Manhattan U.S. Attorney Announces Criminal Charges Against Industrial Bank Of Korea For Violations Of The Bank Secrecy Act

Charges to Be Deferred For Two Years Under an Agreement in which Industrial Bank of Korea Admitted Its Conduct and Agreed to Pay $51 Million

Geoffrey S. Berman, the United States Attorney for the Southern District of New York, and Jeffrey E. Peterson, the Special Agent-in-Charge of the Anchorage, Alaska, Field Office of the Federal Bureau of Investigation (“FBI”), announced criminal charges against Industrial Bank of Korea (“IBK” or the “Bank”) consisting of a one-count felony information charging IBK with violating the Bank Secrecy Act (the “BSA”) by willfully failing to establish, implement, and maintain an adequate anti-money laundering (“AML”) program at IBK’s New York branch (“IBKNY”), a failure that permitted the processing of more than $1 billion in transactions in violation of the International Emergency Economic Powers Act (“IEEPA”).  The case is assigned to United States District Judge Denise L. Cote.

Manhattan U.S. Attorney Geoffrey S. Berman said:  “As they have admitted today, the Industrial Bank of Korea and its New York branch enabled years-long access to and exploitation of the U.S. banking system for prohibited transactions.  As detailed in an extensive Statement of Facts, IBK failed to institute the effective anti-money laundering program repeatedly requested by its own New York-based compliance officer.  As a result, IBKNY failed to detect and report $10 million in illegal U.S. dollar payments from Korean entities to Iranian ones.  Nor did IBK report the balance of the $1 billion of such sanctioned transactions between those parties.  Banks conducting business in the U.S. have a responsibility to ensure that they establish safeguards against the exploitation of the banking system by sanctioned entities that foster, promote, or engage in terrorism.  This Office remains committed to enforcing the law against banks that willfully fail to do so.”

FBI Anchorage Special Agent-in-Charge Jeffrey E. Peterson said:  “Today’s forfeiture is another important step in the FBI’s investigation of the Industrial Bank of Korea’s illegal movement of millions of dollars through the U.S. financial system on behalf of sanctioned Iranian entities. The FBI remains committed to protecting and upholding the integrity of the American financial system and ensuring global banking institutions adhere to U.S. laws, including sanctions against potentially hostile countries.”

Mr. Berman also announced an agreement (the “Agreement”) under which IBK agreed to accept responsibility for its conduct by stipulating to the accuracy of an extensive Statement of Facts, pay penalties totaling $86 million to prosecutors and regulators, refrain from all future criminal conduct, and implement remedial measures as required by its regulators.  Assuming IBK’s continued compliance with the Agreement, the Government has agreed to defer prosecution for a period of two years, after which time the Government will seek to dismiss the charges.

The federal penalty shall be collected through IBK’s forfeiture to the United States of $51 million in a civil forfeiture action also filed today.  Of that amount, one half shall be transferred to the United States Victims of State Sponsored Terrorism Fund, pursuant to the Justice for United States Victims of State Sponsored Terrorism Act.  In addition, IBK has reached a separate agreement with the New York State Department of Financial Services (“DFS”) covering various regulatory violations, under which it shall pay an additional $35 million penalty.

The Government entered into this resolution due, in part, to IBK’s acceptance and acknowledgement of responsibility under the laws of the United States for its conduct, as exhibited by its undertaking of a thorough internal investigation and transactional analysis, providing frequent and regular updates to the U.S. Attorney’s Office, collecting and producing evidence located in other countries to the full extent permitted under applicable laws and regulations, and making employees located in other countries available for interviews in the United States.  These factors and IBK’s willingness to enter into the commitments set forth in the Agreement, along with all other relevant factors and considerations, collectively weighed in favor of deferral of prosecution, and outweighed in this particular case IBK’s failure to self-report the full extent of its involvement in processing transactions that violated United States sanctions laws, failure to preserve certain electronic evidence relevant to those transactions, and failure to remediate fully and promptly the deficiencies in its compliance programs, as described below.

According to the documents filed today in Manhattan federal court:

IBK and IBKNY’s Failure to Maintain an Adequate AML Program

From at least in or about 2011, and continuing until at least in or about 2014, IBK and IBKNY violated United States law by willfully failing to establish, implement, and maintain an adequate AML program at IBKNY.  Among other things, despite requests and admonitions from regulators and IBKNY’s own compliance officer (the “Compliance Officer”), IBK and IBKNY failed to provide the resources, staffing, and training necessary to maintain an adequate AML program by declining to take steps to implement an automated transaction review program or to provide the Compliance Officer with any support staff or assistance.  This failure permitted, among other things, the processing through IBKNY and other U.S. financial institutions of approximately $1 billion in transactions on behalf of one or more IBK customers that violated IEEPA.

From at least 2006 until approximately January 2013, IBKNY used a manual process for reviewing transactions processed by the branch.  By at least early 2010, both outside regulators and the Compliance Officer had come to view the manual review as insufficient and flagged the need to enhance the branch’s transaction monitoring system with additional resources.  In 2010 and 2011, the Compliance Officer made repeated requests, including to IBKNY’s branch manager and to IBK’s Compliance Committee for an automated transaction review system, at one point noting that the “current [manual review] process is manually intensive, excessively time consuming to complete and prone to error, thereby exposing IBKNY to significant Bank Regulatory Sanctions.”

