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District Court Denies Motion to Dismiss in Ongoing CFPB Litigation
On February 12, 2015 the U.S. District Court for the Western District of Kentucky held that claims presented by the CFPB regarding a Kentucky-based law firm’s alleged violations of Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) were legally plausible and denied the Defendants’ motion for judgment on the pleadings. The CFPB’s complaint—filed in October 2013 (as reported in InfoBytes Blog)—purported that principals of the law firm received illegal kickbacks for client referrals paid in the form of “profit distributions” from a network of affiliated title insurance companies. Additionally, it was asserted that the affiliated companies did not provide settlement services, thereby failing to comply with RESPA’s safe harbor for affiliated business agreements. 12 U.S.C. § 2607(c)(4). The Court stated that there was enough “factual detail” presented within the complaint for it to plausibly conclude that the firm had “committed the alleged misconduct,” that the Defendant failed to meet the first safe harbor element, and that the notice of the claim in the case had been “more than sufficient.” The memorandum also stated that the statute of limitations, which Defendants attempted to leverage, offered no guidance as to whether the firm was “entitled to judgment” on the pleadings, leading the Court to render its decision for the CFPB. CFPB v. Borders & Borders, PLLC, et al., No. 3:13-cv-1047-jgh (W.D. KY. February 12, 2015).
FinCrimes Webinar Series Recap: Individual Liability - FinCrimes Professionals in the Spotlight
BuckleySandler hosted a webinar, Individual Liability: Financial Crimes Professionals in the Spotlight, on January 22, 2015 as part of its ongoing FinCrimes Webinar Series. Panelists included Polly Greenberg, Chief, Major Economic Crimes Bureau at the New York County District Attorney’s Office, and Richard Small, Senior Vice President for Enterprise-Wide AML, Anti-Corruption and International Regulatory Compliance at American Express. The following is a summary of the guided conversation moderated by Jamie Parkinson, Partner at BuckleySandler, and key take-aways you can implement in your company.
Best Practice Tips and Take-Aways:
- Be completely transparent with senior management and your board of directors when escalating issues and concerns. Document your requests for program enhancements and management responses.
- Assure yourself that your team is up to the task at hand, adequately resourced and knows that they can escalate anything that concerns them to compliance and/or senior management/the Board.
- When considering the quality of your compliance program, be sure that your program is tested internally by your compliance function, tested again by your organization’s internal audit team, and in addition is examined every few years by external counsel/consultant.
- If confronted with management unwillingness to commit adequate headcount and resources necessary to the compliance program, serious consideration has to be given to resigning and/or reporting these deficiencies.
Significant Actions and Regulatory Statements
The discussion began by giving an overview of trends in enforcement actions in the last few decades, commenting that this topic has been simmering for a long time. In the Bank context, in the late 1980s a series of prosecutions against the Bank of New England, Shearson Lehman, and Bank Boston involved efforts to hold the institution as well as individuals liable. Largely, the government had success against the institutions on theories of collective knowledge and willful blindness but was less successful when prosecuting individuals.
In the brokerage context, the SEC has brought recent actions as part of the Compliance Program Initiative, including charges against compliance personnel when they were clearly responsible for the failure to adopt or implement adequate compliance programs. The SEC has signaled that it will take action against compliance officers if:
- They actively participated in misconduct;
- They helped mislead regulators; or
- They have clear responsibility to implement compliance programs or policies and wholly failed to carry out that responsibility.
Then identified recent enforcement actions taken against board members, including Pacific National Bank involving a failure to remedy deficiencies in that institution’s BSA program. In the Pacific National Bank case, the OCC levied individual fines against the bank’s chairman and three board members who served on its BSA compliance committee for failing to act in their official capacities to correct the failures.
