EXHIBIT 99.5
UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF CALIFORNIA
SAN DIEGO
____________________________________
)
UNITED STATES OF AMERICA, )
)
Plaintiff, )
) No.________________________________
)
v. )
)
UNION BANK OF CALIFORNIA, N.A., )
)
Defendant, )
____________________________________)
DEFERRED PROSECUTION AGREEMENT
______________________________
Defendant Union Bank of California, N.A. ("UBOC"), by and through its
attorneys, Gibson, Dunn & Crutcher, LLP, pursuant to authority granted by its
Board of Directors, and the United States Department of Justice, Criminal
Division (hereinafter, "the United States"), enter into this Deferred
Prosecution Agreement (the "Agreement").
1. UBOC shall waive indictment and agree to the filing of a ONE (1) count
information in the United States District Court for the Southern District of
California, San Diego, charging it with failing to maintain an effective
anti-money laundering program, in violation of Title 31, United States Code,
Sections 5318(h)(1) and 5322(a).
2. UBOC accepts and acknowledges responsibility for its conduct as set
forth in the Factual Statement attached hereto and incorporated by reference
herein as Appendix A (hereinafter, "Factual Statement").
3. UBOC 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 UBOC, its
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attorneys, Board of Directors, agents, officers or employees, shall constitute a
breach of this Agreement as governed by Paragraph 12 of this Agreement, and UBOC
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 UBOC
for the purpose of determining whether UBOC has breached this Agreement shall be
in the sole and reasonable discretion of the United States. Upon the United
States' notification to UBOC of a public statement by any such person that in
whole or in part contradicts a statement of fact contained in the Factual
Statement, UBOC may avoid breach of this Agreement by publicly repudiating such
statement within two business days after notification by the United States. This
paragraph is not intended to apply to any statement made by any individual in
the course of any criminal, regulatory, or civil case initiated by a
governmental or private party against such individual. In addition, consistent
with UBOC's obligation not to contradict any statement of fact set forth in
Appendix A, UBOC may take good faith positions in litigation involving any
person or entity not a party to this Agreement. Nothing stated in this Agreement
is intended to operate or shall operate as a waiver of UBOC's rights under
Federal Rule of Evidence 408.
4. UBOC agrees that it, in accordance with applicable laws: (a) shall
provide to the United States, on request, any relevant document, electronic
data, or other object concerning matters relating to this investigation in
UBOC's possession, custody and/or control. Whenever such data is in electronic
format, UBOC shall provide access to such data and assistance in operating
computer and other equipment as necessary to retrieve the data. This obligation
shall not include production of materials covered by the attorney-client
privilege or the work product doctrine; and (b) shall in all material aspects
completely, fully and timely comply with all the record keeping and reporting
requirements imposed upon it by the Bank Secrecy Act, 31 U.S.C.
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ss.ss. 5311 through 5332 and the Bank Secrecy Act implementing regulations, as
well as the remedial actions set forth in the Department of the Treasury, Office
of the Comptroller of the Currency's CONSENT ORDER, No. AA-EC-07-58.
5. The United States has determined that it could institute a criminal or
civil forfeiture action against certain funds that went through certain accounts
at UBOC. UBOC hereby acknowledges that in excess of $21,600,000.00 may have been
involved in transactions in accounts in violation of Title 18, United States
Code, Sections 1956 and 1957 and, therefore at least some or all of the funds
deposited in such accounts could be subject to forfeiture to the United States
pursuant to Title 18, United States Code, Sections 981 and 982. In lieu of the
United States instituting a civil or criminal forfeiture action against those
funds, UBOC hereby agrees to settle and does settle any and all civil and
criminal forfeiture claims presently held by the United States against those
funds for the sum of $21,600,000.00. UBOC hereby agrees that the funds paid by
UBOC pursuant to this Deferred Prosecution Agreement shall be considered
substitute RES for the purpose of forfeiture to the United States pursuant to 18
U.S.C. ss. 981, and UBOC releases any and all claims it may have to such funds.
