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U.S. Announces Final Decision to Rescind Cuba's Designation as a State Sponsor of Terrorism
On May 29, the Secretary of State announced his final decision to rescind Cuba’s designation as a State Sponsor of Terrorism, effective immediately. The removal of Cuba’s designation followed the Department of State’s comprehensive review of Cuba’s record and the end of a 45-day Congressional pre-notification period after the President certified in an April 14 report to Congress that (i) Cuba has not provided any support for international terrorism during the preceding 6-month period; and (ii) the Cuban government has provided assurances that it will not support acts of international terrorism in the future.
NY DFS Reveals Final BitLicense Requirements for Digital Currency Firms
On June 3, New York’s departing superintendent of financial services, Benjamin Lawsky, revealed that the agency has adopted final regulations of the BitLicense, the regulatory framework in which digital currency firms operate within the state. In prepared remarks delivered at the BITS Emerging Payments Forum in Washington, D.C., Lawsky announced that the final BitLicense – which has undergone two previous updates – contains key consumer protection, AML compliance, and cybersecurity requirements. Moreover, Lawsky advised of the latest changes, and provided guidance clarifying that (i) firms that wish to obtain both a BitLicense and a money transmitter license will not have to submit separate applications, if they can satisfy the requirements for both; (ii) firms filing suspicious activity reports (SARS) with federal regulators, such as FinCEN, will not have to file a duplicate set of SARS with the state; (iii) firms must obtain prior approval for changes to their products or business models; (iv) firms will not require prior approval from the regulator for each round of venture capital funding, unless the investor seeks to oversee the company’s management and policies. Lawsky also clarified that the DFS intends to regulate only financial intermediaries who hold customer funds, rather than software developers who specifically focus on developing software, and do not hold customer funds.
Nevada Enacts Payday Lender Best Practices Act
On May 27, Nevada Governor Brian Sandoval signed into law S.B. 242, enacting the Payday Lender Best Practices Act. The legislation requires payday and similar lenders to use various specified best practices – advocated by the Community Financial Services Association of America – to strengthen consumer protections and promote responsible lending. The Act applies to any lender licensed within the state who operates a deferred deposit loan service, high-interest loan service, or title loan service. In addition to requiring lenders to fully comply with federal TILA disclosure requirements, the Act mandates lenders must also, among other things, (i) disclose to and provide borrowers with the option to enter into a repayment plan if the borrower is unable to pay; (ii) include a notice on marketing materials and advertisements advising borrowers that the loan should be used for short-term financial needs, and that borrowers with credit impairments should seek credit counseling; and (iii) report violations of Nevada’s short-term loan law to the state’s Financial Institutions Division.
Silk Road Operator Sentenced to Life in Prison
On May 29, US District Judge Katherine Forrest sentenced Ross Ulbricht – operator of the online dark market known as Silk Road – to life in prison without the possibility of parole. As previously reported, Ulbricht was found guilty by a federal jury on February 4, 2015 for his alleged creation, ownership, and operation of a website where activities included narcotics distribution, computer hacking, and conspiracy. In addition to a life in prison sentence, Ulbricht has been ordered to pay over $180 million to the federal government. During the year and a half-long legal process of convicting and sentencing Ulbricht, the DOJ also charged two former federal agents with wire fraud and money laundering of digital currency, and held several government auctions to sell bitcoins seized during its investigation of Silk Road.
FIFA Investigation Updates: President Resigns Amidst Corruption Probe; Interpol Issues Red Notices For Six
On June 2, continuing the fallout from the racketeering, wire fraud, and money laundering indictments announced last week by DOJ against soccer executives at FIFA and others tied to the organization, FIFA President Sepp Blatter announced his resignation, less than a week after being re-elected to lead soccer’s governing body. It has been reported that Mr. Blatter is the focus of the same federal corruption investigation. Blatter’s announcement was a reversal from his remarks after winning re-election, stating then “Why would I step down? … That would mean I recognize that I did wrong.”
One day after Blatter’s announcement, Interpol issued Red Notices for six individuals linked to the FIFA corruption investigation, including for two former FIFA officials. The two former FIFA executives, Jack Warner, a Trinidad & Tobago national and former FIFA vice president and executive committee member, and Nicolás Leoz, a Paraguayan national and former FIFA executive committee member, have been arrested in their home countries. The other four Red Notices, which alert Interpol’s member nations that arrest warrants have been issued by a judicial authority (here, the United States) and seek the location and arrest of wanted persons with a view to extradition, were issued for four South American nationals and corporate executives.
