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BNP’s misuse of ‘satellite banks’ may portend future enforcement over ‘nested’ correspondent accounts

Brett Wolf  Regulatory Intelligence

Brett Wolf  Regulatory Intelligence

One of the methods used by BNP Paribas to help the government of Sudan send and receive billions of dollars worth of oil-related payments is of growing to concern to the U.S. Justice Department, and U.S. banks should consider acting to avoid unwitting involvement in such transactions, sources familiar with the matter said.

Records in BNP’s nearly $9 billion settlement with U.S. authorities on Monday indicate that a compliance officer at the bank had warned in 2005 that the method it was using improperly circumvented U.S. sanctions.

BNP is one of a half-dozen European banks to be penalized for “stripping” information about U.S.-sanctioned parties from international wire payment messages so that U.S. dollar-denominated transactions could pass through Manhattan banks without being snared by automated filters.

However, BNP also relied on a more complex tactic to pump Sudan’s prohibited transactions through the U.S. financial system, according to a statement of facts filed in federal court as part of the French banking giant’s guilty plea to conspiring to violate the International Emergency Economic Powers Act and the Trading with the Enemy Act.

BNP routed some illegal payments through unaffiliated third-party financial institutions – known in the court document as “satellite banks” — to hide not only the involvement of the sanctioned entities but also BNP’s role, the court document states.

When transferring funds out of Sudan, Sudanese banks, including those controlled by the government, funneled money into accounts BNP controlled at satellite banks. Those banks in turn would transfer the money to the Sudanese bank’s intended beneficiary through a U.S. bank, without mentioning the involvement of BNP or the Sudanese banks, the court document states. A similar process worked in reverse when the Sudanese banks wanted to receive U.S. dollar payments.

In some cases, BNP employees worked with the satellite banks to ensure that dollar-clearing transactions were delayed by a day or two after the funds arrived in BNP’s correspondent accounts to create a time gap that would “artificially delink” the connected transactions, the document states.

These satellite bank schemes allowed BNP to process “thousands of U.S. dollar transactions, worth billions of dollars in total, for Sudanese sanctioned entities without having the transactions identified and blocked in the United States,” the statement of facts states.

In 2005 a senior compliance officer at the bank warned its Geneva subsidiary that the satellite bank system was being used to evade U.S. sanctions, according to a statement issued by the Justice Department on Monday when announcing the nearly $9 billion settlement with BNP.

“As I understand it, we have a number of Arab Banks (nine identified) on our books that only carry out clearing transactions for Sudanese banks in dollars… This practice effectively means that we are circumventing the U.S. embargo on transactions in USD by Sudan,” the DoJ statement quoted the compliance officer as having said in an email message.

‘Nested’ accounts problematic

Because BNP gained access to the U.S. financial system by operating through satellite banks with U.S. correspondent accounts, BNP had what U.S. officials commonly refer to as “nested” accounts. Because the satellite banks with U.S. correspondent accounts acted as middlemen, the U.S. banks were unaware of BNP’s role, which effectively had anonymous access to the U.S. financial system.

A law enforcement official involved in the BNP case who spoke on condition of anonymity said that due to high-profile enforcement efforts underway for nearly a decade it is unlikely that foreign banks are still “stripping” wire transfer payment messages before sending them to New York to help sanctioned parties access the U.S. financial system.

However, he added that some foreign banks likely are still seeking out and misusing nested accounts to process prohibited transactions due to the relative anonymity such relationships provide.

This could be a problem for U.S. banks that fail to uncover nested accounts within their correspondent banking portfolios and thereby allow prohibited transactions to flow through the U.S. financial system, the source said.

And it can be difficult to detect illicit nested activity, an anti-money laundering professional with years of experience doing such work said. A bank’s best hope of uncovering such misuse of a correspondent account lies in top-notch transaction monitoring systems, said the source, who asked not to be named due to current consulting work.

Even after a suspect wire has been flagged, a skilled analyst must “look deep, take a suspicious wire apart and examine all fields,” often scrubbing as many as ten pages of data for anomalies suggesting clandestine nesting activity, the source said.

The source added that nested transactions can generally be detected only after the fact, and the best a U.S. bank can do is report the activity to the Treasury Department, take it up with the foreign correspondent granting access to a third-party bank, and “hope that it doesn’t happen again.”

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