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What We Can Learn From 5 Banking Failures

Bank failures happen all the time. And more often than not, it happens in “developed” markets like the U.S. where there is an abundance of banks, easy access to credit, and loose regulations across an oversaturated banking market.

According to the FDIC’s own statistics, 531 bank failures have happened since 2008, including three in 2019 – representing around 10% of all FDIC insured banks.

Most of these closures go relatively unnoticed. Sure, they might be briefly mentioned in the news or on a regulatory website. But unless you’re a customer or employee of the bank, chances are you won’t even hear about the shutdown.

That said, some banks go down with a bigger bang than others – especially if they’re at the center of an investigation or scandal. This usually involves money laundering, corruption, or illicit activity.

The reality is that bank failures can happen for a lot of reasons – including poor management, bad accounting, poor financial planning, or failure to comply with regulatory requirements like anti-money laundering (AML) and counter-terrorist financing (CTF) laws and procedures. 

Whatever the reason, there’s a lot to learn from bank failures. In an environment where regulations are increasing, bank closures are on the rise and difficult to predict, and international banking is becoming even more tedious to navigate.

All things considered, it’s more important than ever to know the warning signs of risky banks vulnerable to shut down.

Bank Failures 

Let’s look at a few bank failures that highlight the risks you need to look out for…

1. BPA, Andorra

Banca Privada d’Andorra (BPA) was an Andorran bank that imploded as the result of the U.S. Treasury Department listing it as a “primary money laundering concern” under the Patriot Act. The US government agency, FinCEN, accused BPA of facilitating transactions for criminal organizations from Russia, China, and Venezuela. They recommended that BPA should be banned from processing transactions through the US and encouraged foreign regulators to do the same. 

Within 24 hours, the bank was shut down.

The bank’s CEO was put in prison. Andorran and Spanish regulators seized the bank, froze the accounts, and stopped all operations. They capped the amount of money that customers could withdraw at €2,500 per week, effectively denying customers access to their money. This was one of the largest banks in the country.

Because of the bank’s lax compliance standards, they angered US authorities, who effectively shut it down.

2. Versobank, Estonia

In March 2018, the European Central Bank (ECB) revoked Versobank’s banking license. Why? The bank didn’t implement proper procedures to prevent money laundering and terrorism financing. And, they were catering to lots of risky non-resident customers.

The timing was interesting. Nearly two weeks after the US government agency, FinCEN, announced that ABLV, another Latvian bank, was a “money laundering concern” and would be cut off from the US financial system, the ECB decided to crackdown on Versobank.

All transactions and withdrawals were suspended and the bank was shut down. 

Our analysts spotted several warning signs years at Versobank before the road to shutdown began and the ECB got involved. Insiders can learn more about what we uncovered by checking out the Versobank profile in GlobalBanks database.

3. Caledonian Bank, Cayman Islands

Caledonian Bank, based in the Cayman Islands, went bankrupt in 2015 just days after the US Securities and Exchange Commission (SEC) brought a lawsuit against the bank for fraudulent stock offerings. 

The US courts froze all the bank’s US assets and depositors rushed to the bank to withdraw their funds. But the bank didn’t have enough money to pay back depositors. 

Just four days after the US government filed their lawsuit, all operations were suspended,  Calendonian’s banking license was revoked, and the bank was out of business.

4. ABLV, Latvia

In 2018, ABLV, the third-largest bank in Latvia collapsed after the US government’s Financial Crimes Enforcement Network (FinCEN), stated that ABLV was a “primary money laundering concern.” That notice set off a chain reaction and triggered a run on the bank.

Back in 2017, the bank promised to have a “zero-tolerance policy” on North Korea but then serviced sanctioned entities that were directly involved with North Korea’s acquisition of ballistic missiles. So, ABLV was facilitating terrorism and failing to prevent money laundering. 

Of course, before the North Korea incident, ABLV was known for attracting Russian money and having low KYC/AML standards. For instance, in 2015 GlobalBanks analysts found that the bank allowed non-residents and offshore companies to open accounts without any ties to Latvia. While this was common in Latvia at the time, it suggested that the bank lacked proper AML, KYC, CFT procedures and had a very lenient approach to compliance and client onboarding.

A high percentage of the bank’s assets were also from non-residents. In 2017, nearly 85% of ABLV’s deposits were from the former Soviet Union and offshore companies. Also, foreigners and offshore companies were allowed to open accounts at rep offices, most of which were located in high-risk locations that are known for money laundering: Moscow, St. Petersburg, Yekaterinburg, Vladivostok, Kiev, Odessa, Minsk, Almaty, Dushanbe, Baku, and Tashkent. 

After the US government labelled ABLV a money laundering concern, the bank lost access to the US financial system, lost its banking license, and eventually liquidated. Its customers are still struggling to get their money back and thousands have reported problems opening accounts at banks elsewhere, as there is heightened risk associated with former customers of ABLV.

5. FBME Bank Ltd, Cyprus and Tanzania

FMBE was a Tanzanian bank that carried out most of its operations in Cyprus. It suffered a heavy blow after the U.S. Department of the Treasury’s FinCEN arm accused it of facilitating transactions for numerous criminal organizations, including Hezbollah. 

In response, the Central Bank of Cyprus revoked its banking license. FBME also lost its U.S. correspondent accounts and was cut off from the US financial system. It’s now defunct.

What can we learn from these bank failures?

First, all these banks were solvent when they went down.

Bank failures don’t just happen in times of economic crisis and poor financials anymore. Lax compliance and upsetting regulatory authorities (or the U.S. government) can get a bank shutdown. 

And, that means financial losses, frozen accounts, and a massive inconvenience for customers.

Second, compliance failures come in different forms. And all of them can ruin a bank.

For example, FBME was well-known for attracting Russian money, having abnormally easy KYC requirements, and relaxed account opening procedures

By contrast, BPA in Andorra had stricter protocols for “new customers” and had higher minimum deposit requirements, but was still facilitating illicit activity and servicing drug cartels. 

Third, you need to know the warning signs.

There are always signs that indicate whether a bank is risky and vulnerable to shutdown.

In all of the instances referenced above, there were indications that these banks could be headed towards a closure. This included an openness to high-risk industries, attraction of clients from specific jurisdictions, and poor implementation of KYC & AML procedures, just to name a few basic examples.

What does this mean for GlobalBanks Insiders?

Be hyper-vigilant. Do your homework. Avoid unsafe banks with risky business models who skimp on compliance and are prone to failure. They will eventually get shut down.

The GlobalBanks team monitors and analyzes the offshore banking world, keeping tabs on the data, trends, and new opportunities that matter to individuals and businesses.

In a future article, we’ll outline the warning signs of risky banks prone to shutdown in greater detail.

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