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District Court Denies Motion to Dismiss, Rules Compliance Officers Responsible for AML Program Failures
On January 8, the U.S. District Court of Minnesota ruled that individual officers of financial institutions may be held responsible for ensuring compliance with anti-money laundering laws under the Bank Secrecy Act (BSA). U.S. Dep’t of Treasury v. Haider, No. 15-cv-01518, WL 107940 (Dist. Ct. Minn. Jan. 8, 2016). In May 2015, the defendant filed a motion to dismiss the U.S. Department of the Treasury’s December 2014 complaint against him. The Treasury’s complaint alleged that the defendant failed in his responsibility as the Chief Compliance Officer for an international money transfer company to ensure that “the Company implemented and maintained an effective AML program and complied with its SAR-filing obligations.” The complaint sought a $1 million judgment against the defendant and enjoined him from working for, either directly or indirectly, any “financial institution” as defined in the BSA. In his motion to dismiss, the defendant contended that the Treasury’s complaint should be dismissed because, among other reasons, 31 U.S.C. § 5318(a) permits the imposition of a penalty for AML program failures against an entity, not an individual. However, the District Court of Minnesota dismissed the motion, ruling that the BSA’s more general civil penalty provision, § 5321(a)(1), could subject a partner, director, officer, or employee of a domestic financial institution to civil penalties for violations “of any provision of the BSA or its regulations, excluding the specifically excepted provisions.” Judge David Doty further opined, “Because § 5318(h) is not listed as one of those exceptions, the plain language of the statute provides that a civil penalty may be imposed on corporate officers and employees like [the defendant], who was responsible for designing and overseeing [the company's] AML program.” The defendant also challenged the Treasury’s complaint on the bases that (i) the request for injunctive relief was time barred by the applicable statute of limitations; (ii) FinCEN should not have been permitted to receive and publicly use grand jury information; and (iii) FinCEN violated his due process rights. For various reasons, the District Court declined to decide on such issues or to dismiss materials based on the arguments presented.
Oil and Gas Company Files Lawsuit Against Drilling Partners Challenging Post-FCPA Settlement Reticence
On January 11, a Houston-based oil and gas company filed suit in the U.S. District Court for the Southern District of Texas against its drilling partners in the company’s Guinean operations. The company claims that the drilling partners have unjustly delayed performing the work called for by their operating agreement because of uncertainty over whether the government of Guinea would terminate its drilling agreement with the company in light of the FCPA investigation into the company. That investigation was resolved by a declination letter issued by DOJ in May 2015 and a settlement with the SEC in October 2015. (See previous InfoBytes coverage of that investigation here and here.) The company is seeking a ruling that the drilling partners are in violation of the operating agreement and an order forcing them to fulfill their obligations.
In a November 2015 SEC filing, the company reported a complete lack of operating revenue and warned that further delays in fulfilling requirements imposed by the government of Guinea could result in a loss of the company’s concession to drill in the country. This case illustrates the potential business risks posed by an FCPA investigation—even if it is resolved on relatively favorable terms.
Printing Company Fined £2.2 Million in United Kingdom for Africa Bribes
On January 8, the United Kingdom’s Serious Fraud Office announced that a printing company specializing in official documents such as election ballots was ordered to pay penalties totaling £2.2 million following its 2014 conviction under the Prevention of Corruption Act 1906. The SFO’s announcement regarding the sentencing stated that its investigation began in 2010 and centered on £395,074 in corrupt payments made to foreign officials in Kenya and Mauritania. Two of the company’s former employees, also convicted in connection with the same investigation, were ordered to pay penalties totaling over £20,000.
Digital Insights & Trends: Clearing and Settlement Platforms to Watch in 2016
2015 was the year that blockchain technology, initially used as the public ledger for tracking bitcoin, began to mature and expand beyond payments. While regulators focused on the risks associated with virtual currency, technology companies and financial institutions forged ahead with developing alternate uses for the blockchain.Using blockchain technology offers many upsides, with one of the most notable being faster clearing and settlement functionality. Companies that can clear and settle transactions faster and at a reduced cost will have a competitive advantage. Thus far, however, no dominant player has emerged.
There are a number of companies that are working on creating blockchain platforms for financial institutions to use to clear and settle trades. Below are just a few of note:
- Digital Asset Holdings. Blythe Master and team are developing a blockchain platform for financial institutions to use to settle digital currency trades as well as digitized versions of financial assets. Digital Asset Holdings recently purchased Hyperledger, which developed a distributed ledger to allow banks and other financial institutions to clear and settle transactions in real time, and Blockstack, which offers private blockchain services.
