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Federal Reserve Board Member Recognizes Blockchain Technology's Potential; Warns of Associated Risks
On October 7, at the Institute of International Finance Annual Meeting Panel on Blockchain, Federal Reserve Board member Lael Brainard delivered a speech titled “Distributed Ledger Technology: Implications for Payments, Clearing, and Settlement.” Brainard acknowledged blockchain technology as possibly the “most significant development in many years in payments, clearing, and settlement” and outlined its potential “to transform the way financial market participants transfer, store, and maintain ownership records of digitized assets.” Brainard highlighted payment technology changes as a particular regulatory focus and emphasized the Federal Reserve’s “responsibilities for promoting the safety and efficiency of the payments and settlements systems; supervising financial institutions engaged in payments, clearing and settlement; and safeguarding financial stability.” The following potential benefits of blockchain technology are among those discussed in Brainard’s speech: (i) faster processing and reduced costs in cross-border payments and trade finance; (ii) transparency, reduced costs, and faster settlements within securities markets; and (iii) cryptography as a secure way of transmitting and storing data. Brainard cautioned that, notwithstanding the technology’s promise, certain risks associated with financial technological developments and innovation remain, particularly in the areas of settlement, operations, cybersecurity, money laundering, and terrorist financing. Brainard concluded by highlighting the Federal Reserve’s commitment to industry engagement as blockchain technology evolves, noting that stakeholders “will work together to foster socially beneficial innovation, while insisting that risks are thoroughly understood, managed, and controlled.”
OFAC Publishes Fact Sheet and FAQ Related to Termination of Burma Sanctions Program; Updates SDN List
On October 7, OFAC published a Fact Sheet and Frequently Asked Question (FAQ) number 481 regarding the implementation of the President’s Executive Order entitled “Termination of Emergency with Respect to the Actions and Policies of the Government of Burma.” OFAC’s fact sheet explains that all OFAC-administered restrictions and authorizations under the Burma sanctions program pertaining to banking with Burma, including 2012 and 2013 OFAC general licenses that authorized certain correspondent account activity with Burmese banks, are terminated pursuant to the Executive Order. FAQ 481 clarifies that “[p]ending OFAC enforcement matters will proceed irrespective of the termination of OFAC-administered sanctions on Burma, and OFAC will continue to review apparent violations of the [Burmese Sanctions Regulations], whether [such violations] came to the agency’s attention before or after the Burma sanctions program was terminated.” In connection with terminating the Burma-related sanctions program, OFAC made several deletions to its SDN List.
OFAC Updates Iran-Related FAQs
On October 7, OFAC updated its Frequently Asked Questions (FAQs) relating to the Listing of Certain U.S. Sanctions under the Joint Comprehensive Plan of Action (JCPOA). In addition to adding three FAQs related to due diligence (see M.10 through M.12), OFAC amended two FAQs (C.7 and C.15) regarding Financial and Banking Measures and one FAQ (K.19) related to Foreign Entities Owned or Controlled by U.S. Persons. FAQ M.10 clarifies that while “[i]t is not necessarily sanctionable for a non-U.S. person to engage in transactions with an entity that is not on the SDN List but that is minority owned, or that is controlled in whole or in part, by an Iranian or Iran-related person on the SDN List,” it is recommended that persons engaging in such transactions exercise caution to ensure that they do not involve Iranian or Iran-related persons on the SDN List. FAQs M.11 and M.12, respectively, address (i) due diligence expectations related to the screening of potential Iranian counterparties; and (ii) the circumstances under which OFAC expects a non-U.S. financial institution to repeat the due diligence their customers have already performed on an Iranian customer.
