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U.S. Law Enforcement Authorities and Regulators Resolve Significant Money Laundering and Sanctions Investigations
On December 11, a major international bank holding company announced agreements with U.S. law enforcement authorities and federal bank regulators to end investigations into alleged inadequate compliance with anti-money laundering and sanctions laws by the holding company and its U.S. subsidiaries (collectively the banks). Under these agreements, the banks will make payments totaling $1.92 billion, will continue to cooperate fully with regulatory and law enforcement authorities, and will take further action to strengthen its compliance policies and procedures. As part of the resolution, the bank entered into a deferred prosecution agreement (DPA) with the DOJ pursuant to which the banks will forfeit $1.256 billion, $375 million of which satisfies a settlement with the Office of Foreign Assets Control (OFAC). The four-count criminal information filed in conjunction with the DPA charges that the banks violated the Bank Secrecy Act by failing to maintain an effective anti-money laundering program and to conduct appropriate due diligence on its foreign correspondent account holders. The DOJ also alleged that the banks violated the International Emergency Economic Powers Act and the Trading with the Enemy Act by illegally conducting transactions on behalf of customers in certain countries that were subject to sanctions enforced by OFAC. The banks agreed to pay a single $500 million civil penalty to satisfy separate assessments by the OCC and FinCEN related to the same alleged conduct, as well as a $165 million penalty to the Federal Reserve Board. The banks already have undertaken numerous voluntary remedial actions, including to (i) substantially increase AML compliance spending and staffing, (ii) revamp their Know Your Customer program, (iii) exit 109 correspondent relationships for risk reasons, and (iv) claw back bonuses for a number of senior officers. The banks also have undertaken a comprehensive overhaul of their structure, controls, and procedures, including to (i) simplify the control structure, (ii) create new compliance positions and elevate their roles, (iii) adopt a set of guidelines limiting business in those countries that pose a high financial crime risk, and (iv) implement a single global standard shaped by the highest or most effective anti-money laundering standards available in any location where the banks operates. Pursuant to the DPA, an independent monitor will evaluate the banks’ continued implementation of these and other enhanced compliance measures.
In a separate matter, on December 10, Manhattan District Attorney Cyrus R. Vance, Jr. and the DOJ announced the resolution of a joint investigation into a British bank’s alleged movement of more than $200 million through the U.S. financial system primarily on behalf of Iranian and Sudanese clients by removing information that would have revealed the payments as originating with a sanctioned country or entity, and thereby avoiding OFAC scrutiny. To resolve the matter, the bank was required to pay $227 million in penalties and forfeiture, and to enter into a DPA and corresponding Statement of Facts. Through the DPA, the bank admitted that it violated New York State law by falsifying the records of New York financial institutions and by submitting false statements to its state and federal regulators about its business conduct, and agreed to certain enhanced compliance practices and procedures. The payment also satisfies a settlement with OFAC over the same practices, while the Federal Reserve Board required an additional $100 million penalty to resolve its parallel investigation. The settlement follows an earlier settlement between this British bank and the New York Superintendent of Financial Services regarding the same alleged conduct.
Special Alert: CFPB and DOJ Announce MOU to Coordinate Fair Lending Enforcement Efforts; CFPB Issues First Annual Report to Congress on Fair Lending Activities
On December 6, the Consumer Financial Protection Bureau (CFPB or Bureau) and the U.S. Department of Justice (DOJ) announced a Memorandum of Understanding (MOU) to coordinate enforcement of the federal fair lending laws, including the Equal Credit Opportunity Act (ECOA). Simultaneously, the CFPB issued its first annual Fair Lending Report to Congress as required by the Dodd-Frank Act, which describes the Bureau’s efforts to build its Office of Fair Lending and Equal Opportunity and reviews its fair lending accomplishments. Together, these initiatives demonstrate that the CFPB and DOJ are continuing to work together closely to aggressively enforce the federal fair lending laws.