Three Acquitted In UK Trial For Alleged Nigerian Corruption
On May 27, a London jury found three employees of Swift Technical Solutions Ltd (Swift) not guilty of corruption charges in connection with alleged corrupt payments to tax officials in Nigeria. The SFO announced the verdict on June 2. As to one defendant, the jury was unable to reach a verdict on one count and was discharged; the SFO informed the Southwark Crown Court that it would not seek to retry that defendant on that count and the court entered a verdict of not guilty.
The SFO brought the corruption charges in late 2012 after a two-year investigation related to the tax affairs of a Swift Nigerian subsidiary. The SFO alleged that the Swift employees paid bribes totaling approximately £180,000 in 2008 and 2009 to Nigerian tax officials to avoid, reduce, or delay paying tax on behalf of workers placed by Swift. The alleged bribes occurred before the enactment of the U.K. Bribery Act and allegedly went to agents of two Nigerian Boards of Internal Revenue – the Rivers State Board of Internal Revenue and the Lagos State Board of Internal Revenue. The SFO did not charge Swift with any criminal offense, citing its cooperation with the agency.
Special Alert: CFPB Issues Statement on TRID Enforcement
On June 3, CFPB Director Cordray responded to requests from industry and members of Congress for delayed enforcement of the Bureau’s TILA-RESPA Integrated Disclosure (“TRID”) rule, which will take effect for applications received on or after August 1, 2015. The Bureau did not, as many had hoped, delay the effective date or establish a “hold harmless” period during which the rule would be in effect but public and private enforcement would be limited.
Instead, Director Cordray stated that he had spoken with other regulators “to clarify that [the Bureau’s] oversight of the implementation of the [TRID] Rule will be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the Rule on time.” As noted in Director Cordray’s letter and a related CFPB blog post, this is consistent with the approach applied by the Bureau in early 2014 after the Ability-to-Repay/Qualified Mortgage Rule, Mortgage Servicing Rules, revised Loan Originator Compensation Rule, and other regulations implementing Title XIV of the Dodd-Frank Act took effect. Director Cordray noted that, in the Bureau’s view, this approach “has worked out well.” The Bureau stated in its Winter 2015 Supervisory Highlights that “[m]ost of the Title XIV rules took effect in January 2014 and the CFPB commenced supervisory examinations for compliance four months after the effective date.”
The Bureau’s statements, while helpful in understanding its general approach to supervision and enforcement under the TRID rule, do not provide guidance on what constitutes “good-faith efforts to come into compliance.” Instead, as with the Title XIV rules, this will be determined by the Bureau on a case-by-case basis. Furthermore, the “good-faith efforts” standard will not apply in actions brought by borrowers to enforce the provisions of the TRID rule that carry a private right of action.
Click here to view the full Special Alert.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeremiah S. Buckley, (202) 349-8010
- Jeffrey P. Naimon, (202) 349-8030
- Benjamin B. Klubes, (202) 349-8002
- John P. Kromer, (202) 349-8040
Buckley Sandler FinCrimes Webinar Series Recap: Best Practices in Customer Due Diligence and Know-Your-Customer
BuckleySandler hosted a webinar, Best Practices in Customer Due Diligence and Know-Your-Customer, on May 21, 2015 as part of their ongoing FinCrimes Webinar Series. Panelists included Eric Arciniega, Senior Manager, BSA/AML Due Diligence Operations at First Republic Bank; Janice Mandac, Global Head of KYC at Goldman Sachs; and Nagib Touma, Director Global AML/KYC at Citi. The following is a summary of the guided conversation moderated by Jamie Parkinson, partner at BuckleySandler LLP, and key take-aways you can implement in your company.
Best Practice Tips and Take-Aways:
- Establishing company-wide/global standards for your company’s customer due diligence and KYC program will help to ensure consistency throughout the organization. But, for global institutions, you must also be able to accommodate jurisdictions with requirements that are more stringent than the global standards.
- Be aware of data privacy standards in the countries where you operate. These standards pose a particular challenge to operating a centralized customer due diligence and KYC program.
- Regulators’ recent focus on model risk management extends to your customer risk rating model. Ensure that your model is being tested and tuned rigorously.
Balancing Globalization with Regional Variations
The panelists began the session by discussing how to take advantage of the benefits of a globalized customer due diligence and KYC program while accounting for jurisdictional variations in legal requirements. The panelists observed that a good approach is to first create baseline standards that apply globally and then append local requirements onto the global standards. Panelists felt that it was best to integrate any local requirements into the centralized customer due diligence and KYC system rather than create separate systems for regions with more stringent requirements. To make this possible, the centralized AML function must have ongoing communication with local teams that are on the ground in these jurisdictions.
