Money Laundering Probe at Mexico Border Casts Cloud Over Rabobank

Money Laundering Probe at Mexico Border Casts Cloud Over Rabobank (BloombergBusiness) Tom Schoenberg, Jesse Hamilton
October 26, 2015 — 6:00 AM CET

Rabobank’s Calexico branch had an unusual problem — too much cash.

Among the Dutch bank’s 119 branches in California, the tiny outpost along Mexico’s border needed weekly armored truck visits — sometimes more than one — to haul away all the U.S. dollars being deposited.

The deluge, described by a person familiar with the bank’s operations who said it picked up after 2010, came from businesses just across the border in Mexicali. While other Rabobank branches needed currency to distribute to customers, Calexico was shipping it out.

The armored car trips, which persisted for years, offer a clue about what prosecutors may find in a widening investigation into whether Rabobank Groep was vigilant enough against money laundering. Rabobank shut the Calexico branch in January under a cloud as federal investigators sought to determine if the bank had ignored signs that its California operations may have been used by drug cartels to launder funds.

U.S. investigators now have evidence that some bank officials may have impeded internal efforts to scrutinize customer accounts and to report suspicious transactions, according to the person who described the armored car runs and another person familiar with the investigation. Some of the activity the authorities are said to be looking at occurred under the watch of a compliance officer who Rabobank poached directly from its regulator to get its house in order.

Furthermore, some bank officials may have tried to cover up the alleged activity by withholding documents from the Office of the Comptroller of the Currency, the people said. Federal authorities could view any such actions as obstruction of justice.

Deferred Prosecution

Hendrik Jan Eijpe, Rabobank’s spokesman, said the bank is cooperating with investigators, but declined to provide further information. Peter Carr, a Justice Department spokesman, declined to comment.

A half-dozen U.S. enforcers and regulators are circling Rabobank, a cooperative based in Utrecht that promotes itself as one of Europe’s cleanest and safest banks. Until snared in an industry-wide interest rate-rigging scandal two years ago, the bank had not had a criminal enforcement action or a significant regulatory failing, federal prosecutors said in that case.

Criminal action related to the anti-money laundering probe would be double trouble for Rabobank, which is still bound by its 2013 deal over the manipulation of benchmark interest rates. The deferred prosecution agreement, set to expire Oct. 29, allows Rabobank to escape criminal charges if it avoids further legal trouble in the U.S.

The Justice Department could file charges for the old rate-rigging allegations if it finds fresh problems. UBS Group AG was dealt such a blow in May after officials concluded that the bank had failed to root out misconduct on its foreign exchange desk while under a similar agreement. In the Rabobank interest-rate case, U.S. prosecutors said in an Oct. 1 court filing that they might ask for more time to decide on Rabobank.

Meanwhile, the bank is overhauling its California operations. Rabobank, with about $766 billion in assets, wrote off 600 million euros ($681 million) in the value of its U.S. unit in August, saying the outlook for the business had deteriorated. It blamed costs, stricter capital requirements and a faltering loan book. This month, it named a new chief executive officer of the California operation and said consumer accounts there would be limited to U.S. residents.

Concerns about the bank’s controls extend beyond California. In June the Federal Reserve and New York’s Department of Financial Services issued a public enforcement action against the bank’s New York operations, citing deficiencies related to risk management and compliance, though they didn’t levy financial penalties.

Rabobank’s bonds have performed in line with those of its peers, according to Bank of America Merrill Lynch indexes. Rabobank is rated at Aa2 by Moody’s.

California Expansion

Rabobank’s current troubles stem from an expansion into California more than a decade ago — at what would prove to be an inopportune time. Until then, its U.S. presence was primarily agribusiness lending from New York.

In the first of a series of purchases of regional banks, Rabobank picked up Valley Independent Bank in 2002 and its two dozen branches. That included one in Calexico — a plain, white building tucked among gas stations, Mexican markets and duty-free shops. The town, located on a major border crossing about 120 miles east of San Diego and home to 39,000 people, has struggled for years with narcotics trafficking and violence.

Rabobank’s debut on the border came just as the U.S. reinforced efforts to halt the flow of illegal funds. The Patriot Act, implemented in 2002, expanded the enforcement of banking laws and anti-money laundering requirements.

Comptroller’s Complaints

A new regulator came through the doors with the expansion: the Comptroller’s office, which began lashing Rabobank for faulty money-laundering protections, according to Romy Vinas, then the bank’s U.S. compliance chief in New York. The Comptroller admonished the lender in 2006, Vinas said in a phone interview. As the regulator planned to write up the bank again, Vinas came up with an idea: Hire the official unearthing the bank’s faults.

Laura Akahoshi, a 10-year veteran of the Comptroller’s office, was overseeing Rabobank as the compliance expert for the western division. “I presented the idea to the bank: Who better to fix our problems than the person who wrote us up?” Vinas said.

With what Vinas said was the regulator’s blessing, the bank recruited Akahoshi to handle its compliance in California. Using a standard form, she disclosed to the regulator that Rabobank contacted her about the job on Jan. 11, 2008, just 12 days before the agency brought an enforcement against the bank for insufficient money-laundering protections.