Memorandum of Understanding Regarding Fair Lending Coordination
The new MOU supplements an existing Information Sharing Agreement Regarding Fair Lending Investigations among the DOJ, the U.S. Department of Housing and Urban Development, and the Federal Trade Commission, which allows these fair lending enforcement agencies to share confidential information related to fair lending investigations, screening procedures, and investigative techniques. It also follows a general cooperation MOU that the DOJ and CFPB entered into earlier this year.
The new MOU focuses on information sharing and referral of matters alleging ECOA violations, but also governs the agencies’ referral processes for other fair lending-related laws and joint fair lending investigations.
Referral of ECOA Violations to DOJ: The MOU explains the circumstances under which the CFPB will refer potential ECOA violations to the DOJ for further investigation or prosecution. Consistent with the established practice of the prudential federal bank regulators, the MOU requires the CFPB to refer to the DOJ all matters where it has “reason to believe” that one or more creditors has engaged in a pattern or practice of lending discrimination. The CFPB may also refer to DOJ any violation of Section 701(a) of ECOA, including a recommendation that a civil action be commenced if the CFPB cannot obtain compliance from the financial institution.
Following referral, the DOJ has 60 days to determine whether to proceed with its own investigation. Within that period, the CFPB may not unilaterally commence its own action with regard to the referred violation(s). Even if exigent circumstances arise during the 60-day review period, the CFPB must first consult with the DOJ before taking independent action.
The CFPB may also refer to the DOJ possible violations of fair lending-related laws for which the CFPB has no statutory examination or enforcement authority, but for which the DOJ possesses enforcement authority, including the Fair Housing Act and the Servicemembers Civil Relief Act. Despite its lack of statutory authority to enforce these laws, the CFPB’s Supervision & Examination Manual provides resources to identify such potential violations for purposes of referrals to another federal agency.
Joint Investigations: With regard to joint investigations, the MOU provides only that “[w]hen appropriate, the DOJ and the CFPB will seek to collaborate on investigations, and conduct joint investigations of entities allowing the Agencies to leverage resources and expertise.” The agreement calls for quarterly meetings to discuss investigative activity, but allows each agency to retain “independent authority to proceed in the manner that it determines is appropriate.”
Information Sharing: The MOU describes how the parties have agreed to designate, share, use, and protect as non-public, certain information related to investigations of potential ECOA violations, including confidential supervisory information collected by the CFPB under its supervision and examination authority. The MOU allows for additional case- or investigation-specific information sharing agreements as appropriate, based on a form agreement provided as an attachment to the MOU. Section 7 of the form agreement indicates that “sharing of any confidential information [between the CFPB and DOJ] under this Agreement does not constitute a waiver of, or otherwise affect, any privilege any agency or person may claim with respect to such information under federal law.” This provision appears to mirror the treatment of confidential information under 12 U.S.C. § 1828(x) that applies to the prudential bank regulatory agencies.
CFPB’s First Annual Fair Lending Report to Congress
The First Annual Fair Lending Report of the Consumer Financial Protection Bureau describes the CFPB’s efforts to build its Office of Fair Lending and Equal Opportunity and reviews that office’s accomplishments from July 21, 2011 through July 20, 2012. The CFPB includes among those accomplishments the issuance of “Bulletin 2012-04 on Discrimination in Lending” and the commencement of a number of non-public fair lending investigations, which are ongoing. The Report states that the Bureau continues to develop tools that allow it to identify areas of heightened fair lending risk and to promote efficiency in its supervisory and enforcement efforts. Earlier this year, in its strategic plan, the CFPB explained that it intends to base its fair lending-related performance on, among other indicators, the number of fair lending supervision activities opened during the fiscal year and the percentage of fair lending cases filed that were “successfully resolved” through litigation, settlement, or default judgment.
