Taft v. Agric. Bank of China Ltd.

• Decision Date: 12 May 2016
• Docket Number: 15 Civ. 5321 (PAE)
• Parties: NATASHA TAFT, Plaintiff, v. AGRICULTURAL BANK OF CHINA LTD., Defendant.
• Court: U.S. District Court — Southern District of New York

NATASHA TAFT, Plaintiff, v. AGRICULTURAL BANK OF CHINA LTD., Defendant.

15 Civ. 5321 (PAE)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

May 12, 2016

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge:

Plaintiff Natasha Taft claims that she was constructively discharged from her position as chief compliance officer in the New York branch of defendant Agricultural Bank of China Ltd. ("ABC") in retaliation for bringing certain regulatory issues to the attention of the Federal Reserve Bank of New York ("FRBNY").¹ On January 6, 2016, the Court dismissed, with leave to amend, Taft's whistleblower claim under the Bank Secrecy Act ("BSA"), 31 U.S.C. § 5328(a). Dkt. 50, reported at Taft v. Agric. Bank of China Ltd., No. 15 Civ. 5321 (PAE), 2016 WL 80209 (S.D.N.Y. Jan. 6, 2016) ("January 6 Decision"). Taft then timely amended her operative complaint, adding substantial new allegations about what she reported to the FRBNY and how it responded.

For the following reasons, the Court denies ABC's renewed motion to dismiss.

I. Background²

A. Facts

Taft was employed by ABC between August 2014 and June 5, 2015, when, she alleges, she was constructively discharged. SAC ¶ 3. During this time, she was the chief compliance officer and head of legal and compliance at ABC's New York branch. Id. ¶ 6. Taft had 18 years of experience in compliance and anti-money laundering. Id. ¶ 9. As chief compliance officer, she reported to Jason Zhang, the branch's deputy general manager; Ming Yu was the general manager. Id. ¶ 8. During this time, Taft was the only "C" level female (referring to corporate management) and the only non-Chinese female manager. Id. ¶ 10.

In her capacity as chief compliance officer, Taft "was responsible for ensuring that ABC complied with the many regulations governing its transactions, including the [BSA] and its corresponding federal regulations." Id. ¶ 15. Among other things, Taft and her Compliance Department "were tasked with monitoring" the branch's "large number of international transactions" to "ensure that [ABC] adhered to anti-terrorism and anti-money laundering regulations." Id. ¶¶ 17-18. (The BSA principally requires financial institutions to keep records and file reports that might assist government agencies in detecting and preventing money laundering. See Bank Secrecy Act, United States Dep't of the Treasury, https://perma.cc/YC7F-3LEB.)

ABC used the network operated by the Society for Worldwide Interbank Financial Telecommunication ("SWIFT") to transmit information related to international financial transactions. Id. ¶ 18. ABC used the SWIFT "MT202" format to prepare instructions relating tobank-to-bank transactions, while transactions on behalf of customers were prepared using the "MT202 COV" format. Id. ¶ 19.

In or around September 2014, Taft, following a tip from members of her department, discovered that "a staggering 30% of ABC's transactions, approximately, contained a code of letters and numbers in field 21 of the MT202 format," which Taft knew was "not required to be filled in and was generally left blank in a bank-to-bank transaction." Id. ¶¶ 21-22. To Taft, this indicated that the transaction was "not actually a bank-to-bank transfer, but rather was a payment made on behalf of a customer, so that a MT202 COV format should have been used, containing information regarding the transmittor and recipient." Id. ¶ 23. On this basis, Taft became concerned that ABC was "improperly labeling transactions" so as "to hide information regarding the transmittor and recipient." Id. ¶ 24.

Taft believed that this practice possibly violated the BSA's "Travel Rule." Id. ¶ 26. The Travel Rule, a regulation promulgated under the BSA, requires a transmittor's financial institution to include specified customer-identifying information³ in any transmittal order of $3,000 or more; it also requires an intermediary financial institution⁴ to convey the same information in any corresponding transmittal order if received from the transmittor's financial institution. See 31 C.F.R. § 1010.410(f). Without such customer-identifying information, Taft alleges, her Compliance Department "was unable to properly screen and monitor approximately30% of the branch's transactions to ensure" compliance with Office of Foreign Assets Control ("OFAC") and other anti-money laundering ("AML") requirements. Id. ¶ 27.

