, FinCEN has determined that an assessment of a civil money penalty
under 31 U.S.C. 5321(a)(1) and 31 CFR 103.57(f) is appropriate against BANCO
POPULAR based on violations of the currency transaction reporting provisions and
the suspicious activity reporting provisions of the BSA contained in 31 U.S.C.
Section 5313, 5318 and 31 CFR 103.22 and 103.18.. Therefore, FinCEN assesses
against BANCO POPULAR a civil money penalty of $20,000,000, which penalty shall
be fully satisfied by the payments made by BANCO POPULAR pursuant to this
Agreement in light of BANCO POPULAR's settlement of any and all civil claims
presently held by the United States.
7. In light of BANCO POPULAR's remedial actions to date and its
willingness to: (i)
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acknowledge responsibility for its actions; (ii) continue its cooperation with
the United States; (iii) demonstrate its future good conduct and full compliance
with the Bank Secrecy Act and all of its implementing regulations; (iv) settle
any and all civil claims presently held by the United States against the funds
referred to in Paragraph 5 above for the sum of $21,600,000; and (v) consent to
the assessment of the civil money penalty as set forth in paragraph 6 above, the
United States shall recommend to the Court, pursuant to 18 U.S.C. ss.
3161(h)(2), that prosecution of BANCO POPULAR on the Information filed pursuant
to Paragraph 1 be deferred for a period of twelve (12) months. BANCO POPULAR
shall consent to a motion, the contents to be agreed by the parties, to be filed
by the United States with the Court promptly upon execution of this Agreement,
pursuant to 18 U.S.C. ss. 3161(h)(2), in which the United States will present
this Agreement to the Court and move for a continuance of all further criminal
proceedings, including trial, for a period of twelve (12) months, for speedy
trial exclusion of all time covered by such a continuance, and for approval by
the Court of this deferred prosecution. BANCO POPULAR further agrees to waive
and does hereby expressly waive any and all rights to a speedy trial pursuant to
the Sixth Amendment of the United States Constitution, Title 18, United States
Code, Section 3161, Federal Rule of Criminal Procedure 48(b), and any applicable
Local Rules of the United States District Court for the District of Puerto Rico
for the period that this Agreement is in effect.
8. BANCO POPULAR hereby further expressly agrees that any
violations of the federal money laundering laws and/or the Bank Secrecy Act
pursuant to 18 U.S.C.ss.1957 and 31 U.S.C.ss.ss.5313, 5318 and 5322, that were
not time-barred by the applicable statute of limitations on September 5, 2002,
may, in the sole discretion of the United States, be charged against BPPR within
six (6)
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months of any breach of this Agreement notwithstanding the expiration of any
applicable statute of limitations.
9. The United States agrees that if BANCO POPULAR is in full
compliance with all its obligations under this Agreement, the United States,
within thirty (30) days of the expiration of the time period set forth in
Paragraph 7 above, will seek dismissal with prejudice of the information filed
against BANCO POPULAR pursuant to Paragraph 1 and this Agreement shall expire.
10. BANCO POPULAR and the United States understand that the
Agreement to defer prosecution of BANCO POPULAR must be approved by the Court,
in accordance with 18 U.S.C. ss. 3161(h)(2). Should the Court decline to approve
a deferred prosecution for any reason, both the United States and BANCO POPULAR
are released from any obligation imposed upon them by this Agreement and this
Agreement shall be null and void.
11. Should the United States determine during the term of this
Agreement that BANCO POPULAR has committed any federal crime commenced
subsequent to the date of this Agreement, BANCO POPULAR shall, in the sole
discretion of the United States, thereafter be subject to prosecution for any
federal crimes of which the United States has knowledge. Except in the event of
a breach of this Agreement, it is the intention of the parties to this Agreement
that all criminal and regulatory investigations arising from the facts contained
in or involving the accounts described in the Factual Statement, that have been,
or could have been, conducted by the United States prior to the date of this
Agreement shall not be pursued further as to BANCO POPULAR.
12. Should the United States determine that BANCO POPULAR has
committed a willful and material breach of any provision of this Agreement, the
United States shall provide written notice to
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BANCO POPULAR of alleged breach and provide BANCO POPULAR with a two-week period
in which to make a presentation to the Assistant Attorney General in charge of
the Criminal Division to demonstrate that no breach has occurred or, to the
extent applicable, that the breach is not willful or material or has been cured.
The parties hereto expressly understand and agree that should BANCO POPULAR fail
to make a presentation to the Assistant Attorney General in charge of the
Criminal Division within the said two-week period, it shall be conclusively
presumed that BANCO POPULAR is in willful and material breach of this Agreement.
