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FINRA fines securities firm $20,000 for AML violations
On January 20, the Financial Industry Regulatory Authority (FINRA) entered into a Letter of Acceptance, Waiver, and Consent (AWC), which requires a securities firm to pay a $20,000 fine for allegedly failing to: (i) establish and implement anti-money laundering (AML) policies and procedures reasonably expected to detect and cause the reporting of suspicious activity; (ii) conduct an independent AML test; and (iii) obtain the signature of a principal at the firm evidencing supervisory review and approval of the opening of customer accounts. According to the AWC, in 2018, “following a change in majority ownership, the firm’s business model shifted, and it began to service high-net worth international customers, many of whom were citizens or residents of jurisdictions that posed a heightened risk of money laundering or were considered bank secrecy havens.” The firm allegedly “failed to tailor its AML program to the firm’s new, higher-risk business model,” FINRA stated. The firm did not admit nor deny the findings as part of the AWC but agreed to a censure, among other things.
OFAC sanctions officials and entities connected to Burmese military
On January 31, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 14014 against seven individuals and two entities connected to Burma’s military regime. The sanctions coincide with the one-year anniversary of the military coup d’etat of Burma’s democratically elected government, and are part of a joint action taken with the UK and Canada. Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson stated that the U.S. “will continue to target those responsible for the coup and ongoing violence, enablers of the regime’s brutal repression, and their financial supporters.” As a result of the sanctions, all property and interests in property belonging to the identified persons subject to U.S. jurisdiction are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated individuals, unless exempt or authorized by a general or specific license. Prohibitions “include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person or the receipt of any contribution or provision of funds, goods, or services from any such person.”
DFPI addresses several MTA licensing exemptions
Recently, the California Department of Financial Protection and Innovation (DFPI) released two new opinion letters covering aspects of the California Money Transmission Act (MTA) related to the purchase and sale of digital assets and agent of payee rules. Highlights from the redacted letters include:
- Purchase and Sale of Digital Assets; Payment Processing Services. The redacted opinion letter examines whether the inquiring company’s client is required to be licensed under the MTA. The letter describes two types of transactions proposed to be conducted on the client’s online trading platform: (i) transactions in which customers purchase and sell digital assets from the company in exchange for fiat currency (Direct Purchase Transactions); and (ii) transactions in which merchants use the platform as a payment processor to accept digital assets from customers in exchange for non-fungible tokens (Payment Processing Transactions). DFPI concluded that the Direct Purchase Transactions do not require an MTA license because they do not “involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” DFPI similarly concluded that the Payment Processing Transactions do not require licensure at this time because DFPI has “not yet determined that payment processing transactions involving digital assets constitute receiving money for transmission[.]” Notwithstanding, DFPI added that it has been “studying the cryptocurrency industry closely” and that “[a]t any time, the Department may determine these activities are subject to regulatory supervision. The Department may also adopt regulations or issue interpretive opinions that significantly restrict [the contemplated] business operations.”
- Agent of Payee. The redacted opinion letter addresses whether the inquiring company’s proposed payment processing activities are exempt from the MTA’s licensing requirements. The letter explains that the company proposes to process payments related to purchases of apps through a virtual marketplace that operates on the company’s point of sale terminals. Through the virtual marketplace, customers (generally small businesses or merchants) may purchase apps that are developed and licensed to customers by third-party developers. Pursuant to a developer agreement, the company is appointed by such third-party developers to act as an “agent” of the developers “to collect and hold all Gross Revenue on [the developers’] behalf and to remit the Remittance Amount to [the developers’] Payment Account.” DFPI concluded that receiving funds from a customer for the purposes of transmitting payments to the developer “constitutes ‘receiving money for transmission.’” However, DFPI noted that these activities also satisfy the “agent of payee” exemption requirements because, pursuant to the developer agreement, the company acts as an agent of the developer, and the company’s receipt of payment satisfies “the customer’s (payor’s) obligation to the Developer for goods or services.” Accordingly, DFPI concluded that while the activities described constitute “money transmission” the company is exempt from the MTA’s licensure requirement.
DFPI reminded the companies that its determinations are limited to the presented facts and circumstances and that any change could lead to different conclusions.