Finally, identified remarks made by three key regulators at the November 2013 ABA/ABA and the March 2014 ACAMS conferences. These speeches reflect clear statements with respect to the government’s intention to hold individuals personally liable when the facts warrant. The remarks were made by:
- Jim Cole (Deputy Attorney General, retired Jan. 8, 2015)
- Thomas Curry (Comptroller of the Currency)
- Jennifer Shasky Calvery (Director, FINCEN)
Mr. Small then gave an overview of two significant enforcement actions that involved individual liability. The first case, Brown Brothers Harriman, was brought by FINRA in early 2014 and arose from penny stock transactions executed by the firm through an omnibus brokerage account structure. While the case resulted in an $8 million fine for Brown Brothers, the firm’s Global AML Compliance Officer, Harold Crawford, was also the subject of the enforcement action and was fined $25,000 and barred from working in a compliance function for one month. Crawford’s personal liability was premised on his alleged failure to effectively monitor suspicious activity and to report it as required. Mr. Small pointed out that there were references in the case to an internal Brown Brothers’ memorandum that was developed by their compliance group that cited the increase in potentially suspicious activity and recommended stopping the trades and discontinuing the omnibus brokerage structure that had been used to carry out the transactions. This memo was written in November 2011, and was not acted upon prior to FINRA’s action. Mr. Small observed that the Brown Brothers case was the first time that action was taken against an AML compliance officer for failures in the AML compliance program at their company. He further observed that the case raises the question of what a compliance officer should do if they are raising issues, but not receiving resources from management to address those issues.
The second action Mr. Small discussed, MoneyGram, also involved individual liability for a compliance officer. There, FINCEN and DOJ took joint action against MoneyGram related to a significant number of transactions initiated by MoneyGram that were connected to various fraud schemes. FINCEN and DOJ alleged that MoneyGram received a significant number of complaints from consumers but took no action to address them. FINCEN issued a $1 million civil money penalty against Thomas Haider, who served as ManeyGram’s Chief Compliance Officer from 2003-2008. DOJ filed a complaint to enforce the penalty and also seeking to bar Haider from employment in the financial services industry.
When asked how this case might bear on the design of a Financial Crimes compliance program, Mr. Small commented that it was his personal opinion that this case could be read as counseling against integrating an institution’s BSA compliance function with other functions, such as fraud monitoring if the compliance officer lacks the expertise or full authority over the integrated areas. For example, Mr. Haider had responsibility for performing due diligence on agents, terminating agents, and identifying fraud, in addition to suspicious activity monitoring and SAR filing. The first two of these tasks were ones over which he may not have had full authority and as to the fraud area one in which he lacked the expertise to properly oversee. The panelists agreed that while an institution’s compliance function must have unfettered access to the institution’s data, it is important that the compliance function does not take on responsibilities outside of its area of expertise.
Theories of Individual Liability
Ms. Greenberg then discussed the different theories that can be used to find individual liability. She emphasized that the underlying basis of criminal liability is criminal knowledge and intent to do a particular act. Ms. Greenberg explained that it can be easier to find liability for a corporation due to the theory of collective knowledge. Under this theory, the knowledge of the corporation’s employees is imputed to the corporation, and the corporation is bound by this collective knowledge. So, while no single employee might possess sufficient knowledge to support individual liability, numerous individuals’ knowledge may be combined and imputed to the corporation and this collective knowledge may be sufficient to hold the corporation liable.
Ms. Greenberg also discussed the theory of willful blindness, which is primarily used under federal law. Under this theory, an individual has a subjective belief that there is a high probability that a fact exists but avoids learning whether the fact actually exists. Ms. Greenberg also pointed out that there is a similar concept under New York law called conscious avoidance.
Finally, Ms. Greenberg discussed the considerations taken into account in assessing whether it is appropriate to charge an individual in the corporate crimes context. Initially, authorities must consider whether there was criminal intent and whether that intent can be proven. They must also consider whether they can prove the level of knowledge required by the relevant statute, such as, knowingly, intentionally, or willfully. After deciding that there is probable cause to believe an individual had the required intent, Ms. Greenberg explained that the authority will then consider various factors in exercising prosecutorial discretion. In deciding whether to charge an individual in the corporate crime context, fairness is given much consideration. Ms. Greenberg observed that charging higher-level employees in this context may be more common than charging lower-level employees because higher-level employees bear more responsibility for the corporation and play a much larger role in influencing the corporate culture.