The parties further understand and agree that the Assistant Attorney General's
exercise of discretion under this paragraph is not subject to review in any
court or tribunal outside the Criminal Division of the Department of Justice. In
the event of a breach of this Agreement that results in a prosecution, such
prosecution may be premised upon any information provided by or on behalf of
BANCO POPULAR to the United States at any time, unless otherwise agreed when the
information was provided.
13. BANCO POPULAR agrees that, if it sells or merges all or
substantially all of its business operations as they exist as of the date of
this Agreement to a single purchaser or group of affiliated purchasers during
the term of this Agreement, it shall include in any contract for sale or merger
a provision binding the purchaser/successor to the obligations described in this
Agreement.
14. It is further understood that this Agreement is binding on
BANCO POPULAR, the United States, the Federal Reserve and FinCEN, but
specifically does not bind any other federal agencies, or any state or local
authorities, although the United States will bring the cooperation of BANCO
POPULAR and its compliance with its other obligations under this Agreement to
the attention of state or local prosecuting offices or regulatory agencies, if
requested by BANCO POPULAR or its
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attorneys.
15. It is further understood that this Agreement does not relate
to or cover any criminal conduct by BANCO POPULAR other than the conduct or the
accounts described in the Factual Statement.
16. BANCO POPULAR and the United States agree that, upon
acceptance by the Court, this Agreement and an Order deferring prosecution shall
be publicly filed in the United States District Court for the District of Puerto
Rico.
17. Since the execution of the Written Agreement with the Federal
Reserve, Banco Popular has taken all of the corrective actions required by the
enforcement action and, as of this date, is in full compliance with all of the
provisions of the Written Agreement. Accordingly, upon the execution of this
Agreement, the Federal Reserve is terminating the Written Agreement. Given the
nature of the violations of the Bank Secrecy Act and the Bank Secrecy Act
compliance program requirements of Regulation H of the Board of Governors, 12
C.F.R. 208.63, the Federal Reserve would have used its authority under 12 U.S.C.
1818(i) to assess a substantial civil money penalty against the bank. However,
in light of the significant forfeiture embodied in this Agreement, the Federal
Reserve has determined that it will not exercise its authority to assess a fine
for the conduct described in this Agreement.
18. This Agreement sets forth all the terms of the Deferred
Prosecution Agreement between BANCO POPULAR and the United States. No promises,
agreements, or conditions have been entered into other than those expressly set
forth in this Agreement, and none shall be entered into and/or are binding upon
BANCO POPULAR or the United States unless expressly set forth in writing,
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signed by the United States, BANCO POPULAR's attorneys, and a duly authorized
representative of BANCO POPULAR and physically attached to this Agreement. This
Agreement supersedes any prior promises, agreements or conditions between BANCO
POPULAR and the United States.
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ACKNOWLEDGMENTS
We, Richard L. Carrion, David H. Chafey, Jr., Brunilda Santos de
Alvarez, the duly authorized representatives of Banco Popular de Puerto Rico,
hereby expressly acknowledge the following: (1) that we have read this entire
Agreement; (2) that we have had an opportunity to discuss this Agreement fully
and freely with Banco Popular's attorneys; (3) that Banco Popular fully and
completely understands each and every one of its terms; (4) that Banco Popular
is fully satisfied with the advice and representation provided to it by its
attorneys; and (5) that Banco Popular has signed this Agreement voluntarily.
BANCO POPULAR DE PUERTO RICO
January 16, 2003 /s/ Richard L. Carrion
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DATE /s/ David Chafey, Jr.
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/s/ Brunilda Santos de Alvarez
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COUNSEL FOR BANCO POPULAR
I, JOSE AGUAYO the attorney for Banco Popular de Puerto Rico, hereby
expressly acknowledge the following: (1) that I have discussed this Agreement
with my client; (2) that I have fully explained each one of its terms to my
client; (3) that I have fully answered each and every question put to me by my
client regarding the Agreement; and (4) I believe my client completely
understands all of the Agreement's terms.