The panelists discussed the challenges posed by jurisdictions with data privacy requirements that make it impossible to house customers’ information in a centralized database. In Switzerland for example, one panelist explained that the company has created a separate incidence of the customer due diligence and KYC system with firewalls to ensure that the data privacy requirements are fulfilled. Other jurisdictions’ requirements could lead a company to create a duplicate record of a customer’s information for use outside the jurisdiction. The panelists suggested categorizing jurisdictions into buckets based on how open or private they are to create controls that prevent unauthorized access.
The panelists stressed the value of leveraging your company’s technology to acquire a consistent set of information about new customers during the onboarding process. When a customer has one record across the company, that information can be used by different lines of business and different applications can be run off of the database. This same principle applies when a company implements a global case management tool for AML cases.
Effective Customer Risk Rating Models
The panelists identified many different factors that an effective customer risk rating model should take into account. These included:
(1) The kinds of business the customer is engaged in;
(2) Locations in which the customer operates;
(3) Whether the customer maintains custodial accounts;
(4) Reputational risk associated with the customer;
(5) Negative news reports on the customer; and
(6) SARs filed on the customer.
Here, too, the panelists noted the challenge of incorporating jurisdictional variation in requirements, such as a country requiring certain industries to be rated high-risk, into a globalized system. But again, the panelists felt that the best approach was to establish a global model and incorporate jurisdictional-specific requirements. One panelist described a peer-grouping function that compares a customer to similar customers within the company’s portfolio to see if the customer is operating much differently than similar customers.
The panelists observed that regulators have placed particular emphasis on models in general, including customer risk rating models. Accordingly, the panelists stressed the importance of the Supervisory Guidance on Model Risk Management released by the OCC in April 2011 when testing and tuning your customer risk rating model. The panelists generally agreed that testing and tuning the customer risk rating model should be an ongoing process with enhancements made to the model on a regular basis; perhaps annually or quarterly. A regular review should also be conducted to look for new factors that should be considered in the model.
Looking ahead
The panelists concluded the session by discussing what issues related to customer due diligence and KYC they anticipated being especially important in the upcoming year. Several panelists mentioned the anticipated beneficial ownership rules. The panelists said that they are beginning to have internal discussions about the costs and changes that will need to be made to comply with the new requirements. The panelists also mentioned that meeting regulatory expectations for their customer risk rating models will also be an important issue.
CFPB and DOJ Settle With Mortgage Lender for Alleged Discriminatory Mortgage Pricing
On May 28, the CFPB, along with the DOJ, filed a joint complaint against a California-based mortgage lender alleging that the lender violated the Equal Credit Opportunity Act by engaging in a pattern or practice of discrimination from 2006 to 2011 that increased loan prices for African-American and Hispanic borrowers. The DOJ also alleges that the lender violated the Fair Housing Act. According to the complaint, the lender’s mortgage broker compensation policy, which incented discretionary interest rate and fee increases to borrowers, resulted in approximately 14,000 African-American and Hispanic borrowers being charged higher total broker fees on wholesale mortgage loans than non-Hispanic white borrowers. The complaint alleges that the higher fees were not based on the borrowers’ credit risk profile, but rather on the basis of race or national origin. The parties separately filed a proposed consent order which would require the mortgage lender to, among other things, pay $9 million in consumer relief to affected borrowers to resolve the allegations. The proposed consent order is currently pending court approval.
HUD Reaches $200 Million Settlement Over Redlining Allegations
On May 26, the U.S. Department of Housing and Urban Development announced that it entered into a conciliation agreement with a Wisconsin-based bank to resolve claims that, from 2008 to 2010, the bank discriminated on the basis of race and national origin by denying loans to qualified African-American and Hispanic applicants, and making few loans in majority-minority census tracts in five metropolitan areas in Illinois, Minnesota, and Wisconsin (while making loans in nearby predominantly white tracts). Among other things, the agreement requires the bank, over a three-year period, to: (i) pay nearly $10 million in the form of lower interest rate home mortgages and down payment/closing cost assistance to qualified borrowers in majority-minority census tracts in specified housing markets in Illinois, Minnesota, and Wisconsin, (ii) invest nearly $200 million in increased mortgage lending in majority-minority census tracts in these areas, (iii) provide nearly $3 million to help existing homeowners repair their properties in these predominantly minority communities, (iv) pay $1.4 million to support affirmative marketing of loans in these census tracts, and (v) open offices in certain specified majority-minority census tract areas. According to HUD, this is the largest redlining settlement that it has initiated.