Skip to main content
Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • Germany’s Largest Bank Agrees to Fix Foreign Exchange Activities Controls and Volcker Rule Compliance Program, Fined Nearly $157 Million

    Federal Issues

    On April 20, the Federal Reserve issued two separate enforcement actions against a major German global bank and its subsidiaries for allegedly failing to have appropriate controls to ensure that the bank’s foreign exchange activities (Covered FX Activities) were in compliance and also allegedly failing to have an adequate compliance program to ensure its traders abided by the Volcker Rule’s requirements. The combined sanctions total almost $157 million in civil money penalties.

    Covered FX Activities. According to the Fed’s cease and desist order, the Board of Governors’ investigation, covering October 2008 through October 2013, found deficiencies in the bank’s governance, risk management, compliance, and audit policies and procedures. Specifically, FX traders communicated through chatrooms with traders at other financial institutions, but due to deficient policies and procedures, the bank failed to detect and address such “unsafe and unsound conduct.” Under the terms of the order, the bank is required to submit the following: (i) a written plan to improve senior management’s oversight of the bank’s compliance with applicable U.S. laws and regulations and applicable internal policies in connection with its foreign exchange activities; (ii) an enhanced written internal control and compliance program designed to monitor and detect potential misconduct; and (iii) a written plan to improve its compliance risk management program with applicable U.S. laws and regulations with respect to foreign exchange activities. In addition, the bank must pay a $136.9 million civil money penalty.

    Volcker Rule. That same day the Fed also issued a consent order to the bank for allegedly failing to establish a compliance program reasonably designed to ensure and monitor compliance with Volcker Rule requirements. The Volker Rule prohibits insured depository institutions and affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The  consent order’s findings were based on a Volcker Rule CEO attestation, “which identified the existence of weaknesses in the [bank’s] Volcker Rule compliance program, including, among other things, certain governance, design, and operational deficiencies across key compliance pillars and the design of reporting mechanisms.” Moreover, the Board of Governors’ determination was based on, among other things, (i) “significant” gaps in the bank’s compliance program which resulted in deficiencies in the scope of independent testing efforts; (ii) “significant” weaknesses in the bank’s demonstrable analyses “showing that its proprietary trading is not to exceed the reasonably expected near term demands of clients, customers, or counterparties—[referred to as “RENT-D”]—required for permitted market-making activities,”; and (iii) weakness in the bank’s metrics reporting and monitoring process which, when combined with the aforementioned, “limited the [b]ank’s ability to adequately monitor trading activity.” Under the terms of the consent order, the bank is required to submit a written plan to improve senior management’s oversight of the firm’s compliance with Volcker Rule requirements. It must also submit enhanced written internal controls and compliance risk management program measures. These submissions are in addition to paying a $19.71 million civil money penalty.

    Federal Issues Enforcement Bank Compliance Volcker Rule Sanctions Federal Reserve Foreign Exchange Trading

  • House Financial Institutions and Consumer Credit Subcommittee Examines Transparency in the Financial Regulatory System

    Federal Issues

    On March 6, the House Financial Institutions and Consumer Credit Subcommittee held a hearing to consider the need to increase transparency in the financial regulatory system and examine opportunities for reform. According to a committee memorandum, the purpose of the hearing was to examine both (i) “the impact the rules and processes from federal financial agencies . . . have had on financial companies and their customers”; and (ii) “opportunities for reform of these federal financial agencies, with the aim of improving transparency, accountability and due process for regulated persons and entities and their customers.” As explained by Chairman Blaine Luetkemeyer in a committee press release following the hearing, “ambiguous guidance, contradictory rules, and aggressive enforcement has led to confusion for financial companies seeking to comply with Dodd-Frank and other Obama-era rules.” And, the Chairman continued, “the greatest impact is on the customers of those financial companies, who in many cases have been left clamoring for access to financial services, and paying more for the ones they’ve been able to retain.”

    Four witnesses offered testimony and answered questions before the committee:

    • Greg Baer, President of the Clearing House Association, focused his testimony on the critical importance of the due process clause and the Administrative Procedure Act, and how “a transparent [rule-making] process tend[s] to produce better regulation,” while the lack thereof has “adverse consequences on the quality of rules being administered and the ability of our banking system to support economic growth.”
    • Norbert Michel, a senior Research Fellow at the Heritage Foundation, testified, among other things, that “for decades, the U.S. regulatory framework has increasingly made it more difficult to create and maintain jobs and businesses that benefit Americans,” and that, “[o]ne of the main reasons the regulatory regime has been counterproductive for so long is because it allows regulators to micromanage firms’ financial risk, a process that substitutes regulators’ judgments for those of private investors.”
    • Amias Moore Gerety, Former Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury discussed both (i) how the post-crisis Wall Street Reforms “strengthened our financial system and supported our economic recovery,” and (ii) how “the ability to deliver regulation that is appropriate to the risk is the central question for policy makers designing financial regulation—both of individual institutions and for the constantly evolving financial system as a whole.”
    • Bill Himpler, an Executive Vice President at the American Financial Services Association shared what he viewed as a contradiction between his belief that “[c]redit should not be limited to the wealthy or those with perfect credit scores,” and his observation that the “CFPB seems to believe that credit should only be extended to those borrowers who do not present any risk.”