Jan. 16, 2003 /s/ Jose R. Aguayo Caussade
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DATE JOSE AGUAYO
Attorney for Banco Popular de Puerto Rico
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ON BEHALF OF THE GOVERNMENT
UNITED STATES DEPARTMENT OF JUSTICE
MICHAEL CHERTOFF
Assistant Attorney General, Criminal Division
U. S. Department of Justice
H.S. GARCIA
United States Attorney
District of Puerto Rico
January 14, 2003 /s/ John Roth
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DATE By: JOHN ROTH, Chief
Asset Forfeiture and Money Laundering Section
U.S. Department of Justice, Criminal Division
January 14, 2003 /s/ Stephen M. May
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DATE By: STEPHEN M. MAY
USDC-PR No. 217901
U.S. Department of Justice, Criminal Division
Asset Forfeiture and Money Laundering Section
1400 New York Avenue, N.W.
Bond Building 10100
Washington, DC 20005
(202) 514-1263 (Phone)
(202) 616-1344 (Fax)
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BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM
January 13, 2003 /s/ Jennifer J. Johnson
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DATE By: JENNIFER J. JOHNSON
Secretary of the Board
U.S. DEPARTMENT OF THE TREASURY
FINANCIAL CRIMES ENFORCEMENT NETWORK
January 14, 2003 /s/ James Sloan
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DATE By: JAMES F. SLOAN, Director
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BACKGROUND
1. BANCO POPULAR DE PUERTO RICO ("BPPR") is a financial
institution organized, licensed and doing business under the laws of the United
States and the Commonwealth of Puerto Rico.
2. BPPR is a "financial institution" as defined in 31
U.S.C.ss.5312 and a bank ad defined in 31 C.F.R.ss.103.11(c); an "insured bank"
as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C.
ss.1813(h)); and a "State member bank" of the Federal Reserve System (12
U.S.C.ss.1813 (d)).
3. The Federal Reserve Bank of New York and the Commissioner of
Financial Institutions of Puerto Rico have supervisory regulatory oversight of
Popular, Inc., BPPR (its principal banking subsidiary), and related
subsidiaries.
4. The Bank Secrecy Act ("BSA"), 31 U.S.C.ss.5311 et. seq., and
its implementing regulations, which Congress enacted to address an increase in
money laundering criminal activity utilizing financial institutions, require
domestic banks, insured banks and other financial institutions to maintain
certain records and file reports that are especially useful in criminal, tax or
regulatory investigations or proceedings, and to detect and report suspicious
activity therein that might be indicative of money laundering, terrorist
financing and other financial crimes.
CURRENCY TRANSACTION REPORTS
5. BPPR was required pursuant to 31 U.S.C. ss. 5313(a) and 5322
and 31 C.F.R. ss. 103.22(b)(1) (previously designated at 31 C.F.R. ss.
103.22(a)(1)) and ss. 103.28 to file a Currency Transaction Report ("CTR") for
each deposit, withdrawal, exchange of currency or other payment or transfer by,
through, or to BPPR which involved a transaction in currency of more
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than $10,000. Title 31 C.F.R. ss. 103.27 (a)(1) required BPPR to file CTRs
within fifteen (15) days following the day on which the reportable transaction
occurred. CTRs filed on magnetic media are considered filed timely if received
by the Internal Revenue Service ("IRS") no more than twenty-five (25) days after
the date of the transaction. Internal Revenue Service, Specifications for
Magnetic Media Filing of Currency Transaction Reports 6 (Feb. 1999). Title 31
C.F.R. ss. 103.28 required BPPR to verify and record on a CTR the name and
address of the individual presenting the transaction, as well as the entity or
person on whose behalf the transaction was to be effected. Multiple cash
transactions that are divided into amounts under $10,000 to avoid the filing of
a CTR or other BSA reporting or recordkeeping requirement is commonly referred
to as "structuring" and is prohibited 31 U.S.C. ss. 5324. Structuring is also
required to be reported under the BSA's suspicious activity reporting provisions
in 31 U.S.C. ss.5318(g) and 31 C.F.R. 103.18 as discussed in paragraph 8 below.
6. In order to comply with the BSA and its implementing
regulations, BPPR was required to detect, monitor and accurately report large
currency transactions and suspicious activity occurring at the financial
institution.
SUSPICIOUS ACTIVITY REPORTS
7. BPPR was required pursuant to 31 U.S.C. ss. 5318(g), 31 C.F.R.
ss. 103.18 (previously designated at 31 C.F.R. ss. 103.21), and 12 C.F.R. ss.
208.62 (previously designated at 12 C.F.R. ss. 208.20) and ss. 208.63
(previously designated at 12 C.F.R. ss. 208.14) to file with the Department of
Treasury and in some cases appropriate Federal law enforcement agencies, in
accordance with the form's instructions, a Suspicious Activity Report ("SAR")
when it detected
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the type of activity described below in paragraph 8. This requirement became
effective on April 1, 1996. According to the form's instructions, BPPR was
required to file a SAR with the Department of Treasury's Financial Crimes
Enforcement Network ("FinCEN") no later than thirty (30) calendar days after the
date of initial detection of facts that might have constituted a basis for
filing a SAR.
