Failed Bank Fined for AML Deficiencies and Misleading Statements
Commentary by Thomas Delaney
A US holding company and its state registered bank settled charges brought by the SEC, Federal Reserve ("FRB") and the California Department of Financial Protection and Innovation ("CDFPI") for anti-money laundering compliance deficiencies and misleading statements.
According to the SEC Complaint, the bank "failed to adequately or automatically monitor for suspicious activity approximately $1 trillion in banking transactions that occurred" on the exchange network and "failed to detect nearly $9 billion in suspicious transfers" by the bank "and its related entities." The SEC charged the bank's US parent company, its former CEO and former Chief Risk Officer ("CRO") with misleading investors about the strength of the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program and the monitoring of crypto customers. In addition, the SEC charged the former Chief Financial Officer ("CFO") with misleading investors about company losses from securities sales following the collapse of the company's subsidiary bank. The SEC stated that the company's "misleading statements" regarding the adequacy of the compliance program "caused panic" throughout the crypto asset industry. To settle the charges with the SEC, the company agreed to (i) pay a $50,000,000 civil penalty and (ii) a permanent injunction to settle charges. The former CEO and CRO agreed to (i) permanent injunctions; (ii) five-year office-and-director bars and; (iii) civil penalties of $1,000,000 and $250,000 respectively.
The parent company and its subsidiary bank also settled charges brought by the with the FRB and the CDFPI following an investigation. The FRB noted that, in May of 2023, the parent company and the bank agreed to enter a cease-and-desist order requiring the bank to implement its "self-liquidation and cessation of operations in a safe and sound manner." In its Order, the FRB concluded that the bank has "taken appropriate steps to liquidate and wind down the operations of the Bank" and "has repaid all of its deposit liabilities." To settle the FRB charges, the bank agreed to pay a $43,000,000 fine.
Commentary
You can fold, but you can get called for violations of AML obligations.
What is particularly notable about this announcement is that Silvergate was voluntarily liquidating Silvergate Bank, a California chartered bank that provided financial services to foreign and domestic entities, including the bankrupt FTX, which traded on the bank's affiliated Silvergate Exchange Network. In addition to entering into a consent agreement with the Federal Reserve, Silvergate has entered into a separate settlement with the SEC to pay $50 million. Silvergate Bank allegedly failed to identify and report nearly $9 billion in suspicious transfers among FTX and its related entities.
The consent agreement demonstrates that the Federal Reserve Board will hold parent companies accountable for the regulatory shortcomings of their bank subsidiaries, particularly with respect to AML compliance, even in the context of an ongoing liquidation. It is also a reminder of the heightened scrutiny that federal banking regulators give to relationships between banks and crypto firms.