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NYDFS Submits Comment Letter Opposing OCC FinTech Charter
On January 17, the New York Department of Financial Services (NYDFS) Superintendent Maria T. Vullo submitted a comment letter in stern opposition to the OCC proposal to create a new FinTech charter, stating that the proposed regulatory scheme is not authorized by federal law and would create a number of problems, including a serious risk of regulatory confusion and uncertainty. New York’s top financial regulator is of the opinion that “the OCC should not use technological advances as an excuse to attempt to usurp state laws.” More specifically, NYDFS’ contends, among other things, that: (i) state regulators are better equipped to regulate cash-intensive nonbank financial service companies; (ii) a national charter is likely to stifle rather than encourage innovation; (iii) the proposal could permit companies to engage in regulatory arbitrage and avoid state consumer protection laws; and (iv) a national charter would encourage large “too big to fail” institutions, permitting a small number of technology-savvy firms to dominate different types of financial services.
An interview of Superintendent Vullo discussing this topic may be accessed here.
PA Secretary of Banking and Securities Voices Concerns About OCC FinTech Charter
On January 17, Secretary of the Pennsylvania Department of Banking and Securities, Robin L. Wiessmann, submitted a comment letter calling upon the OCC to give “more thoughtful deliberation about the intended and unintended consequences that will result from such an apparent departure from the OCC’s current policy and scope of supervision.” Specifically, Wiessman requested that the federal bank regulator address three concerns regarding: (i) the broad application and ambiguity of the term “fintech”; (ii) the need by the OCC to have an adequate regulatory scheme in place before approving charters; and (iii) the possible federal preemption of existing state consumer protection laws. The Secretary’s letter echoes many of the concerns raised in a recent comment letter submitted by the Conference of State Bank Supervisors (CSBS) “reiterating its opposition to the [OCC] proposal to issue a special charter for fintech companies.”
John Doe Lawsuit Says CFPB Action Unlawful After PHH
On January 10, a California-chartered finance company with its principal place of business in Manila, Philippines filed an action to enjoin the CFPB from, among other things, disclosing the existence of an investigation of the plaintiff and taking any action against the plaintiff unless and until the CFPB is constitutionally structured. John Doe Co. v. CFPB, D.D.C., No. 17-cv-00049 (D.D.C. Jan. 10, 2017). The action was prompted, in part, by the recent PHH v. CFPB decision in which the court held that the CFPB’s single director leadership structure is unconstitutional and, thus, that the agency must operate as an executive agency supervised by the President. Here, the John Doe plaintiff argues that because the CFPB has requested review of the PHH decision, the court’s remedy in regarding the CFPB’s structure has not taken effect and thus agency is operating in violation of the Constitution. Therefore, plaintiff asserts, the CFPB can take no further action against it—including publication of the CFPB’s investigation of plaintiff or initiation of enforcement action against plaintiff.
We note, that on the same day the plaintiff filed its complaint, the court issued an order reflecting its decision that the plaintiff be able to proceed in its action against the CFPB under a pseudonym. In so doing, the court noted that where a company has filed an action to protect against the government’s disclosure of its identity, it would be “counterintuitive that a court should require that same company to disclose its identity in the parallel court proceedings.” Judge Rudolph Contreras of the U.S. District Court for the District of Columbia has given the CFPB until Jan. 25 to respond to the company’s complaint and motion to proceed under a pseudonym.
CFPB Files Suit Against Nation's Largest Student Loan Company
On January 18, the CFPB initiated an enforcement action against the nation’s largest student loan servicer based upon alleged violations of the CFPA, FCRA, and FDCPA. In a complaint filed with the Middle District of Pennsylvania, the Bureau charged that the student lender “systematically and illegally” created “obstacles to repayment” and “cheated” many borrowers out of their rights to lower repayments, causing them to pay much more than they had to for their loans. The CFPB “seeks to obtain permanent injunctive relief, restitution, refunds, damages, civil money penalties, and other relief.”
Later that day, the lender issued a statement categorically rejecting the CFPB's charges, explaining: “[T]he suit improperly seeks to impose penalties [] based on new servicing standards applied retroactively and applied only against one servicer. The regulator-asserted standards are inconsistent with Department of Education regulations, and will harm student loan borrowers, including through higher defaults.” The company also noted that “the timing of this lawsuit—midnight action filed on the eve of a new administration—reflects their political motivations.”
