Due Diligence Fails

Share This Post

Due Diligence Fails

Some Examples to Take Note of…

In this month’s Aegis Journal we invite you to look at two cases that include distinct failures in the Due Diligence Process. Each of these, to say the least, represents both a teachable moment and a red-faced moment (RFM) for the party’s experiencing the failures.

The first example is taken from the U.S. Treasury’s Office of Foreign Asset Control (OFAC) Enforcement Information dated June 27, 2013, which reads:

Wells Fargo Bank, N.A. Settles Potential Liability for Apparent Violations of the Foreign Narcotics Kingpin Sanctions Regulations (SDNTK):

Wells Fargo Bank, N.A. (“Wells Fargo”) has agreed to remit $23,937 to settle potential civil liability for 804 apparent violations of the Foreign Narcotics Kingpin Sanctions Regulations, 31 C.F.R. part 598. The Office of Foreign Assets Control (“OFAC”) has determined that Wells Fargo voluntarily self-disclosed the apparent violations, and that the apparent violations constituted a non-egregious case.

Between December 12, 2007, and March 11, 2010, Wells Fargo maintained accounts for, and processed 58 transactions totaling $22,211.94 on behalf of, Claudia Aguirre Sanchez (“Aguirre Sanchez”). On December 12, 2007, OFAC designated Aguirre Sanchez pursuant to the Foreign Narcotics Kingpin Designation Act, 21 U.S.C. 1901 et seq. (the “Kingpin Act”).

Wells Fargo opened the accounts prior to the December 2007 designation under the name “Claudia Aguirre.” When opening the accounts, the customer provided Wells Fargo with a U.S. address, a U.S. Social Security Number, and a date of birth. The date of birth provided in connection with opening the accounts matched the date of birth for Aguirre Sanchez on OFAC’s list of Specially Designated Nationals and Blocked Persons (“SDN List”).

Separately, between November 14, 2008, and May 6, 2010, Wells Fargo maintained accounts for, and processed 746 transactions totaling $53,780.39 on behalf of, Carlos Antonio Ruelas Topete (“Ruelas Topete”). OFAC designated Ruelas Topete pursuant to the Kingpin Act on January 12, 2005. Wells Fargo opened the accounts subsequent to that designation under the name “Carlos A. Ruelas.” When opening the accounts, the customer provided Wells Fargo with a U.S. address, a U.S. Social Security Number, and a date of birth. The date of birth provided in connection with opening the accounts matched the date of birth for Ruelas Topete on the SDN List.

The total base penalty amount for the apparent violations was $37,996. The settlement amount reflects OFAC’s consideration of the following facts and circumstances, pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, app. A. Mitigation was extended because Wells Fargo has not received a penalty notice or a Finding of Violation from OFAC in the five years preceding the date of the transactions giving rise to the apparent violations; the apparent violations processed by Wells Fargo could have been licensed by OFAC under licensing policy existing at the time of the apparent violations; Wells Fargo cooperated with OFAC throughout its investigation, including by signing a tolling agreement; and

Wells Fargo has taken significant remedial steps, including specific measures to bolster its screening processes, since these apparent violations occurred. OFAC considered the following to be aggravating factors in this case: at the time of the apparent violations, Wells Fargo did not include screening based on date of birth within its OFAC compliance procedures; and Wells Fargo is a very large and highly-sophisticated financial institution.

Lessons to be learned here: It is critical that all of the available data about a prospective or current client be used in the AML and Sanctions Screening Processes. In these examples using both the known client names and their dates of birth would likely have caused a match to the SDN entities named.  Additionally, perhaps a bit more information about the client in the account opening process might have helped alert someone in the bank about the name discrepancies between the names of the clients as presented to the bank and the SDN Names on the OFAC SDN List.  A good understanding of cultural nomenclature issues is also beneficial in account screening and KYC process.

Perhaps an independent SWOT analysis and testing of your sanctions compliance program to compare how things are really being done, measured against how you think they are being done might be in order?

~ ~ ~

The second example comes from testimony on June 26, 2013 at a U. S. House of Representatives Oversight Committee Hearing, regarding a contractor, who allegedly used his close friendship with an IRS employee to gain award a half-billion dollar contract with the IRS.  The contractor also apparently has claimed status as a disabled veteran, based upon a military prep school foot injury, thereby allowing him to compete more favorably in competing for government contract awards.

Rep. Tammy Duckworth (D-IL) is a combat veteran who has lost both feet (as a double amputee just below the knee) as well as most of the use of her right arm, due to enemy action in Iraq.

Braulio Castillo the president and CEO of Strong Castle, Inc. (formerly Signet Computers),

In 1984, Braulio Castillo was attending the U.S. Military Academy Prep School, where he injured his ankle during an orienteering exercise. Castillo left the prep school after nine months, then played football the following year at the University of San Diego.

According to Federal Times:

Still, 27 years later, soon after Castillo purchased a government contracting company, he filed a claim with the Veterans Affairs Department seeking compensation for a service-related disability, investigators found.

Once approved, the disability enabled Castillo’s company access to government set-asides through VA’s Service-Disabled Veteran-Owned Small Business program.

Castillo told a VA examiner weighing the company’s application for entry into the set-aside program about the “crosses I bear due to my service to our great country,” according to the report.

Castillo later told congressional investigators that his injury was debilitating over the years and that he’d had three (3) foot fusions. Had Castillo completed his year at the preparatory school without injury, he wouldn’t have been considered a veteran. However, a Veterans Administration official told U.S. House of Representatives investigators that cadets injured at school become veterans due to service-connected disability, the report said.

When it was Duckworth’s turn to question Castillo, Duckworth grew visibly upset with Braulio Castillo, as evidenced by the following testimony:

“Does your foot hurt?” Duckworth asked Castillo.

Castillo said affirmatively that it did.

“My feet hurt too,” said Duckworth. “In fact, the balls of my feet burn continuously, and I feel like there’s a nail being hammered into my heel right now. So I can understand pain and suffering, and how service connection can actually cause long-term, unremitting, unyielding, unstoppable pain.”

Then she added, “I’m sorry that twisting your ankle in high school has now come back to hurt you in such a painful way, if also opportune for you to gain this status for your business.”

Duckworth also contrasted Castillo’s injury to a friend who suffered an injury in Vietnam that resulted in death from cancer. She also detailed injuries to her arm.

“I’m still in danger of possibly losing my arm. I can’t feel it,” Duckworth pointed out.

Duckworth slammed Castillo for saying there are “crosses” he bears due to his injury. She said that Castillo was “gaming the system.”

“Shame on you, Mr. Castillo… Shame on you. You may not have broken any laws … but you certainly broke the trust of this great nation. You broke the trust of veterans,” Duckworth said.

Lessons to be learned here:  There seems to be multiple failures of due diligence in this case. First, there seems to be a failure of the Veterans Administration in verifying a legitimate service related injury to allow Castillo to claim disabled veteran status. It seems to us that foot injuries at military or any other prep school should not qualify when active duty military members are waiting on average between 8-9 months for their initial disability claims to be processed.

Secondly, there is an apparent failure in government contracting at the Internal Revenue Service to also allow this claim to be used to compete for set aside consideration regarding the $500M contract award.

Due Diligence is a process ~ not an action to be performed in checklist fashion. The checklists (thought lists) that many over rely upon are only a starting point in the process.  RFMs such as those described in these two examples are totally avoidable, provided that proper due diligence had been performed prior to the execution of client on boarding by Wells Fargo Bank and prior to contract execution by the Internal Revenue Service.

More To Explore