IBK, $100 Billion Fine for Violating US Anti-Money Laundering Law (Comprehensive)

Industrial Bank of Korea Accused of Violating Iran Sanctions... New York Branch Faces Fine Equivalent to Six Times Annual Net Profit
Following NongHyup, Domestic Banks Including IBK Expected to Significantly Strengthen Anti-Money Laundering Measures Amid Consecutive Sanctions

[Asia Economy Reporter Haeyoung Kwon] IBK Industrial Bank of Korea has been hit with a 'fine bomb' worth approximately 100 billion KRW by the U.S. prosecutors and financial authorities for violating Iran sanctions at its New York branch. This amount is equivalent to six years' worth of net profits (16 billion KRW annually) generated by IBK's New York branch, causing significant reputational risk as well as financial losses. Following NH Nonghyup Bank, the U.S. authorities have imposed consecutive sanctions on IBK for inadequate anti-money laundering (AML) measures, and it is expected that related operations of domestic banks operating locally will be significantly strengthened.

According to the financial sector on the 21st, IBK agreed to pay a fine of 86 million USD (approximately 104.9 billion KRW) to the U.S. prosecutors and the New York State Department of Financial Services (NYDFS) regarding allegations of Iran sanctions violations at its New York branch. This comes six years after the U.S. prosecutors began their investigation in May 2014.

The issue originated from Company A, which IBK was transacting with. Company A engaged in intermediary trade between Iran and third countries and, through false transactions, used IBK's Korean won settlement account from February to July 2011 to receive export payments and then remit U.S. dollars overseas. IBK failed to timely detect Company A's false transactions and was accused of violating U.S. anti-money laundering laws during the remittance intermediary process.

It is reported that not only the U.S. financial authorities but also local prosecutors got involved because the allegations go beyond simple AML deficiencies to include violations of Iran sanctions. The U.S. has been enforcing stringent Iran sanctions, including excluding Iran from the U.S. dollar payment system. While the NYDFS concluded its investigation by imposing the fine, the U.S. prosecutors issued a two-year deferred prosecution agreement, which is also related to this matter.

An IBK official stated, "We interpret the U.S. prosecutors' deferred prosecution agreement as a directive to strengthen AML operations over the next two years," adding, "We will pay the penalty within the scope of the already accrued provisions and will continuously consult with domestic and foreign regulatory authorities to improve and maintain compliance systems, including AML, more effectively while ensuring future compliance with relevant laws."

IBK acknowledged that its past AML program at the New York branch did not meet U.S. legal requirements and took measures such as improving the AML system and increasing personnel, resulting in an effective AML program currently in place. The NYDFS also evaluated in the consent order signed with IBK that the AML program at the New York branch was appropriate as of 2019.

Previously, NH Nonghyup Bank's New York branch was fined approximately 11 million USD (about 11.9 billion KRW) by the NYDFS in December 2017 for inadequate AML operations. This amount far exceeds Nonghyup Bank New York branch's annual net profit (around 10 billion KRW).

The U.S. financial authorities are increasingly demanding stringent AML operations from foreign banks operating locally, including domestic banks. Being sanctioned by local authorities not only lowers reputational risk but also risks being placed on the U.S. authorities' 'blacklist,' subjecting banks to focused monitoring and potential restrictions on local business operations. The financial losses are also substantial, prompting banks to continuously strengthen AML operations at both domestic headquarters and overseas subsidiaries and branches.

IBK and Nonghyup Bank's presidents personally visited their New York branches at the end of 2018 to oversee internal control operations, including AML, and held meetings with financial authorities. This was to reinforce related systems by having the CEOs directly manage compliance operations. Measures such as improving the local AML system and increasing personnel were also implemented. KB Kookmin Bank and Shinhan Bank have also increased related personnel and started improving process procedures in coordination with their headquarters to strengthen AML capabilities. Woori Bank expanded its AML team within the Compliance Support Department to an AML Department and established an 'Overseas AML Team.'

The Financial Supervisory Service (FSS) also established an 'AML Office' at the end of 2017 to encourage financial companies to strengthen compliance operations. Recently, the Financial Action Task Force (FATF) has ordered enhanced control over transactions involving so-called 'ghost accounts' and strengthened measures to prevent tax evasion by professionals, indicating that domestic banks' AML efforts are expected to be further reinforced.