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Federal Reserve releases Comprehensive Capital Analysis and Review results
On June 27, the Federal Reserve (Fed) released the results of the Comprehensive Capital Analysis and Review (CCAR) conducted for 18 banking firms. The Fed considers quantitative and qualitative factors in its evaluation, including projected capital ratios under hypothetical severe economic conditions and the strength of the firm’s capital planning process, including its risk management, internal controls, and governance practices. The Fed did not object to the capital plans of any of the 18 firms, but did require one to address “limited weaknesses” the test identified. The Fed noted that, “On balance, virtually all firms are now meeting the Federal Reserve's capital planning expectations, which is an improvement from last year's assessment. The firms in the test have significantly increased their capital since the first round of stress tests in 2009.”
Federal Judge denies Ukrainian billionaire’s motion to dismiss criminal charges, and Austrian Supreme Court grants U.S. extradition request
Judge Rebecca Pallmeyer of the United States District Court for the Eastern District of Illinois denied a motion to dismiss filed by Ukrainian billionaire Dmitry Firtash, allowing several criminal charges––including one count of aiding and abetting an FCPA violation––to proceed. Shortly thereafter, the Austrian Supreme Court reportedly agreed to extradite Firtash to the United States, subject to final review by Austria’s Justice Minister. For prior coverage of Firtash’s motion to dismiss, please see here.
Firtash’s motion argued, inter alia, that he could not be liable under the FCPA as a Ukrainian citizen who does not belong to any class of foreign nationals subject to that statute. Because the Seventh Circuit had not reached the precise question that Firtash raised, Firtash cited Second Circuit precedent holding that “foreign nationals may only violate the [FCPA] outside the United States if they are agents, employees, directors, or shareholders of an American issuer or domestic concern.” United States v. Hoskins, 902 F.3d 69, 97 (2d Cir. 2018). Because Firtash is none of these, he claimed to be exempt from FCPA liability.
Judge Pallmeyer disagreed. Putting aside Hoskins, the judge analyzed generally applicable Seventh Circuit and Supreme Court jurisprudence regarding secondary liability, and concluded that a defendant can be liable for aiding and abetting or conspiring to commit a crime even if he or she would be exempt from primary liability for that crime. Judge Pallmeyer acknowledged that the presumption against extraterritorial application “arguably undermined” the Seventh Circuit precedent upon which her opinion relied, but stated that she was “unwilling to disregard clear guidance from the Seventh Circuit” on the subject of secondary liability. In addition to conflicting with Hoskins, Judge Pallmeyer’s opinion supports the broader scope of FCPA liability for foreign nationals that the DOJ has been pushing for years, and marks the beginning of a potential circuit split on the issue of secondary liability under the FCPA.
CEO and director of investment firm convicted of conspiracy to bribe Haitian officials
After a two-week jury trial in the United States District Court for the District of Massachusetts, the CEO of an investment firm and one of its directors were convicted of conspiracy to violate the FCPA and the Travel Act. Joseph Baptiste, a retired U.S. Army Colonel, was also found guilty of violating the Travel Act and conspiracy to commit money laundering. For prior coverage of the charges against Baptiste and CEO Roger Richard Boncy, please see here.
The evidence that federal prosecutors presented against Boncy and Baptiste included intercepted phone calls in which they discussed their plan to bribe Haitian officials “at all levels of government” in order to obtain governmental approval of a proposed $84 million project to develop a port in northwestern Haiti. In a recorded conversation with undercover agents posing as investors, Boncy and Baptiste allegedly solicited funds and told agents that the funds would be used to bribe the aide of a high-level elected official in Haiti. To conceal the bribes, Boncy and Baptiste allegedly said that they would funnel the agents’ funds through a U.S.-based non-profit organization that Baptiste controlled, which purported to sponsor social programs for Haitian residents.
The case against Boncy and Baptiste began with a sting operation conducted by the FBI in 2017. Boncy and Baptiste are scheduled to be sentenced by Judge Allison D. Burroughs on September 12, 2019.