When she arrived in February of that year, Akahoshi led the bank’s effort to get out from under the regulatory scrutiny that she had helped impose. The bank had recently doubled its size in California and was operating under a probationary agreement to submit reports to regulators, put enough staff on compliance and set up a new process to track large cash transactions and international transfers.

No Obstacle

The agency reviewed Akahoshi’s work before her hiring and found there was no ethical obstacle to her joining Rabobank, according to a Comptroller’s document. Federal law allows a government official to take a job at a firm previously supervised, but bans the person from speaking with or meeting with agency officials about matters specifically handled while in government.

Bank examiners don’t have the kind of ethical restrictions governing lawyers. The law allows a Comptroller’s official to take a job at the firm previously supervised and to help it with the same matters handled at the agency.

“The revolving door in and out of government is loosely regulated, particularly for non-lawyers,” said Richard Painter, a former White House ethics counsel who is now a law professor at the University of Minnesota. The government has little power over former employees, he said.

The Comptroller’s office declined to provide additional information on Rabobank oversight.
“We are prohibited from commenting on supervisory matters pertaining to specific banks,” said Bryan Hubbard, a spokesman for the regulator.

Akahoshi didn’t respond to multiple attempts to contact her through e-mail and acquaintances, and she wasn’t at a Netherlands property listed as her residence. Her Rabobank e-mail and phone line weren’t in service, and the bank declined to forward messages to her or confirm she’s still an employee.

Stephen Byron, the deputy Akahoshi hired from American Express Co. to oversee the bank’s money laundering protections, didn’t respond to multiple e-mail and phone messages.

Cutting Costs

Rabobank’s offices in Imperial County, which included Calexico, El Centro and Brawley, were among the company’s top 10 for deposits during Calexico’s 2013 peak — a list that included bigger cities such as Fresno and Bakersfield.

Calexico’s overall deposits rose 39 percent (a typical growth rate among the lender’s California branches) to $153 million from 2008 to 2013, according to the Federal Deposit Insurance Corp. Some of the gain was driven by developments across the border. Mexico President Felipe Calderon tried to squeeze money launderers by clamping down on deposits of U.S. dollars in 2010. Butcher shops and electronics stores that were legitimate Mexican businesses began stuffing millions of dollars in cash into Rabobank accounts, one person said.

Another person said bank employees struggled to separate the good accounts from the bad since real businesses could be used to hide criminal activity.

The effort became more difficult after the financial crisis prompted staff reductions. In California, the bank cut three of nine people dedicated to sniffing out money laundering, two of whom were on the border, said the person familiar with the operations. Each remaining worker went from studying about 25 transactions a day to more than 75, the person said. Eventually, the Rabobank compliance team was consolidated at its Roseville office in the center of the state, leaving no one on the ground on the border, the person said.

Suspicious Activity

Banks must flag regulators by filing suspicious activity reports when any transaction might run afoul of U.S. laws. At one point, the person said, bank officials told staff members they were generating too many reports on Mexican customers. Byron headed to Mexicali in 2012 to meet about a dozen customers. Afterward, he concluded they were legitimate businesses and there was no need to question their activities, the person said.

Still, the deposits that were flowing out in armored cars kept coming. One thread of the current federal investigation involves big deposits into an account linked to the relative of a Calexico bank official, according to a third person familiar with the investigation. Those deposits weren’t properly reported, the person said.

Some cash transactions caught the attention of federal investigators in San Diego who asked why the bank hadn’t flagged the activity, the people said. In three cases dating back to 2011, the U.S. seized assets from Rabobank accounts belonging to suspected money launderers, according to court filings. Rabobank is not accused of wrongdoing in them. In one case, the funds were held in accounts of fitness centers linked to a Mexican cocaine-trafficking operation, and in another to a San Diego customs broker who pleaded guilty to money laundering and other charges. In September, assets were taken from the former owner of a Calexico-area car dealership who admitted to laundering the proceeds of drug trafficking.

At the end of 2013, the Comptroller again called out Rabobank and demanded changes for the third time in seven years. By this time, Akahoshi had left the U.S. to work in Rabobank’s headquarters, according to her LinkedIn profile, and she later moved on to a special assignment in Asia.

Calexico Blight

Six months after Rabobank exited Calexico, Bank of America followed, leaving the city with just two banks, Wells Fargo and Union Bank, and two credit unions. Wells Fargo said in a statement that it is running a robust anti-money laundering program and is committed to vigilant compliance. Union Bank also said that it maintains anti-money laundering protocols throughout its branches, including Calexico.

The departure of two big banks has nonetheless sparked an outcry from city leaders and federal lawmakers who say the fight against money laundering is harming the town’s economy, which depends on big financial institutions for business growth and jobs.

Rabobank’s former outpost, once sporting flat-screen televisions and offering cookies to customers, is now vacant. The classic drive-through overhang has served as a spot for people seeking shelter from the summer sun.

“It’s become a homeless encampment,” said Daniel Fitzgerald, president of the Calexico Chamber of Commerce. “It’s a problem for the city.”