6. In consideration of UBOC's remedial actions to date and its willingness
to: (i) acknowledge responsibility for its conduct as detailed in the Factual
Statement; (ii) continue its cooperation with the United States; (iii)
demonstrate its future good conduct and compliance in all material aspects with
the Bank Secrecy Act and all of its implementing regulations, including, but not
limited to, the remedial actions specified in Paragraph 9 below; and (iv) settle
any and all civil and criminal claims currently held by the United States, its
agencies, and representatives against the funds referred to in Paragraph 5 above
for the sum of $21,600,000.00, the United States shall recommend to the Court,
pursuant to 18 U.S.C. ss. 3161(h)(2), that prosecution of UBOC on the
Information filed pursuant to Paragraph 1 be deferred for a period
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of twelve (12) months. UBOC 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. UBOC
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 Southern District of California for the period that this Agreement is in
effect.
7. UBOC hereby further expressly agrees that any violations of the Bank
Secrecy Act pursuant to 31 U.S.C. ss.ss. 5318(h) and 5322(a) that were not
time-barred by the applicable statute of limitations as of the dAte of this
Agreement may, in the sole reasonable discretion of the United States, be
charged against UBOC within six (6) months of any breach of this Agreement
notwithstanding the expiration of any applicable statute of limitations.
8. The United States agrees that if UBOC is in compliance in all material
aspects with all of its obligations under this Agreement, the United States,
within thirty (30) days of the expiration of the time period set forth in
Paragraph 6 above, shall seek dismissal with prejudice of the Information filed
against UBOC pursuant to Paragraph 1 and this Agreement shall expire and be of
no further force or effect. Notwithstanding the preceding sentence, the parties
agree that if UBOC's business operations are sold to a party or parties
unaffiliated with UBOC as of the date hereof, whether by sale of stock, merger,
consolidation, sale of a significant portion of its assets, or other form of
business combination, or otherwise undergoes a direct or indirect change of
control within the term of this Agreement, the Information shall be dismissed
with prejudice
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and all other obligations of UBOC under this Agreement, other than the
obligations set forth in paragraph 4(a), which shall continue during what would
have been the remaining term of this Agreement, shall terminate upon the closing
of any such transaction or the occurrence of such change of control.
9. UBOC has agreed to implement certain remedial measures designed to fully
comply with the Bank Secrecy Act, specifically the terms and conditions of the
Department of the Treasury, Office of the Comptroller of the Currency's CONSENT
ORDER, No. AA-EC-07-58, and the Department of the Treasury, Financial Crimes
Enforcement Network's CONSENT TO THE ASSESSMENT OF CIVIL MONEY PENALTY, No.
2007-02, the terms of which are hereby fully incorporated into this Factual
Statement and related Deferred Prosecution Agreement.
10. UBOC and the United States understand that the Agreement to defer
prosecution of UBOC 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 UBOC 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 UBOC has committed any federal crime commenced subsequent to the date of
this Agreement, UBOC shall, in the sole reasonable 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,
the parties agree that all criminal investigations arising from: (a) the facts
contained in, connected to, or involving the accounts described in the Factual
Statement; (b) other accounts that were the subject of grand jury subpoenas in
the course of this investigation, as well as UBOC's efforts to comply with grand
jury subpoenas issued in the course of the investigation; and (c) UBOC's
Anti-Money Laundering/Bank Secrecy Act
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compliance program, including UBOC's compliance with the Bank Secrecy Act's
suspicious activity reporting requirements, that have been, or could have been,
conducted by the United States prior to the date of this Agreement, shall not be
pursued further and that the United States will not bring any additional charges
against UBOC (including its bank holding company, UnionBanCal Corporation)
relating to these matters.
12. Should the United States determine that UBOC has committed a willful
and material breach of any provision of this Agreement, the United States shall
provide written notice to UBOC of the alleged breach and provide UBOC with a
thirty day (30) period, or longer at the reasonable discretion of the Assistant
Attorney General in charge of the Criminal Division, in which to make a
presentation to the Assistant Attorney General 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 UBOC fail to make a presentation to the Assistant Attorney General
within such time period, it shall be presumed that UBOC is in willful and
material breach of this Agreement. The parties further understand and agree that
the Assistant Attorney General's exercise of reasonable discretion under this
paragraph is not subject to review in any court or tribunal outside of the
Department of Justice. In the event of an uncured willful and material breach of
this Agreement which results in a prosecution, such prosecution may be premised
upon any information provided by or on behalf of UBOC to the United States at
any time, unless otherwise agreed when the information was provided.