The Report states that federal regulators referred 12 ECOA-related matters to the DOJ from July 21, 2011 through December 31, 2011 and provides a summary of the most frequently cited Regulation B violations found by the federal regulators during examinations of financial institutions. The Report also provides a summary of a study and report by the CFPB to Congress on use of cohort default rates in private education lending, and provides a general status on rulemakings required by the Dodd-Frank Act. The CFPB describes the rulemaking to expand the scope of the data that must be collected and submitted under the Home Mortgage Disclosure Act (HMDA) as being in the “pre-rule stage,” and the Bureau has begun the planning process for new rules concerning data collection and reporting of small, minority- and women-owned business loan data by gathering information from stakeholders.
BuckleySandler LLP is a national leader in fair lending enforcement, litigation, and compliance. Attorneys in our Fair and Responsible Banking Team and CFPB Team defend institutions facing fair lending enforcement actions brought by the DOJ, CFPB and other federal agencies, and the firm regularly counsels an array of financial institutions seeking to comply with the full range of federal fair lending laws.
FinCEN, FDIC, and DOJ Announce Coordinated Anti-Money Laundering Enforcement Action and Settlement
On November 19, FinCEN and the FDIC announced that a state bank agreed to pay a $15 million civil money penalty to resolve the bank’s “history of noncompliance” with Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements, including recent allegations that the bank failed to implement an effective BSA/AML Compliance Program with reasonable internal controls. Specifically, the federal agencies alleged that the bank failed to adequately oversee third-party payment processor relationships and related products and services. The payment also resolves parallel civil claims by the DOJ that the bank violated the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) by originating withdrawal transactions on behalf of fraudulent merchants and causing money to be taken from the bank accounts of consumer victims. Concurrent with the federal action, the Delaware Office of State Bank Commissioner terminated the bank’s state charter.
DOJ and SEC Publish Long-Awaited FCPA Resource Guide
On November 14, the DOJ and the SEC released A Resource Guide to the Foreign Corrupt Practices Act. The long-awaited release comes almost a year to the day after Assistant Attorney General Lanny Breuer announced that the agencies would prepare an FCPA guidance document. Overall, the Resource Guide is a compilation of previously-issued guidance and litigation positions set forth by the DOJ and the SEC with regard to (i) who and what is covered by the FCPA’s anti-bribery and accounting provisions, (ii) the definition of a “foreign official”, (iii) what constitute proper and improper gifts, travel and entertainment expenses, (iv) facilitating payments, (v) how successor liability applies in the mergers and acquisitions context, and (vi) the different types of civil and criminal resolutions available in the FCPA context. The Guide also provides what the DOJ refers to as “the hallmarks of an effective corporate compliance program,” which may serve as a useful starting point for constructing, testing or revising an FCPA compliance program. At an industry conference this week, Assistant Attorney General Breuer explained that the Guide represents “the most comprehensive effort ever undertaken by either the Justice Department or the SEC to explain our approach to enforcing a particular statute.” BuckleySandler’s FCPA Practice plans to prepare an analysis and perspectives on the Resource Guide, drawing from recent trial and international compliance counseling experience.
DOJ Obtains $100 Million Money Laundering Settlement from Money Services Business
On November 9, the DOJ announced that a money services business (MSB) agreed to enter into a deferred prosecution agreement (DPA) and pay $100 million for failing to maintain an effective anti-money laundering program and for aiding and abetting wire fraud. The DOJ alleged that over a roughly five year period (2004-2009) the MSB profited on thousands of transactions processed on behalf of agents known to be involved in an international fraud scheme. The MSB’s senior management deferred to sales department executives and ignored recommendations from the MSB’s fraud department that certain agents known to be engaged in fraud be terminated, according to the DOJ. Moreover, the DOJ states that the MSB systematically and willfully failed to meet AML obligations under the Bank Secrecy Act, including by failing to (i) implement policies or procedures to file the required Suspicious Activity Reports (SARs) when victims reported fraud on transactions over $2,000, (ii) file SARs on agents known to be involved in the fraud, (iii) conduct effective AML audits of its agents and outlets, (iv) conduct adequate due diligence on prospective and existing agents by verifying that a legitimate business existed, and (v) sufficiently resource and staff its AML program.