Treasury and Federal Reserve Support G-7 Elements of Cybersecurity for the Financial Sector
On October 11, the U.S. Department of the Treasury announced that the Group of Seven (G-7) countries – comprised of the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom – issued fundamental elements to “help address cyber risks facing the financial sector from both entity-specific and system-wide perspectives.” In Fundamental Elements of Cybersecurity for the Financial Sector, G-7 outlines eight elements for private and public entities within the financial sector to use as “building blocks” for confronting cyber-related issues, the first of which is to establish and implement tailored cybersecurity strategies and operational frameworks that should be tailored to an entity’s nature, size, complexity, risk profile, and culture. G-7’s remaining seven elements are as follows: (i) define and facilitate effective governance structures to ensure accountability; (ii) identify cyber risks and implement control assessments, including systems, policies, procedures, and training; (iii) “establish systematic monitoring processes to rapidly detect cyber incidents and periodically evaluate the effectiveness of identified controls, including through network monitoring, testing, audits, and exercises”; (iv) ensure that incident response policies are effective and guarantee timeliness; (v) establish and test contingency plans that help to ensure effective recovery of critical functions and operations; (vi) share cybersecurity information with internal and external stakeholders, including threat indicators, vulnerabilities, and incidents; and (vii) develop a review process that addresses, among other things, evolving cyber risks. In support of the G-7 elements, Federal Reserve Vice Chairman Stanley Fischer stated that they are “a crucial step in furthering hardening each link in the chain of our global financial system.”
OCC Releases Bulletin on Revised Examination Procedures for the Military Lending Act
On October 7, following the Federal Reserve’s and the CFPB’s leads, the OCC released Bulletin 2016-33 advising financial institutions of updated interagency examination procedures for compliance with the Department of Defense’s (DoD) Military Lending Act (MLA) July 2015 final rule. As previously summarized in BuckleySandler’s Special Alert, the DoD issued an interpretive rule regarding the amendments to the regulations implementing the MLA on August 26, 2016. The 2015 final rule went into effect for consumer credit products other than credit cards on October 3, 2016. The requirements will take effect for credit card accounts one year later, on October 3, 2017. The OCC plans to include the updated interagency examination procedures in the Comptroller’s Handbook.
CFPB Releases Final Rule on Prepaid Financial Products; Chamber of Digital Commerce Comments on Scope of the Rule
On October 5, the CFPB released its final rule on prepaid financial products, including traditional prepaid cards, mobile wallets, person-to-person payment products, and other electronic accounts with the ability to store funds. The rule is intended to provide consumers with additional federal protections under the Electronic Fund Transfer Act analogous to the protections checking account consumers receive. The following federal protections are included in the new rule: (i) financial institutions will be required to provide certain account information for free via telephone, online, and in writing upon request, unless periodic statements are provided; (ii) financial institutions must work with consumers who find errors on their accounts, including unauthorized or fraudulent charges, timely investigate and resolve these incidents, and restore missing funds when appropriate; and (iii) consumers will be protected against unauthorized transactions, such as withdrawals or purchases, if their prepaid cards are lost or stolen. The rule contains new “Know Before You Owe” prepaid disclosures similar to those used for mortgages and student financial aid offers. In addition to requiring two (one short, the other long) disclosure forms, the new rule requires that prepaid account issuers post agreement offers made available to the general public on their websites, submit all agreements to the CFPB, and make agreements that are not required to be posted on their website available to relevant consumers. The new rule also includes credit protections stemming primarily from the Truth in Lending Act and the Credit Card Accountability Responsibility and Disclosure Act, including providing consumers with monthly credit billing statements, giving consumers reasonable time – at least 21 days – to repay their debt before incurring late fees, ensuring that consumers are able to repay the debt before making a credit offer, and limiting the fee and interest charges to 25% of the total credit limit during the first year an account is open. The rule, which has not yet been published in the Federal Register, has a general compliance date of October 1, 2017, but includes certain accommodations, one of which is an October 2018 effective date for the requirement that agreements be submitted to the CFPB.
The Chamber of Digital Commerce submitted comments to the CFPB in December advocating that virtual currency products and services should fall outside the scope of the prepaid rule. Pursuant to the final rule, the CFPB found that “application of Regulation E and this final rule to such products and services is outside the scope of this rulemaking.”
