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Comptroller Otting discusses regulatory priorities during congressional testimonies
On June 13 and 14, Comptroller of Currency Joseph Otting appeared before the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs to discuss his priorities as Comptroller. As highlighted in the identical press releases for both House and Senate hearings, Otting testified about the OCC’s achievements and efforts since being sworn in as Comptroller in November 2017. Among other things, Otting discussed the agency’s efforts to (i) modernize the Community Reinvestment Act (CRA); (ii) promote compliance with the Bank Secrecy Act and anti-money laundering regulations (BSA/AML); and (iii) simplify the Volcker Rule, particularly for small and mid-size banks. Otting emphasized in his written testimony that his priority is to reduce the regulatory burden on financial institutions, specifying that the CRA requirements have become "too complex, outdated, cumbersome, and subjective." To that end, Otting stated that the OCC, in coordination with other federal agencies, is preparing an advance notice of proposed rulemaking to gather information on potential CRA updates, which, in Otting’s view, should include (i) expanding the types of activities that are eligible for CRA credit; (ii) changing assessment areas so they are not based solely on where the bank has a physical presence; and (iii) providing clearer metrics. As for BSA/AML, Otting noted this was his “number two issue” behind reforming the CRA and the working group—the OCC, FinCEN, the FDIC, the Federal Reserve, and NCUA— will likely address key issues like de-risking and improvement of transparency over the next three to six months. Otting noted his pleasure with the Volcker Rule changes in the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155/ P.L. 115-174) but cautioned that fine-tuning may be necessary as the OCC proceeds with implementation.
OCC releases recent enforcement actions, issues $12.5 million penalty for BSA/AML compliance deficiencies
On June 15, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. The new enforcement actions include cease and desist orders, civil money penalty orders, and removal/prohibition orders. The consent order described below was among those in the OCC’s list:
On April 14, the OCC issued a consent order and $12.5 million civil money penalty order against a New York-branch of an international bank for alleged deficiencies in the branch’s BSA/AML compliance program. The alleged deficiencies included the failure to file timely Suspicious Activity Reports (SARs) as well as deficiencies in the branch’s compliance with Office of Foreign Asset Control (OFAC) requirements. Among other things, the consent order requires the branch to (i) develop and implement an ongoing BSA/AML and OFAC risk assessment program; (ii) adopt an independent audit program to conduct a review of the bank’s BSA/AML compliance program; and (iii) ensure the branch has a permanent and experienced BSA officer. The bank has neither admitted nor denied the OCC’s findings.
FDIC releases April enforcement actions, including flood insurance and BSA/AML violations
On May 25, the FDIC released a list of 35 administrative enforcement actions taken against banks and individuals in April. Civil money penalties were assessed against several individuals and one bank. The FDIC assessed a $5,000 civil money penalty against a New Jersey-based bank, citing violations of the Flood Disaster Protection Act for allegedly failing to ensure 20 properties were adequately covered by flood insurance for the term of the loan. Additionally, the FDIC issued two consent orders, one against a South Dakota-based bank for unsafe or unsound banking practices or violations of law or regulation. The FDIC ordered the bank to, among other things, (i) retain qualified management; (ii) develop an independent external loan review program; and (iii) develop a plan to address the weaknesses in the bank’s audit and internal controls. The second consent order alleges violations of the Bank Secrecy Act and anti-money laundering (BSA/AML) rules by a Maryland-based bank. The bank is ordered to, among other things, (i) perform an enhanced risk assessment of the bank’s operations; (ii) revise and implement internal controls for BSA/AML compliance; and (iii) take necessary steps to correct or eliminate all cited violations.
Also on the list are 11 Section 19 orders, which allow applicants to participate in the affairs of an insured depository institution after having demonstrated “satisfactory evidence of rehabilitation,” and four terminations of consent orders.
There are no administrative hearings scheduled for June 2018. The FDIC database containing all 35 enforcement decisions and orders may be accessed here.
OCC highlights key risks affecting the federal banking system in spring 2018 semiannual risk report
On May 24, the OCC released its Semiannual Risk Perspective for Spring 2018, identifying and reiterating key risk areas that pose a threat to the safety and soundness of national banks and federal savings associations. Priorities focus on credit, operational, compliance, and interest risk, and while the OCC commented on the improved financial performance of banks from 2016 to early 2018, in addition to the “incremental improvement in banks’ overall risk management practices,” the agency also noted that risks previously highlighted in its Fall 2017 report have “changed only modestly.” (See previous InfoBytes coverage here.)