13. UBOC agrees that, if UBOC's business operations are sold to a party or
parties unaffiliated with UBOC as of the date hereof, whether by sale of stock,
merger, consolidation, sale of a significant portion of its assets, or other
form of business combination, or otherwise undergoes a direct or indirect change
of control within the term of this Agreement, UBOC shall include in any contract
for sale or merger a provision binding the purchaser/successor to the
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obligations described in Paragraph 4(a) of this Agreement regarding cooperation
with the Department of Justice.
14. It is further understood that this Agreement is binding on UBOC and the
United States Department of Justice, but specifically does not bind any other
federal agencies, or any state or local authorities, although the United States
will bring the cooperation of UBOC 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 UBOC or its attorneys.
15. It is further understood that this Agreement does not relate to or
cover any criminal conduct by UBOC other than the conduct or accounts described
in paragraph 11.
16. UBOC 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 Southern District of California, San Diego.
17. This Agreement sets forth all the terms of the Deferred Prosecution
Agreement between UBOC and the United States. No promises, agreements, or
conditions shall be entered into and/or are binding upon UBOC or the United
States unless expressly set forth in writing, signed by the United States,
UBOC's attorneys, and a duly authorized representative of UBOC. This Agreement
supersedes any prior promises, agreements or conditions between UBOC and the
United States.
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ACKNOWLEDGMENTS
I, Masaaki Tanaka, the duly authorized representative of Union Bank of
California, N.A., hereby expressly acknowledge the following: (1) that I have
read this entire Agreement; (2) that I have had an opportunity to discuss this
Agreement fully and freely with Union Bank of California, N.A.'s attorneys; (3)
that Union Bank of California, N.A. fully and completely understands each and
every one of its terms; (4) that Union Bank of California, N.A. is fully
satisfied with the advice and representation provided to it by its attorneys;
and (5) that Union Bank of California, N.A. has signed this Agreement
voluntarily.
Union Bank of California, N.A.
9-17-07 /s/ MASAAKI TANAKA
__________________ ______________________________________
DATE Masaaki Tanaka
President & Chief Executive Officer
Union Bank of California, N.A.
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COUNSEL FOR UNION BANK OF CALIFORNIA, N.A.
The undersigned is outside counsel for UBOC. In connection with such
representation, I acknowledge that: (1) I have discussed this Agreement with my
client; (2) I have fully explained each one of its terms to my client; (3) 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.
GIBSON, DUNN & CRUTCHER LLP
AMY G. RUDNICK
NICOLA T. HANNA
LINDA NOONAN
9/17/07 /s/ NICOLA T. HANNA
__________________ ______________________________________
DATE By: NICOLA T. HANNA
Attorneys for Union Bank of
California, N.A.
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ON BEHALF OF THE GOVERNMENT
ALICE FISHER
Assistant Attorney General, Criminal Division
United States Department of Justice
9/17/07 /s/ RICHARD WEBER
__________________ _____________________________________________
DATE By: RICHARD WEBER, Chief
Asset Forfeiture and Money Laundering Section
U.S. Department of Justice, Criminal Division
9/17/07 /s/ JOHN W. SELLERS
__________________ _____________________________________________
DATE By: JOHN W. SELLERS
Senior Trial Attorney
Asset Forfeiture and Money Laundering Section
U.S. Department of Justice, Criminal Division
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UNITED STATES V. UNION BANK OF CALIFORNIA, N.A. Page 1
Deferred Prosecution Agreement
Statement of Facts
1. UNION BANK OF CALIFORNIA, N.A. (hereinafter, "UBOC") is a
wholly-owned subsidiary of UnionBanCal Corporation, a publicly traded bank
holding company. As of June 30, 2007, UBOC had assets of approximately $53
billion and operated through 327 branch office locations. The Department of the
Treasury, Office of the Comptroller of the Currency (OCC) is UBOC's primary
regulator.
2. Congress enacted the Bank Secrecy Act, 31 U.S.C. ss. 5311 et seq.,
and its implementing regulations ("BSA") to address an increase in criminal
money laundering activities utilizing financial institutions. Among other
provisions, it requires domestic banks, insured banks and other financial
institutions to maintain programs designed to detect and report suspicious
activity that might be indicative of money laundering, terrorist financing and
other financial crimes, and to maintain certain records and file reports related
thereto that are especially useful in criminal, tax or regulatory investigations
or proceedings.