Misleading Mortgage Investors Costs Germany's Largest Bank $7.2 Billion
On January 17, the Department of Justice (DOJ) announced a $7.2 billion settlement with Germany’s largest lender, resolving federal civil claims that a German global bank misled investors in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2006 and 2007. Under the terms of the settlement agreement, the bank must pay a $3.1 billion civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), and must provide $4.1 billion in consumer relief. The DOJ described the settlement as “one of the largest FIRREA penalties ever paid.”
As a part of the settlement, the bank acknowledged misleading investors in the packaging, securitization, marketing, sale, and issuance of RMBS. Pursuant to the agreement, an independent monitor will determine whether the bank has satisfied its consumer relief obligations. In connection with the settlement, the DOJ released an appendix containing credit and compliance due diligence results from a selection of the bank’s RMBS, along with a list of the RMBS at issue. The settlement— described by the DOJ as “one of the largest FIRREA penalties ever paid”—does not release any individuals from potential criminal or civil liability. The bank has agreed to fully cooperate with investigations related to the conduct covered by the agreement.
OFAC Settles with Canadian Bank for Apparent Violations of Cuban Assets Control Regulations and Iran Sanctions
On January 13, Treasury’s Office of Foreign Asset Control (OFAC) announced a $516,105 settlement agreement with a Canadian-based bank and its online-brokerage subsidiaries in connection with accounts held and transactions processed on behalf of certain Specially Designated Nationals and Blocked Persons located in Cuba, Iran and other locations in the Middle East. OFAC also identified general “shortcomings in the bank’s OFAC compliance policies, procedures, and programs” including the bank’s failure to screen for any potential nexus to an OFAC-sanctioned country or entity prior to processing related transactions through the U.S. financial system and occurring due to shortcomings in the banks policies and procedures. The settlement agreement does, however, note that the Apparent Violations constituted a non-egregious case, that the Bank voluntarily self-disclosed the Apparent Violations, and that the applicable total base penalty amount for the apparent violations was $955,750—well above the $516,105 amount OFAC assessed.
Notably, in the agreement’s concluding paragraph, OFAC highlights, as a general matter, the risks associated with both “subsidiaries in high-risk industries–such as securities firms” and, in particular “online payment platforms when the financial institution is unable to restrict access for individuals and entities located in comprehensively sanctioned countries.”
OCC FinTech Proposal Draws a Range of Comments from Industry Stakeholders
A number of stakeholders submitted comment letters this week in response to the OCC's recent proposal to move forward with developing a special purpose national bank charter for financial technology (“FinTech”) companies and accompanying white paper outlining the OCC’s authority to grant such charters to FinTech companies and potential minimum supervisory standards for successful FinTech bank applicants. With the comment period for its white paper closing this week, the bank regulator drew a range of reactions from the stakeholders, several of which are described below:
Consumer Bankers Association (CBA): In its comment letter, the CBA noted that the OCC needs to provide more clarity about the regulatory and supervisory framework that will be applied to FinTech companies, and to proceed cautiously and “provide the public with more information about the potential risks and rewards presented by” FinTech companies. The trade association recommended that the OCC utilize its new Office of Innovation and Responsible Innovation Framework to conduct a study of the FinTech sector to provide sufficient information to evaluate the need for and public benefits of a FinTech charter. Although the CBA confirmed support for “any effort to enhance the ability of banks to innovate,” it stated that it could not “yet support the inclusion of fintech companies into the federal banking system.”
Independent Community Bankers of America (ICBA): In its comment letter, the ICBA stressed the need for the OCC to issue new chartering rules pursuant to the procedure under the Administrative Procedure Act, in consultation with the other bank regulators, and that ultimately these new institutions should be subject to the same supervision and regulation as community banks. The ICBA also expressed “strong concerns about issuing special purpose national bank charters to fintech companies without spelling out clearly the supervision and regulation that these chartered institutions and their parent companies would be subject to.”
American Bankers Association (ABA). The ABA’s comment letter expressed support of a special purpose national bank charter for FinTech companies, as long as existing rules and oversight are applied evenly and fairly. The letter noted, among other things, that significant benefits of financial innovation for consumers are “only realized when innovations are delivered responsibly,” which can be ensured by regulation and oversight. The letter added that “answers to many difficult questions should be made before granting any special purpose charter, including how to ensure that regulations and consumer protection are applied evenly; what protections must be in place to preserve existing laws regarding the separation of banking and commerce; and how would enforcement of operating agreements be accomplished.” The ABA also urged the OCC to work with other agencies “carefully and cooperatively” before any new charter is approved.