8. BPPR is required pursuant to 31 C.F.R. ss. 103.18, which
became effective on April 1, 1996, to report any transaction conducted or
attempted by, at, or through the bank, if it involved or aggregated at least
$5,000 in funds or other assets, and the bank knew, suspected, or had reason to
suspect that:
(i) The transaction involved funds derived from illegal
activities or was intended or conducted in order to hide or
disguise funds or assets derived from illegal activities
(including without limitation, the ownership, nature, source,
location, or control of such funds or assets) as part of a
plan to violate or evade any federal law or regulations or to
avoid any transaction reporting requirement under federal law
or regulation.
(ii) The transaction was designed to evade any
requirements promulgated under the Bank Secrecy Act.
(iii) The transaction had no business or apparent lawful
purpose or was not the sort in which the particular customer
would normally be expected to engage, and the bank knew of no
reasonable explanation for the transaction after examining the
available facts, including the background and possible purpose
of the transaction.
9. Suspicious Activity Report Instructions contained on the SAR
form (Federal Reserve Form 2230) state: "in situations involving violations
requiring immediate attention, such as when a reportable violation is ongoing,
the financial institution shall immediately notify, by telephone, appropriate
law enforcement and financial institution supervisory authorities in addition to
filing a timely suspicious activity report." Despite the facts set forth in
paragraphs 11
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to 36, BPPR failed to immediately notify by telephone appropriate law
enforcement and financial institution supervisory authorities in addition to
filing timely and accurate SARs.
10. As described more fully below, voluminous unusual or
suspicious transactions were conducted in connection with the Ferrario, Vallejo
and Dominican Republic Money Service Business accounts (the "Subject Accounts").
Although BPPR filed SARs on these accounts, they were untimely. In some cases,
BPPR filed a single SAR in connection with the Subject Accounts years after the
commencement and continuation of the suspicious activity. In some cases, the
SARs filed by BPPR were inaccurate in important respects. These untimely
filings, absence of supplementary SARs and/or the inaccuracies in SARs which the
bank did file, had an effect upon federal law enforcement's ability to determine
whether the transactions involved funds derived from illegal activities or were
intended or conducted in order to hide or disguise funds or assets derived from
illegal activities (including without limitation, the ownership, nature, source,
location, or control of such funds or assets) as part of a plan to violate or
evade any federal law or regulations or to avoid any transaction reporting
requirement under federal law or regulation.
FERRARIO TRANSACTIONS
11. From June 16, 1995 to March 2, 1998, Roberto Ferrario Pozzi
("Ferrario") maintained Account # 011-254521 in the name of "Roberto Ferrario
Pozzi, DBA (doing business as) Gilligans" at the Old San Juan Branch of BPPR
(the "Ferrario Account"). Before the opening of the Ferrario account, Ferrario
was a customer of BPPR. In 1989 and 1990, Ferrario opened a credit card account
and personal account and obtained a personal loan from the bank.
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When BPPR opened the Ferrario Account, bank employees reviewed an unaudited,
unsigned financial statement provided by Ferrario, a credit report, which showed
a positive six-year credit history, and bank statements from an account at
another bank.
12. Ferrario maintained a business in the name of Phone Home. On
occasion, Ferrario represented to some bank employees that Phone Home sold phone
cards and offered long distance telephone, facsimile and money transmission
services (including wire transfer services). On one occasion (as more fully
described below), Ferrario represented to a bank employee that he managed a gas
station. Ferrario's account opening information stated that he was doing
business as "Gilligans," a cafe. The bank's customer information file identified
Ferrario's business as "Puerto Rico Net Yellow."
13. BPPR failed to conduct sufficient due diligence to confirm
whether Ferrario actually operated businesses as he had represented.
14. From June 16, 1995 through March 2, 1998, the date on which
BPPR filed a SAR on the Ferrario Account, Ferrario deposited approximately $20
million in cash into the Ferrario Account. Approximately $8 million in
additional cash was deposited into the Ferrario Account from March 3, 1998
through September 15, 1998, on which latter date a U.S. Customs agent requested
BPPR to keep the account open. Despite the suspicious nature of these deposits,
the bank did not investigate and /or file additional SARs reporting the
suspicious activity to FinCEN. On December 8, 1998, Ferrario was indicted for
money laundering in connection with certain of the deposits in the Ferrario
Account. Ferrario and employees of Phone Home regularly made large cash deposits
consisting of small denomination bills. On certain occasions, the cash was
carried into the branch in paper bags or gym bags. The amount of cash deposited
increased over
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time, significantly increasing in June 1997. During the six months the account
was open in 1995, the monthly deposits were $51,303 in July, $150,416 in August,
$34,276 in September, $126,742 in October, $456,640 in November and $243,045 in
December. In 1996, the monthly average of deposits was approximately $411,160.
