Industrial Bank Of Korea Agrees To Pay $86 Million To Settle Money Laundering Probes

Industrial Bank of Korea (IBK) reached settlements with U.S. prosecutors and New York State banking regulators, agreeing on Monday to pay USD 86 million to resolve investigations into its anti-money-laundering (AML) compliance program.

Deficiencies in AML compliance, including a lack of staffing and resources at the New York branch, led the bank to process more than USD 1 billion in transactions that violated U.S. sanctions, prosecutors said. The New York branch handled USD 10 million in U.S.-dollar payments from South Korean entities to Iranian ones, according to federal prosecutors. The vast majority of the transactions had cleared through New York financial institutions, including IBK’s local branch and at least one other state-regulated bank, New York regulators said.

“Banks conducting business in the U.S. have a responsibility to ensure that they establish safeguards against the exploitation of the banking system by sanctioned entities that foster, promote or engage in terrorism,” said Manhattan U.S. Attorney Geoffrey S. Berman.

IBK, which is publicly traded but primarily owned by the South Korean government, agreed to accept responsibility for its conduct and entered into a two-year deferred prosecution agreement, prosecutors said. The New York branch, IBK’s only U.S. presence, acted as a correspondent bank primarily for IBK and its affiliates, providing wire transfer services for companies conducting foreign trade. As of this writing, the bank didn’t have a response to the settlements on its website.

Under the agreement, IBK forfeited USD 51 million to the U.S. federal government, half of which will be transferred to the U.S. Victims of State Sponsored Terrorism Fund, prosecutors said. Iran has been on the U.S. list of state sponsors of terrorism since 1984. The bank also will pay USD 35 million in fines to the New York Department of Financial Services (DFS) as part of a separate settlement for violating state law.

IBK has beefed up its compliance function, according to the federal settlement: It created two bodies to provide AML and sanctions compliance oversight. The New York branch hired a new compliance officer, who reports directly to the head office’s chief compliance officer, as well as a deputy and nine additional staffers. IBK also implemented a new compliance testing program, developed methodologies for reporting, tracking and assessing compliance issues, and reworked its transaction monitoring processes and systems, the federal settlement said.

The bank’s problems stemmed in part from its failure to establish, implement and maintain an adequate AML program at the New York branch from 2011 to 2014, federal prosecutors said.

The New York branch had only one compliance officer on staff and it used a manual process for reviewing transactions, prosecutors said. Despite the compliance officer’s requests for additional resources and automated transactions screening, IBK didn’t provide solutions, according to prosecutors. Leadership at the New York branch proposed tasking bank interns with the effort, and it ultimately assigned one of its IT employees to help on a part-time basis; it took no meaningful action on the request for the screening tools, according to prosecutors.

Due to the lack of both an automated screening program and sufficient staffing resources, the compliance officer fell months behind on his transaction reviews, prosecutors said.

As a result, the branch didn’t detect or flag suspicious activity until months after the transactions were completed, including a series of transfers worth more than USD 1 billion over a six-month period in 2011 involving Kenneth Zong and Iranian co-conspirators, prosecutors said.

Zong, who was charged in the U.S. in a 47-count indictment in 2016, was convicted in South Korea and has not been permitted to leave the country, according to the New York State Attorney General. Zong’s son, Mitchell, is serving a 30-month sentence in the U.S. for his role in the scheme; he’s scheduled to be released in March 2021, according to records from the Bureau of Prisons.

Three Iranian co-conspirators, identified in an affidavit supporting forfeiture filings tied to the Zong indictment as Pourya Nayebi, Houshang Hosseinpour and Houshang Farsoudeh, were all delisted as part of the nuclear deal. They set up multiple front companies in Iran, the United Arab Emirates, Turkey, Georgia, Lichtenstein, New Zealand and elsewhere to conduct business on behalf of the Iranian government, according to the affidavit. The three of them had been added to the Foreign Sanctions Evaders (FSE) list in 2014 for facilitating transactions on behalf of sanctioned parties, including Bank Melli Iran, Bank Saderat and Bank Tejarat. Bank Melli Iran and Bank Tejarat, which were also removed under the nuclear agreement, were relisted in November 2018 after the U.S. exited the deal.

The purported scheme was the subject of an extensive report in July 2017 by Politico Magazine.

Zong and others, including the Iranian nationals, abused a Korean won-denominated account at IBK held by the Central Bank of Iran (CBI) that was subject to several limitations under U.S. sanctions law, according to a statement of facts filed as part of the IBK settlement. The CBI account could only be used for transactions involving certain types of goods, including Iranian crude oil exports, the document said.

Zong and the co-conspirators set up shell companies in Korea, Iran and elsewhere, which engaged in sham trade transactions and submitted fictitious documents to Korean banks, including IBK, the document said. The purpose: to facilitate the transfer of Iranian funds from the CBI won account to Koran entities’ accounts, the conversion of the funds into U.S. dollars and the subsequent transfer of the U.S. dollars from the entities to other accounts in the Zong scheme, according to the document. All told, Zong initiated more than 88 transactions via the IBK accounts, causing more than USD 1 billion in Iranian funds to be transferred, it said.

The first of the transactions, processed by IBK’s New York branch on Feb. 10, 2011, wasn’t detected until July 20 of that year, when the compliance officer was conducting his manual review, according to the court document. The compliance officer flagged 20 transactions worth about USD 10 million that had been originated by Zong through the CBI account and had passed through the New York branch, the document said.

The officer then requested supporting documents and reached out to the head office employee responsible for the division that oversaw the CBI account, saying he had “no doubt” the bank would be hit by a U.S. enforcement action and adding that the problem lay with the bank in Korea. Unbeknownst to the compliance officer, IBK had already routed more than USD 990 million in transactions tied to Zong through other accounts.

In late August 2011, IBK’s head office suspended all intermediary trade, the type of transactions Zong was purportedly conducting, through the CBI account, and it filed a suspicious activity report regarding the funds that had been processed through the New York branch. It also disclosed the matter to the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), but the bank only acknowledged the funds that had transferred through New York -- IBK never self-reported the remaining USD 990 million, according to prosecutors. In January 2013, after Zong was indicted in South Korea, the bank provided to OFAC the materials that had been released by Seoul prosecutors.

Shortly after the compliance officer had flagged the Zong-related transactions, he again alerted IBK’s management to the state of the compliance program. Despite the memo, an automated transaction monitoring system didn’t become operational until January 2013, and it wasn’t validated by the New York branch’s external auditor until 2014. And the branch didn’t hire a second full-time compliance employee until October 2014.

The bank was in 2014 alerted to, and cooperated with, investigations by federal and New York State prosecutors, but IBK failed to preserve certain emails and documents, prosecutors said. IBK and its New York branch entered into an agreement in 2016 with two of its U.S. regulators, DFS and the Federal Reserve Bank of New York. Since that time, the bank has made “significant efforts” to remediate its AML compliance program, prosecutors said.