Pursuant to the DPA, the MSB must (i) create an independent compliance and ethics committee of the board of directors with direct oversight of the chief compliance officer and the compliance program, (ii) adopt a global anti-fraud and anti-money laundering standard to ensure that their agents throughout the world will, at a minimum, be required to adhere to U.S. anti-fraud and anti-money laundering standards, (iii) adopt a bonus system that rates all executives on success in meeting compliance obligations, with failure making the executive ineligible for any bonus for that year, and (iv) adopt enhanced due diligence for agents deemed to be high risk or operating in a high-risk area. The MSB also agreed to retain an independent monitor that will oversee implementation and maintenance of these enhanced compliance obligations, evaluate the overall effectiveness of its anti-fraud and anti-money laundering programs, and report regularly to the DOJ.
DOJ Files First Civil Fraud Suit Alleging False Claims Act And FIRREA Violations In The Sale Of Loans To Fannie Mae And Freddie Mac
On October 24, the United States Attorney’s Office for the Southern District of New York (SDNY) filed a $1 billion civil mortgage fraud lawsuit against a mortgage lender and a major financial institution in connection with loans sold to the government-sponsored enterprises (GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Filed as a complaint-in-intervention in a pending qui tam, or whistleblower, lawsuit, the complaint alleges that the mortgage lender engaged in a scheme to defraud the GSEs in connection with the mortgage loans it sold to them, and that the financial institution that later acquired the lender was aware of and continued the misconduct. The suit seeks damages and penalties under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). This is the first civil suit brought by the Department of Justice concerning mortgages sold to the GSEs, and indicates that the government might commence other suits based on the sale of conventional mortgages to those entities.
The government’s allegations focus on a loan origination system initiated by the lender in 2006 that allegedly eliminated checkpoints on loan quality and led to fraud and other defects in the loans. The complaint alleges that the lender and the financial institution sold these loans to the GSEs but misrepresented that the loans complied with GSE requirements. The GSEs pooled the loans into mortgage backed securities and sold them to investors, subject to guarantees on principal and interest payments. As the allegedly defective loans defaulted, the GSEs suffered over $1 billion in losses through the payment of guarantees to investors.
These allegations set forth a theory of liability that the government had not previously articulated. Previous cases brought by the government primarily involved loans made by government program participants and alleged misrepresentations made directly to government agencies, whereas the complaint in this case is based on conventional loans and alleged misrepresentations to the GSEs. Moreover, unlike previous cases, defendants did not receive federal funds directly from the government, but rather only may have received such funds indirectly based on the government’s funding of the GSEs.
In addition, the complaint also represents another use by the government of FIRREA. Here, FIRREA is used to pursue the alleged profits made by defendants from the challenged loan origination system. See “Understanding FIRREA’s Reach: When Does Fraud ‘Affect’ a Financial Institution.” The case also marks yet another financial fraud qui tam action filed in New York. Both the FCA and FIRREA provide substantial rewards for whistleblowers and the government’s relatively quick decision to intervene, along with its fast response in other recent matters, may encourage other such suits in the SDNY. See “Whistle-Blower Bounties May Encourage Residential Mortgage-Backed Securities Fraud Reporting.”
In short, this action is another example of the government’s increasingly aggressive efforts to recoup losses stemming from the financial meltdown, as well as a reminder of the significance of the whistleblower provisions in both the FCA and FIRREA. Most importantly, it is a clear sign that government loan program participants are no longer the only targets for financial fraud recovery, and that the government may challenge the conduct of any lender who sold loans to the GSEs.