3. The U.S. Department of Justice, Criminal Division, Asset Forfeiture
and Money Laundering Section ("AFMLS"), and the U.S. Drug Enforcement
Administration ("DEA"), have determined that from May 2003 through at least
April 2004, UBOC violated the anti-money laundering and suspicious activity
reporting requirements of the BSA and its implementing regulations. The
violations at UBOC were serious and systemic and allowed certain UBOC customers
to launder millions of dollars of proceeds from the sale of illegal narcotics
through UBOC accounts over an extended time period.
4. Investigators have identified specific accounts maintained at UBOC
that were used to launder at least $21.6 million of drug proceeds by and through
accounts
UNITED STATES V. UNION BANK OF CALIFORNIA, N.A. Page 2
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Statement of Facts
controlled by licensed Mexican currency exchange houses (referred to locally and
hereinafter as "casas de cambio"). Evidence establishes that UBOC maintained
more than a dozen accounts for Mexican casas de cambio, and that some of these
accounts were used in concert with one another to launder drug proceeds.
HIGH RISK PROFILE OF UBOC BANKING ACTIVITIES
5. UBOC's primary market is California, which is designated as both a
High Intensity Money Laundering and Related Financial Crime Area and a High
Intensity Drug Trafficking Area. UBOC's exposure to money laundering activities
was elevated due to its past marketing of accounts to Mexican casas de cambio
and other Mexican business entities beginning in the 1990s. As early as 1996,
DEA, federal regulators and other prominent anti-money laundering organizations
began publicly highlighting the increased money laundering risk presented by
Mexican casas de cambio to the U.S. financial system. DEA warned that Mexican
drug trafficking organizations were increasingly using casas de cambio to place
drug proceeds into the U.S. financial system by smuggling the drug proceeds out
of the United States to Mexico and selling those dollars to Mexican casas de
cambio for pesos. The placement of drug proceeds with Mexican casas de cambio is
beneficial to both sides of the transaction: the drug trafficking organization
is able to obtain local currency (pesos) to continue its illicit activities
without having to risk structuring drug proceeds into the banking system; and
the casa de cambio, which has a significant need for U.S. dollars in the
ordinary course of its currency exchange activities, obtains a valuable source
of discounted U.S. dollars.
UNITED STATES V. UNION BANK OF CALIFORNIA, N.A. Page 3
Deferred Prosecution Agreement
Statement of Facts
SUMMARY OF INVESTIGATION
6. The investigation of UBOC's handling of Mexican casa de cambio
accounts resulted from evidence obtained from several U.S. and international
undercover operations that documented the export of multi-ton quantities of
cocaine out of Colombia to Mexico, for transshipment to the U.S. and Europe.
Investigators then traced the flow of the resulting drug proceeds in the form of
bulk shipments of U.S. dollars and euros to a few Mexican casas de cambio
working in concert with one another, or to the direct deposit of drug proceeds
to accounts held by the casas de cambio in Spain. In either case, once the drug
proceeds were successfully placed with the Mexican casas de cambio, the proceeds
were then either wire transferred or, after being converted to other negotiable
instruments, directly shipped to UBOC in California for deposit to certain of
the casas de cambio bank accounts.
7. This complex drug trafficking and money laundering organization was
led by several individuals, including Ricardo Mauricio Bernal-Palacios
(hereinafter "Ricardo Mauricio") and his brother, Juan Manuel Bernal-Palacios
(hereinafter "Juan Manuel"). Unbeknownst to UBOC, which maintained accounts for
Ribadeo Casa de Cambio, based in Mexico City, previously named Casa de Cambio
Intercontinental (hereinafter referred to as "Ribadeo"), Ricardo Mauricio became
a part owner of Ribadeo, and with the assistance of Ribadeo's President and
signatory of Ribadeo's UBOC accounts, Francisco Jose Anton-Perez, used Ribadeo
to launder millions of dollars of drug proceeds through its' UBOC accounts in
the United States.
