On April 26, 2023, the U.S. Financial Crimes Enforcement Network (FinCEN) announced it assessed a $1.5 million civil money penalty on South Dakota-chartered The Kingdom Trust Company (Kingdom Trust) for willful violations of the U.S. Bank Secrecy Act (BSA). FinCEN said this is its first enforcement action against a trust company. Details of the bases for the fine are in a publicly available 32-page Consent Order.
What Is FinCEN?
The U.S. Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Department of the Treasury. FinCEN’s goal is to safeguard the financial system from illicit use and combat money laundering and promote national security.
Who Is Kingdom Trust?
Kingdom Trust is a South Dakota-chartered trust company with an affiliated service company in Kentucky. It is an independent qualified custodian under the U.S. Investment Advisers Act of 1940, as amended, and 26 USC 408. The company specializes “in unique and innovative custody solutions for individual investors, investment sponsors, family offices, advisory firms, broker-dealers and various other investment platforms.” According to Kingdom Trust, it serves over 100,000 clients and has over $12 billion in assets under custody.
Although Kingdom Trust is a state-chartered company, it is subject to the laws of South Dakota as well as certain U.S. federal laws including the Bank Secrecy Act (BSA).
What Is A Consent Order?
In the U.S. legal system, it is possible for a government agency to enter into a voluntary agreement with a party to resolve allegations the agency has made against the party. The agreement is then submitted to the appropriate court for a judge to review and, if she approves, issue a consent order (or consent decree). The order is binding on all parties and subject to future court enforcement if one of the parties fails to comply. In this case the consent order is based on federal civil not criminal law.
Kingdom Trust’s Failures
The following are some of the issues outlined by FinCEN in the Consent Order:
Deficient processes for identifying and reporting suspicious activity.
Failure to recruit personnel with AML experience including SAR filing. [See my previous post That's a SAR Not a SAR! for more information.]
Failure to timely and accurately report hundreds of suspicious transactions.
Insufficient training, instruction, and an overall failure to build a culture of compliance.
Expansion into a new line of business (foreign custody services) to customers with elevated risks of money laundering without considering the resources required to identify and report suspicious transactions for those customers leading to the transmission of at least $4 billion in payments for foreign entities through the U.S.
Failure to make meaningful changes after a third-party audit cited BSA/AML deficiencies.
Lack of questions by personnel to high-risk clients regarding payments and face value acceptance of responses when questions were asked.
Failure to understand client payments did not match the claimed lines of business.
Failure to file SARs on parties on Kingdom Trust’s own watch list.
Apparent lack of awareness that its owns customers and counterparties were the subject of media reports alleging their involvement in specified unlawful activities including money laundering and securities fraud schemes.
Consistently choosing to prioritize building its business (with minimal compliance expenditures) over building an adequate AML compliance program.
Positive Steps by Kingdom Trust
FinCEN highlighted several positive steps taken by Kingdom Trust prior to and during the FinCEN investigation:
Increased AML staffing.
Worked with an independent consultant and then law firm to improve its AML compliance program.
Implemented an automated transaction monitoring system.
Provided substantial cooperation to FinCEN throughout its investigation.
Provided cooperation to law enforcement regarding many of the relevant accounts.
Kingdom Trust’s Undertakings
Through the Consent Order, Kingdom Trust undertakings include:
Hire an independent consultant, subject to FinCEN approval, to conduct a SAR Lookback Review with the resulting detailed report to be shared with FinCEN.
File SARs for all covered transactions identified by the independent consultant.
Hire an independent consultant, subject to FinCEN approval, to review the effectiveness of Kingdom Trust’s AML program with the resulting detailed report to be shared with FinCEN.
Provide FinCEN with a written report detailing the extent to which it has adopted and implemented recommendations made by the independent consultant.
Make payment of $1,500,000 to the U.S. Treasury.
Potential Impact
FinCEN has only recently (2020) gained some authority over state regulated trusts. This investigation does not provide FinCEN with a positive impression of the state of compliance. Trust companies should take a hard look at their internal processes and training to determine what steps to take to be compliant in both the state regulator and FinCEN’s view. The mindset that business growth takes priority over internal compliance and training will not be accepted by any examiner.
For assistance, please contact me via my contact page or at elizabeth@elizabethmcmorrowlaw.com.