- Ethereum. Launched in mid-2015, it offers its own decentralized blockchain platform that allows each blockchain to be customized to fit the specific security that is subject to clearance and settlement.
- Bankchain. Developed by ItBit, it is a ledger system seeking to leverage the blockchain for clearing, settlement, and custody.
- Clearmatics is working with UBS to help develop a digital coin based on blockchain technology to settle trades and make cross-border payments.
- R3CEV has developed a consortium of 42 banks dedicated to developing blockchain technology for settlements and payments, among other things.
- Citigroup is developing various blockchain technologies (at least three) and has created a test virtual currency, “Citicoin,” which it uses to test the blockchain technologies.
In addition, companies are using blockchain technology to issue and trade equities. At the end of 2015, Nasdaq issued shares in Chain.com using Nasdaq Linq, its blockchain ledger technology. Additionally, the SEC approved Overstock.com’s plan to issue company stock via blockchain through its subsidiary, t0.
As the above demonstrates, both technology companies and financial institutions will be focused on developing numerous use cases for blockchain technology beyond payments in 2016. Regulators are also beginning to focus on the blockchain technology itself as opposed to solely virtual currency. For example, the CFTC is holding a hearing on January 26, 2016 to discuss the use of blockchain technology in derivatives markets. Taken together, 2016 seems to be the year that blockchain technology separates itself from payments and begins to stand on its own. Judging by the CFTC’s interest in blockchain technology, it appears that regulators may be thinking the same thing.
For another retrospective on the blockchain in 2015, see our Coindesk article "The Stories That Shaped the Blockchain Narrative in 2015."
New York AG Requires Transportation Company to Enhance Data Security Practices
On January 6, New York AG Schneiderman announced a settlement with a California-based transportation network company that requires the company to enhance its data security protection practices to ensure protection of consumers’ personal information. In November 2014, the AG’s office launched an investigation into the company’s collection, maintenance, and disclosure of users’ personal information “amid reports that [company] executives had access to riders’ locations and that the company displayed this information in an aerial view, known internally as ‘God View.’” Moreover, in February 2015, the company reported to the AG’s office that, as early as September 2014, it had experienced a data breach where company drivers’ names and license numbers were exposed to an unauthorized third party. In addition to the $20,000 penalty for failure to provide timely notice regarding the data breach, the settlement requires the company to (i) limit access to geo-location information to designated employees through technical access controls and a formal authorization and approval process; (ii) designate at least one employee to coordinate and supervise its privacy and security program; (iii) conduct annual training for employees implementing its data security practices and the handling of private information; (iv) adopt protective technologies for the storage, access, and transfer of private information, and the credentials required to access such information; (v) conduct regular assessments of the effectiveness of internal controls and procedures related to securing private information and geo-location information, as well as implement updates to such controls based on the assessments; and (vi) include a separate section in its consumer-facing privacy policy describing policies regarding location information collected from riders.
FTC and Florida AG Take Action Against Payment Processing Operation
On January 8, the FTC and Florida Attorney General Pam Bondi announced an amended complaint against a California-based processing sales organization, its three executives, and three telemarketing company owners (collectively “the defendants”) for alleged violations of the (i) Telemarketing and Consumer Fraud and Abuse Protection Act; (ii) the FTC Act; (iii) the FTC’s Telemarking Sales Rule; and (iv) the Florida Deceptive and Unfair Trade Practices Act. According to the complaint, the defendants operated a nation-wide debt relief scam by cold calling consumers and making false promises that they could “reduce consumers’ interest rates on their credit cards, save consumers thousands of dollars in a short time period, and refund consumers’ money if the promised savings were not realized.” The FTC and AG Bondi allege that, from at least November 2012 to October 2014, the defendants solicited at least 26 “‘straw men’” to act as signatories on “shell businesses and dummy merchant accounts” that were used to process consumer credit card payments. The FTC is seeking injunctive relief, rescission or reformation of contracts, restitution, the refund of monies paid, the disgorgement or ill-gotten monies, and other equitable relief; Florida AG Bondi is seeking injunctive relief, restitution, costs and attorneys’ fees, as well as other equitable relief.
