Korean banks face increased scrutiny on cash dealings.

Chang Kyu Park was nearly 30 before he saw his first check. It was 1971, the year he immigrated to the United States from Korea. "Only conglomerates used checks," said Park, a pharmacist. For small businesses back home, cash was the only way "to buy and sell."

The tradition continues in Koreatown, where thousands of cash-based small businesses, such as groceries and coin-operated laundries, have thrived for years. For banks serving Korean-American customers, receiving cash deposits for thousands of dollars is business as usual.

Now, local Korean-American bankers say regulators have suddenly become more interested in high volumes of cash flowing in and out of their institutions -- a practice largely ignored before Sept. 11.

"Regulatory agencies have been tightening up," said Yong Ku Choe, senior Vice president and chief financial officer at Hanmi Financial Corp.

Since November, three of the six Los Angeles-based banks catering to Korean clientele have entered into consent orders with the federal government to insure compliance with the Bank Secrecy Act, which requires banks to report cash transactions greater than $10,000.

Consent orders are, in effect, stern warnings in which regulators identify problems the bank consents to fix, usually within a few months. Should the bank falter, the authorities may take more serious actions, such as imposing fines and, ultimately, ceasing deposit insurance coverage.

Christy Cornell-Pape, a case manager and Bank Secrecy Act specialist at the San Francisco regional office of the Federal Deposit Insurance Corp., said smaller banks have a higher frequency of BSA violations, though she was reluctant to attach much significance to it.

"This happens a lot to smaller banks, and sometimes it happens at ethnic banks because they don't take the time and money to hire someone," she said. "I wouldn't say that it's a complete coincidence, but I don't think three banks makes a trend, either," she said.

To get in line with regulators, the local banks have upgraded information technology systems, retrained employees and, in at least one case, hired a compliance officer. Analysts called the moves "immaterial" to the banks' bottom line.

Debating impetus

While the steps are widely acknowledged, regulators and bank management disagree on the motivations.

Regulators claim that they've always been tough on monitoring the movement of large volumes of cash and other signs of money laundering.

Local bankers -- and the analysts who follow them -- said that just isn't so.

"The laws didn't change, the Bank Secrecy Act has just become more strictly enforced," said Steve Didion, president of Hoefer & Arnett in San Francisco and an equity analyst covering community banks throughout California. "That's not to say these are illegitimate businesses or criminal enterprises. The genesis of the orders, in my understanding, was Sept. 11."

In recent weeks, the Bush administration has been proposing a variety of money laundering rules that will cover not only banks, but credit-card companies, wire-transfer firms and even mutual funds. The concern is that financial institutions of all kinds are susceptible to criminal activity -- borne out by revelations that the terrorists responsible for the Sept. 11 hijackings used credit cards and wire services to move money.

In L.A., the most recent consent order, issued in March, was to Pacific Union Bank, the second largest Korean-American bank based in Los Angeles, with $770 million in assets.

Diane Kim, Pacific Union's senior vice president and chief financial officer, said the tone of the FDIC's bi-annual "safety and soundness" examination, which began Sept. 4, changed quickly after Sept. 11. Safety and soundness exams are regular assessments by regulatory agencies of banks' financial health and operations.

"Prior to this exam we never had any major issues, and we've had many exams before," she said.

Cornell-Pape said the FDIC has not changed its policies since Sept. 11 and declined to comment on any particular financial institution.

"In my mind it's unfortunate, but BSA compliance sometimes takes a back seat in the safety and soundness exam," she said. "That has not changed, we still look primarily at the financial condition of the institution."

A month before Pacific Union Bank entered into its agreement with the FDIC, Nara Bancorp entered into a similar agreement with the Office of the Comptroller of the Currency (OCC), its primary regulator. "They found that our cash transaction-related monitoring systems were lacking to their level," said Timothy Chang, senior vice president and treasurer at Nara.

Chang said his bank has since begun "retraining employees to adhere to the Bank Secrecy Act and anti-money laundering clauses," and has hired a compliance officer.

Depending on their charters, banks may be regulated by the OCC, FDIC or the Federal Reserve Board.

Continued vigilance

OCC regulators say nothing has changed since Sept. 11.

"I don't think there's been any uptick in money laundering related actions," said Dan Stipano, deputy chief counsel at the OCC. "Bank regulators have been very vigilant in this area for some time."

Still, Nara's announcement of a consent order came as a surprise to analysts at CIBC World Markets, who in a report to investors reassured them that the bank's bottom line would not be affected.

"Regulators have apparently taken a stricter look at this issue in the post-9-11 environment, particularly at smaller community banks," the report said. "Management is optimistic that the consent order will be lifted following the next regulatory exam in September. We do not believe that this will hurt Nara's internal growth outlook this year."

On Nov. 30, the FDIC entered into a consent order with another local Korean-American institution, California Center Bank. Following a re-examination, the FDIC terminated the order early this month. Officials from CCB were said to be out last week but a spokesperson said "it's absolutely true" that regulators have been paying more attention banks' adherence to the Bank Secrecy Act.

Meanwhile, Park, the druggist, said the cash culture is not about to change. A member of the board at Hanmi, the largest Korean bank in Los Angeles with $1.2 billion in total assets, he said, "The banks are responsible, the Korean people are not used to checks."

Regulators and banking officials agree that some changes are inevitable.

"As long as the institution is correctly reporting the transactions we could care less (about cash transactions)," Cornell-Pape said.

Kim said she thinks the recent actions are good for the Korean banking community as a whole. "I think a lot of Korean-American banks have taken this in a positive light," she said. "It's time for us to take a look at ourselves. You go to the airport now and you have to endure the long waits, banks have to have heightened awareness as well."