As tensions between the United States and Iran reach new heights, U.S. banks should expect stricter regulatory scrutiny in the anti-money laundering arena, according to corporate whistleblower Everett Stern, who worked with CIA investigators to expose HSBC's 2012 international money laundering activities.

On January 3, the United States carried out a targeted killing of Major General Qassem Soleimani, commander of Iran's Islamic Revolutionary Guard Corps' Quds Force. In response, Iran fired missiles at two Iraqi military bases housing U.S. troops the following week. No casualties were reported.

The Trump administration subsequently imposed a new round of economic sanctions on Iran, targeting its construction, manufacturing, textile, and mining sectors.

"I assure you, the resulting tightening of anti-money laundering regulations and the related laws that will be introduced will be beyond imagination," Stern told industry outlet Banking Dive.

During his time as a whistleblower at HSBC, Stern prompted the London-based bank to pay a record $1.9 billion fine for allowing itself to be used to launder drug money and for violating sanctions regulations by doing business with customers in Iran, Libya, Sudan, Burma, and Cuba.

Lawrence Ward, a partner at Dorsey & Whitney law firm who focuses on global trade matters, said Trump's latest round of sanctions appears designed to exert maximum pressure on foreign financial institutions, expecting them to proactively cut off business ties with all individuals and entities in various sectors of Iran's economy.

"If foreign financial institutions facilitate any transactions for individuals and entities in these sanctioned sectors, their own correspondent accounts in the United States will face the risk of being closed," he told Banking Dive.

Ward also noted that these sanctions could create "compliance challenges" for foreign and U.S. banks. Ward previously served as an appointed member of the U.S. State Department's Defense Trade Advisory Group.

"Certain activities with Iran, such as humanitarian donations, will largely remain permitted, but such activities involving individuals and entities targeted by these new sanctions will not be allowed," he said. "Whether these sanctions achieve their intended effect will, of course, depend on whether the U.S. government applies them credibly and strategically to target specific individuals and entities. More importantly, it will depend on whether foreign financial institutions take these sanctions seriously and restrict financing channels for sanctioned Iranian businesses."

Increased regulatory scrutiny

The U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) has designated Iran as a "primary money laundering concern." Section 311 of the U.S. Patriot Act, effective November 4, prohibits U.S. financial institutions from opening or maintaining correspondent accounts for Iranian financial institutions. The rule also prohibits U.S. financial institutions from processing transactions involving Iranian banks.

According to The Wall Street Journal, FinCEN also established a Global Investigations Division in August, meaning U.S. financial institutions may be required to provide more customer information to FinCEN.

Former officials told the newspaper that this new independent office highlights one of FinCEN's key priorities in 2020.

Steven Beattie, EY's global financial crime and operations leader, called the division "another tool in the arsenal," adding that in recent years financial regulators and law enforcement agencies have increasingly relied on banks to identify criminals.

As the HSBC case showed, banks do not always proactively disclose their connections to money laundering or terrorist financing activities.

Whistleblower history

Stern served as an anti-money laundering compliance officer at HSBC between 2010 and 2011. He initially noticed that HSBC employees and senior management manipulated wire transfer filters to allow funds to flow to sanctioned parties or sanctioned countries.

"They added dots and dashes to payment instructions so the payment information wouldn't match, and the wire transfer would go through smoothly," he said.

After multiple alerts to supervisors were ignored, Stern turned to the CIA, providing information to the agency for over a year before leaving the bank in November 2011.

"HSBC was deliberately trying to funnel money to terrorists and drug cartels. That was their game, and they profited handsomely from it," he said.

Following a federal investigation, HSBC reached a deferred prosecution agreement with the U.S. Department of Justice in late 2012, agreeing to forfeit $1.256 billion and hire a compliance monitor.

As part of the settlement, the bank admitted to failing to maintain an effective anti-money laundering program and failing to conduct basic due diligence on some account holders.

For these violations, HSBC also agreed to pay $665 million in civil penalties—$500 million to the Office of the Comptroller of the Currency (OCC) and $165 million to the Federal Reserve.

Despite the record fine and public admission of wrongdoing, Stern said, "The real mission was not accomplished, which was putting the people involved in prison."

Stern noted that HSBC's $1.9 billion fine was equivalent to only five weeks of the bank's profits. No HSBC employees faced criminal charges.

"These banks get fined, but they make so much money that fines are irrelevant to them. It's just the cost of doing business," Stern said. He now runs Tactical Rabbit, a private intelligence firm he founded in 2012.

Federal authorities acknowledged at the press conference announcing the settlement that they chose not to prosecute HSBC out of concern that criminal charges could jeopardize the globally systemically important bank.

"If U.S. authorities decided to bring criminal charges, HSBC would almost certainly lose its U.S. banking license, the institution's future would be threatened, and the entire banking system would be thrown into turmoil," then-Assistant Attorney General Lanny Breuer said at the time.

Additionally, legal actions seeking to hold HSBC and other global banks accountable for the deaths of U.S. soldiers have faced obstacles. These soldiers are said to have died in attacks by terrorist-linked weapons, with the banks allegedly facilitating such attacks by providing banking services to Iran.

In recent years, multiple lawsuits aimed at holding global banks accountable have been dismissed. These lawsuits alleged that the banks provided financial services to Iran, thereby enabling militants to attack U.S. troops in Iraq.

Judge Pamela Chen of the U.S. District Court for the Eastern District of New York ruled in a September decision that providing material support to a foreign government accused of supporting terrorism does not constitute an actionable claim under the Anti-Terrorism Act. She noted that plaintiffs would need to prove that defendants knew their actions would aid terrorism.

Anti-money laundering legislative developments

Over the past year, anti-money laundering reform has been a topic of focus for several lawmakers.

The House passed the "Coordinating and Leveraging Activities for Reform and Enforcement Act of 2019" (H.R. 758) in March. The bill aims to "strengthen cooperation between financial institutions and law enforcement agencies to better detect, deter, and combat terrorism and financial crime." The bill would provide safe harbor protections for banks that retain customer accounts at the request of law enforcement.

Another anti-money laundering bill, the "Corporate Transparency Act" (H.R. 2513), would combat the illegal use of anonymous shell companies. The bill has received support from banks and industry trade groups.

The bill would require businesses with shell company characteristics to disclose their true beneficial owners to FinCEN at the time of formation.

Rep. Carolyn Maloney, a New York Democrat who introduced the bill in May, said the bill would also streamline compliance costs for financial institutions.