There's a wholesale clean up going on in Wealth management.
This time it's RBC that's in the mix. This from the Wall Street Journal
Inside Royal Bank of Canada’s Latin Misadventure
ENLARGE
By
Alistair MacDonald and
Rita Trichur
While some bankers celebrated, RBC’s compliance department soon raised a warning flag. Worried that Mr. Miranda’s accounts might attract scrutiny from global regulators over potential money laundering, some compliance officers began recommending that the accounts be shut down around 2007, according to people familiar with the episode.
But the Miami banker, Dirceu Magalhaes, successfully argued against axing the prize client, even after Brazilian prosecutors charged Mr. Miranda with corruption in 2012, these people say.
In 2013, Mr. Miranda’s accounts attracted the attention of a U.S. banking regulator, the Office of the Comptroller of the Currency, which that year deemed RBC’s anti-money-laundering controls unsatisfactory, according to people familiar with the matter.
The tensions between compliance and business officials at Canada’s largest bank, revealed in internal company documents seen by The Wall Street Journal, underscore the dilemma faced by many of the world’s financial giants as they balance the promise of lucrative accounts in emerging markets against the increased risk of regulatory action.
Banks from Standard Chartered PLC to HSBC PLC have been pulling out of serving the wealthy in some developing markets, in one of the unintended consequences of a crackdown by global regulators on money laundering and terrorist financing.
For RBC, which weathered the financial crisis to become one of the world’s largest banks, the OCC’s negative review was one in a long line of brushes with regulators and prosecutors over anti-money-laundering controls in its Latin America and Caribbean wealth-management businesses.
RBC moved to close down this business late last year after facing government investigations in several countries, including the U.S., Uruguay, and France. Just as it was unwinding its operations, RBC was contacted by the Department of Justice and by the Department of Homeland Security about separate Venezuelan accounts, according to people familiar with the matter. Those people said the Venezuelan accounts had, like Mr. Miranda’s, been previously flagged by internal compliance officers.
“There is always a war between compliance and bankers,” said Kim Manchester, whose Manchester CF advises banks on anti-money-laundering but who wasn’t commenting specifically on RBC. “Where banks get into trouble is when the banker wins again and again.”
A spokeswoman for RBC said that, due to client confidentiality, it wouldn’t comment on any individual or account, even to confirm or deny that they were customers. The spokeswoman said the bank has a strong record of global regulatory compliance. “RBC works within the legal and regulatory framework of every country in which we operate,” she said in an email.
The Justice Department declined to comment.
Mr. Miranda declined to comment for this article. A lawyer for Mr. Miranda said that his client hasn’t received any formal request from Brazilian courts to present his defense on the pending corruption case and declined further comment.
In a phone call, Mr. Magalhaes said that he had “no concerns” about allegations contained in this article, but declined further comment.
Star client
Much of the RBC drama has played out in an office on Brickell Ave. in Miami’s financial district. That office, where Mr. Magalhaes was based, acted as a U.S. hub to service rich clients across Latin America and the Caribbean as RBC opened offices in Brazil, Chile, Panama, Mexico and Uruguay in 2008 and 2009.Among Miami’s star clients was Mr. Miranda, who had made a fortune of over $500 million helping companies obtain licenses to set up in the Amazon city of Manaus, according to an internal RBC note seen by The Wall Street Journal. The former senator came from humble origins; some four decades ago he drove a Volkswagen Passat and had a net worth of $10,000, according to the document.
By 2008, Mr. Miranda owned real estate worth $5 million on Ilha das Cabras, or Goat Island, off the coast of São Paulo; three houses worth $10.5 million; a Learjet; four farms; and eight cars, including a Rolls Royce, the note said.
But RBC’s compliance department didn’t share the bankers’ enthusiasm for Mr. Miranda.
Some compliance officers were agitating for the account to be closed around 2007, soon after it was opened, because as a former politician he was viewed as a higher risk, a person familiar with the matter said. In August 2009, an article in Brazilian newspaper Folha de S. Paulo said a company held by Mr. Miranda’s family, KKW do Brasil, made a donation to the foundation of former Brazilian President José Sarney. The article didn’t accuse Mr. Miranda, his family or Mr. Sarney of wrongdoing. Still, press coverage in Brazil reminded compliance officials at RBC of how Mr. Miranda’s political past and connections would be scrutinized by regulators, according to two people familiar with the matter.