In 2010 and 2011, the Compliance Officer was the only compliance employee at IBKNY.  During the same time period when the Compliance Officer was documenting the deficiencies in the IBKNY transaction review program, the Compliance Officer also made “a formal request for one additional IBKNY professional compliance staff” member.  In response, IBKNY senior leadership, including IBKNY’s branch manager, first proposed assigning bank interns to assist the Compliance Officer, and ultimately assigned one of IBKNY’s IT employees to assist the Compliance Officer on a part-time basis while still maintaining responsibility for IT work.  That employee, who had limited English language ability, had no experience in compliance and was of limited use to the Compliance Officer.

In March 2011, the Compliance Officer wrote another memo, in which he highlighted the significant problems caused by the continued need to engage in manual review of all transactions, adding that he had fallen so far behind at that point that “it would take approximately six months to get caught up enough to meet regulatory expectations.”  The Compliance Officer thus wrote that “it is imperative that IBKNY immediately recruit additional experienced AML/BSA resources” and recommended that, given the delay in starting the automated review of transactions, IBKNY hire additional experienced BSA/AML staff.  No meaningful action was taken on the Compliance Officer’s request for additional personnel.  Rather, the Branch Manager agreed to authorize overtime for the Compliance Officer and the IT employee assisting him so that they could devote extra hours to the manual review process.

Due to the lack of an automated screening program and the lack of sufficient, adequately trained compliance staff to engage in the manual review process, the Compliance Officer fell months behind in his review of transactions being processed on behalf of IBK through IBKNY.  As a result, IBKNY did not detect or flag significant suspicious transactions that were processed through the branch until months after those transactions had been completed.

IEEPA-Violating Transactions by Kenneth Zong and His Co-Conspirators

In particular, IBKNY and IBK failed to promptly identify a series of transactions that violated the United States’ economic sanctions against Iran (the “Zong Transactions”):  From January 2011 until July 2011, Kenneth Zong,[1] an American citizen, and various primarily Iranian co-conspirators exploited bank accounts that had been established at IBK and at another bank to permit certain forms of trade between Korea-based entities and Iran (the “CBI Won Accounts”), to transfer U.S. Dollars (“USD”) unlawfully to Iranian-controlled entities.  In order to evade U.S. sanctions, Zong and his co-conspirators set up shell companies in Korea, Iran, and elsewhere, which engaged in sham trade transactions and submitted fictitious documentation to Korean banks, including IBK, in order to facilitate the transfer of Iranian funds from the CBI Won Accounts to Korean entities’ accounts, the conversion of the funds into USD, and the subsequent transfer of USD from those entities through U.S. financial institutions to other accounts controlled by Zong and his co-conspirators and/or for the benefit of Zong and his co-conspirators.

IBKNY did not review and identify the Zong Transactions as unlawful until more than five months after they began to be processed through IBK, after IBK had already processed more than $1 billion worth of such transactions.

IBK and IBKNY’s Continued Failure to Implement an Adequate AML Program 

Shortly after the Compliance Officer flagged the Zong Transactions, he again alerted IBK’s management to the dire state of IBKNY’s AML program, noting in a memo to senior leadership at IBK’s Head Office that:

[C]urrently the branch AML monitoring program is behind 8 monthly BSA reviews due to insufficient resources.  Branch management has refused to accept my repeated recommendation to increase resources. . . .  Regulation H of the Federal Reserve mandates a branch have a BSA program that includes an effective BSA review process with sufficient resources to be able to detect and report suspicious activity within a reasonable time frame.  Under these requirements, the branch is deficient in both areas.

Nevertheless, IBKNY did not take immediate steps to remedy these deficiencies.  While IBK initiated a process to select a vendor to install an automated system in August 2011, the system did not become operational for another 18 months.  Moreover, while the system commenced operation in January 2013, it was not validated by IBKNY’s external auditor until 2014.  Nor did IBKNY hire even a second full-time compliance employee until October 2014.

Even after these fundamental improvements were made, IBK did not fully remediate IBKNY’s broader BSA/AML deficiencies for years, even after entering into a Written Agreement with their primary regulators to correct such deficiencies in February 2016.

IBK’s Failure to Disclose Its Wrongdoing in a Timely Manner

While IBKNY filed a suspicious activity report regarding the subset of Zong’s transactions that had been processed through IBKNY (approximately $10 million worth of transactions) and made a disclosure regarding those transactions to the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) in August 2011, IBK never self-reported to OFAC its involvement in the remaining $990 million worth of Zong’s illegal transactions.  Similarly, IBK did not self-disclose its willful violations of the Bank Secrecy Act prior to the Government’s investigation.

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Mr. Berman praised the outstanding investigative work of the Anchorage Field Office of the FBI.  He also thanked the United States Attorney’s Office for the District of Alaska, the Federal Reserve Bank of New York, and the New York State Department of Financial Services for their assistance with this matter.  The Office of the New York State Attorney General also conducted its own investigation alongside the United States Attorney’s Office for the Southern District of New York on this investigation.

The prosecution is being handled by the Office’s Money Laundering and Transnational Criminal Enterprises Unit.  Assistant U.S. Attorneys Edward B. Diskant, Benet J. Kearney, and Alexander Wilson are in charge of the prosecution.

[1] On or about December 14, 2016, Zong was indicted in the District of Alaska and charged with violations of IEEPA and money laundering offenses.  The entirety of the text of that indictment and the description of the indictment set forth herein constitute only allegations, and every fact described should be treated as an allegation.