    Federal Issues House Financial Services Committee Bank Regulatory Bank Compliance

  • Bank Holding Company and Nonbank Auto Lender Subsidiary Sign New Written Agreement with Boston Fed

    Consumer Finance

    On March 21, the Federal Reserve Bank of Boston (Boston Fed) and a national bank holding company and its nonbank subsidiary (a Dallas-based auto lender) entered into a Written Agreement to address concerns related to their July 2015 Written Agreement, which required a detailed description of the holding company’s efforts to strengthen board oversight specifically with regard to committees, executive positions, and lines of reporting (see July 2015 InfoBytes summary). The 2017 Written Agreement is a result of deficiencies identified by the Boston Fed in the subsidiary’s compliance risk management program. The terms of the current Written Agreement require, among other things, the board of directors of the subsidiary to submit a revised compliance risk management plan addressing, among others: (i) comprehensive compliance risk assessments to identify “risks associated with applicable consumer compliance laws”; (ii) enhanced written policies and procedures to address risks arising from noncompliance; and (iii) a revised code of conduct for employees that outlines rules governing compliance and reporting processes for known or suspected violations of consumer compliance laws, regulations, and supervisory guidance. Furthermore, the company must submit written revisions to its firmwide internal audit program with respect to auditing its revised compliance risk management program.

    Consumer Finance Bank Compliance Compliance Federal Reserve Risk Management

  • London-based Bank Agrees to $32 Million Settlement with OCC Concerning Faulty Foreclosure Claims

    Courts

    On January 11, the OCC reported that it has ordered a large London-based bank to pay $32.5 million to settle claims that the bank failed to properly follow the regulator’s orders to improve mortgage foreclosure practices that led to borrowers being harmed after the 2008 credit crisis. Specifically, the OCC had accused the bank in 2015 of failing to meet the demands it had agreed to, and the agency imposed certain additional restrictions on the company’s mortgage-servicing abilities until it fixed the alleged shortcomings. The regulator also noted that the bank had failed to properly file documents in certain bankruptcy cases after the orders (for which it was ordered to pay $3.5 million in remediation to borrowers). The OCC confirmed, however, that the bank is now in compliance with all OCC orders related to the alleged foreclosure practices.

    Courts Banking Mortgages OCC Bank Compliance

  • OCC Finalizes Rule Banning Industrial, Commercial Metal Dealing

    Federal Issues

    Last week, on December 28, 2016, the OCC announced the release of its final rule to prohibit national banks and federal savings associations from dealing or investing in industrial or commercial metals. Under the new restrictions, banks will no longer be permitted to deal or invest in metals and alloys in forms primarily suited for industrial or commercial purposes, such as copper cathodes, aluminum T-bars and gold jewelry. The final rule is effective as of April 1, 2017, and includes a divestiture period, which provides for institutions that previously acquired industrial or commercial metal through dealing or investing to unwind their investments as soon as practicable, but not later than April 1, 2018. The OCC may also—on a case-by-case basis—grant up to four separate one-year extensions of the divestiture period if the bank has made a good faith effort to dispose of its existing investments and the bank’s retention of the metal is not inconsistent with safe and sound operation.

    Federal Issues Banking OCC Bank Compliance

  • Fed Extends Post-Employment Restrictions for Senior Examiners

    Federal Issues

    In a press release on November 18, the Fed announced revised post-employment restrictions that more than double the number of senior staff examiners barred from leaving a Federal Reserve Bank and going right to work for a bank they had supervised. By law, senior bank examiners are prohibited for one year from accepting paid work from a financial institution that they had primary responsibility for examining in their last year of Reserve Bank employment. This post-employment restriction has previously applied only to central points of contacts (CPCs) at firms with more than $10 billion in assets. The revised policy expands this post-employment restriction to deputy CPCs, senior supervisory officers (SSOs), deputy SSOs, enterprise risk officers, and supervisory team leaders, which has the effect of more than doubling the number of senior examiners covered. The policy—which takes effect January 2, 2017—does not apply to senior examiners responsible for multiple unaffiliated banks.

    In addition, another new Fed policy prohibits former Fed Bank officers from representing financial institutions and other third parties in matters before the Fed for one year after leaving their Federal Reserve position. This policy takes effect on December 5.

