Lessons and Questions From AgBank Sanction

Last week New York state regulators fined Agricultural Bank of China $215 million for running a weak compliance program and undermining its chief compliance officer so much that eventually she quit. Sounds great, right?

Well, before you go stapling that piece of news to your audit committee chairman’s forehead, let’s take a closer look at this case. It raises interesting questions about the limits of financial regulators, just as much as it helps the cause of the empowered chief compliance officer.

First, the facts of the case. AgBank opened its New York branch in 2012 to clear dollar-denominated transactions that other branches were handling for customers overseas. The bank is one of the largest in China ($2.7 trillion assets under management), and New York is its only branch in the United States. Still, one branch in New York is enough to fall under jurisdiction of the state’s Department of Financial Services.

AgBank’s relationship with NY-DFS went sour quickly. State bank examiners panned its transaction monitoring program in 2013, and warned the bank in 2014 not to expand its dollar clearing business until its compliance effort improved. No such improvement came to pass, but the bank surged ahead with its dollar clearing business anyway. It also amassed a backlog of more than 700 questionable transactions that hadn’t been investigated.

Meanwhile, the bank’s U.S. compliance officer Natasha Taft joined the bank in 2014 and noticed questionable transactions almost immediately: money sent or received by overseas parties flagged by the Treasury Department as probable drug traffickers.

Taft first brought her concerns to the bank’s general manager. He wasn’t thrilled but allowed her to proceed. She asked the Federal Reserve for guidance. Regulators at the Fed then replied with a warning to the bank’s general manager. He then barred Taft from any further communication with regulators, and all requests for information from other branches of AgBank had to be pre-approved by the general manager.

By spring of 2015, Taft took leave of absence from the bank. She left by June, and the rest of the compliance team quit in August. By then the NY-DFS investigation was underway, and here we are. (Taft is now suing AgBank for wrongful termination and sexual harassment.)

The Good Lessons

U.S. compliance officers of foreign banks have a tough job. Plenty of foreign banks want a branch in the United States so they can facilitate dollar-denominated transactions, but they have no greater aspirations to the U.S. market. That means the “compliance function” might only be one compliance officer and an administrative assistant.

This sanction demonstrates the need for a strong compliance function even under those forlorn circumstances. A $215 million fine is irritating even for large banks, and especially ones where U.S.-based business may not be a large part of their overall revenue. This case is one you can take to your boss and say, “I told you this stuff matters even if we’re the only branch the bank has in the United States!”

The case also suggests that the New York Department of Financial Services is going to be a permanent player on the financial regulatory scene. New York created the DFS only five years ago, and we’ve now seen several major enforcement cases spanning the tenure of three DFS directors. Compliance officers may not like it, and federal banking regulators aren’t thrilled with a state regulator dabbling on their turf either. But now we have certainty that DFS will not be ignored.

More than anything else, however, this case validates the importance of compliance officers overall. As the DFS complaint said, AgBank demonstrated “a fundamental lack of recognition of the need for a vigorous compliance infrastructure.” And that poor attitude, including the ostracization of the compliance officer, cost the bank a lot of money. That’s a good thing.

The Questions to Answer

How AgBank improves its compliance program from here is the interesting part. The DFS settlement includes numerous reforms, such as:

• An independent monitor, chosen solely by DFS, who will review AgBank’s compliance program;
• A completely overhauled compliance program, including a new chief compliance officer for the U.S. branch with “full autonomy, independence, and responsibility for implementing and maintaining an effective compliance program that is … supported by adequate staffing levels and resources;”
• Annual risk-based internal audit plans, approved by the board of directors, that ensure timely correction of problems uncovered by regulatory examinations;
• A written plan for the board of directors to implement adequate internal control for the branch’s compliance function, and to ensure that the new chief compliance officer has adequate support to do the job effectively.

My question is how all this will work in practice. The DFS settlement only says that AgBank has 60 days to hire a monitor, who will then have 60 days to file a compliance report back to the state. Once DFS reviews and accepts that report, AgBank will have 60 more days to submit written plans for how it will achieve all of the above.

For example, to whom will this compliance officer report? From what I can find on LinkedIn, AgBank seems to have only one “chief” compliance officer (as we would understand the role, anyway) to oversee its London operations, and none at its headquarters in Beijing. Presumably DFS wants this compliance officer to be as independent as possible, which theoretically means reporting to the CEO. Yet that seems unlikely for the compliance officer of one branch, 6,800 miles away from the bosses in Beijing.

Second, will AgBank really embrace these reforms? For example, is the board of directors really going to empower a strong internal audit function that will help the board to hold itself accountable to compliance? That would be great to see, but it will only happen if the board makes a commitment to get serious about compliance. And that will only happen if other regulators—above all, Chinese regulators—hold the bank to similar high standards.

Or might the bank decide that U.S. compliance isn’t worth the cost and pull out of New York? More than a few foreign banks would love to exit the U.S. regulatory regime (just look at the billions HSBC has spent tangling with regulators here).

We shall see. This is a bank compliance program worth watching in the future.