Feds lob $1.5 million penalty against SD-based trust company
A federal agency is fining a trust company registered in South Dakota.
The Financial Crimes Enforcement Network, or FinCEN, is assessing the $1.5 million fine against The Kingdom Trust Company for what they describe as willful violations of the Bank Secrecy Act. That law requires financial institutions to report suspicious transactions.
It’s the first enforcement action the agency has taken against a trust company.
The Kingdom Trust is a South Dakota-chartered trust company, though the bulk of its employees reside in southwestern Kentucky. Representatives with the company have not returned requests for comment.
According to a FinCEN consent order, the fine stems from Kingdom Trust's failure to report hundreds of transactions involving suspicious activities by its customers, "particularly with respect to high-risk customers whose businesses pose an elevated risk of money laundering.”
FinCEN said from early 2015 to 2021, the company had a single employee monitoring thousands of transactions a day looking for elevated risks of suspicious activity.
“Kingdom Trust relied on a manual review of daily transactions by a single employee to identify potentially suspicious transactions and activity at various points throughout the Relevant Time Period,” the consent order said. “This manual review process was handled by the AML Compliance Officer from December 2018 to February 2020. Following that person’s departure in March 2020, these duties were transferred to a more junior employee, Kingdom Trust’s sole Compliance Analyst, for a period of approximately four months. In both instances, the assigned employees had other responsibilities and no prior AML/BSA experience.”
FinCEN said Kingdom Trust started working with international clients, “despite Kingdom Trust’s lack of experience in dealing with foreign securities firms” and its "lack of understanding why their clients were unable to establish custodial relationships with US-based securities firms.” Those clients included several in Latin America that FinCEN said had “elevated risks of money laundering.”
“Kingdom Trust’s decision to proceed with this new line of business allowed the transmission of at least $4 billion in payments for foreign entities through the United States with minimal oversight,” FinCEN said.
Of the suspicious transactions identified by FinCEN, over 400 were transactions processed in 2016 and 2017 for a customer accused of laundering bulk cash deliveries and wire transfers from illegal drug sales. A New York indictment alleges the cash was documented as payments for cellular phones and obscured the transfer of illicit proceeds totaling roughly $63 million.
FinCEN also said Kingdom Trust failed to identify accounts that perpetuated securities fraud with a value of around $9 million.
“Kingdom Trust’s failure in detecting and reporting suspicious activity for these transactions may have caused substantial harm to the U.S. financial system,” FinCEN added.
The penalty adds to recent high-profile nature of the South Dakota-based trust companies and the state’s law since the Pandora Papers reporting in late 2021. The Republican-controlled state legislature have dismissed calls for transparency reforms to the industry, and instead passed itsfirst trust law this session since the blockbuster reporting to allow for more digital execution of trust documents.
The state is required to examine each trust company registered in the state at least once every three years. That examination includes a review of internal policies, practices, audits and compliance with the Bank Secrecy Act.
"The FinCEN has overall authority for enforcement and compliance with the BSA/AML requirements, including civil penalty authority for violations. They also write all of the regulations that cover this area and provide guidance to industry," said South Dakota Department of Labor spokesperson Dawn Dovre. "The Division of Banking updated our guidance after substantial changes were made in the rules in late 2020, which went into effect in March 2021.