Considerations for Compliance Professionals
The panelists noted that it is very important for compliance professionals to have their areas of responsibility clearly defined, and to ensure that they have the control and expertise to manage these areas appropriately, as well as sufficient resources to carry out the compliance program effectively. It was pointed out that the areas most often associated with institutional and individual liability include:
- Failures in the culture of compliance within the organizations;
- Inadequate resources committed to BSA compliance;
- Weaknesses in the organization’s technology and transaction monitoring processes; and
- Inadequacies in the quality of risk management.
Mr. Small stressed the importance of being transparent with senior management and the board of directors when faced with a lack of resources, commenting that it is important to discuss the issue, listen to any proposed alternatives, and take a stance on what the best solution is. The panelists stressed the importance of documenting your requests and the responses and agreed that such documentation can be important to enforcement authorities in deciding whether to charge individuals. The panelists agreed that the trend towards increased individual liability could result in increased SAR filings. IT was suggested that it may be safer to file a SAR when in doubt but defensive SAR filing should be avoided if possible. He noted too that it is very important to thoroughly document decisions not to file.
Department of Education Publishes Intent to Establish a Negotiated Rulemaking Committee to Develop Pay as You Earn Expansion Regulations
On September 3, the Department of Education (the “Department”) announced its intent to establish a negotiated rulemaking committee to help develop regulations to allow more student borrowers of Federal Direct Loans to use the Pay as You Earn Repayment Plan (“PAYE Plan”). President Obama expanded the eligibility for the PAYE Plan, which caps payments at 10% of annual income, in a Presidential Memorandum issued on June 9, 2014 in which he charged the Department to establish new regulations to implement this expansion. The Department intends to select participants for the committee from nominees of the organizations and groups that represent the interests significantly affected by the proposed regulations. The Department will hold two public hearings, on October 23 and November 4, to discuss the rulemaking agenda and plans to thereafter establish a committee. The Department expects that the committee will begin negotiations in February 2015 and will meet in the Washington, DC area.
CFPB Interagency Agreement Increases Oversight Of Colleges Serving Veterans
Recently, the CFPB signed a memorandum of understanding with the Departments of Veterans Affairs, Defense and Education to improve outreach and transparency to veterans and servicemembers by providing meaningful information to help them make informed decisions when selecting an institution of higher learning, including access to financial cost and performance outcome information. These improvements for military educational benefit recipients are designed to prevent deceptive recruiting practices and ensure that educational institutions provide high-quality academic and support services to veterans and servicemembers. Specifically, the agreement requires the CFPB to (i) designate the Assistant Director for Servicemember Affairs, Holly Petraeus, as the point of contact for information sharing processes among the Departments of Veterans Affairs, Defense and Education; (ii) alert agencies to patterns of noncompliance; and (iii) provide complaint data to the FTC. On August 26, the CFPB issued a press release describing this agreement as a means to better protect veterans, servicemembers, and their family members attending college by carrying out “a comprehensive strategy to strengthen enforcement and compliance work.” The agreement is effective July 18, 2014.
Federal District Court Holds Bitcoin Is Money
On August 19, the U.S. District Court for the Southern District of New York found that Bitcoin is “money” in a memorandum order denying a defendant’s motion to dismiss a federal money laundering charge. Faiella et al. v. United States, No. 14-cr-243 (JSR), 2014 WL 4100897 (S.D.N.Y. Aug. 19, 2014). The defendant is a former Bitcoin exchange owner who was charged in 2013 with unlawfully operating an unlicensed money transmitting business. In his motion before the court, the defendant argued that the charge should be dismissed because Bitcoin is not “money” within the meaning of the statute. The court disagreed, relying upon the dictionary definition of “money” to conclude that Bitcoin “clearly qualifies as ‘money’” as it “can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.” The court additionally relied on Congress’ intent that anti-money laundering statutes keep pace with evolving threats, and also cited an opinion from a similar case in the U.S. District Court for the Eastern District of Texas that concluded Bitcoin can be used as money. SEC v. Shavers, No. 4:13-CV-416, 2013 WL 4028182, at *2 (E.D. Tex. Aug. 6, 2013).
