M&T mans the front line to fight money laundering

Regardless of how M&T Bank Corp.’s planned acquisition of Hudson City Bancorp plays out, one thing is clear: M&T will end up with a much stronger system for fighting money laundering.

Buffalo-based M&T and New Jersey-based Hudson City Bancorp still want to complete their $3.7 billion merger – a marriage more than two years in the making – but federal regulators were unhappy with shortcomings they found in M&T’s anti-money laundering and Bank Secrecy Act safeguards.

To try to satisfy those concerns, M&T has ramped up hiring and spent tens of millions of dollars to create what observers expect will be a sophisticated system.

“Instead of going from a Honda Accord or a Camry to a BMW, they’re going to a Maserati,” said Brian Klock, an analyst with Keefe, Bruyette & Woods.

M&T chief financial officer Rene F. Jones in a recent conference call said the bank has made “substantial progress” in beefing up its compliance programs, but he did not predict when the Hudson City deal might wrap up. The two banks have set Dec. 31 as the date after which either party could walk away without a financial penalty. But the banks twice before have extended their deadline.

M&T’s leaders have made it plain their priority is getting the bank’s anti-money laundering systems up to regulators’ standards. And M&T is hardly the only bank – large or small – under pressure on this issue. “There’s more and more of these that are popping up,” Klock said.

But M&T has drawn attention partly because of how long its expensive, high-profile planned deal with Hudson City has dragged on.

M&T’s effort to improve its anti-money laundering and Bank Secrecy Act program is a massive project, a combination of spending on technology, employees, and training. The result will be a system designed to be better equipped to catch irregularities that could indicate illegal activity.

Jones, in comments in fall 2013, said: “You actually have to think about it in the way of building the state-of-the-art, best-in-the-industry practices, in part because of all the trillions of dollars of illicit activity that ends up going through the banking system, those folks are ramping up their efforts to try to figure out new ways to get around you.”

Donald MacLeod, M&T’s director of investor relations, put it succinctly at a recent investors’ conference: “We want to have a best-in-class program so that it does not draw regulatory scrutiny for any of our activities going forward,” he said.

The Federal Reserve Bank of New York doesn’t comment on the type of process M&T is going through. But in general, regulators these days want financial institutions to act as the first defense against drug cartels, terrorist groups or other criminal organizations attempting to “launder” illicit funds to make them appear legitimate. And while banks can build advanced computer networks to crunch data and spit out reports, they still need trained employees who can analyze results, identify questionable transactions, and file suspicious activity reports with authorities.

“Banks have to be a bigger part of the police part of the cash transactions,” said Bert Ely, a Virginia-based consultant for financial firms.

The Financial Crimes Enforcement Network, or FinCEN, which is a bureau of the U.S. Department of Treasury, gathers data from financial institutions for its investigations. FinCEN says banks’ attention to detail in transactions can uncover wrongdoing that ultimately stop illegal activity and help produce convictions.

FinCEN cites a case of a doctor who was using a weight-loss clinic as a cover to provide prescriptions for cash.

An unidentified financial institution spotted payments structured to evade federal reporting requirements and notified FinCEN. Another lender filed reports on the same doctor, related to more than $1 million in suspicious activity. That lender also reported unusual behavior, like the customer depositing thousands of dollars in cash at a branch when he opened an account, and refusing to answer an employee’s routine questions for a currency transaction report.

FinCEN said in September alone, it received more than 73,000 suspicious activity reports from lending institutions – an average of more than 2,400 per day – and about 669,000 of those reports through the first nine months of the year. Some observers wonder how FinCEN can possibly use all of the data pouring in. But Ely said this is the world the banks must live in: “You’ve got to play by the rules.”

The price for banks to play by the rules is high.

“Others have said that, despite the massive amounts of money that the industry has spent on (Bank Secrecy Act/anti-money laundering), it’s not clear that banks have really anything to do with finding any terrorists anywhere or stopping the flow of funds to terrorist groups,” said Bob Ramsey, an analyst with FBR Capital Markets. “It’s not entirely clear that there’s an immediate payoff for all the investment that’s there. I guess the flip side of the coin is, that the stakes are high and you don’t really know what would have happened if you didn’t make those investments.”

Kristin Kiefer, acting deputy controller for the Office of the Comptroller of the Currency’s Northeastern district, was recently asked about banks’ ability to keep up with anti-money laundering and Bank Secrecy Act requirements.

“It’s a challenge,” Kiefer said. “The laws are fairly specific. The laws are fairly detailed, but I think the challenge is for the institutions to try to meet the requirements of the regulations in a cost-effecitve way.”

M&T spent $60 million on its anti-money laundering and Bank Secrecy Act program last year, and expects to pour about $150 million into the effort this year. The bank recently had 613 employees devoting most of their time to compliance work, a number expected to decline over time.

In comments to shareholders earlier this year, chairman and chief executive officer Robert G. Wilmers explained the bank was creating a system that would “identify those clients whose histories show them to be at highest risk for criminal behavior through review of up to 105 pieces of information for each account, ranging from financial activity to negative news searches.”

That will allow M&T to “better understand the risk, to determine whether they should continue to be permitted to do business with the bank, and also whether heightened scrutiny is warranted,” he said.

Wilmers said the bank would ultimately have to “risk score” each of its 3.7 million customers, representing 5.4 million accounts, and use its new processes “to more effectively monitor new customers, including those we inherit through acquisitions.”

Ramsey said M&T will end up with an anti-money laundering system with much stronger defenses. “They will be better able than ever to sort of risk-rate the customers that they do business with and assess the risk potential of various transactions and the customers.”

The great unknown is what all of M&T’s investment will mean for the approval of the stalled Hudson City deal.

“I think that (M&T) is basically doing everything within their control to move the ball forward, and on some level, you’ve got to sort of let these things take their natural course and regulators move at their own pace,” Ramsey said.