UNITED STATES V. UNION BANK OF CALIFORNIA, N.A. Page 4
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Statement of Facts
8. The Bernals' drug trafficking and money laundering activities ended
in February 2006 when they were indicted in the Southern District of Florida,
Miami, on money laundering and drug trafficking charges. In May 2007, the
Bernals were extradited to the United States and, on August 28, 2007, pleaded
guilty to 38 counts of money laundering.
SUMMARY OF SUSPICIOUS ACTIVITY IN TARGETED CASA DE CAMBIO ACCOUNTS
9. As part of the investigation into the Bernals' money laundering
activities, law enforcement reviewed account documentation and transactional
activity in the Mexican casa de cambio accounts at UBOC and identified numerous
indicators, or "red flags," of suspicious activities that were not timely
detected or reported by UBOC, including:
o UNUSUAL BULK CASH DEPOSITS. Large bulk cash deposits through one
of the casa de cambio accounts, in a pattern and amounts
unsupported by the customer's known business model. A significant
amount of the bulk cash deposited into this one account was
subsequently credited to the Ribadeo account for no known
business purpose.
o UNSUPPORTED LIQUIDITY TRANSFERS. Internal debit/credit
transactions between unrelated casa de cambio accounts within
UBOC accounted for 80 percent of funds deposited into the Ribadeo
account, which the bank understood to be liquidity transfers.
UBOC did not independently corroborate the legitimacy of these
informal liquidity contracts, including the source of the funds
and the manner and means for satisfaction of the liquidity loans.
For example, law enforcement identified $295 million in so-called
liquidity transfers from various casa de cambio accounts within
UBOC to Ribadeo's UBOC account, but Ribadeo repaid only $29
million. There is no information available as to how Ribadeo
managed to repay the remaining $266 million.
o UNUSUAL ORIGINATORS OF INCOMING WIRES. Fewer than 50 individuals
or entities accounted for 92 percent of incoming wire transfers
into the Ribadeo account. Other than the 13 casas de cambio,
which had accounts at UBOC, UBOC did not document and corroborate
the legitimacy of the other originators. Many, as it
UNITED STATES V. UNION BANK OF CALIFORNIA, N.A. Page 5
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Statement of Facts
turns out, were fronts for money laundering activities, including
DEA undercover bank accounts.
o UNEXPLAINED POUCH DEPOSITS. A large volume of travelers checks
and third-party checks deposited into the casa de cambio accounts
was inconsistent with the known business activities of the casas
de cambio. Some of the casas de cambio did not engage in retail
operations and therefore had no apparent legitimate source for
the large volume of travelers checks and third-party checks being
deposited into their UBOC accounts.
o SEQUENTIAL AND STRUCTURED MONETARY INSTRUMENTS. Thousands of
travelers checks and third-party checks were deposited through
pouch deposits and contained numerous examples of structuring,
sequential serial numbers and endorsement / deposit dates on or
near the date of purchase by a handful of individuals. Other
suspicious elements included "smurf marks" (see discussion below)
and endorsements by someone other than the payee.
o STRUCTURED WIRE TRANSFERS. Numerous instances where round dollar
amounts were sent through the casa de cambio accounts to a single
beneficiary through a series of structured wire transfers in
differing amounts from different originators (and vice-versa).
o UNDOCUMENTED RELATED ACCOUNTS. Numerous examples of unusual
transfers of funds to accounts outside of UBOC held in the names
of corporations controlled by the same individuals who owned and
controlled the UBOC casa de cambio accounts. These corporations
were not profiled and documented by UBOC.
DRUG MONEY LAUNDERING THROUGH TRAVELERS CHECKS AND THIRD-PARTY CHECKS
10. Some Mexican casas de cambio, including Ribadeo, routinely used
commercial couriers to deliver large pouch deposits to UBOC in California, which
included numerous third party checks and travelers checks. Evidence establishes
that large amounts of bulk cash drug proceeds was smuggled into Mexico, where a
small group of individuals used the currency to purchase travelers checks at
various financial institutions in Mexico. These individuals, referred to by law
enforcement as "smurfs," were hired by the Bernals, or by professional money
launderers working with the Bernals, to purchase dozens, sometimes hundreds of
travelers checks, as well as third-
UNITED STATES V. UNION BANK OF CALIFORNIA, N.A. Page 6
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Statement of Facts
party checks, every day from various financial institutions and individuals in
Mexico, in a manner designed to avoid suspicion and bank reporting requirements.
