Anti-money laundering measures strengthened after Mega Bank probe

  • Date: 2016-10-11

I. Background

On August 19, 2016 the New York State Department of Financial Services (DFS) issued a consent order fining Mega International Commercial Bank of Taiwan US$180 million for violations of the U.S. Bank Secrecy Act and anti-money laundering laws. The fine resulted from a routine examination of the New York branch of Mega Bank from January through March of 2015 that uncovered compliance deficiencies, violations of anti-money laundering requirements, and failure to report suspicious transactions.

Given the substantial size of the fine, Premier Lin Chuan on August 21, 2016 directed the Financial Supervisory Commission (FSC) to form a task force with the Central Bank of the Republic of China (Taiwan), the Ministry of Finance (MOF) and the Ministry of Justice (MOJ) to investigate the violations and hold those responsible accountable. The FSC was also ordered to ensure that all banks strengthen internal control mechanisms, implement risk control and compliance measures, and tighten management  of overseas branches. To shore up Taiwan’s anti-money laundering regulations, the Executive Yuan on August 25 passed amendments to the Money Laundering Control Act that were then approved by the Legislature on December 9.
II. DFS grounds for fining Mega Bank

The consent order and a DFS press release dated August 19, 2016 did not indicate whether money laundering activities were uncovered at Mega Bank’s New York branch, but did identify a number of compliance deficiencies:

A. Poor compliance infrastructure:
The branch’s chief compliance officer and anti-money laundering staff had inadequate knowledge of U.S. regulatory requirements and conflicts of commitment. Both the head office and the branch also failed to quickly remedy shortcomings indicated by DFS examiners.

B. Failure to report suspicious transactions:
Mega Bank failed to report suspicious transactions between its New York and Panama branches. Both the head office and the branch also failed to periodically review surveillance monitoring filter criteria designed to detect suspicious activity.

C. Failure to comply with anti-money laundering laws:
The New York branch procedures provided little guidance concerning the reporting of continuing suspicious activities. The branch also failed to exercise due diligence in reviewing its customers.

D. Failure to perform due diligence:
The Mega Bank head office failed to carry out oversight of the New York branch.


III. Government response and action 

The Executive Yuan has instructed the MOJ and the FSC to swiftly ascertain the facts of the case and investigate as high up the chain of command as necessary. Other government actions taken thus far:

A. On August 22, the FSC, MOF, MOJ and central bank formed a cross-agency task force to launch an administrative investigation into Mega Bank’s violations. To ensure an efficient investigation, the Executive Yuan also set up a panel under Vice Premier Lin Hsi-yao on August 30 to supervise the task force’s investigation and progress.

B. On September 14 the FSC fined Mega Bank NT$10 million (US$317,662) and suspended the bank’s applications to set up overseas branches until all deficiencies relating to the New York case are corrected; six executives were removed from their jobs and barred from holding financial managerial positions for five years. Meanwhile, a team of local prosecutors continues to probe whether Mega Bank was involved in money laundering or insider trading. To hold government agencies accountable as well, the Executive Yuan supervisory panel submitted a report on the responsibilities of ministers to the Control Yuan on October 7.

C. On August 25 the Executive Yuan passed amendments to the Money Laundering Control Act to prevent money laundering and related crimes, strengthen the money-laundering prevention system, maintain financial order, increase the transparency of money flows, and strengthen international cooperation. The amendments were approved by the Legislative Yuan on December 9. On March 16, 2017, the Executive Yuan established the Anti-Money Laundering Office to bolster Taiwan’s capability to combat money laundering and improve its performance in international evaluations.

D. In light of the Mega Bank case the FSC and MOJ have instituted several reforms for all Taiwanese banks, including strengthening the management of overseas branches by head offices; tightening internal controls through three strategic lines of defense; evaluating the effectiveness of boards of directors, and of government representatives on those boards; and requiring banks to provide early notice of major incidents to their board of directors and competent authority. Some of the measures are outlined below:

1. Improve audit systems:
Head offices should step up audits of overseas branches, and hire external experts to conduct independent examinations if necessary.

2. Strengthen compliance measures:
For any overseas branch, the responsible person must have adequate experience and training, and the chief compliance officer must be proficient in local financial laws and regulations. Overseas branches should step up efforts to identify suspicious transactions, monitor high-risk accounts, and report to the home office on a regular basis.

3. Reinforce education and training:
Banks should conduct ongoing courses on internal controls, auditing and compliance to train board members representing the government to better perform their duties. Comprehensive, long-term training programs should be in place to ensure high-level executives of overseas branches have the necessary language abilities, professional legal expertise, and knowledge regarding local culture.
IV. Conclusion

Taiwan has joined the global fight against money laundering and financial crimes by enacting anti-money laundering regulations in line with international standards. Financial institutions are now better equipped to prevent such crimes and have strengthened their internal controls, risk management, compliance, and oversight of overseas branches. All of these efforts will keep banks from becoming a vehicle for illegal commerce, thus maintaining their integrity, protecting lawful businesses, and safeguarding national security.