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On September 21, 2016, the SEC reached a $766,000 settlement with a personal care and dietary supplement company over charges that it violated the internal controls and books and records provisions of the FCPA. The SEC alleged that the company’s China subsidiary made a $150,000 payment to a charity chosen by a Chinese Communist party official in order to obtain that official’s assistance in terminating an on-going provisional agency investigation into the company’s compliance with local rules for direct selling.
The settlement reveals important lessons for U.S. companies regarding oversight of charitable contributions made by their foreign-based subsidiaries. According to the Order, the company’s China subsidiary had informed its U.S. counterpart of the donation but omitted the relationship between the donation, foreign official, and provisional agency investigation. While the U.S. company flagged the FCPA risks a large donation in China may raise, and advised its China subsidiary to consult with outside U.S. legal counsel to assure compliance, the counsel’s advice was ultimately ignored by the subsidiary. The SEC concluded that the company failed to maintain necessary internal controls, specifically with respect to due diligence conducted by its China subsidiary regarding charitable contributions and accounting for such donations.
Notably, this is the second time that the government has charged a company with violating the FCPA based only on a charitable donation to purportedly buy the influence of a foreign official. The settlement illustrates the SEC’s increasing focus on charitable donations in high risk markets.
On September 30, 2016, the SEC reached a $20 million settlement with a British pharmaceutical company arising from the company’s business in China. The SEC alleged that between 2010 and 2013, sales and marketing managers of the company’s China subsidiary made corrupt payments to medical professionals to encourage more prescriptions for the company’s products. The purported corrupt payments included gifts, travel, entertainment, shopping, and cash but were recorded in the company’s books and records as legitimate marketing expenses, speaker fees, medical association payments, and travel and entertainment expenses. Because the medical professionals worked in government-owned hospitals, the SEC considered them to be foreign government officials under the FCPA, and charged the company with violations of the internal controls and recordkeeping provisions of the FCPA.
The $20 million dollar settlement with the SEC follows an almost $490 million sanction ordered in 2014 by a Chinese Court against the company’s Chinese subsidiary based on the same alleged bribery scheme. Five of the company’s managers were also convicted in that action in China and its former country manager was deported. FCPA Scorecard coverage of the Chinese Court order can be found here.
On September 29, the OCC released final guidelines establishing standards for recovery planning for large OCC-regulated institutions. The guidelines, which are not applicable to community banks, are designed to provide “a comprehensive framework for evaluating the financial effects of severe stress that may affect a covered institution and options it may take to remain viable under such stress.” Pursuant to the guidelines, an institution “should develop and maintain a recovery plan that is specific to that covered bank and appropriate for its individual size, risk profile, activities, and complexity, including the complexity of its organizational and legal entity structure.” OCC examiners will begin to assess an institution’s recovery plan for appropriateness and adequacy. The guidelines, which contain various compliance dates, become effective January 1, 2017.
On October 4, the FTC announced a $1.3 billion judgment against defendants responsible for operating an allegedly deceptive payday lending scheme. The judgment is the result of 2012 complaint in which the FTC alleged that the defendants engaged in deceptive acts or practices in violation of Section 5(a) of the FTC Act by making false and misleading representations about costs and payment of the loans. According to the FTC, the defendants claimed that they would charge consumers the loan amount and a one-time finance fee. However, the court found that the defendants “made multiple withdrawals from consumers’ bank accounts and assessed a new finance fee each time, without disclosing the true costs of the loan.” The $1.3 billion order is the largest litigated judgment the FTC has obtained to date.
On September 27, the CFPB entered into a consent agreement with a California-based online lender for allegedly misrepresenting, among other things, the fees charged, the loan products that were available to consumers, and whether the loans would be reported to credit reporting companies. As part of the agreement, the CFPB indicated that the lender would be required to include the correct finance charge and annual percentage rate in all of its online disclosures, and must test those disclosures annually to ensure accuracy and compliance with the Truth in Lending Act. As a result, the lender will be required to pay $1.83 million in consumer redress as well as $1.8 million as a civil penalty.