FDIC discusses post-financial crisis legal claims and enforcement proceedings
Recently, the FDIC reported on legal claims and enforcement proceedings taken by the agency during the financial crisis in the years from 2008 to 2013. During this time period, the FDIC stated it “pursued and defended more legal claims in both its receivership and corporate capacities than during the savings and loan and banking crisis of the 1980s and early 1990s.” In its receivership capacity, the FDIC investigated and litigated many professional liability claims and sought to enter and collect on criminal restitution and forfeiture orders related to failed banks. The agency also pursued many enforcement claims and other actions related to both open and failed banks in its corporate capacity. The report discussed numerous topics, including the FDIC’s investigation into the residential mortgage-backed security (RMBS) portfolios of failed insured depository institutions (IDIs), which often “revealed that RMBS portfolios suffered heavy losses because the credit quality of loans collateralizing the RMBS was much lower than the credit quality represented in the RMBS offering documents.” Ultimately, 19 lawsuits were filed by the FDIC on behalf of eight receiverships seeking damages based on the IDIs’ purchases of RMBS. Other significant topics discussed within the report focus on LIBOR suppression claims, residential mortgage malpractice and/or mortgage fraud, criminal claims and recovery, income tax refund litigation, and administrative enforcement proceedings, among others.
CFTC issues no-action letter on compliance date for swap data
On January 31, the CFTC issued a no-action letter on the compliance dates for the November 25, 2020 amendments to the swap data reporting rules. According to the letter, the CFTC’s Division of Data does not recommend that the Commission take enforcement action against market participants “for failure to comply with the Amendments before December 5, 2022, and for failure to comply with the Block and Cap Amendments before December 4, 2023, provided that the entity comply with the Parts 43, 45, 46, and 49 regulations that were in effect on January 1, 2021.” A statement released by CFTC Commissioner Dawn D. Stump noted that she “expect[s] market participants to work diligently toward resolving the operational and technological issues they have encountered in complying with the Amendments,” and that she hoped the efforts will “better align swap data reporting rules internationally [and] will at last permit much needed international deference among the various regulatory bodies who long ago committed to improving swap data for the benefit of these global markets.”
CFPB studies criminal justice financial ecosystem
On January 31, the CFPB published a report studying the criminal justice financial ecosystem, which addressed financial challenges people and families face at every stage of the criminal justice process. According to Justice-Involved Individuals and the Consumer Financial Marketplace, contact with the criminal justice system is very common in the U.S. In 2019, 2.1 million adults were in jail or prison, 4.4 million were under community supervision, and 77 million adults (1 in 3) had a criminal record. These statistics, the Bureau stated, do not account for family members or friends who are often responsible for providing financial support for incarcerated individuals, and who often encounter financial impacts as a result. The Bureau reported that individuals often struggle to pay criminal justice debt and often face steep fines, including additional fees tacked on by third-party debt collectors that, if not paid, may result in incarceration. Additionally, the Bureau reported that the choice of financial service providers is limited within the criminal justice system, and that faced with little or no choice as to how to receive funds upon release from prison or jail, individuals often incur high fees to access their money and may experience difficulties resolving errors. Last October, the Bureau issued a consent order against a provider of financial services to prisons and jails, which alleged that the company engaged in unfair, deceptive, and abusive acts or practices in violation of the CFPA by charging consumers fees to access their own funds on prepaid debit cards that they were required to use (covered by InfoBytes here). The report also found that governments are increasingly shifting incarceration costs to the incarcerated individuals and their families. These costs, the Bureau said, are often sourced to private companies that inflate prices above typical market costs, and raise serious concerns about the transparency, fairness, and availability of consumer choice in markets associated with the justice system.
CFPB releases regulatory agenda
On January 31, the CFPB released its semiannual regulatory agenda in the Federal Register, as part of the Fall 2021 Unified Agenda of Federal Regulatory and Deregulatory Actions. According to the CFPB, it “reasonably anticipates having the regulatory matters identified below under consideration during the period from November 1, 2021 to October 31, 2022.” The next agenda will be published in Spring 2022, which will update the recently released agenda through Spring 2023. Among other things, the agenda noted that the Bureau made “significant progress” on the implementation of Section 1071 of the Dodd-Frank Act, which covers banks’ collection, reporting, and disclosure of information on credit applications made by women-owned, minority-owned, and small businesses. Other highlights of the agenda include the Bureau’s: (i) continued collaboration with other federal agencies on regulations for automated valuation models under the FIRREA amendments to Dodd-Frank; (ii) expectation to issue a final rule on the transition away from the LIBOR index, which aims to ensure that loans tied to LIBOR are transitioned “in an orderly, transparent, and fair manner”; (iii) assessment of a rule implementing HMDA; (iv) work on regulations for PACE financing and its “continu[ed] engagement with stakeholders and collect information” from a Advance Notice of Proposed Rulemaking, issued in March 2019 (covered by InfoBytes here); and (v) continued monitoring of consumer financial product markets and creation of working groups to focus on specific markets for potential future rulemakings.
