Citigroup subsidiary to pay $97M in bank-secrecy violations

A Citigroup subsidiary based in Southern California agreed to forfeit $97 million to resolve an investigation into federal Bank Secrecy Act violations involving nearly $142 million in suspicious transactions to Mexico.

The subsidiary, Banamex USA, is based in Los Angeles. Locally, CitiBank has branches in Napa and ATM locations in Novato, Petaluma, San Rafael and Sonoma.

In its agreement with the Justice Department to avoid criminal prosecution, Banamex admitted to violations in failing to file Suspicious Activity Reports and guard against money laundering. From 2007 to at least 2012, the company processed some 30 million remittance transactions to Mexico, valued at $8.8 billion. During that time, the system kicked out more than 18,000 alerts regarding $142 million in potentially suspicious transactions, but the bank only filed nine suspicious-activity reports, and none from 2010 to 2012.

The case is the first strong indicator that the DOJ under new Attorney General Jeff Sessions will crack down on banks that handle suspicious transactions that could involve illegal drugs. Under the Controlled Substances Act of 1970, cannabis is a Schedule I drug, federally illegal. Yet cannabis for medical use has been legal in California since 1996, and adult-use cannabis was legalized in November under Proposition 64.

“Banamex USA employed a limited and manual transaction-monitoring system,” the DOJ said in a a statement, “running only two scenarios to identify suspicious activity on the millions of remittance transactions it processed.”

In a related matter in 2015, the Federal Deposit Insurance Corporation and California Department of Business Oversight ordered Banamex USA to pay $140 million as a penalty for violations of the Bank Secrecy Act, also passed in 1970. That law requires financial institutions to keep records of cash transactions of $10,000 or more in a day and of multiple cash transactions by the same individual or business at lower amounts if the total exceeds $10,000.

In March of this year, the FDIC launched enforcement actions against four former senior executives of Banamex USA. One executive was fined, another barred from working at financial institutions, and two executives were both fined and barred.

The FDIC office in San Francisco participated in the investigation. The Department of Business Oversight regulates banks in California. Jan Lynn Owen, commissioner of the department, visited Santa Rosa on May 4 for a conference of the Cannabis Banking Working Group, created by John Chiang, state treasurer, after passage of Prop. 64.

Owen was a strategic-initiatives manager at Apple from 2009 to 2010, and worked at JP Morgan Chase and Washington Mutual.

As part of the decision not to proceed with prosecution under the recent settlement, the bank agreed to “exiting Banamex USA’s money-service business entirely, and ultimately ceasing all banking operations,” the DOJ said. “Citigroup further agreed to report to the Justice Department regarding implementation of compliance measures to improve oversight of its subsidiaries’ Bank Secrecy Act compliance.”

James Dunn covers technology, biotech, law, the food industry, and banking and finance. Reach him at james.dunn@busjrnl.com or 707-521-4257

which owns the Press Democrat and North Bay Business Journal.

Anderson noted challenges of managing a large business with its finances anchored in cash, including payroll. “From a banking perspective, lost productivity is a huge issue,” Anderson said. “I’m amazed the industry has done as well as it has to this point - with all the headwinds - how to do things in a cash-based world.”

The gusher of cash generated by cannabis commerce in California can be treated the way it is in other cash business, such as restaurants, laundromats and convenience stores. Blue Line Protection Group, a Denver-based cash-transport business, expects to move nearly $300 million in cash for the Colorado cannabis industry, according to Ricky Bennett, the company’s chief operations and compliance officer.

“There is a need to protect it and ensure it is safely deposited,” Bennett said. “We’re talking millions of dollars of cash each and every day.”

Cannabis businesses will pay local and state fees for permits, sales taxes to the Board of Equalization, employment taxes to the Employment Development Department, as well as state and federal income taxes. All these agencies will reckon with an influx of cannabis cash.

Blue Line is paid by financial institutions that accept cash from businesses in the cannabis industry.

Lamine Zarrad worked in the Office of the Comptroller of the Currency, a federal agency that regulates banks. Last year he founded Tokken, a Denver-based mobile-banking platform that harnessed technology underlying bitcoin to allow electronic payments in the cannabis industry. The company uses the federal Automated Clearing House, the main system for transfer of money electronically, including credit cards and debit cards, among banks and the Federal Reserve.

Tokken’s app runs on a smartphone and allows money to move from a cannabis customer’s payment card or bank account to Tokken, which has sub-accounts for dispensaries. Using blockchain-ledger technology, the company creates a cryptographic hashed record to verify the validity of transaction data. The goal is to manage risk while facilitating exchanges of cannabis funds.

“The blockchain is the parent of bitcoin transactions,” Zarrad said. “Everything in our system is also recorded in the public blockchain in an encrypted fashion. An auditor, a law-enforcement agency” can use the technology to verify the legitimacy of transactions. Because transactions are recorded on numerous servers around the world, they cannot be altered in attempts at fraud.

“It creates end-to-end control for every transaction,” Zarrad said, tracking each consumer’s transactions. “We know everything about a business on our platform,” he said, cross-checking individuals and companies with watch lists and social-media data to ferret out crime or terrorism.

Japan leads the United States in blockchain adoption. A consortium of Japanese banks is creating a blockchain platform for Japanese banks, likely based on Ripple, a fintech startup backed by Google. In March, Japanese banks ran a test of the Ripple platform.

Bank of America joined a Global Payments Steering Group in September to examine cryptocurrency transactions.

While bankers explore digital transactions, CannaCom Valley hurtles toward adult-use commerce, with permitting expected by January 2018. The industry still runs almost entirely on cash.

James Dunn covers technology, ?biotech, law, the food industry, cannabis, and banking and finance. Reach him at: james.dunn@busjrnl.com or 707-521-4257