Violation Incident of Mega Bank New York Branch

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Figure 10: Financial Statistics for Mega International Commercial Bank, 2014 ~ 2016

Source: Mega International Commercial Bank

4.2. Violation Incident of Mega Bank New York Branch

Mega Bank is licensed by the NYDFS to operate a foreign bank branch in New York State. At the time of violation incident of its New York Branch happened, Mega Bank held total assets of approximately US$103 billion, and assets held by its New York Branch were approximately US$9 billion. Mega Bank New York Branch has operated a correspondent banking business for many years (NYDFS 2016).

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2014 2015 2016

Financial Statisitcs for Mega Bank, 2014 ~ 2016 (Unit: In Thousands of NT Dollars)

Net Operating Income Net Income

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Mega Bank and its New York Branch signed a Consent Order with the NYDFS on August 19, 2016. The Consent Order concluded that Mega Bank and its New York Branch failed to maintain an effective and compliant anti-money laundering compliance program and failed to comply with regulations and reporting issues of the BSA/AML. Mega Bank was fined at a penalty of US$180 million (NT$5.7 billion, in equivalent) as a result of having an inadequate and deficient compliance program (Mega Financial Holding Co., Ltd. 2016).The New York State DFS Examination discovered numerous deficiencies in Mega Bank New York Branch's compliance function, which was extremely troubling and can be concluded into the following six aspects (NYDFS 2016):

(1) The New York Branch's Poor Internal Controls

(i) The compliance structure at Mega Bank New York Branch was significantly flawed given that the compliance and operational functions were comingled causing a conflict of interest arose from the dual conflicting responsibilities of certain compliance personnel with little familiarity with U.S. regulatory requirements. Similarly, its Chief Compliance Officer (CCO) had insufficient knowledge of U.S. BSA/AML and the Office of Foreign Assets Control of the United States Department of Treasury (OFAC) requirements.

(ii) New York Branch's transaction monitoring systems and policies were seriously deficient.

Compliance personnel failed to periodically review surveillance monitoring filter criteria and thresholds. Moreover, plenty of documents relied upon in the transaction monitoring process remained un-translated from Chinese, preventing effective examination by the NYDFS. Additionally, its procedures provided little guidance associated with the reporting requirements for continuing suspicious activity, and it neither filed a Suspicious Activity Report (SAR) nor maintained necessary documentation to support decisions made by

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compliance personnel during the investigation of alerts researched by compliance staff.

(iii) New York Branch's BSA/AML policies and procedures lacked consistency and unity of purpose. Also, New York Branch acts as a correspondent bank of other affiliates of Mega Bank, but it failed to conduct adequate reviews of these correspondent banking activities.

(2) Suspicious Activity Involving Mega Bank's Panama Branches

Mega Bank operates two branches in Panama, located in Panama City and the Colon Free Trade Zone (FTZ) respectively. Panama has been recognized as a high-risk jurisdiction for money laundering and is no longer subject to the Financial Action Task Force's monitoring process.

Mega Bank New York Branch failed to treat transactions running between itself and Panama Branches with the highest level of due diligence and scrutiny, and its Head Office has been indifferent to the risks regarding such transactions indicative of possible money laundering and other suspicious activity, which indicated that both Mega Bank and its New York Branch lacked the understanding of the need for a vigorous compliance infrastructure.

(3) Failure to Conduct Adequate Customer Due Diligence

Mega Bank New York Branch neither followed established policies and procedures to undertake enhanced due diligence for high-risk customers nor conduct periodic reviews for medium and low-risk customers to identify any increase in the risk level of such customers. In addition, it failed to undertake adequate customer due diligence for its counterparties (e.g.

foreign financial institutions) in correspondent banking business. Furthermore, a great number of customer files lacked adequate information on beneficial ownership, which seriously compromises its Know-Your-Customer (KYC) processes.

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(4) Inadequate Risk Assessment Policies and Procedures

Mega Bank New York Branch's overall risk assessments were also found seriously flawed with insufficient methodology since its risk assessment for BSA/AML issues lacked a complete review for its customers, products, services, geographic locations served, etc. and not conducted on a yearly basis as recommended. Likewise, its risk assessment for OFAC concerns was found to be flawed for similar reasons.

(5) Lack of Diligent Oversight by the Head Office

Mega Bank New York Branch failed to forward its quarterly compliance meeting minutes to Head Office compliance, however, it substituted a meeting agenda for proper meeting minutes.

Furthermore, its report on quarterly compliance meetings lacked sufficient information on the compliance environment and SARs filed during prior periods, preventing Head Office compliance from properly evaluating the compliance adequacy of its New York Branch.

Similarly, plenty of documents remained untranslated from Chinese to English, which precluded effective examination by the NYDFS.

(6) Troubling and Dismissive Response to the DFS Examination

In Mega Bank’s response to the DFS examination report, it has refuted numerous examination findings. Mega Bank and its New York Branch declared that certain types of transactions do not constitute suspicious activity. Moreover, Mega Bank neither acted proactively to remedy its acute deficiencies as directed in the DFS examination report nor has taken sufficient steps to demonstrate its resolution to improve the quality of its compliance program.

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According to the Consent Order, in addition to the US$180 million penalty paid within ten days of executing the Consent Order, Mega Bank shall engage a compliance consultant designated by the NYDFS to consult and oversee its New York branch for improving its compliance function. Also, Mega Bank shall retain an independent monitor designated by the NYDFS to monitor all the transactions for the past three years (Mega International Commercial Bank;

NYDFS 2016).In the aftermath of the violation incident occurred, Mega Bank was also fined by the FSC in Taiwan at a penalty in the amount of NT$10 million (US$315,000, in equivalent), moreover, the FSC mandated the ouster of six executives of Mega Bank and banned it from establishing new oversea branches (TheNewsLens).

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Figure 11: Deficiencies Directed by the New York State DFS Examination

Sources: Chinatimes; NYDFS