On September 26, the CFPB entered into a consent agreement with a Georgia-based automobile-title lender and its affiliates, based on allegations that the lender violated the Unfair and Abusive prongs of the Consumer Financial Protection Act. The CFPB alleged that the lender “lur[ed] consumers into costly loan renewals by presenting them with misleading information about the deals’ terms and costs.” The CFPB specifically indicated the lender’s use of a “Payback Guide” that focused the consumer’s attention on the monthly payment, and not on the total cost of the transaction, including the costs to roll over the loan to an additional period, materially interferes with the consumer’s ability to understand the terms of the transaction. The CFPB also alleged that the lender committed unfair debt-collection practices by visiting consumers’ homes, references, and places of employment, and revealing information about past-due debt to third parties, including neighbors, roommates, family members, supervisors, and co-workers. Under the terms of the consent order, the lender is prohibited from using the Payback Guide and from encouraging consumers to exceed the original term of repayment. The order also prohibits the lender from making in-person visits to collect payments. Under the agreement, the lender must pay $9 million as a civil penalty to the CFPB.
On September 22, the CFPB filed a complaint in federal district court against a credit repair company, claiming that the company charged consumers a series of illegal fees, including a fee to access the consumer’s credit report, a fee to set up the consumer’s account, and a monthly fee that continues to accrue until the consumer affirmatively cancels the service. The CFPB also alleged that the company misrepresented the cost and effectiveness of its services, stating that it could “remove virtually any negative information from a consumer’s credit report,” and that it raises customer’s credit scores by an average of more than 100 points, without proper substantiation for either claim. The CFPB alleged that the company’s actions violate the Telephone Sales Rule, and the deceptive prong of the Consumer Financial Protection Act.
On September 29, the Federal Reserve released the interagency examination procedures for the DOD’s Military Lending Act (MLA) final rule published in July of 2015. Also on September 29, the CFPB released its own examination procedures under the final rule, providing guidance as to how the CFPB will conduct reviews under what will be a broader scope of coverage under the MLA, including credit cards, deposit advance products, overdraft lines of credit (not traditional overdraft services), and certain types of installment loans. The final rule goes into effect on Monday, October 3 for most extensions of consumer credit to active duty servicemembers and their dependents.
On September 26, the Federal Reserve released a proposed rule that would essentially remove bank holding companies defined to be “large and noncomplex” from the qualitative portion of annual Comprehensive Capital Analysis and Review (CCAR) assessment process (“stress tests”). Under the proposed rule, large and noncomplex bank holding companies are those with total consolidated assets of at least $50 billion, but less than $250 billion, less than $10 billion in foreign exposure, and less than $75 billion in average nonbank assets. Currently, the Fed applies the CCAR process to bank holding companies with more than $50 billion in total consolidated assets. Fed Governor Daniel Tarullo indicated that the Fed was also considering adoption of a “stress capital buffer” approach for larger, global systemically important banks (GSIB). The new approach would replace the uniform 2.5-percent capital conservation buffer, and would instead require GSIBs to retain capital “equal to the maximum decline in a firm's common equity tier 1 capital ratio under the severely adverse scenario of the supervisory stress test before the inclusion of the firm's planned capital distributions.”
On September 23, the Federal Reserve released a proposed rule outlining new risk-based capital and other regulatory requirements for banks that transact in physical commodities. Among other things, the proposed rule would require financial holding companies to retain additional capital if the company is engaged in activities involving commodities for which existing laws impose certain environmental liability. The rule also looks to accomplish the following: (i) to restrict the amount of physical commodity trading activity firms may conduct; (ii) to rescind authorizations that allow firms to engage in physical commodity activities involving power plants; (iii) to remove copper from the list of precious metals that all bank holding companies are permitted to own and store; and (iv) to establish reporting requirements on the nature and extent of firms' physical commodity holdings and activities. In the memo discussing the proposal, the Fed indicated that it was addressing circumstances where “damages can exceed the market value of the physical commodity involved in the catastrophic events, and can exceed the committed capital and insurance policies of the organization.” The deadline to submit comments is set at December 22.
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jessica L. Pollet to discuss "Law & compliance speedsmarts" at the American Financial Services Association Law & Compliance Symposium
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program