CFPB Creates HMDA and ECOA Safe Harbor for New Fannie/Freddie Application Form
On September 29, the CFPB published an Approval Action in the Federal Register that provides a safe harbor under the Equal Credit Opportunity Act (ECOA) and Regulation B for lenders who use the revised Uniform Residential Loan Application (URLA) form issued by Fannie Mae and Freddie Mac in August 2016. The Bureau’s Approval Action states that it has “determined that the relevant language in the 2016 URLA is in compliance with” Regulation B’s requirements for whether, and how, a creditor may seek information about an applicant’s race, color, religion, national origin, sex, marital status, and income sources, and information about an applicant’s spouse or former spouse.
The Bureau’s Approval Action also offers flexibility for lenders who must collect and report information about mortgage applicants’ ethnicity and race under the Home Mortgage Disclosure Act (HMDA), implemented by Regulation C. On October 28, 2015, the Bureau amended Regulation C to require covered lenders to offer applicants the opportunity to self-identify using disaggregated categories of ethnicity and race, effective January 1, 2018. The CFPB notes in the Federal Register notice that before January 1, 2108, asking applicants to self-identify using the disaggregated categories would not have been allowed under Regulation B’s restrictions on seeking information about an applicant’s ethnicity, race and other characteristics. The Approval Action gives lenders the option of using the disaggregated categories of ethnicity and race for applications taken in 2017 without violating Regulation B. It states that if a lender opts to collect information using the disaggregated categories in 2017, for applications that see final action before January 1, 2018, the lender must report the data to the Bureau using only the current aggregate categories for ethnicity and race. If a lender takes final action in 2018 or later on an application received in 2017, it may choose to report the data using either the current aggregate or the new disaggregated categories.
OCC Issues Bulletin Regarding Mandatory Contractual Stay Requirements for Qualified Financial Contracts
On October 3, the OCC issued Bulletin 2016-31 seeking comment on a proposed rule intended to “enhance the resilience and the safety and soundness of federally chartered and licensed financial institutions.” Pursuant to the proposal, a covered bank would be required to ensure that a covered qualified financial contract (i) contains a contractual stay-and-transfer provision equivalent to those contained in the Dodd-Frank Act’s stay-and-transfer provision under title II and in the Federal Deposit Insurance Act; and (ii) restricts the use of default rights based on an affiliate’s insolvency. Moreover, the proposal would “make conforming amendments in certain definitions in the capital adequacy standards in 12 CFR 3 and the liquidity risk measurement standards in 12 CFR 50.” Comments on the proposed rule are due by October 18, 2016.
FinCEN Assesses Civil Money Penalty Against Nevada-Based Casino for BSA/AML Violations
On October 3, FinCEN assessed a $12 million civil money penalty against a Nevada-based casino for willfully violating the anti-money laundering (AML) provisions of the Bank Secrecy Act (BSA). Pursuant to the Statement of Facts, from March 2009 through September 28, 2015, the casino allegedly failed to (i) develop and implement an effective AML program reasonably designed to ensure compliance with the BSA; (ii) exercise due diligence in its monitoring of suspicious activity; and (iii) maintain sufficient AML compliance controls, procedures, training, and audits, which resulted in multiple filing and recordkeeping control violations. As part of the FinCEN’s Assessment and the Non-Prosecution Agreement filed by the U.S. Attorney’s Officers, the casino must (i) perform a series of required Remedial Measures to ensure compliance going forward; and (ii) conduct a look-back review to ensure that suspicious transactions and attempted transactions were appropriately reported for transactions that occurred between 2010 and 2013.
FinCEN Acting Director Comments on Recent Casino Actions and Culture of Compliance
On October 3, FinCEN Acting Director Jamal El-Hindi issued a statement regarding anti-money laundering and countering the financing of terrorism compliance. According to Acting Director El-Hindi, two recent actions against casinos represent failure to (i) adequately train staff at every level in the organization; and (ii) properly file - or file at all – Suspicious Activity Reports and Currency Transaction Reports. Still, Acting Director El-Hindi acknowledged that casinos in general have improved their AML compliance efforts. Acting Director El-Hindi stated that FinCEN will continue to work with casinos on their compliance efforts, and cautioned that “[a] good compliance culture is one where doing the right thing is rewarded, and where ‘looking the other way’ has consequences.”