From January through May 1997, the monthly average of deposits was approximately
$490,000. From June through December 1997, the monthly average of deposits was
approximately $1.4 million. From January through August 1998, the monthly
average of deposits was approximately $1.2 million. In response to inquiries
from the Old San Juan Branch employees about the reason for the increase,
Ferrario represented to bank employees that his deposits had increased because
he had consolidated deposits from two other banks at BPPR. BPPR failed to
confirm or investigate Ferrario's representations. From June 1997, until the
bank was instructed to keep the account open, a substantial number of the cash
deposits totaled hundreds of thousands of dollars in a single day. Subsequent
investigation would show that these cash transactions were inconsistent with
Ferrario's purported business. In June 1997, the operations of the Old San Juan
branch were disrupted as a result of the time it took to count Ferrario's cash.
At one point, employees of the bank told Ferrario to make his deposits to the
night deposit box in order to avoid tying up the teller lines. In the summer of
1997, BPPR scheduled and incurred the expense of significantly more armored car
pickups to transport the Ferrario cash away, a fact that the Old San Juan Branch
reported to the regional manager and regional operations officer to justify
their additional expenses.
15. As early as October 1995, the branch manager at the Old San
Juan Branch was informed by one of his branch employees that Ferrario's
transactions were significant and suspicious. The branch manager, however, took
no action. As early as May 1997, memoranda
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were sent from the Old San Juan Branch operations manager to the San Juan
Regional Operations Manager concerning the increased daily branch cash levels
caused by Ferrario's deposits.
16. From June 1995 to March 1998, Ferrario instructed the bank to
make hundreds of wire transfers to over 300 different companies or individuals
located in the United States and abroad. In 1997 and 1998, 83% and 78%,
respectively, of the money transmitted by Ferrario and 78% and 73%,
respectively, of the total number of wire transfers were sent to U.S. domestic
banks or U.S. offices of non-U.S. banks. Typically, deposits and subsequent wire
transfers were made in the same day or the next day. After June 1997, wire
transfers numbered between 40 to 80 a month and amounted to approximately 25% of
the branch's daily wire activity. BPPR did not investigate the nature of
Ferrario's business or determine whether the wire transfers or other account
activity was consistent with the purported business or consistent with money
laundering. Despite a number of branch employees being aware of the above
suspicious activity which occurred between July 1995 and March 1998, BPPR failed
to investigate the Ferrario Account for over two years from the date the account
was opened. Moreover, BPPR failed to investigate and/or report to FinCEN the
suspicious activity which occurred in the Ferrario Account from March 1998
through September 15, 1998, through a supplementary SAR.
17. Between July 1995 and March 1998, BPPR filed four hundred and
sixteen (416) CTRs reporting Ferrario's cash transactions. Three hundred and
eighty-four (384) of these CTRs stated that the funds were derived from a gas
station. In 1995, in connection with the preparation of a CTR, Ferrario told one
of the Old San Juan Branch employees that he operated a gas station. This
information was saved in a software program that the bank used to prepare CTRs
and
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automatically reappeared in nearly all the subsequent CTRs. BPPR failed to
review and monitor these CTR filings. In a single week in 1995, the same branch
employee filed three CTRs listing three different sources of funds -- overseas
calls, gas station, and money transfer -- as the source for the cash deposits.
Again, due to the lack of CTR review, these inconsistencies were not identified.
18. BPPR did not send two bulk data tapes -- created in May 1997
and June 1998, respectively -- containing CTRs for approximately a two-week
period to FinCEN, resulting in 4,761 CTRs not being filed for various customers,
including nine CTRs for Ferrario. These two tapes were regenerated and all CTRs
were untimely filed with the IRS.
19. Ferrario's business was located in a reputable area in Old San
Juan, directly across from the United States Courthouse, two blocks from the
largest U.S. Customs office in Puerto Rico and one block from the Old San Juan
branch. On their way to and from work, Old San Juan branch employees passed by
Ferrario's business but rarely saw customers at the business. Tellers at the Old
San Juan Branch commented that the money deposited by Ferrario was strange or
unusual. In addition, concerns about the large volume of cash deposits and the
disruption it caused at the branch were discussed at monthly branch meetings.