CFPB Issues Guidance On Ensuring Equal Treatment For Married Same-Sex Couples
On July 8, the CFPB released guidance designed to ensure equal treatment for legally married same-sex couples in response to the Supreme Court’s decision in United States v. Windsor, 133 S. Ct. 2675 (2013). Windsor held unconstitutional section 3 of the Defense of Marriage Act, which defined the word “marriage” as “a legal union between one man and one woman as husband and wife” and the word “spouse” as referring “only to a person of the opposite sex who is a husband or a wife.”
The CFPB's guidance, which took the form of a memorandum to CFPB staff, states that regardless of a person’s state of residency, the CFPB will consider a person who is married under the laws of any jurisdiction to be married nationwide for purposes of enforcing, administering, or interpreting the statutes, regulations, and policies under the Bureau’s jurisdiction. The Bureau adds that it “will not regard a person to be married by virtue of being in a domestic partnership, civil union, or other relationship not denominated by law as a marriage.”
The guidance adds that the Bureau will use and interpret the terms “spouse,” “marriage,” “married,” “husband,” “wife,” and any other similar terms related to family or marital status in all statutes, regulations, and policies administered, enforced or interpreted by the Bureau (including ECOA and Regulation B, FDCPA, TILA, RESPA) to include same-sex marriages and married same-sex spouses. The Bureau’s stated policy on same-sex marriage follows HUD’s Equal Access Rule, which became effective March 5, 2012, which ensures access to HUD-assisted or HUD-insured housing for LGBT persons.
President Obama Announces Student Loan Initiatives; Senate Student Loan Refinance Bill Fails
On June 9, President Obama announced numerous initiatives related to federal student loans and signed a presidential memorandum directing the Education and Treasury Departments to execute certain of those initiatives. The central directive instructs the Education Department to initiate a rulemaking that will allow students who borrowed before October 2007 or who have not borrowed since October 2011 to cap their payments at 10 percent of their monthly incomes. The Education Department aims to finalize the program by December 2015. In addition, the President announced that, among other things, (i) the Education Department will renegotiate its contracts with federal loan servicers to alter financial incentives “to help borrowers repay their loans on time, lower payments for servicers when loans enter delinquency or default, and increase the value of borrowers’ customer satisfaction when allocating new loan volume”; (ii) the Education Department will proactively apply SCRA protections by reducing interest rates automatically for eligible servicemembers and will also provide additional guidance to Federal Family Education Loan program servicers to provide for a similar streamlined process; (iii) Treasury and the Education Department will work with tax preparation companies to communicate information about federal student loan repayment options; and (iv) the Education Department will expand other existing efforts to identify borrowers who may be struggling to repay and provide them with information about repayment options. The President also called on Congress to pass federal student loan refinance legislation championed by Senator Elizabeth Warren (D-MA). On June 11, the Senate failed to advance that bill, which was designed to allow federal loan borrowers to reat rates set last year by the Bipartisan Student Loan Certainty Act, and allow private loan borrowers to refinance loans into the federal program at the same rates.