DOJ Sues Mortgage Lender Over Alleged Fraudulent Certification of FHA Loans
On October 9, the U.S. Attorney for the Southern District of New York and the U.S. Department of Housing and Urban Development (HUD) announced a civil fraud suit against a mortgage lender alleged to have falsely certified loans under the FHA’s Direct Endorsement Lender Program. The suit, filed in coordination with the Financial Fraud Enforcement Task Force (FFETF), claims that from May 2001 through October 2005, the lender regularly and knowingly engaged in reckless origination and underwriting of FHA loans, while certifying to HUD that those loans met the FHA Direct Endorsement Lender Program requirements and were therefore eligible for FHA insurance. Further, the suit alleges that the lender failed to conduct adequate quality control, failed to comply with HUD self-reporting requirements, and later attempted to cover up its reporting failures. The government claims that it was required to pay, and will continue to have to pay, FHA benefits on defaulted loans that contained material violations, and seeks treble damages and penalties under the False Claims Act, as well as Financial Institutions Reform, Recovery, and Enforcement Act penalties. The government also seeks compensatory damages under the common law theories of breach of fiduciary duty, gross negligence, negligence, unjust enrichment, and payment under mistake of fact. This suit follows the settlements earlier this year of several other cases involving similar claims. One other similar suit is currently pending.
DOJ Announces Results of Year-Long Mortgage Fraud Initiative
On October 9, the DOJ, HUD, the FTC, and the FBI announced the results of the Distressed Homeowner Initiative, a year-long national effort to coordinate federal and state investigation and prosecution of alleged mortgage fraudsters. The Initiative was carried out under the Mortgage Fraud Working Group of the FFETF. Between October 1, 2011 and September 30, 2012, the unit’s work resulted in 285 criminal indictments and informations against 530 defendants. The announcement described many of the Working Group’s investigative tactics, including undercover operations, and explained the reasons behind the Working Group’s focus on Southern California. The Working Group expects more enforcement actions to result from ongoing investigations, and the FFETF has several other active working groups, including the Residential Mortgage-Backed Securities Working Group that recently sued a major bank over alleged fraudulent misrepresentations and omissions in the sale of RMBS to investors.
NY AG Files First RMBS Working Group Action, Expects More to Follow
On October 2, the Residential Mortgage-Backed Securities (RMBS) Working Group announced its first legal action. The civil complaint, filed against a major bank by New York Attorney General Eric Schneiderman on behalf of the people of that state, alleges that an underwriter acquired by the bank made fraudulent misrepresentations and omissions in the sale of RMBS to investors. The suit claims that losses resulting from the allegedly fraudulent sales total approximately $22.5 billion to date, but the complaint does not specify the damages sought. In announcing the suit, Attorney General Schneiderman, as well as Acting U.S. Associate Attorney General Tony West and other federal Working Group members, described the coordinated efforts that culminated in this filing. Specifically, Working Group members stressed the assistance provided by the SEC and the FHFA. Indeed, the allegations in the New York Attorney General’s complaint are similar to allegations previously made by the FHFA on behalf of Fannie Mae and Freddie Mac against numerous financial institutions. The allegations also parallel those made by private plaintiffs. On behalf of the RMBS Working Group, which was first announced by President Obama during his 2012 State of the Union address, Mr. Schneiderman has promised more civil, and potentially criminal, enforcement activity against other financial institutions.
Legislators Accuse Assistant AG of Inappropriate Interference in Disparate Impact Case
On September 24, Representatives Lamar Smith (R-TX), Patrick McHenry (R-NC), and Darrell Issa (R-CA), along with Senator Charles Grassley (R-IA), sent a letter to U.S. Attorney General Eric Holder alleging that Assistant Attorney General Tom Perez struck an inappropriate deal with the City of St. Paul to entice the City to withdrawal its appeal in Magner v. Gallagher, a case that could have yielded a decision on whether disparate impact claims are cognizable under the Fair Housing Act, and if they are, the applicable legal standards for such claims. Based on a DOJ staff briefing and documents obtained from the DOJ, the lawmakers claim that the DOJ agreed not to intervene in a False Claims Act case pending against the City of St. Paul in exchange for the City abandoning its appeal, and that such an arrangement went beyond a standard settlement between the parties. The letters seeks additional documents and interviews of top DOJ officials by September 28, 2012.