SEC Outlines 2016 Examination Priorities
On January 11, the SEC’s Office of Compliance Inspections and Examinations issued its Examination Priorities for 2016. The examination priorities, which address issues across a variety of financial institutions, include (i) protecting retail investors, including those planning for retirement, by undertaking examinations to review exchange-traded funds (ETFs) and ETF practices, variable annuity recommendations and disclosure, and potential conflicts and risks involving advisers to public pension funds; (ii) evaluating market-wide risks by, among other thing, continuing to focus on cybersecurity controls at broker-dealers and investment advisers; and (iii) using enhanced data analytics to assess anti-money laundering compliance, detect microcap fraud, and complete reviews of excessive trading. Additional areas of examination priority for 2016 include (i) municipal advisors; (ii) private placements; (iii) investment advisers and investment companies that have not yet been examined; (iv) private fund advisers; and (v) transfer agents.
Second Circuit Affirms District Court Ruling, Dismisses Case Alleging Breach of Fiduciary Duty
On January 6, the Court of Appeals for the Second Circuit affirmed the Southern District of New York’s decision to dismiss a derivative action alleging that the Chief Executive Officer, Chairman of the Board of Directors, ten other Board members, and two former corporate officers and advisers of the nominal defendant financial institution ignored “glaring ‘red flags’ of suspicious and illicit misconduct associated with” Bernard Madoff’s Ponzi scheme and Madoff’s investment advisory unit’s account with the institution. Cent. Laborers’ Pension Fund v. Dimon, No. 14-4516, (2nd Cir. Jan. 6, 2015). In July 2014, “the District Court dismissed plaintiffs’ complaint on the ground that they ‘failed to allege with particularity facts sufficient to excuse [their] failure to make demand upon the Board prior to filing’ their action.” The District Court found that the plaintiffs had not alleged that the defendants (i) “‘utterly failed to implement any reporting or information system or controls’”; or (ii) “‘having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.’” (quoting Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006)). The District Court further found that because the plaintiffs only claimed that the financial institution’s controls were “inadequate,” as opposed to nonexistent, they were unable to maintain a Caremark action, i.e., an action for failure to monitor. See Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996). Plaintiffs challenged the District Court’s ruling on the grounds that “they should have been required to plead only defendants’ ‘utter failure to attempt to assure a reasonable information and reporting system existed,” as opposed to failing to implement any reporting or information system or controls. The Second Circuit upheld the District Court’s decision, however, maintaining that “the standard that the District Court applied was taken verbatim from Stone v. Ritter, a Delaware Supreme Court decision that the District Court was obligated to follow,” and although the language the plaintiffs contended should have been used was taken from Caremark, Caremark is not controlling because it was issued by a lower court than Stone before Stone was issued and Stone interpreted Caremark. The Second Circuit further opined that it was not clear that replacing the Stone standard with the language from Caremark would have made a “difference in the disposition of plaintiffs’ action” because of facts demonstrating an “attempt to assure a reasonable information and reporting system existed.”
CFPB Issues Request for Information Regarding HMDA Disclosure Guidelines
On January 7, the CFPB announced that it will request public feedback on the resubmission of mortgage lending data reported under HMDA. Upon publication in the Federal Register, the Request for Information Regarding Home Mortgage Disclosure Act Resubmission Guidelines (Request for Information) will be open for 60 days. The Bureau’s Request for Information follows the agency’s October release of a final rule amending Regulation C to expand the reporting requirements of the HMDA regulation. Among other things, the amended rule increases the number of data points collected from financial institutions that must be reported to federal regulators beginning March 1, 2019, thus potentially necessitating revisions to the resubmission guidelines, which are the guidelines that describe when supervised institutions will be expected to correct and resubmit data. In response to questions regarding whether the CFPB will adjust mortgage lending data resubmission guidelines to reflect the new data requirements under the amended rule, the Request for Information seeks public comment regarding (among other things): (i) the CFPB’s use of resubmission error thresholds and how they should be calculated; (ii) whether error thresholds should vary depending upon an institution’s LAR entry size; and (iii) whether systemic and non-systemic errors should be treated differently, and, if so, how they should be distinguished from one another.
CFPB Names David Silberman Acting Deputy Director
On January 7, the CFPB named David Silberman as the agency’s interim Acting Deputy Director, replacing Meredith Fuchs, while the CFPB searches for a permanent replacement. Since 2011, Silberman has served as the CFPB’s Associate Director for Research, Markets, and Regulations, a role he will retain while he serves as Acting Deputy Director. Fuchs, who served as the CFPB’s General Counsel and Acting Deputy Director, announced her departure in 2015; Mary McLeod will replace Fuchs as the Bureau’s General Counsel.