Court Rules Commercial Real Estate Broker Can't Collect Commission Because Of Involvement Of Unlicensed Salesperson
Last month, the U.S. District Court for the Eastern District of Virginia held that a state-licensed real estate company was unable to collect its commission on a real estate lease transaction because a key employee involved in the lease transaction was not licensed as a real estate sales person. The real estate company, which is appealing the decision, sued a property owner last year for breach of contract after the property owner refused to pay a $6.6 million commission on a transaction the real estate company negotiated as the exclusive leasing agent for the property owner. The property owner originally asserted that the total commission owed was substantially lower, based on what it claimed were oral agreements that were reflected in the written submissions made to the tenant. However, during discovery in the case, the property owner learned at least one of the real estate companys employees involved in the leasing transaction was not licensed as real estate salesperson or broker and asserted that as such, the real estate company is not entitled to receive any commission. As the court explained, Virginia law requires that every employee or independent contractor who acts as a salesperson for a brokerage firm, such as [the real estate company in this case], holds a license as a real estate salesperson or broker[] and that [n]o individual shall act as a broker without a real estate broker's license from the Board. The company did not contest that the employee at issue was unlicensed, but rather argued that the employee did not engage in activities that required licensing. In the companys view, state law requires a license only to make an offer to lease or to negotiate or enter into a lease, and that in this case the formal lease offers were made by and in the name of the property owner, not the real estate company or any of its employees. The court rejected the companys interpretation of the statute, explaining that such a narrow, hyper-formalistic reading of the licensing requirements would effectively eliminate the need for a license by most persons centrally involved in a leasing transaction on behalf of an owner. The court reasoned that the statutes definitions, as reflected in the range of activities a licensee is authorized to perform and the limited scope of services an unlicensed person can provide, are clearly intended to capture the realities and breadth of activities that make up the leasing process, not the specific, more formal events necessary to consummate a transaction. The court held that even though the company was licensed as a real estate broker, it was prohibited from receiving any commission it otherwise would be entitled to receive under its agreement with the property owner because the individual employee lacked the required license. The court acknowledged that there is no explicit statute or judicial decision that imposes such a prohibition under Virginia law, but concluded easily based on public policy that an individuals failure to have a license precludes the company from receiving any commission in this case. The court explained that (i) the companys license did not cover the individual; (ii) the company certified that its covered employees would hold the required license, and (iii) the company had a statutory duty to ensure that its services were carried out in accordance with the state licensing requirements. The company recently filed a notice that it is appealing the case to the Fourth Circuit; briefing has not yet commenced.
Fannie Mae, Freddie Mac Direct Servicers To Comply With Chicago Vacant Property Settlement
This week, Fannie Mae (Lender Letter LL-2014-03) and Freddie Mac (Bulletin 2014-7) advised servicers of the memorandum of understanding the FHFA recently entered into to resolve litigation with the City of Chicago over a city ordinance that requires mortgagees to register vacant properties and pay a $500 registration fee per property, and provided guidance for complying with the memorandum. Fannie Mae and Freddie Mac direct servicers to comply with the MOU by May 12, 2014, including by (i) voluntarily registering vacant properties with the city; (ii) halting remittance of vacant property registration fees, penalties, or fines to the city; and (iii) no longer completing any maintenance required by the ordinance. The guidance also provides instructions for obtaining reimbursement for fees already submitted to the city. Fannie Mae and Freddie Mac will not reimburse servicers for any fees assessed for failing to comply with the ordinance that are incurred on or after May 12.
FHFA, City Of Chicago Resolve Dispute Over Vacant Property Ordinance
On April 3, the U.S. District Court for the Northern District of Illinois approved an order of dismissal and memorandum of understanding jointly entered by the FHFA and the City of Chicago to end more than two years of litigation over a city ordinance that requires mortgagees to register vacant properties and pay a $500 registration fee per property. The ordinance also imposes maintenance and other obligations—whether the property has been foreclosed upon or not—with fines for noncompliance. In 2011, the FHFA sued the city, objecting that the ordinance would have improperly covered the activities of Fannie Mae, Freddie Mac, and their agents. In August 2013, the court held that Fannie Mae and Freddie Mac are exempt from the ordinance, and the FHFA subsequently sought to clarify the scope of the court’s order and asked the court for declaratory and monetary relief. The parties now have agreed to a memorandum of understanding pursuant to which the city will not enforce the ordinance against Fannie Mae, Freddie Mac, or their agents for as long as the GSEs remain under federal conservatorship. The FHFA agreed that Fannie Mae and Freddie Mac will voluntarily register their vacant properties with the city, and the FHFA agreed not to try to recover fees and penalties already paid to the city under the ordinance.