During a decade in which big banks have suffered immense reputational damage, U.S. Bancorp in Minneapolis was an outlier. The $462 billion-asset company avoided many of the crisis-era scandals that damaged some of its main competitors.
That unsullied image took a hit on Thursday, when U.S. Bank admitted that it looked the other way regarding certain suspicious accounts and concealed from its regulator key information regarding its efforts to combat money laundering.
Charged with two felony violations, U.S. Bank entered into a deferred prosecution agreement with the U.S. Attorney’s Office in the Southern District of New York. Under the deal, prosecutors will seek to dismiss the criminal charges after two years, assuming the bank upholds its end of the bargain. U.S. Bank also agreed to pay a total of $613 million in penalties.
In recent years, many banks have acknowledged that their anti-money-laundering efforts were not up to snuff. What is different in this case is that U.S. Bank tried to throw regulators — the Office of the Comptroller of the Currency in particular — off its trail.
“As we often argue, the cover-up is always worse than the infraction,” Jaret Seiberg, an analyst at Cowen Washington Research Group, wrote in a note to clients. “In this case, we believe the evidence of a deliberate effort to conceal the problem compelled action by the regulators and the Justice Department.”
One piece of good news for the bank is that its Thursday’s announcement did not come as a surprise to U.S. Bank shareholders.
Back in 2015, U.S. Bank and the OCC entered into a consent order regarding the bank’s anti-money-laundering efforts. More recently, the bank disclosed that it expected to pay more than $600 million to resolve the investigation. U.S. Bank’s share price fell by less than 1 percentage point Thursday.
“We’ve known for three years that they’re doing everything that they can to remediate this,” said Scott Siefers, an analyst at Sandler O’Neill.
What was not known publicly before Thursday were the details of the misconduct at U.S. Bank. That bad behavior falls into three categories.
First, U.S. Bank was hammered for its longstanding relationship with Scott Tucker, a onetime payday lending baron who is currently serving a prison sentence of more than 16 years after a jury found him guilty of charges including racketeering, wire fraud and money laundering.
Several years ago, Tucker entered into relationships with certain Native American tribes in an effort to benefit from tribal sovereignty immunity, a legal concept that could be invoked to evade responsibility for violations of state interest rate caps. But those relationships were shams — Tucker remained in control of the payday lending operations — and U.S. Bank employees were aware of various red flags.
“For site visits, bank employees traveled to Tucker’s offices in Overland Park, Kan., even though the purported customers’ addresses — and the only ones listed on the site visit verification forms and questionnaires directed at the tribal companies — were those of the tribes,” U.S. Bank acknowledged in a joint statement of facts released by the prosecutors.
The statement of facts released Thursday indicates that Tucker’s accounts generated roughly $2 million to $3 million in profit for U.S. Bank in 2011. It also states that U.S. Bank did not file any suspicious activity reports related to Tucker-controlled accounts until November 2013, the same month that it was served with a subpoena in connection with Tucker.
U.S. Bank also got hit by prosecutors for failing to monitor Western Union transactions that were conducted inside its branches by individuals who were not customers of the bank. When U.S. Bank employees flagged specific transactions that raised money laundering concerns, they went uninvestigated.
Finally, U.S. Bank admitted to failing to take adequate steps to detect money laundering, and then concealing the inadequacies of its approach from the OCC.
In one example, the bank configured software to generate a fixed number of alerts each month, rather than using a threshold that would have generated alerts any time a certain level of risk was exceeded. The number of alerts to be reviewed each month fell from 1,500 in 2004 to 500 in 2009.
At one point, U.S. Bank’s anti-money-laundering officer told another senior manager at the bank of an effort to “pull the wool over the eyes” of the OCC.
To be sure, the misconduct laid out by federal prosecutors is all at least four years old, and U.S. Bank has subsequently installed new leadership to combat money laundering.
“No one from the previous AML leadership team is with the bank,” U.S. Bank spokesman Dana Ripley said in an email Thursday.
Since 2014, U.S. Bank has invested in a larger compliance staff and improved its controls. In 2016,
And just this week, U.S. Bank was again included in the Ethisphere Institute’s annual list of the world’s most ethical companies, an indication that the bank’s AML woes have yet to damage its reputation.
The OCC consent order remains in place, but analysts who follow the U.S. Bank expect that it could be lifted in the second half of this year.
In a news release, CEO Andy Cecere said that the bank “has accepted responsibility for the past deficiencies in our AML program. Our culture of ethics and integrity demands that we do better. One of U.S. Bank’s key priorities is to maintain an exceptional AML program and we are confident in the strength of the program we have in place today.”
Whether the penalties against U.S. Bank were tough enough will surely be debated in the coming days.
“This inadequate penalty highlights how bankers repeatedly have faced insufficient consequences for their actions,” Robert Weissman, president of the liberal group Public Citizen, said in an email. “It is inconceivable that a street criminal — or the operator of a predatory payday lending business — would receive this kind of treatment.”