Once purchased, the smurfs transferred the travelers checks and third party
checks to Ribadeo, which then used commercial couriers to deliver the checks to
UBOC in California. A similar pattern of activity was evident in a few of the
casa de cambio accounts at UBOC. Many of the travelers checks contained readily
identifiable patterns of this money laundering activity, including:
o "Smurf marks," e.g., notations on the face of the check used as a
method for indicating the person who purchased the travelers
check. It is essential for smurfs to have some method to account
for the bulk cash they received and converted into travelers
checks or third-party checks.
o Sequential serial numbers, many in large $1,000 denominations,
deposited at UBOC on or near the date of purchase in Mexico by a
handful of individuals. In one instance, a single individual
endorsed and transferred to Ribadeo 34 sequentially numbered,
$1,000 travelers checks on or about the same day the checks were
purchased in Mexico, which Ribadeo deposited into its' UBOC
account the next day. Another example was found where 30
sequentially-numbered, $1,000 travelers checks were purchased by
three different individuals, and deposited at UBOC in two
deposits in a single day.
o Purchaser and endorser information on most of the travelers
checks was illegible, missing, or inconsistent.
o Dollar amounts and exchange patterns of the checks were
inconsistent with the expected use of such checks by tourists and
legitimate individuals and businesses in Mexico.
11. UBOC failed to timely identify and report the suspicious activity
surrounding the deposit of travelers checks and third-party checks into the
Ribadeo accounts and certain other casa de cambio accounts, as well as the
suspicious nature of incoming and outgoing wire transfers.
UNITED STATES V. UNION BANK OF CALIFORNIA, N.A. Page 7
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Statement of Facts
ANTI-MONEY LAUNDERING PROGRAM REQUIREMENTS
12. Pursuant to Title 31, United States Code, Section 5318(h)(1) and 12
C.F.R. ss. 21.21, UBOC was required to establish and maintain an anti-money
laundering ("AML") compliance program that, at a minimum: (a) provides internal
policies, procedures, and controls designed to guard against money laundering;
(b) provides for an individual or individuals to coordinate and monitor
day-to-day compliance with the BSA and AML requirements; (c) provides for an
ongoing employee training program; and (d) provides for independent testing for
compliance conducted by bank personnel or an outside party.
13. UBOC was required pursuant to 31 U.S.C. ss. 5318(g) and 31 C.F.R.
ss. 103.18 and 12 C.F.R. ss. 21.11 to file with the Department of Treasury a
Suspicious Activity Report ("SAR"), in accordance with the form's instructions,
when it detected the type of activity described in paragraphs 9 and 10 above.
The requirement became effective on April 1, 1996. According to the form's
instructions, UBOC was required to file a SAR with the Department of Treasury's
Financial Crimes Enforcement Network for 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 regulation or to avoid any transaction
reporting requirement under federal law or regulation.
UNITED STATES V. UNION BANK OF CALIFORNIA, N.A. Page 8
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Statement of Facts
(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.
UNION BANK'S FAILURE TO IMPLEMENT AN EFFECTIVE AML PROGRAM
14. The investigation into this matter has determined that the primary
cause of UBOC's failure to identify, report and prevent the suspicious activity
described in Paragraphs 9 and 10 above is that UBOC's BSA and AML program
contained serious and systemic deficiencies in critical areas required by the
BSA and its implementing regulations, as amended by the PATRIOT Act of 2001. The
following summarizes the deficiencies that remained uncorrected over a several
year period:
o KNOW YOUR CUSTOMER PROGRAM. Prior to 2005, UBOC failed to
implement an effective Know Your Customer Program and to apply
enhanced due diligence procedures to high-risk accounts,
particularly in the context of high-risk foreign money service
businesses. UBOC had no policy or procedure in place to document
the appropriate, expected and usual transactions that a customer
could be expected to accomplish or to update customer information
during the course of the relationship.
o RISK ASSESSMENT. UBOC did not begin conducting formal and
comprehensive risk assessments to identify all of its high-risk
customers and transactions until late 2005. Consequently, UBOC
did not develop effective policies and procedures to subject high
risk customers, accounts and transactions to enhanced due
diligence and monitoring.
