UPDATE 1-Fed tells Bank of Montreal to fight money laundering harder

By Emily Flitter

NEW YORK, May 17 (Reuters) - The U.S. Federal Reserve Boardsaid it has told Bank of Montreal to step up efforts to detectand prevent money laundering at the Canadian bank's Chicagobranch.

The warning puts Bank of Montreal in a growing category offinancial institutions under pressure to do a better job ofadhering to strict U.S. requirements for identifying potentiallyillegal activity by their customers.

The Fed entered into a written agreement requiring Bank ofMontreal to strengthen its compliance after a recent inspectionby the central bank's examiners found deficiencies in Bank ofMontreal's anti-money laundering program. The Fed made theagreement public on Friday.

A spokeswoman for the Fed declined to describe the problemsit found, saying its policy prohibits discussion of specificinstitutions.

"Our remediation activities are well underway," said BMOspokesman Paul Deegan. "BMO is fully committed to the higheststandards of regulatory compliance with Bank SecrecyAct/Anti-Money Laundering requirements and expectations in eachof the jurisdictions in which we operate."

The agreement said the Fed found Bank of Montreal's Chicagobranch "lacked effective systems of governance and internalcontrols to adequately oversee the activities of Bank ofMontreal's U.S. operations with respect to legal, compliance,and reputational risks."

Banks operating in the United States, whether they areAmerican or foreign, must closely monitor customer activity forsigns of money laundering or other illegal acts. They mustreport unusual behavior in the form of "suspicious activityreports" to the U.S. Treasury Department.

The Treasury uses the reports - sharing them with theFederal Bureau of Investigation and other law enforcementagencies - to help track down criminals and terrorists.

The U.S. Treasury is currently building a system to morebroadly share the banks' reports with U.S. spy agencies as well.

The anti-money laundering rules were first defined by theBank Secrecy Act and later strengthened by the USA Patriot Actafter the attacks of Sept. 11, 2001.

Scrutiny of these programs may get tougher this year,according to an April 5 note by Fitch.

Citing heavy fines the U.S. levied against HSBC andStandard Chartered for lapses in anti-money launderingcontrols last year, Fitch analysts predicted banks could spendmore this year on anti-money laundering compliance.

"For customers of affected banks, tougher AML scrutiny willlikely lead to longer transaction times, increased documentationrequirements, and potentially higher fees," the analysts wrote.

JPMorgan Chase & Co and Citigroup have also run intotrouble recently with anti-money laundering requirements.JPMorgan is under fire from another regulator, theOffice of the Comptroller of the Currency, which expected toissue a "cease-and-desist" order - a more serious citation thanthe Fed's warning to Bank of Montreal - in the coming months.

The Fed told Citi in March to improve its money-launderingmonitoring program.