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Last November, Alabama-based AmSouth Bank was fined $50 million for violating anti-money laundering and bank secrecy laws. It was the largest such fine ever imposed. The bank also agreed to revamp its internal procedures and to forgo a planned expansion, which will likely put a check on the rapid growth it has enjoyed in recent years. Criminal prosecution is still possible if the U.S. Attorney’s Office isn’t satisfied with the bank’s reforms. Had AmSouth been funding al-Qaida? Was it a front for narcotics dealers? Hardly. Two men had been running a Ponzi scheme and funneling money through AmSouth. Both men were caught and sentenced to long prison terms. The victims lost about $10 million, virtually all of which was recovered through civil litigation. AmSouth was culpable because it should have caught the scheme and reported it to banking regulators, but never did. Still, the con men weren’t exactly Osama Bin Laden and Pablo Escobar. So why was AmSouth hit so hard? The bank’s lawyers are at least partially to blame. The investigation of AmSouth only started after the bank failed to respond to eight subpoenas issued by a grand jury investigating the Ponzi scheme, according to the U.S. Attorney’s Office for the Southern District of Mississippi. When the government got the documents from other sources, there were “many discussions and other communications between AmSouth’s outside counsel and attorneys for the government,” according to the statement of facts filed at the conclusion of the criminal case against AmSouth, but “AmSouth’s outside counsel’s responses to the concerns were misleading and inadequate.” Prosecutors maintained that the delays were “legally inexcusable.” AmSouth was represented by Baker, Donelson, Bearman, Caldwell & Berkowitz of Memphis. Shareholder Sam Blair, acting as spokesman for the firm, issued a statement: “We are of the opinion that we did not do anything wrong or inappropriate, and we decline to comment further.” About a year into the investigation, in September 2003, Baker Donelson was replaced by Robert Bennett and Andrew Sandler of Skadden, Arps, Slate, Meagher & Flom in Washington, D.C. (Neither lawyer would discuss the case.) They took a very different approach with the prosecution: quick and complete cooperation. That attitude appears to have won over the prosecution. The same statement of facts that excoriates Baker Donelson is careful to exonerate Skadden for any wrongdoing. Twice. At the time Skadden took over, Charles Tuggle was the chair of Baker Donelson. About a month later, he resigned to become vice president of risk management and business development at FTN Financial, a subsidiary of First Horizon National Corp. Tuggle’s lawyer, Charles Newman of Burch, Porter & Johnson in Memphis e-mailed that Tuggle moved “solely because he was attracted to the opportunity First Horizon offered him.” Veterans of bank regulatory warfare agree that Baker Donelson’s noncooperation drove up the amount of the fine. “My reading of the documents is that the prosecution was mad at outside counsel,” says Douglas Greenburg, a partner at Winston & Strawn and the co-author of the 9/11 Commission’s “Monograph on Terrorist Financing.” A source close to the investigation adds, “I don’t think Baker appreciated the seismic shift in the regulatory environment.” That shift has been under way since 9/11. The USA Patriot Act, which passed in the wake of those attacks, imposed a slew of new reporting requirements on banks. Existing laws, such as the Bank Secrecy Act, were tightened as well. But it wasn’t until the Riggs Bank scandal broke in 2004 that the regulators fully felt the impact. Riggs pled guilty to laundering hundreds of millions of dollars for people like former Chilean dictator Augusto Pinochet and the corrupt rulers of Equatorial Guinea. The regulators who were supposed to monitor the bank were taken to task in a U.S. Senate report, which blasted their “uneven and, at times, ineffective” oversight. The report told regulators “that this is not business as usual, that the system has changed,” says H. Rodgin Cohen of Sullivan & Cromwell, one of the leading banking lawyers in the country. The message was also received at the U.S. Department of Justice, which proved ready and willing to become “the regulator of last resort,” as Greenburg puts it. The Justice Department brought its first criminal action against a bank for failing to detect money laundering in November 2002. Four more (including AmSouth) have been brought since, and two more are reportedly near settlement. Justice’s new role has riled the agencies which regulate banks, including the Federal Reserve Board, the Financial Crimes Enforcement Network (FinCen), a division of the U.S. Department of the Treasury, and the Office of the Comptroller of the Currency. They see it as “a trend to criminalize behavior designed to be governed by civil standards,” according to William Fox, director of FinCen. Cohen cites two reasons why Justice’s heightened role is cause for concern. First, many prosecutors don’t know banking like the regulators do, and aren’t as good at gauging what activity should have raised a red flag. Second, fear of criminal liability is causing bankers to file too many reports, thus undercutting their effectiveness. To prosecutors, of course, those concerns are secondary to the goal of preventing money laundering. Sometimes regulators seem more concerned about protecting their turf than the banking system. At an anti-money laundering conference in March in Hollywood, Fla., Herbert Biern, a senior official with the Federal Reserve, clashed with Lester Joseph, then the acting chief of Justice’s asset forfeiture and money laundering section. Biern argued that the Justice Department was undermining the anti-money laundering effort. “Law enforcement is shooting the messenger,” he said. “You shoot the messenger, you stop getting messages.” Joseph countered that Justice was merely picking up a ball dropped by regulators. “Some prosecutors are wondering why they are discovering problems that weren’t already discovered by bank regulators,” he said. Attorneys who have defended banks in Justice Department investigations (none of whom would speak for the record) say the department’s actions have been uneven and inconsistent. They compare AmSouth to Arab Bank PLC, which allegedly transferred more than $20 million to suspected terrorists in the Middle East, but is only expected to be fined about $20 million, according to a report in The Wall Street Journal. And to Riggs, which washed far more money than AmSouth — as much as $700 million — for far more notorious clients, but was fined only $41 million. To those critics, the problem has a human face: Cynthia Eldridge, lead prosecutor of AmSouth. Since the fine was announced, she has been regularly hammered by both banks and regulators. For example, a source close to the investigation says, “I don’t want to say that the prosecution was being vindictive [because of Baker Donelson's lack of cooperation], but … ” And David Aufhauser, general counsel of UBS Warburg (now UBS Investment Bank) and former general counsel of the Treasury Department, described the case as “ a Justice Department hijacking of a regulatory issue.” In a statement, Eldridge says that she’s just doing her job: “Congress enacted these criminal provisions [of the Bank Secrecy Act], and our job as prosecutors is to prosecute violations.” Justification for the size of the fine can be found in FinCen’s report on the case, which found that AmSouth “willfully violated” anti-money laundering regulations, and detailed the “systemic deficiencies” in the bank’s program. Fair or not, the AmSouth case sends a message. Banks and the lawyers who represent them are scrambling to play by new rules, which Cohen describes as “no more zealous advocacy in defense of your client. Just give us the documents.”

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