Citigroup (C) Settles Money Laundering Probe, To Pay $97M

On Monday, banking giant, Citigroup Inc. (NYSE:C) , and the U.S. Department of Justice (DOJ) entered into a settlement agreement related to the criminal investigation at the bank's Banamex USA (BUSA) unit. The unit was probed for violating anti-money laundering (AML) rules and the Bank Secrecy Act (BSA).

The settlement agreement is non-prosecution and includes an amount of $97 million to be paid by Citigroup. The bank will meet the expenses from the existing reserves.

Per the DOJ, the Citigroup subsidiary had “wilfully” failed in maintaining effective controls and violated rules over a five-year period to 2012.

Further, regulators claimed that Banamex USA conducted less than 10 investigations though “potentially suspicious” transactions exceeded 18,000 alerts generated by the unit’s monitoring system between 2010 and 2012.

Banamex USA “understood the need to enhance its anti-money laundering efforts, yet failed to make necessary improvements to its transaction monitoring controls or to add staffing resources,” the justice department said.

Previously, putting an end to the regulatory probe over its three-branch Banamex USA subsidiary, Citigroup had decided to shut down the unit in Jul 2015. Notably, the closure followed the agreement by the bank to pay $140 million as settlement to regulators over loopholes in its AML program. The penalty amount imposed by the Federal Deposit Insurance Corp. included $40 million to be paid to California's Department of Business Oversight as civil penalties.

Following the settlement, Citigroup is expected to fully liquidate Banamex USA by the end of Jun 2017. The unit held few branches in the U.S. and was associated with Citigroup's Mexico-based Banamex subsidiary, now known as Citibanamex.

Background

The New York-based bank had announced in 2014 annual filing that its compliance with Bank Secrecy Act and anti-money laundering laws are being probed by additional authorities, and its subsidiary – Banamex USA – was not being spared.

Citigroup mentioned that several regulators, including Financial Crimes Enforcement Network – a bureau of the U.S. Department of Treasury – and the California Department of Business Oversight, have asked the bank for information related to the BSA and AML issues.

Notably, in 2014, the company revealed that Banamex USA had received grand jury subpoenas from the U.S. Attorney’s Office for the District of Massachusetts and a subpoena from the Federal Deposit Insurance Corporation (“FDIC”) regarding the company’s policies, procedures and activities with respect to compliance with the BSA and AML requirements.

The company stated that it was extending full co-operation to the investigators.

Based in California, Banamex USA is engaged in providing banking services to individuals and small businesses in the U.S. and Mexico. Citigroup took over Banamex USA with the acquisition of the Mexican bank – Banamex – in 2001. However, the USA unit has been entangled in regulatory probes for the past few years.

Regulators had earlier identified that Citigroup had inadequacies over its AML compliance at Banamex USA. In 2012, FDIC and the California regulators filed a consent order asking Banamex USA to improve the processes of high-risk customer identification. In 2013, Citigroup entered into a consent order with the Federal Reserve to take steps to improve company-wide anti-money laundering compliance efforts.

Similar Issues with Other Banks

Earlier in 2017, Deutsche Bank AG (NYSE:DB) also paid a $425 million fine as it was accused for involvement in a plan that illegally laundered $10 billion out of Russia.

Notably, in 2012, HSBC Holdings plc (NYSE:C) was blamed for substantial lapses in its anti-money laundering compliance and was fined $1.9 billion for misdeeds.

Conclusion

Banks across the globe have been facing increasing scrutiny for their business practices. Many of the firms have paid billions of dollars as fines and compensation to settle lawsuits and probes. Many investors have lost their hard-earned money as a result of such business malpractices. Such settlements help restore their confidence in law-enforcement agencies. Moreover, it reduces the existing litigation burden of banks.

Currently, Citigroup carries a Zacks Rank #3 (Hold). Shares of Citigroup have gained 7.7% in the last six months, outperforming 5.5% growth recorded by the Zacks categorized Regional Banks-Major industry.

A better-ranked bank – Comerica Incorporated (NYSE:CMA) – has been witnessing upward estimate revisions for the last 60 days. Additionally, the stock jumped over 10% over the past six months. It currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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