Financial Services Roundtable (FSR): Finally, a comment letter submitted by the FSR commended the OCC for developing the proposal, noting that regulations and regulators need to evolve with technology and changing customer preferences. The FSR letter noted that the OCC’s initiative should ensure parity among national charters, and not result in a two-tiered national banking system under which special purpose FinTech banks are subject to compromised supervisory standards. The letter added that to ensure parity in regulation and supervision, “the OCC may find it necessary to re-evaluate some standards applicable to full-service national banks and, as mentioned previously, examine the existing regulatory constraints inhibiting national banks from engaging in responsible innovation.”
CFPB Seeks Advisory Council Applications
As explained in a January 16 blog post, the CFPB recently set up three “advisory groups”—the Consumer Advisory Board, the Community Bank Advisory Council, and the Credit Union Advisory Council—in anticipation that the groups would provide information about emerging trends and practices in the consumer financial marketplace and to open lines of direct communication with smaller financial institutions. On January 16, the Bureau requested applications seeking to fill vacancies in all three groups, which have seats that will become vacant in the fall of 2017. According to the post, the CFPB is seeking individuals with expertise in a variety of consumer protection issues, including representatives of banks serving underserved communities, representatives of communities impacted by higher priced mortgages, employees of credit unions and community banks, and academics. Applications are due March 1.
Chilean Chemical Company Settles FCPA Charges With SEC and DOJ
On January 13, Chilean chemical and mining company agreed to pay nearly $30.5 million to resolve criminal and civil FCPA charges in connection with payments to politically-connected individuals in Chile. The company admitted that, from at least 2008 to 2015, it made approximately $15 million in payments to Chilean politicians, political candidates, and individuals connected to them. Many of the payments violated Chilean tax law and/or campaign finance limits and were not supported by documentation. Rather, the company made many of these payments to third-party vendors associated with the politically-connected individuals based on fictitious contracts and invoices for non-existent services. The company falsely recorded many of these payments in its books and records.
The company agreed to a three-year deferred prosecution agreement (DPA) with the DOJ, including a $15,487,500 criminal penalty, and agreed to retain an independent compliance monitor for two years. The criminal penalty reflected a 25 percent discount from the low end of the U.S. Sentencing Guidelines fine range due to the company’s full cooperation and substantial remediation. The company also agreed to pay a $15 million penalty to the SEC pursuant to an Administrative Order Instituting Cease-and-Desist Proceedings to settle the SEC’s charges that the company violated the books and records and internal controls provisions of the FCPA.
This settlement demonstrates the jurisdictional-reach of the U.S. government in enforcing the FCPA. The Chilean company with no U.S. operations, agreed to settle both the SEC’s and DOJ’s charges even though the entirety of the conduct occurred outside of the United States and was committed by foreign nationals. The only tie to the United States referenced in the SEC and DOJ settlement papers is that the company is registered with the SEC as a foreign private issuer (its Series B shares have been listed on the NYSE since 1993).
UK-based Manufacturer Settles FCPA Charges As Part of $800 Million Global Bribery Investigation Resolution
On January 17, a UK-based manufacturer and distributor for the civil aerospace, defense aerospace, marine, and energy sectors worldwide, agreed to pay nearly $170 million to the DOJ to resolve charges that it conspired to violate the anti-bribery provisions of the FCPA around the world. The settlement with the DOJ (via a three-year deferred prosecution agreement (DPA)), was a fraction of the company's $800 million global resolution in connection with bribes paid to government officials in exchange for government contracts in China, India, Indonesia, Malaysia, Nigeria, Russia, Thailand, Brazil, Kazahkstan, Azerbaijan, Angola, and Iraq.
In addition to settling with the DOJ, the company resolved charges with the UK SFO by entering into a DPA and agreeing to pay a fine of $604,808,392. The company entered into a leniency agreement with the Brazilian Ministério Público Federal (MPF) and agreed to pay a penalty of $25,579,170.
According to the DPA Statement of Facts, the company admitted that between 2000 and 2013, it conspired to violate the anti-bribery provisions of the FCPA by paying more than $35 million in bribes to foreign officials in exchange for confidential information and/or government contracts. Many of these contracts benefited RRESI, the company’s indirect U.S. subsidiary. The company made the majority of the bribes by inflating commission payments to third-party intermediaries, who then paid part of the commission as bribes to government officials.
The DOJ lauded the company’s cooperation in its investigation and as a result, the company received a 25 percent reduction from the low end of the U.S. Sentencing Guidelines fine range due. However, the DOJ refused to award the company any voluntary disclosure credit. The DOJ has been transparent that it only will award voluntary disclosure credit when the disclosure occurs prior to an imminent threat of disclosure or government investigation. Here, that test was not satisfied because the company did not disclose the conduct until after media reports and the related SFO inquiry began.