o TRANSACTION MONITORING. UBOC failed to monitor and exercise
control over transactions in accounts, particularly those
conducted by customers presenting a high-risk of money
laundering. Until 2005, UBOC had no formal policy or procedure to
subject high-risk customers, such as Mexican casas de cambio, and
high-risk transactions, such as pouch or bulk-cash deposits, from
customers located in foreign countries, to enhanced monitoring
and due diligence. Resources allocated for AML
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Statement of Facts
transaction monitoring for suspicious or unusual activity were
inadequate considering the large number of high-risk transactions
and accounts.
o AUDIT AND TESTING. Until 2004, UBOC did not develop an overall
audit plan to comprehensively assess and evaluate the bank's
compliance with the Bank Secrecy Act or comprehensively test the
bank's compliance with the SAR filing requirements, suspicious
activity monitoring, AML training, KYC documentation, cash letter
processing, and due diligence procedures.
o POLICIES AND PROCEDURES. UBOC failed to develop uniform, formal
written BSA and AML policies and procedures. It was not until
2005 that UBOC developed a comprehensive AML policy as required
by the BSA.
o POUCH DEPOSITS. UBOC failed to implement a policy or procedure to
monitor and report suspicious transactions surrounding pouch
deposits. Until 2005, there was no effort made to review
individual items deposited through pouch deposits for suspicious
activities.
15. During examinations conducted between 2003 and 2005, the Federal
Reserve and the OCC independently identified these deficiencies in the context
of their AML and BSA compliance examinations.
UBOC'S KNOW YOUR CUSTOMER FAILURES
16. Federal banking regulators have advised banks, including UBOC, that
an effective AML program should incorporate the following principles into their
business practices:
a. Determine the true identity of all customers requesting services;
b. Determine the customer's source(s) of funds for transactions;
c. Determine the particular customer's normal and expected
transactions;
d. Monitor customer transactions to determine if they are consistent
with the normal and expected transactions for that customer or
for similar categories or classes of customers;
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e. Identify customer transactions that do not appear to be
consistent with normal and expected transactions for that
particular customer or for customers in similar categories or
classes; and
f. Determine if a transaction is unusual or suspicious and, if so,
report those transactions.
17. The business practices listed above are commonly referred to in the
industry and by law enforcement as the "Know Your Customer" ("KYC")
requirements.
18. Had UBOC maintained an effective KYC Program, it would have been
able to identify major anomalies in the transactions occurring in the Mexican
casa de cambio accounts, particularly the red flags described in Paragraphs 9
and 10 above. Indeed, the primary "product" sold by the casas de cambio was U.S.
dollars. Considering the high-risk nature of this particular type of customer,
UBOC should have investigated the source of those dollars, to verify that they
were purchased or obtained from legitimate sources that were consistent with the
known and reasonable business model of the customer. The bank should have
identified, profiled and corroborated the major suppliers of the U.S. dollars
deposited into the casa de cambio accounts, using an enhanced due diligence
standard.
19. Had UBOC done so, it would have discovered that Ribadeo, for
example, primarily was using two source groups for its U.S. dollar supply,
cumulatively amounting to hundreds of millions of dollars. Ribadeo's U.S.
dollars did not come into the UBOC accounts as a result of foreign currency
exchange transactions, as would be expected. Instead, Ribadeo purchased its
dollars from two primary groups:
o First, Ribadeo purchased the majority of its dollars from other
casas de cambio. Some of those dollars originated from very large
bulk cash
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deposits made at UBOC by one casa de cambio. To facilitate the
flow of dollars between the Mexican casas de cambio, some of the
casas de cambio shared computer systems, essentially merging
those casas de cambio into a single financial entity. UBOC failed
to identify this unusual and high-risk business practice, even
though it should have been evident by the commingling of funds in
the unrelated casa de cambio accounts at UBOC.
o Second, Ribadeo purchased dollars from a handful of black market
sources, mostly individuals and businesses that were fronts for
money laundering activity. Most of the drug money law enforcement
traced through Ribadeo accounts originated from the latter source
of supply. The deposits from these black market sources were in
the form of travelers checks, third party checks, and wire
transfers from less than 50 individuals or entities. Given the
small number of suppliers of U.S. dollars to Ribadeo and the
high-risk nature of Ribadeo's business, a profile of these
entities was reasonable and necessary.