20. In August 1997, BPPR received a law enforcement subpoena
seeking information relating to the Ferrario Account. However, neither the Old
San Juan Branch nor BPPR's Compliance Division was notified of the subpoena
because BPPR imposed no formal written policy or practice upon its legal
requirements department to refer law enforcement subpoenas to the bank's
compliance division for investigation. In the Fall of 1999, BPPR changed its
policy to
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require the Compliance Division to be notified of subpoenas.
21. BPPR failed to conduct an investigation into Ferrario or his
business until December 1997, and therefore did not file an SAR on the Ferrario
Account activity until March 2, 1998. BPPR reported only $10,112,320 as the
dollar amount involved in the suspicious activity and a period of suspicious
activity limited to March 28, 1996 to January 26, 1998. The SAR did not identify
the number as representing wire transfers during this period and did not report
the amount of deposits. The SAR also did not include: 18 wire transfers in 1995
totaling $185,010; 22 wire transfers in 1996 totaling $170,898; 19 wire
transfers in 1997 totaling $232,548; and 10 additional wire transfers in January
1998 totaling $10,743. The SAR did not state the amount of cash deposited during
the time period of the suspicious activity, which was substantially higher than
the wire transfer amount. Moreover, the SAR did not describe the entire time
period of the suspicious activity. Additionally, the narrative of the SAR
reported daily cash deposit activity of between $12,000 and $258,509 (as a
result of a typographical error; the actual maximum number was $528,509) when in
fact there were numerous daily cash deposits in excess of the reported amount.
Lastly, the SAR incorrectly reported the name of the Ferrario Account as "Puerto
Rico Net Yellow," an additional account maintained by Ferrario at BPPR, but not
the account in which the cash deposits and wire transfers occurred. The
inaccuracies contained within the SAR had an effect upon federal law
enforcement's ability to determine whether a crime had been committed, was
continuing to be committed, and the extent of any criminal activity.
22. In April 1998, the Audit Committee of the Board of Directors
of BPPR was informed, in a routine quarterly report made by the Compliance
Division listing all SARs filed,
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and their amounts, during the quarter, that the Ferrario SAR had been filed.
Although this was by far the largest SAR in dollar amount ever reported to the
Audit Committee, the Compliance Division failed to inform the Audit Committee or
senior management of the seriousness of the matter or identify any
vulnerabilities in BPPR's anti-money laundering program. BPPR did not focus on
vulnerabilities in its anti-money laundering program until September 1999.
VALLEJO TRANSACTIONS
23. From May 1998 through June 2000, Jairo de Jesus Vallejo
("Vallejo") maintained Account #013-254405 in the name of Durcaribe, Inc. (the
"Durcaribe Account") at the Carolina Highway Branch of BPPR. Vallejo maintained
this account for a business in the name of Durcaribe, Inc. that distributed
hydraulic equipment.
24. Prior to November 1998, the Durcaribe Account had an average
monthly balance of $3,000. From November 1998 through September 1999, the
Durcaribe Account average monthly balance increased 4000% to approximately
$120,000. The nature of the deposits changed from checks to cash. Cash deposits
were inconsistent with the nature of Durcaribe's declared business.
25. In January l999, Vallejo opened a second account, in the name
of Valjur Corporation, Account #314-000657 (the "Valjur Account") at the
Carolina Food Court Branch of BPPR. The purported business purpose of Valjur
Corporation was the import and export of beer and leather goods.
26. From November 1998 through June 2000, Vallejo deposited at
multiple branches
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into the Durcaribe and Valjur Accounts cash proceeds, divided into amounts less
than $10,000 and made up of small denomination bills. As many as six deposits a
day were made at various branches. Vallejo also sent 67 wire transfers from his
accounts. Fifty-two percent of the total number of wire transfers, which
represented 54% of the money transmitted by Vallejo, was sent to U.S. domestic
banks or U.S. offices of non-U.S. banks. A majority of the international wire
transfers went to Panama, the Cayman Islands, and the Bahamas. This activity was
inconsistent with the purported business. This activity was consistent with
money laundering.
