During the 2022 Session, to deflect calls for action to prevent corrupt financial dealings in South Dakota’s trust industry, Republican legislators expressed supreme confidence in the reliability of South Dakota’s trust companies to vet their customers:
Senate Majority Leader Gary Cammack (R-Union Center) told reporters in a news conference Thursday some lawmakers heard a presentation from people in South Dakota’s trust industry.
“I have all the confidence in the world that that sorta thing isn’t happening in South Dakota,” Cammack said. “The amount of vetting that they do to even accept a customer is absolutely amazing. They chase every rabbit down every trail.”
…“I don’t buy the report that was presented last fall,” House Majority Leader Kent Peterson (R-Salem) said. “The work that they do is done the right way” [Eric Mayer, “Republican Leadership Says No Trust Industry Bills Expected,” KELO-TV, 2022.02.10].
This week, the Financial Crimes Enforcement Network, a bureau of the United States Treasury, announced it is fining South Dakota-chartered Kingdom Trust Company $1.5 million for failing to vet its customers:
The Financial Crimes Enforcement Network has assessed a $1.5 million civil money penalty on South Dakota-chartered The Kingdom Trust Company (Kingdom Trust) for willful violations of the Bank Secrecy Act (BSA) and its implementing regulations. This is FinCEN’s first enforcement action against a trust company.
“Kingdom Trust had virtually no process to identify and report suspicious transactions, resulting in it processing over $4 billion in international wires with essentially no controls,” said FinCEN’s Acting Director Himamauli Das. “This enforcement action is an important statement that we will not tolerate trust companies with weak compliance programs that fail to identify and report suspicious activities, particularly with respect to high-risk customers whose businesses pose an elevated risk of money laundering.”
Kingdom Trust admits that it willfully failed to accurately and timely report hundreds of transactions to FinCEN involving suspicious activity by its customers, including transactions with connections to a trade-based money laundering scheme and multiple securities fraud schemes that were the subject of both criminal and civil actions. These failures stemmed from Kingdom Trust’s severely underdeveloped process for identifying and reporting suspicious activity [Financial Crimes Enforcement Network, press release, 2023.04.26].
Kingdom Trust’s “severely underdeveloped” compliance process included failing to hire enough experienced financial experts to watch for money laundering and securities fraud:
Kingdom Trust’s process for identifying and reporting potentially suspicious activity during the Relevant Time Period was severely underdeveloped and ad hoc, resulting in Kingdom Trust’s willful failure to timely and accurately file SARs. Kingdom Trust personnel with AML [anti-money laundering] responsibilities have acknowledged not fully understanding federal SAR [suspicious activity report] filing requirements and that they may have missed important information about some of their riskiest clients as the result of maintaining other, non-AML responsibilities.
These deficiencies were exacerbated by Kingdom Trust’s failure, during the Relevant Time Period, to recruit sufficient personnel with experience in AML compliance, including SAR filing obligations, even after Kingdom Trust expanded into a new line of business offering services to customers that had elevated risks of money laundering. Kingdom Trust relied on a manual review of daily transactions by a single employee to identify potentially suspicious transactions and activity at various points throughout the Relevant Time Period….
The process used by Kingdom Trust to review transactions was substantially inadequate for the purpose of identifying suspicious activity. First, the daily reports reviewed by the Compliance Analyst did not provide any contextual information about the customer (e.g., source of funds) or the counterparty beyond originator or beneficiary name (e.g., their address, the Bank Identifier Code of the originating/beneficiary bank). Second, even if the reports had contained sufficient information, the manual nature of this process also made it difficult to detect suspicious activity given the transactional volume (generally in the thousands each day) when compared to the level of staffing. Finally, although Kingdom Trust’s AML training presentations included red flags, few of these red flags could have been identified based on a review of the daily transaction reports alone. For example, the red flags included: customer requests for anonymity, customer attempts to open an account without identification, and an account opened with a nominal balance that subsequently increased rapidly and significantly. It would not be reasonably possible for a Kingdom Trust employee to identify those red flags given the quantity of information contained in the daily transaction reports. The result is that Kingdom Trust willfully failed to timely and accurately report hundreds of suspicious transactions that flowed through Kingdom Trust into the U.S. financial system during the Relevant Time Period [FinCEN, Consent Order in the Matter of The Kingdom Trust Company, U.S. Treasury, 2023.04.26].
Among other harms, FinCEN’s failure to put eyes on shady transactions appears to have helped foreign customers move $4 billion unsupervised through the U.S. financial system including $63 million in drug money:
FinCEN said Kingdom Trust started working with international clients, “despite Kingdom Trust’s lack of experience in dealing with foreign securities firms” and its “lack of understanding why their clients were unable to establish custodial relationships with US-based securities firms.” Those clients included several in Latin America that FinCEN said had “elevated risks of money laundering.”
“Kingdom Trust’s decision to proceed with this new line of business allowed the transmission of at least $4 billion in payments for foreign entities through the United States with minimal oversight,” FinCEN said.
Of the suspicious transactions identified by FinCEN, over 400 were transactions processed in 2016 and 2017 for a customer accused of laundering bulk cash deliveries and wire transfers from illegal drug sales. A New York indictment alleges the cash was documented as payments for cellular phones and obscured the transfer of illicit proceeds totaling roughly $63 million.
FinCEN also said Kingdom Trust failed to identify accounts that perpetuated securities fraud with a value of around $9 million.
“Kingdom Trust’s failure in detecting and reporting suspicious activity for these transactions may have caused substantial harm to the U.S. financial system,” FinCEN added [Lee Strubinger, “Feds Lob $1.5 Million Penalty Against SD-Based Trust Company,” SDPB Radio, 2023.04.27].
Just reading the papers would have alerted Kingdom Trust to the shadiness of many of its customers:
…not only did much of the activity that Kingdom Trust failed to report bear hallmarks of suspicious transactions, several of Kingdom Trust’s customers and counterparties were the subject of media reports alleging their involvement in specified unlawful activities [FinCEN, Consent Order, 2023.04.26, p. 17].
In addition to paying the $1.5-million fine, Kingdom Trust must within 60 days hire a qualified independent consultant to review transactions from February 15, 2016, through March 15, 2021, involving the problematic customers and accounts revealed in this investigation. Kingdom Trust must file suspicious activity reports for all transactions flagged by the independent consultant. Kingdom Trust must also hire an independent consultant to review its anti-money laundering programs and make all reforms that consultant recommends. Kingdom Trust must admit that it willfully broke the Bank Secrecy Act and may not claim the civil penalty as basis for a tax deduction.
Perhaps Republicans will revisit their absolute confidence in South Dakota trust companies’ due diligence next Session.