ENLARGERegulators are particularly sensitive about individuals with political ties in developing countries. The Treasury Department’s Financial Crimes Enforcement Network, FinCEN, for instance, asks banks to conduct “enhanced scrutiny” of any private banking account maintained for foreign political figures and their families.
Bank compliance officials often face a difficult job in which they have to make recommendations based on the movement of money through accounts and material they find online, including media reports.
In Miami, bankers argued hard to keep Mr. Miranda as a client, according to three people familiar with the matter.
The client himself insisted on keeping a low profile.
“Mr. Miranda has asked that all telephone contact with him be very discrete [sic], and that he be contacted only by Dirceu” and two other RBC officials, according to an RBC document from September 2009.
Julian Stienstra, who headed the Miami office at the time, denied that there had been tension between bankers and compliance. Mr. Stienstra said that as soon as concerns were brought about Mr. Miranda the account was closed down.
But while RBC closed down the bank accounts in 2010, at least part of that money was rolled into a trust RBC set up for the Miranda family, according to people familiar with the matter. The Spetses Trust was fed by 17 separate companies and offshore vehicles which had either been set up, or bought, with money from an RBC loan to Mr. Miranda’s daughter, Marcela Scarpa Miranda Batista, according to an internal document and these people.
RBC declined to comment on the trust and wouldn’t confirm whether Mr. Miranda was a client. “Safeguarding the privacy and confidentiality of our clients, employees and other third parties is a cornerstone of our business,” a spokeswoman said in an emailed statement.
Ms. Miranda Batista couldn’t be reached for comment.
At the base of the trust were four Brazilian companies that could feed funds through separate silos into three layers of companies, two people familiar with the matter say. The layers were registered in three jurisdictions: the Netherlands, Delaware and Barbados. Because money was never passed among the four Brazilian companies, which meant there were fewer transactions happening in that country, it was less likely to attract the scrutiny of Brazilian regulators, people familiar with the matter said.
Compliance officers frequently raised red flags about the trust, according to an internal document and the three people familiar with the matter.
In March, 2012, a senior trust officer at RBC’s Bahamas office asked Mr. Magalhaes for “evidence of ownership” of Aglais Investment Company, which had deposited $2 million into the Spetses Trust, according to an email thread viewed by the Journal.
In a return email, Mr. Magalhaes told the trust officer that the company belonged to the “same beneficiary” as Spetses and said that the client was getting proof of ownership from a “safe box” in New York.
“We have to trust in our client,” he wrote.
But on March 27, the trust officer, Chevez Johnson-Ramirez, emailed again, saying the bank had already made an ‘exception’ to accept funds from Aglais several months earlier.
“The bank’s policy is to allow a grace period of 5 days which has been exceeded,” she said, but in a later email agreed to wait until April 5.
Regulators typically demand banks quickly establish the identities of large depositors, particularly when the account is owned by a so-called politically exposed person.
ENLARGEBy Dec. 11, proof of ownership for Aglais still hadn’t arrived.
“We urgently need to receive this due diligence,” wrote Ms. Johnson-Ramirez, who couldn’t be reached for comment.
From the exchange viewed by the Journal, it is unclear whether proof was ever provided.
About a year later, in the fall of 2013, Mr. Magalhaes was fired from RBC after the bank discovered transfers that couldn’t be easily explained, according to Mr. Stienstra.
Internal RBC investigators concluded that Mr. Magalhaes had been involved in undocumented foreign exchange trading, according to two people familiar with the matter. In such trades, currencies are swapped by depositing cash into somebody’s account in one country and withdrawing an equivalent amount in another currency from that person’s foreign account, evading regulators because the money doesn’t move across a border.
In 2013, just a year before RBC would begin the process of closing down its Latin American operation, the bank renewed its lease on its 28-story Miami tower and added an extra 10,200 square feet to the space it rented, according to the property’s broker Jones Lang LaSalle.