MONITORING OF SUSPICIOUS TRANSACTIONS
20. Until 2005, UBOC did not have an automated account monitoring
system that was designed to identify red flags of suspicious account activity
based on pre-determined client activity patterns. A previous automated system,
initiated in 2002, was inquiry-based and depended on a monitoring structure that
was decentralized amongst the various business units, and inadequately staffed,
to manually flag suspicious activity in
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the system. Without an effective automated system, UBOC was unable to
sufficiently identify suspicious activities or patterns of incoming and outgoing
wire transfers. Bank employees handling pouch deposits or cash letters processed
the deposits in the ordinary course of business and UBOC took no action to
review the items deposited for suspicious activities or patterns.
21. With respect to high-risk international accounts, UBOC placed
significant responsibility for account monitoring on its front-line
"relationship managers" (hereinafter referred to as "RMs"). Procedures specified
that each RM was to regularly review client account statements and account
activity, to periodically visit the client at the client's place of business,
and to evaluate the customer's own anti-money laundering policies and
procedures.
22. UBOC RMs made some effort to comply with these requirements, such
as conducting site visits and inquiring about AML policies and procedures, but,
in certain cases, after the accounts were opened, and did not conduct adequate
independent compliance assessments.
23. In the late 1990s, UBOC specifically appointed a compliance officer
to review the account activity of the high-risk international accounts, but did
not provide that individual with adequate resources to effectively accomplish
the task. The compliance officer manually reviewed the accounts, which included
many thousands of transactions, once every quarter, and tried to identify
anything suspicious. The compliance officer would periodically ask the RM to
contact the client to obtain additional information about specific transactions,
but no reports of suspicious activity
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resulted from these manual reviews. In May 2003, UBOC stopped monitoring the
casa de cambio transactions altogether because no suspicious activity was
identified through previous reviews. Monitoring using an automated tool resumed
in January 2004, but initially with insufficient staffing.
UNION BANK'S REMEDIAL ACTIONS
24. Throughout this investigation, UBOC's cooperation with law
enforcement has been exceptional. Upon learning of this investigation, UBOC
devoted considerable resources to assist the government's investigation by,
among other things, providing investigators access to bank employees while
promptly complying with grand jury subpoenas seeking bank documents.
25. UBOC also has devoted considerable resources to correct and improve
its BSA and AML compliance policies, procedures and controls. In June 2004, UBOC
contracted with expert outside consultants to conduct a comprehensive review of
its BSA and AML program and began taking significant steps to enhance and
modernize its program and correct past deficiencies. In addition, UBOC
voluntarily conducted a historical transaction review or "lookback" analysis of
all the casa de cambio accounts and filed SARs, where appropriate. UBOC also
closed all of the casa de cambio accounts, as well as the business unit that
maintained the casas de cambio relationships. Other significant remedial efforts
that UBOC took with the active support of the Board of Directors and senior
management include:
o An enhanced BSA and AML compliance structure and organization,
consisting of 160 persons, including a BSA Officer, local BSA
compliance officers in all business units, and a BSA Compliance
Counsel. The staff in the
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unit responsible for suspicious activity investigations and SAR
filings now numbers 65.
o Significant efforts to foster a strong compliance culture, the
success of which is evidenced by a substantial increase in the
number of internal referrals of suspicious activity throughout
the bank.
o BSA and AML compliance is now a critical performance element for
all officers and employees who interface with customers or handle
customer transactions.
o Conducted a comprehensive risk assessment to identify high risk
customers for application of enhanced due diligence and
suspicious activity monitoring standards appropriate to the risk.
o Implemented enhanced personnel training programs for BSA and AML
compliance.
o Purchased, developed and implemented advanced anti-money
laundering systems and software.
o Strengthened the BSA / AML audit function.
26. UBOC continues to cooperate with the OCC, its primary regulator,
and FinCEN, which have each identified the BSA and AML compliance deficiencies
described herein, and have issued orders requiring UBOC to implement significant
remedial measures to correct them.