WASHINGTON, D.C. – Lone Star National Bank, a Texas-based financial institution, has been assessed a significant $2 million civil money penalty by the Financial Crimes Enforcement Network (FinCEN) for what regulators deemed willful violations of the Bank Secrecy Act (BSA). This enforcement action, announced today, highlights the critical risks banks face when engaging in international correspondent banking activities without robust compliance frameworks. FinCEN’s assessment points to critical failures by Lone Star Bank to adhere to Section 312 of the USA PATRIOT Act, which mandates stringent due diligence for correspondent banking relationships.
The regulatory scrutiny on Lone Star Bank isn’t entirely new. Previously, the Office of the Comptroller of the Currency (OCC) had addressed several BSA compliance shortcomings at the bank. However, FinCEN’s latest action specifically zeroes in on the bank’s failures under Section 312, underscoring a crucial lesson for financial institutions: venturing into international banking requires preparedness and meticulous adherence to regulatory obligations. In this instance, Lone Star Bank’s dealings with a Mexican financial institution customer involved substantial sums of money moving through the bank, activity that should have triggered heightened scrutiny from the outset.
A key lapse identified by FinCEN was Lone Star Bank’s failure to adequately investigate publicly available information concerning the foreign bank owner’s alleged history of securities fraud. Furthermore, the bank neglected to independently verify crucial information provided by the foreign bank regarding the source of funds, the intended purpose of the account, and the anticipated transaction activity. These omissions represent significant breakdowns in due diligence, a cornerstone of BSA compliance, particularly in correspondent banking.
“Lone Star plainly failed to ask obvious due diligence questions in connection with its foreign bank account relationship, and did not follow up on inconsistencies in answers to the questions that it did ask,” stated FinCEN Acting Director Jamal El-Hindi. He emphasized that despite previous penalties levied by the OCC, FinCEN’s assessment specifically addresses penalties under its Section 312 authority. Director El-Hindi’s statement serves as a stark reminder that BSA compliance is not optional, regardless of an institution’s size. “Smaller banks, just like the bigger ones, need to fully understand and follow the 312 due diligence requirements if they open up accounts for foreign banks. The risks can indeed be managed, but not if they are ignored,” he added.
The issues leading to FinCEN’s penalty are not new developments. As early as 2012, the OCC had identified significant deficiencies, leading to a Consent Order and a Memorandum of Understanding with Lone Star Bank. Despite these early warnings, severe anti-money laundering (AML) program weaknesses persisted at Lone Star Bank through 2014. This lack of sustained improvement prompted the OCC to issue a Consent Order for a $1 million civil money penalty against Lone Star Bank in 2015. The prior penalty paid to the OCC will be credited towards FinCEN’s $2 million assessment, requiring Lone Star Bank to pay an additional $1 million to fully satisfy its obligation to FinCEN.
It is worth noting that FinCEN has acknowledged Lone Star Bank’s considerable efforts to rectify its BSA program and comply with the OCC’s Consent Order. Lone Star Bank has ceased engaging in the correspondent banking activities that led to these regulatory issues. To strengthen its compliance framework, the bank has engaged external consultants to conduct independent audits, enhance customer due diligence processes, perform lookbacks for suspicious activity, and expand its BSA compliance department. This action by FinCEN serves as a critical reminder to all financial institutions, especially community banks like Lone Star Bank, about the paramount importance of robust BSA compliance programs, particularly when operating in the realm of international finance. The case of Lone Star Bank underscores that proactive due diligence and adherence to regulatory guidelines are not just best practices, but essential safeguards against financial crime and regulatory penalties.