Despite the expansion, RBC was concerned enough about the Miami office that in July 2013 it hired a former Central Intelligence Agency counterterrorism officer, Joseph Malpica, to investigate potential problems there, people familiar with the matter said. Mr. Malpica would go on to clash with Miami-based bankers and leave in frustration eight months later, three of these people said. Mr. Malpica had suggested that the Venezuelan accounts, among others, be closed. He also asked for an internal investigation into any management lapses that may have allowed the undocumented foreign-exchange trading to go unnoticed and whether it was happening elsewhere at RBC, a request that was refused by Toronto, one of the people said.
In March 2014, RBC’s chief compliance officer, Francine Blackburn, flew down to Miami, where she was briefed about the trades and other regulatory issues, a person familiar with the matter said.
The following month, the OCC descended on RBC’s Miami office for a scheduled review, setting up in a conference room on the 21st floor of the Brickell Avenue tower, according to a person familiar with the matter.
Among the regulator’s concerns: the Spetses Trust. The OCC didn’t like that money was sometimes credited and debited between the various vehicles within 24 to 48 hours, two people familiar with the matter said. In September 2013, for instance, $1 million moved from Toronto through two different Miami-based accounts to Brazil, according to internal documents. The four transactions were conducted and authorized on the same day.
An OCC spokeswoman declined to comment.
Suspicious activity
Banks are asked to look out for such money flows, which are often seen as a sign of potential money laundering. RBC, though, failed to file so-called suspicious activity reports to U.S. regulators for these movements, according to people familiar with the matter.By late 2014, several of RBC’s Venezuelan accounts were also attracting the attention of U.S. regulators. In November, RBC’s Miami office and an office in Toronto both got a call from an agent at the U.S. Department of Justice. The call was followed by a series of Justice Department subpoenas seeking information on these accounts, the people familiar with the matter said. In December, Homeland Security asked for all documents related to one of the accounts.
A representative of Homeland Security declined to comment.
Prosecutors in Uruguay and France also started cases against the bank in the past several years. In 2008, the Uruguayan central bank fined RBC $50,140 for “omissions” in anti-money-laundering controls, according to the central bank’s website. RBC has said it plans to contest French allegations that its Bahamas wealth management office was complicit in tax fraud.
The problems in Latin America and the Caribbean were concerning to RBC board members, who had been briefed by Ms. Blackburn on at least one occasion, according to a person familiar with the matter.
RBC’s board came to a decision to exit the region after concluding that revenues there weren’t worth the numerous, often small, regulatory issues that had plagued the operations, according to a person familiar with the matter.
The bank’s spokeswoman said the decision was driven by a desire to focus on more profitable markets with greater scale.
Last September, staffers were assembled in conference rooms throughout the Brickell Avenue office, where Stuart Rutledge, head of RBC’s international wealth management business, was dialed in, two people familiar with the matter said. Mr. Rutledge said that the operation would be closing down, along with offices in New York and Houston that had also handled wealth management in Latin America and the Caribbean.
Mr. Rutledge didn’t reply to requests for comment.
As the Miami office began winding down at the end of last year and start of 2015, RBC ended its relationship with Mr. Miranda and closed the accounts of the Venezuelan clients who had triggered the calls from the Justice Department and Homeland Security, a person familiar with the matter said.
On a recent visit, the floors where RBC’s bankers and compliance had once jousted looked deserted. A notice pasted to a door said that the Miami bank branch had closed on April 30. A 20th-floor conference room still bore the signs of what appeared to have been a farewell party. A whiteboard read: “You R’ Stellar. Reach for the Stars.”
—Rogerio Jelmayer, Ben Dummett, Katherine Dunn, Christopher M. Matthews and Lisa Schwartz contributed to this article.
Write to Alistair MacDonald at alistair.macdonald@wsj.com and Rita Trichur at rita.trichur@wsj.com
Read the article online here: http://www.wsj.com/articles/inside-royal-bank-of-canadas-latin-misadventure-1438828641
Inside Royal Bank of Canada’s Latin Misadventure - WSJ
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