27. Despite Vallejo's efforts to avoid filing CTRs, the bank's
Large Cash Reporting System, which was and is used to aggregate cash deposits
for the purpose of complying with the CTR-reporting requirements, identified
many of Vallejo's structured transactions. As a result, numerous CTRs were filed
for Vallejo's accounts. However, the Compliance Division opened an investigation
on the Valjur Account only after a branch teller who happened to work at two
different branches on successive days and saw Vallejo deposit cash into his
account at two different BPPR branches in amounts less than $10,000. In August
1999, a notation was made in the Compliance Division's Valjur investigative file
that structuring was apparent in the account. Nevertheless, the investigative
file was closed in September 1999. The investigative file contains notations to
the effect that the client "desisted" from his deposit practice and "improved"
the use of the account. No SAR was filed, despite the structuring. Bank records
indicate that Vallejo continued to structure cash into both the Valjur and the
Durcaribe Accounts. During the course of the SAR investigation on the Valjur
Account, the Compliance Division never detected that Vallejo also maintained the
Durcaribe Account. In addition, although BPPR had received law enforcement
subpoenas before deciding to close the SAR investigation, the
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Compliance Division was not notified of the subpoenas, due to BPPR's failure to
have in place a formal written policy or practice upon its legal requirements
department to refer law enforcement subpoenas to the bank's compliance division
for investigation.
28. BPPR did not file SARs on the Valjur and Durcaribe accounts
until November 1999. As part of BPPR's efforts to improve its BSA compliance
program in the Fall of 1999, BPPR reviewed a list of all customers that had
performed cash transactions that met certain broad parameters. As a result of
this review, BPPR's Rio Piedras region sent a memorandum to the Compliance
Division on November 2, 1999, identifying, among other accounts, the Valjur and
Durcaribe accounts. The Compliance Division commenced an investigation and, on
November 18, 1999, filed SARs on these accounts. At the time of the filing of
the SARs, over $1 million had passed through the accounts, which BPPR
subsequently learned were narcotics proceeds. The Durcaribe SAR only covered
1999 (even though the account was opened in 1998), reporting cash transactions
in the account during the year of $377,790 and wire transfers in the amount of
$929,577. The Valjur SAR covered only October 1999 (even though the account was
opened in 1998), reporting cash transactions in the account in the month of
$91,880 and wire transfers in the amount of $111,802. As a result, the SARs did
not state the full amount of cash transactions or wire transfers in the
accounts. The SARs noted that the Compliance Division's investigation concerning
the Valjur and Durcaribe accounts was continuing.
29. As part of BPPR's continuing investigation concerning the
Valjur and Durcaribe accounts, it conducted a "know your client" visit to
Vallejo's purported place of business. Following this visit, supplemental SARs
were filed on December 17, 1999, noting that the account activity reported on
the SARs filed in November was inconsistent with the nature of
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Vallejo's purported business. Vallejo continued to structure deposits into both
accounts.
30. In December 1999, BPPR contemplated closing the accounts,
following its receipt of a fourth law enforcement subpoena related to the
accounts. At that time, as part of BPPR's efforts to improve its BSA and
anti-money laundering efforts, the bank was in the process of revising its
account closing policy to correct some uncertainty concerning the criteria that
should be applied to account closings. BPPR did not immediately close the Valjur
and Durcaribe accounts because it had concerns about potential lawsuits from the
client and hindering law enforcement efforts. In February 2000, BPPR's
Anti-Money Laundering committee (the "AML Committee"), which was established by
the bank's senior management in the Fall of 1999, acceded to the request of a
Special Agent of the Internal Revenue Service to keep the account open. The
failure of the SARs to cover the entire period during which the accounts were
open had an effect upon federal law enforcement's ability to determine whether a
crime had been committed, was continuing to be committed, and the extent of any
criminal activity. According to both a letter, dated March 22, 2000, from the
IRS Special Agent and the affidavit filed by the IRS Special Agent in support of
the criminal complaint against Vallejo, the government relied on information
supplied by BPPR in prosecuting Vallejo.
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DOMINICAN REPUBLIC MONEY SERVICE BUSINESS ACCOUNTS TRANSACTIONS
31. From at least as early as 1997 through approximately June
2000, BPPR provided correspondent services to foreign money service businesses
located in the Dominican Republic. During this period of time, the Dominican
Republic was known to be a high-risk area for narcotics-related money
laundering.
32. Although BPPR knew the general purpose of the businesses in
question (i.e., money services business), the bank failed to document adequately
the basis for this knowledge. For example, BPPR failed to document whether any
customer visits were made to these businesses prior to 1999, and the customer
files relating to these accounts contained inadequate documentation as to the
nature of the client's business. Although BPPR conducted KYC visits in 1999, the
visitation documentation contains no information about the expected volume and
type of account activity for the purported business.