Taft brought these concerns to her boss Zhang and to chief financial officer Joe Franzese, but she was told "she was wrong and that there were no issues with the transactions [she] identified." Id. ¶ 28. Thereafter, Yu and Zhang, contrary to past practice, refused to allow Taft's Compliance Department to request information from ABC's home office about the customers associated with the identified transactions. Id. ¶ 30. Therefore, the Compliance Department could not run the transactions through OFAC filters to determine if they involved prohibited countries, such as Iran or Sudan. Id. ¶ 31; see also id. ¶ 25 (describing other transactions that Taft learned, after an information request to the home office, involved such sanctioned countries).

Taft ultimately advised Yu that "she had an obligation to report her findings to the regulators and that she would do so, regardless of whether ABC would consent or not." Id. ¶ 33. Taft agreed to "couch her concerns as a 'request for guidance,'" even though ABC and Taft knew that she was addressing "what she believed was a potential violation of law." Id. ¶ 34.

Shortly thereafter, Taft called William Hilton, the FRBNY's Supervisory Manager of Foreign Financial Institutions. On that call, Taft "described ABC's conduct and her concern that [ABC] was intentionally violating the law," pointing to "weak customer due diligence for trade finance customers, lack of information on those payments, heavy volumes of those payments, misusing payment formats, a history of OFAC reported potential violations, transactions involving Iran, Sudan and other high-risk areas, weak [AML] monitoring controls and a refusal to respond to Compliance's requests for information." Id. ¶ 35. She also told Hilton she had"faced hostility from management" for raising these concerns. Id. ¶ 36. Hilton asked Taft to send a memo reflecting her concerns. Id. ¶ 37.

After ABC learned about this phone call, it forbade employees from speaking with regulators unless Zhang or Franzese were present. Id. ¶ 38. Taft then prepared a memo, as Hilton requested. Id. ¶ 39. Zhang "demanded significant input into the wording of Taft's memo and sought to dilute the seriousness of the conduct referenced in the memo." Id. ¶ 40. But, Taft alleges, ABC "never wanted" Taft to communicate with regulators at all and the communication "only occurred because of Taft's independent efforts." Id. ¶ 45.

The memo from Taft to Hilton, dated November 10, 2014, begins by referring to their "recent conversation." SAC, Ex. A, at 1 ("Memo"). The Memo expresses "concerns" and seeks "guidance" about the Compliance Department's discovery of a "number of transactions related to clearing US Dollars for ABC's Trade related customers for Letters of Credit and Collection transactions," with respect to which the customers "are not identified on [the] payment messages." Id. at 1. The Memo states that "Compliance believes this represents risk for adequate OFAC screening or AML monitoring controls." Id. at 2.

The Memo reports that, before seeking the FRBNY's guidance on this issue, the Compliance Department "reached out to other banks, consulting firms and the regulators to better understand what the regulatory expectations are and what the industry practices are with respect to such transactions." Id. It adds that "Compliance was not able to identify specific regulation with respect to such scenarios," although it identified "various methods" in the industry for addressing the issue. Id. The Memo concludes by stating that "Trade Finance is a new frontier for money laundering and the regulators are taking a very firm approach to ensure clearing banks have adequate policies and controls," and, therefore, "we seek your guidance tofurther address this issue." Id. at 3. Attached to the Memo was a document titled "Travel Rule Violation Example.pdf." Id. at 2. That document appears to be a print-out from the SWIFT messaging system; at the top of the document, someone, perhaps Taft, has scrawled "Trade Fin. Transaction without orig/ben." Id. at 4.

On February 4, 2015, the FRBNY—specifically Lawrence F. Rostoker, Supervisory Team Manager of the Financial Institution Supervision Group—responded to the Memo with a letter addressed to Zhang and Yu. See SAC, Ex. B ("FRBNY Letter"); see also SAC ¶ 43 (alleging that the letter was in response to the Memo). The FRBNY Letter said that "there is concern that MT202 payment messages are inappropriately being used for trade finance-related transactions rather than the MT202COV payment messages, which would include details of the underlying originators and beneficiaries or the customers and/or counterparties." FRBNY Letter at 1. The FRBNY Letter added that ABC was "processing significant volumes of trade finance-related transactions via MT202 messages." Id. This fact, "coupled with overall heightened risks posed by trade finance activities due to the lack of adequate transparency[,] raise concerns of undue BSA/AML and OFAC risks to the branch." Id. at 1-2. Therefore, the FRBNY wrote, "it is prudent for the branch to require transparency about all underlying customers in such transactions," e.g., by instructing its home office and "other respondents" that the MT202 COV format should be used where the bank-to-bank transfer relates to customer activity. Id. at 2.

Taft alleges that, as a result of the FRBNY Letter, ABC "was required to alter its business practices" to ensure greater transparency before its next regulatory examination. SAC ¶ 45. And ABC's management "became furious at Taft for impacting their business and exposing [ABC] to...