    Federal Issues Banking Examination Federal Reserve Bank Compliance Enforcement

  • FinCEN Highlights Existing AML Program Obligations on MSB Principal-Agent Relationships

    Fintech

    On March 11, FinCEN issued FIN-2016-G001 to provide clarity to money services business (MSB) principals regarding the risks associated with foreign agents’ AML compliance. FinCEN’s guidance, which complements recently issued state guidance, encourages coordination among Federal and state regulators on issues related to MSBs’ AML program obligations. FinCEN emphasizes that an MSB “remains independently and wholly responsible for implementing adequate AML program requirements,” noting, therefore, that “neither the agent nor the principal can avoid liability for failing to establish and maintain an effective AML program by pointing to a contract assigning this responsibility to another party (whether the agent or principal).” According to FinCEN’s guidance and pursuant 31 CFR § 1022.210, an effective AML program must, at a minimum, (i) incorporate policies, procedures, and internal controls reasonably designed to ensure BSA compliance; (ii) designate an individual responsible for monitoring day-to-day BSA compliance; (iii) provide adequate training to the appropriate personnel regarding their responsibilities under the program; and (iv) provide for independent testing of the program to ensure there are no material weaknesses. In addition, FinCEN reminds MSB principals that, when conducting monitoring of their agents, they must (i) identify the owners of the MSB’s agents; (ii) continually evaluate agents’ operations; and (iii) evaluate agents’ implementation of policies, procedures, and controls. Finally, the guidance advises MSB principals to consider certain risk factors when conducting agent monitoring, including, but not limited to, (i) whether the agent has an established and adhered to AML program; (ii) whether the owners are known or suspected to be linked to criminal conduct or terrorism; (iii) the nature of the markets the agent serves and whether money laundering or terrorist financing are associated risks of the markets; (iv) the anticipated level of activity of the agent’s services; and (v) the nature and duration of the relationship.

    Anti-Money Laundering FinCEN Bank Compliance

  • OCC Releases Bulletin Outlining BSA Noncompliance Enforcement Process

    Consumer Finance

    On February 29, the OCC released Bulletin 2016-6, supplementing information in Bulletin 2007-36, “BSA Enforcement Policy,” and rescinding Bulletin 205-45, “Process for Taking Administrative Enforcement Actions Against Banks Based on BSA Violations.” Applicable to OCC-supervised institutions, the bulletin describes the OCC’s enforcement process for banks’ noncompliance with BSA requirements and dealing with repeated or uncorrected BSA compliance problems. As outlined in the bulletin, this administrative enforcement process is comprised of four distinct parts: (i) notice and opportunity to respond, during which bank management has 15 days to respond to the OCC’s written notice regarding potential noncompliance; (ii) consideration of enforcement actions, when the OCC’s supervisory office and legal department reviews relevant materials and makes a recommendation to the OCC Supervision Review Committee, which then determines whether the OCC should pursue an enforcement action or if the determination should instead be delegated to the Senior Deputy Comptroller; (iii) initiation of BSA enforcement actions, at which point the bank receives the final letter or report of examination, a proposed cease-and-desist order, and notice regarding potential civil money penalties upon approval of the action; and (iv) coordination with other agencies, when the OCC notifies FinCEN of any informal and formal actions taken against the alleged perpetrator, and when the OCC ensures that all suspicious activity reports are filed and coordinated with other appropriate law enforcement agencies.

    OCC FinCEN Bank Secrecy Act Bank Compliance Enforcement

  • OCC and FinCEN Assess Civil Money Penalties against Florida-Based Wealth Management Firm for BSA Violations

    Consumer Finance

    On February 25, the OCC, in coordination with FinCEN, announced that it took action against a Florida-based wealth management firm and private bank for allegedly violating the Bank Secrecy Act (BSA). According to the OCC, the bank failed to maintain an effective BSA/AML compliance program, thus violating its 2010 agreement with the OCC to “revise its policies, procedures, and systems related to the BSA/AML laws and regulations (‘BSA/AML Compliance Program’), and, among other things, address weaknesses with the Bank’s BSA/AML Compliance programs, including a lack of internal controls necessary to ensure effective and timely customer identification, risk assessment, monitoring, validation, and suspicious activity reports (‘SARs’).” Without admitting or denying any wrongdoing, the bank agreed to pay a total of $4 million in civil penalties, with $2.5 million to be paid directly to the OCC and, pursuant to FinCEN’s separately announced civil money penalty, $1.5 to be paid to the U.S. Department of the Treasury.

    OCC Anti-Money Laundering FinCEN Bank Secrecy Act Bank Compliance

  • OCC to Host Credit and Compliance Risks Workshops

    Consumer Finance

    On March 22, the OCC will host a Credit Risk workshop for directors of national community banks and federal savings associations. The workshop will focus on credit risk within the loan portfolio, including identifying trends and recognizing problems. In addition, the workshop will address (i) the board and management’s roles; (ii) how to stay informed of changes in credit risk; and (iii) how to effect change. On March 23, the OCC will host a separate Compliance Risk workshop that will include lectures, discussions, and exercises on key elements of a robust compliance risk management system. Topic discussions will include the BSA, Community Reinvestment Act, and the TRID rule. Both workshops will take place in Santa Ana, California; capacity is limited to the first 35 registrants.

    OCC Bank Compliance Community Banks Risk Management

Pages

Upcoming Events