When Citigroup Inc. bought Mexico’s second-largest bank in 2001, its executives spoke excitedly about capitalizing on the billions of dollars that flow across America’s southern border.
But 14 years later, Citigroup shut down its Mexican operation’s American subsidiary, Banamex USA in Century City – after paying $140 million in fines over the bank’s failure to comply with anti-money-laundering rules. The high-cost flameout, along with less severe setbacks for other institutions, has some industry insiders wondering if any bank can move money across borders without breaking today’s rules.
Since sweeping new regulations were passed in the wake of the financial crisis, a handful of American banks have ended relatively inexpensive services that allowed customers to send money to Mexico.
Bank of America’s SafeSend, a low-cost way to transfer funds to individuals south of the border, was quietly discontinued in February 2013, though a bank spokeswoman said at the time that the decision to kill the program was based on weak demand.
However, it’s not just Americans wishing to send money to Mexico that are affected. Carson’s Merchants Bank of California announced in February that it would stop wiring money from Somali immigrants to their families back home. The bank – which had handled about two-thirds of all U.S. remittances to Somalia after Wells Fargo, U.S. Bank and other institutions pulled out – attributed that decision to “ever-changing regulatory requirements and expenses,” according to a letter obtained by the Business Journal last year.
In that case, nonprofit groups in the region chalked up regulators’ concerns to fears that money from the United States was finding its way to terrorist group al-Shabab.
Ran Grushkowsky, co-founder of Santa Monica online money remittance portal WireCash, which began life as a joint venture with Cleveland’s KeyBank, said it’s ordinary remitters, not drug cartels, who are feeling the pain of the tighter regulations.
“It’s a problem plaguing this whole industry, really without good reasoning,” Grushkowsky said. “They’re not really preventing money-laundering. All they’re doing is hurting the consumer and eliminating competition.”
Still, the impact is felt most sharply at banks sending money to countries plagued by terrorism, drug trafficking or other ills. L.A.’s Chinese-American banks, for instance, have noticed an increase in the general compliance burden, but didn’t single out any extra scrutiny on their international transfers.
However, the Federal Reserve did order China’s China Construction Bank last month to improve its anti-money-laundering practices at its New York branch, and regulators ordered Koreatown’s Hanmi Financial Corp. to improve its anti-money-laundering program in 2005, though the bank was able to satisfy regulators the following year, and it appears the government has turned its attention to more troublesome spots as of late.
As part of its $12.5 billion purchase of Grupo Financio Banamex-Accival in 2001, Citigroup also picked up California Commerce Bank, which it would rename Banamex USA. The New York finance giant hit the ground running, looking to use its new capabilities to cash in on the robust flow of money between the United States and Mexico.
By fall 2003, Citigroup had introduced several products leveraging Banamex USA’s advantages, including one allowing U.S. customers to share credit lines with relatives in Mexico. It was a useful tool for cross-border families, but it’s easy to see how such a product – with a single account shared by multiple parties on each side of the border – could be used for nefarious purposes.
In 2012, the Federal Deposit Insurance Corp. and the California Department of Business Oversight ordered Banamex USA to improve its methods of identifying and reporting potentially suspicious customers. But the bank apparently was unable to do so, and Citigroup announced on July 22 that it would shut the institution down and pay $140 million in fines to the FDIC and DBO.
A Citigroup spokeswoman declined to comment to the Business Journal.
The severity of the punishment – in addition to the regulatory burden that’s helped drive other banks away from cross-border business – seems likely to continue to turn banks off of that line of work. That’s unwelcome news for those who rely on international remittances.
Wade Francis, a former bank examiner and the president of bank consulting firm Unicon Financial Services Inc. in Long Beach, thinks regulators, despite good intentions, have created an untenable environment for banks that want to legitimately move money across borders.
Tom Dresslar, special assistant to the commissioner at the DBO – which pocketed $40 million of that fine – said the severe penalty wasn’t designed to scare banks away from sending money to Mexico.
“The intent is not to discourage banks from servicing border areas,” Dresslar said. “These laws are on the books for good reason: to make sure that banks don’t facilitate criminal activity either knowingly or because of a lack of due diligence.”
Despite Banamex’s failure, Dresslar believes it’s possible for banks to efficiently move money across borders while following all proper protocols.”
“You can service border areas and still do what it takes,” he said. “Nobody’s saying it’s easy, but it’s definitely doable.”
But Francis isn’t so sure. He also worries that California – which has already been shedding banks – will drive more institutions away if it continues to try to extract similarly sized pounds of flesh.
“These kinds of fines are going to have a chilling effect,” Francis said. “These banks don’t necessarily have to be in California to do business. And when they leave, there’s less competition, which means higher costs for borrowers.”
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