California investigating loyalty programs for CCPA compliance
On January 28, the California attorney general announced an “investigative sweep” of businesses operating loyalty programs in the state. The California Consumer Privacy Act (CCPA), which became effective January 1, 2020, requires businesses that offer financial incentives in exchange for personal information, including loyalty programs, to provide consumers with a notice that clearly describes the material terms of the financial incentive program before consumers opt-in. (See InfoBytes coverage of the CCPA here.) Notices of noncompliance were sent to several businesses whose loyalty programs allegedly violated the CCPA, including data brokers, marketing companies, businesses handling children’s information, media outlets, and online retailers. Businesses have 30 days to cure or fix the alleged violation and come into compliance with the law before the initiation of an enforcement action. “I urge all businesses in California to take note and be transparent about how you’re using your customer’s data,” Attorney General Rob Bonta stated in the announcement. “My office continues to fight to protect consumer privacy, and we will enforce the law.”
CFPB files emergency motion to hold phantom debt scammers in contempt
On January 22, the CFPB filed an emergency motion seeking to hold two individual defendants in contempt of court for allegedly failing to honor the terms of a default judgment and order related to a 2015 enforcement action. The defendants are two of multiple participants that were allegedly involved in an illegal phantom debt collection scheme involving payment processors and a telephone broadcast service provider. As previously covered by InfoBytes, the Bureau claimed that the defendants attempted to collect debt that consumers did not owe or that the collectors were not authorized to collect, used harassing and deceptive techniques in violation of the CFPA and FDCPA, and placed robo-calls through a telephone broadcast service provider to millions of consumers stating that the consumers had engaged in check fraud and threatening them with legal action if they did not provide payment information. At the time, the Bureau obtained a preliminary injunction to halt the debt collection activities and freeze the assets of all defendants named in the lawsuit.
According to the Bureau, the two defendants named in the emergency motion failed to comply with any of the required terms under the default judgment entered last October, which required, among other things, the payment of civil money penalties ranging from $100,000 to $500,000, and permanently banned the defendants from attempting collections on any consumer financial product or service and from selling any debt-relief service. (Covered by InfoBytes here.) The defendants’ disregard for court orders “has been a recurring theme of this case,” the Bureau wrote in its the motion, claiming that the defendants, among other things, failed to show up for scheduled depositions or produce requested documents, and violated the preliminary injunction by transferring assets and concealing properties that they owned. After both defendants were found to be in contempt for not complying with the preliminary injunction, a receiver was appointed to conserve the assets for the benefit of affected consumers, which one of the defendants “promptly” violated. After the defendants failed to respond to additional requests, the Bureau filed the motion to have them both found in contempt. The defendants have “provided no cause for comfort that they will respect rulings of the Court or that they will comply with the law unless the Permanent Injunction Order is enforced,” the Bureau stated in its motion.
OCC seeks comments on compliance risk for reverse mortgages
On January 28, the OCC published a notice and request for comment in the Federal Register seeking feedback on the renewal of its guidance for managing compliance and reputation risks for reverse mortgage products. The OCC, along with the FDIC, Federal Reserve Board, and the NCUA issued final guidance in 2010 focusing on the need for institutions “to provide adequate information to consumers about reverse mortgage products, to provide qualified independent counseling to consumers considering these products, and to avoid potential conflicts of interest.” The 2010 guidance also addressed related policies, procedures, internal controls, third party risk management, training, and program maintenance. The current notice seeks feedback on (i) whether the collection of the information is necessary and carries a practical utility; (ii) the accuracy of the estimates of the information collection burden; (iii) methods for enhancing the quality, utility and clarity of the information to be collected; (iv) ways to minimize the information collection burden for respondents; and (v) “[e]stimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.” Comments are due March 29.