33. From at least as early as 1997, BPPR received these
businesses' checks and other items in bulk for purposes of processing, and
processed the items without reviewing them. There was activity through certain
of these accounts which was indicative of money laundering by the businesses or
their customers yet no SARs were filed.
34. In one case, BPPR failed to investigate and allowed
transactions to continue even after being put on notice by law enforcement that
the account might have involved criminal activity. Specifically, BPPR was served
with a Drug Enforcement Administration seizure warrant relating to an account
opened at BPPR that had received $275,000 from Comercial Importadora SMA, a
Dominican Republic business that had also opened an account at the bank.
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Although the branch manager informed the account holder of Comercial Importadora
that his account had to be closed, after consultation with the account holder
and his lawyer, the branch manager allowed the account holder's brother to open
an account on the same day the seizure warrant was received and the account
opening documentation noted that the account was a substitute for the Comercial
Importadora SMA account.
35. As discussed above, in the Fall of 1999, BPPR applied broad
parameters against all accounts at the bank to identify suspicious activity.
These procedures led BPPR to focus on the money transmitters based in the
Dominican Republic. By the second quarter of 2000, SARs had been filed for most
of these accounts. By the time the SARs were filed, subpoenas had been received
by BPPR on most of the accounts. These accounts were all closed at the end of
the second quarter of 2000.
REMEDIAL ACTION
36. During the period of 1995 through 1998, the Federal Reserve
conducted four examinations of BPPR. Bank examiners are required by federal law
(12 U.S.C. ss. 1818(s)) to identify any problems relating to a bank's BSA
compliance. These examinations did not contain any criticism of BPPR's BSA
compliance policies or procedures. The duty to determine whether its compliance
program was effective belonged to BPPR, not banking regulators. Beginning in
October 1999, the Federal Reserve conducted an examination of BPPR. In March
2000 the Bank entered into a Written Agreement with the Federal Reserve.
37. Beginning in September 1999, BPPR's senior management focused
on enhancing its BSA compliance program. These included the formation of a Task
Force, which first met on
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October 13, 1999, comprised of senior bank executives and other key bank
employees to formalize the process of making improvements to the bank's BSA and
AML program. The Task Force was given a broad mandate to revise and improve all
procedures and processes related to the BSA. During October 1999, the Task Force
met on numerous occasions to review and to make recommendations to improve the
Bank's BSA and AML program.
38. In November 1999, BPPR created a permanent AML Committee to
oversee and implement the bank's AML efforts. In October 1999, BPPR's Senior
Management Council ("SMC"), which included the chief executive officer, all the
executive vice presidents and the General Counsel, began to meet on a weekly
basis to oversee the Task Force's and subsequently the AML Committee's progress
in implementing its plan and to submit monthly progress reports to the Federal
Reserve.
39. As a result of these efforts, there were numerous innovations
in BPPR's BSA compliance program, including the following:
- A new BSA and AML Department was created and divided into
three areas: detection and investigation, training and BSA
audit, and compliance. Thirteen employees were assigned to
this new department, seven of whom were hired by December
1999.
- The Legal Requirements unit -- the group that reviews and
processes subpoenas -- was elevated to department level and a
new unit head was appointed.
- BPPR's KYC policies were significantly revised in December
1999 and approved by BPPR's board in early 2000.
- Training materials were revised, and a test was created to
measure whether employees understand the training. In
addition, the frequency of BSA and AML training was increased.
From December 1999 through December 2000, BPPR provided BSA
and AML training to substantially all of its employees.
- BPPR hired KPMG to provide the bank with "best practices" for
a BSA and AML
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compliance program. KPMG provided, among other things,
advanced training to the AML Committee and certain employees
of the Corporate Compliance Division and other departments
involved in BSA functions, advice as to the most advanced
suspicious activity software program and guidance on the
implementation of a new written BSA compliance program.
- BPPR purchased a new state-of-the-art suspicious activity
detection software program called ASSIST. BPPR established
broad parameters to identify suspicious activity and applies
those parameters against all accounts at BPPR.
- BPPR developed a "hot list" procedure to determine whether
individuals identified in the news as having engaged in
illegal activities had accounts at BPPR.
- BPPR hired two new individuals with investigative and
financial backgrounds to investigate suspicious activity. BPPR
also began to file SARs on a weekly basis.
- BPPR made extensive efforts to improve its CTR review and
filing function. The responsibility for the preparation and
review of CTRs was transferred to an operations unit in retail
banking to improve supervision over this process. The number
of employees reviewing CTRs was doubled.
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