Specific areas of concern noted by the OCC include: (i) easing of commercial credit underwriting practices; (ii) increasing complexity and severity of cybersecurity threats; (iii) use of third-party service providers for critical operations; (iv) compliance challenges under the Bank Secrecy Act; (v) challenges in risk management involving consumer compliance regulations; and (vi) rising market interest rates, including certain risks associated with the “potential effects of rising interest rates, increasing competition for retail and commercial deposits, and post-crisis liquidity regulations for banks with total assets of $250 billion or more, on the mix and cost of deposits.” Additionally, concerns related to integrated mortgage disclosure requirements under TILA and RESPA previously considered a key risk have been downgraded to an issue to be monitored.
Federal Reserve Governor discusses potential impact of digital innovations on the financial system
On May 15, Federal Reserve Board Governor Lael Brainard spoke at a digital currency conference sponsored by the Federal Reserve Bank of San Francisco to discuss how digital innovations may impact the financial system, specifically in the areas of payments, clearing, and settlement. Brainard discussed, among other things, the importance of understanding the impact these innovations may have on (i) investor and consumer protection issues, and (ii) cryptocurrency and distributed ledger technology governance, particularly with respect to Bank Secrecy Act/anti-money laundering concerns. In addition, Brainard commented on the inherent risks and challenges surrounding the concept of a central bank digital currency, and noted that at this time, “there is no compelling demonstrated need for a Fed-issued digital currency [because] [m]ost consumers and businesses in the U.S. already make retail payments electronically using debit and credit cards, payment applications, and the automated clearinghouse network. Moreover, people are finding easy ways to make digital payments directly to other people through a variety of mobile apps.” Brainard noted, however, that the Federal Reserve is monitoring these technological developments as “digital tokens for wholesale payments and some aspects of distributed ledger technology—the key technologies underlying cryptocurrencies—may hold promise for strengthening traditional financial instruments and markets” in the coming years.
California branch sentenced in BSA/AML obstruction case
On May 18, the U.S. District Court for the Southern District of California sentenced a Netherlands-based financial institution’s U.S. subsidiary for “impairing, impeding and obstructing” the OCC during its 2012 examination by concealing deficiencies in its Bank Secrecy Act and anti-money laundering (BSA/AML) compliance programs. As previously covered by InfoBytes, the branch plead guilty in February to one count of conspiracy to defraud the U.S. Government and agreed to pay over $368 million as a result of allowing “hundreds of millions of dollars in untraceable cash, sourced from Mexico and elsewhere, to be deposited into its rural bank branches” without conducting adequate BSA/AML review. In addition to the February plea agreement, the court sentenced the bank to a two-year term of probation and fined the bank $500,000, the maximum statutory fine.
FINRA, SEC reach settlements with Chinese broker-dealers over anti-money laundering compliance
On May 16, the Financial Industry Regulatory Authority (FINRA) and the SEC reached settlements (here and here) with a Chinese-based broker-dealer following an inquiry and investigation into the firm’s anti-money laundering (AML) programs. According to FINRA, the broker-dealer allegedly failed to implement reasonable processes to ensure that its AML programs were able to detect and report potentially suspicious transactions, particularly those concerning penny stocks. In addition, FINRA claimed the broker-dealer’s AML program compliance testing was “inadequate and failed to uncover any of the deficiencies in the firm’s trade monitoring.” In a separate investigation conducted by the SEC in conjunction with FINRA’s inquiry, the broker-dealer reached a settlement over allegations that it failed to, among other things, file suspicious activity reports as required under the Bank Secrecy Act or comply in a timely fashion with SEC record requests. Under the terms of the settlements, the broker-dealer agreed to pay $5.3 million to FINRA for systemic anti-money laundering compliance failures and $860,000 to the SEC. In agreeing to the settlements, the broker-dealer neither admitted nor denied the charges, but consented to the entry of the findings.
The SEC’s investigation also resulted in settlements with a second broker-dealer and its AML officer for allegedly violating the Exchange Act and SEC financial recordkeeping and reporting requirements for not reporting the suspicious sales of billions of penny stock shares. The broker dealer agreed to pay a civil money penalty of $1,000,000 to the SEC, was censured, and was ordered to cease and desist from causing or committing any violations or future violations of the SEC’s suspicious activity reporting requirements. The AML officer was assessed a $15,000 civil money penalty and barred from association with any broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agency, or national recognized statistical rating organization for a period of three years, among other things.
FinCEN issues ruling to clarify beneficial ownership requirements for premium finance cash refunds
On May 11, the Financial Crimes Enforcement Network (FinCEN) issued a ruling to provide exceptive relief to covered financial institutions from the requirements to obtain and verify the identity of beneficial owners of legal entity customers at account opening to insurance premium finance lending products that allow for cash refunds. Although FinCEN’s regulations already exempted covered financial institutions from the requirements to identify and verify the identity of the beneficial owner of legal entity customers at account opening to the extent that the legal entity customer opens the account for the purpose of financing insurance premiums, the exemption does not apply if there is a possibility of cash refunds. However, because premium finance lenders typically process a significant number of cash refunds, and premium finance loans present a low risk for money laundering, FinCEN issued the ruling to provide for additional relief for premium finance loans offering cash refunds. A condition of the relief is that the cash “refunds are only remitted directly to the borrower or the borrower’s agent or broker.”
FinCEN recognizes law enforcement agencies for use of BSA reporting
On May 8, the Financial Crimes Enforcement Network (FinCEN) announced its third annual Law Enforcement Awards to law enforcement agencies that use Bank Secrecy Act data provided by financial institutions in their criminal investigations. The program seeks to recognize law enforcement agencies that made effective use of financial institution reporting to obtain a successful prosecution, and to demonstrate to the financial industry the value of its reporting to law enforcement. The following agencies were recognized:
- Suspicious Activity Report Review Task Force Category – Internal Revenue Service-Criminal Investigation (IRS-CI). Based on a review of financial data showing a pattern of unusual cash withdrawals by one subject from a single financial institution, IRS-CI uncovered a criminal conspiracy to defraud the estate of a deceased individual of over $2 million. IRS-CI executed warrants and recovered over $500,000 and over $2 million in restitution was ordered to be returned to the true heir of the estate.
- Transnational Organized Crime/Third Party Money Launderers Category – Drug Enforcement Administration (DEA). Using FinCEN’s data and investigative tools, the DEA helped dismantle two Southern California and Tijuana-based money laundering schemes. Arrest warrants were issued for 27 individuals and officials were able to seize millions of dollars in cash, real estate, and vehicles.
- Transnational Security Threats Category – FBI. Utilizing FinCEN resources, an FBI investigation, conducted in coordination with the Office of Foreign Assets Control (OFAC), resulted in the blocking of $7 million in transactions used to provide access to the U.S. financial system on behalf of North Korean entities, a $20 million monetary penalty, and the addition of several entities to OFAC’s Designated Nationals and Blocked Persons List (SDN list).
- Cyber Threats Category – Internal Revenue Service-Criminal Investigation (IRS-CI). IRS-CI untangled a money laundering scheme that had generated over $17 million in proceeds through wire transfers from multiple foreign-based accounts. IRS-CI search warrants led to the forfeiture of $10 million in fraudulent proceeds and three subjects pled guilty to conspiracy to commit fraud and related activity in connection with computers, with a fourth found guilty of wire fraud and money laundering.
- Significant Fraud Category – Immigration and Customs Enforcement – Homeland Security Investigations (HSI). HSI led an investigation that identified a complex money laundering conspiracy in which operators at an India-based call center and U.S.-based facilitators worked together to launder $300 million. Twenty-four subjects in the United States were arrested across eight states, all of whom were convicted of conspiracy, money laundering, and various fraud crimes.
- Third-Party Money Launderers Category – Internal Revenue Service – Criminal Investigation (IRS-CI). IRS-CI led a multi-agency effort to combat Mexican kleptocracy. Using FinCEN resources and a high volume of financial data, an investigation resulted in seizure of over $800 million in assets and subjects being charged with various financial crimes, such as money laundering, bank fraud, wire fraud, loan fraud, and racketeering.
- State and Local Law Enforcement – Nassau County Policy Department. Nassau County Police launched an investigation after becoming aware of a high volume of cash deposits in a subject’s account. In coordination with the DEA, Nassau County Police determined the activity was a trade-based money laundering scheme designed to launder the proceeds of illegal narcotics transactions. The investigation resulted in fines totaling $8.5 million.
FinCEN and California card club agree to a reduced penalty for AML violations
On May 3, the Financial Crimes Enforcement Network (FinCEN) and a California card club agreed to a $5 million penalty for Bank Secrecy Act (BSA) and anti-money laundering (AML) violations from 2009 to 2017. In November 2017, FinCEN assessed the company $8 million in civil money penalties but has now agreed to suspend $3 million pending compliance with certain requirements in the consent order. As previously covered by InfoBytes, FinCEN alleges the company failed to file certain Suspicious Activity Reports (SARs) regarding loan sharking and other criminal activities being conducted through the company and failed to implement sufficient internal controls to monitor risks associated with gaming practices that allowed customers to co-mingle and pool bets with anonymity. The order requires the company to, among other things, adopt an AML program and hire a qualified independent consultant to review its effectiveness and retain a compliance officer to ensure compliance with BSA requirements.