Legislation eliminates VA conforming loan cap
On June 25, President Trump signed HR 299, the “Blue Water Navy Vietnam Veterans Act of 2019.” Among other changes, the bill (i) adjusts the loan fees applicable to the Department of Veterans Affairs’ (VA) home loan guaranty program by providing a new loan fee table; and (ii) eliminates the program limit on the guaranty amount, which is based on the Freddie Mac conforming loan limit determined under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act. The bill will allow VA borrowers to borrow above the conforming loan limit, currently set at $484,350, for loans guaranteed on or after January 1, 2020.
CFPB's first in symposia series discusses 'abusive' standard
On June 25, the CFPB held its “Abusive Acts or Practices Symposium,” the first event in a symposia series covering a range of consumer financial services topics. The event had two panels of experts discussing unfair, deceptive, or abusive acts and practices (UDAAP)—the first was a policy discussion, moderated by Tom Pahl, CFPB’s Policy Associate Director, Research, Markets and Regulation; and the second, examined how the “abusive” standard has been used in practice in the field and was moderated by David Bleicken, CFPB Deputy Associate Director, Supervision, Enforcement and Fair Lending. Director Kraninger began the symposium noting that it will help to “inform the Bureau’s thinking as to whether the Bureau should use its rulemaking or other tools to provide clarity about the general meaning of abusiveness—and, if so, which principles should be applied to determine the scope of abusiveness.”
The policy panel focused on whether consumer harm was required for a practice to be considered abusive. One panelist noted that while the Dodd-Frank Act statutory definition of abusive does not specifically require proof of consumer harm, it would be surprising if consumer harm wasn’t a priority in weighing enforcement claims. As for what principles the Bureau should apply in determining the scope of abusive acts and practices, one panelist identified three: “fidelity, autonomy, and modesty,” meaning the Bureau should follow the statutory language, protect autonomy of consumer decision-making, and be careful not to tie its hands prematurely based on current market information.
The practitioners’ panel focused on whether there was even a need to clarify the abusive standard, as it is already statutorily defined. Most panelists agreed that a guidance document or policy statement would be an important first step for the Bureau in providing clarity to the industry. Specifically, the panelists noted that the industry has struggled with examples of how abusiveness is different from unfairness or deception, arguing the Bureau has been “inconsistent at times” in the application of the abusive standard. One panelist explained that the Bureau often brings abusive claims in connection with a claim of deception or unfairness, stating “while this may work for the Bureau’s litigation strategy the market looks to enforcement for guidance on the policy. Standalone abusiveness claims that show how abusiveness is different from deception and unfairness would provide direction to staff and industry.” Because the standard is unclear to industry, a panelist argued that many companies choose to limit products or offerings to avoid unknown compliance risks.
An archived copy of the webcast will be available on the Bureau’s website.
House Fintech Task Force holds first hearing
On June 25, the House Financial Services Committee’s Task Force on Financial Technology held its first-ever hearing, entitled “Overseeing the Fintech Revolution: Domestic and International Perspectives on Fintech Regulation.” As previously covered by InfoBytes, the Committee created the task force to explore the use of alternative data in loan underwriting, payments, big data, and data privacy challenges. The hearing’s witness panel consisted of high-ranking innovation officials across various agencies and associations, including the CFPB, OCC, SEC, CSBS, and the U.K.’s Financial Conduct Authority. Among other things, the hearing discussed whether digital currency is considered a security, the OCC’s special purpose national bank charter, and the U.K.’s regulatory sandbox approach.
SEC representative, Valerie Szczepanik, stated that she believes the SEC has been “quite clear” with regard to initial coin offerings, noting that “[e]ach digital asset is its own animal. It has to be examined on its facts and circumstances to determine what in fact it is. It could be a security, it could be a commodity, it could be something else. So we stand ready to provide kind of guidance to folks if they want to come and talk to us. We encourage them to come talk to us before they do anything so they can get the benefit of our guidance.”
While much of the OCC special purpose bank charter discussion focused on a social media’s plan to launch its own virtual currency, CSBS representative, Charles Clark, emphasized that “[s]tate regulators oppose the special purpose charter because it lacks statutory authority” and that it should be up to Congress to decide whether the OCC can regulate non-bank entities. Clark noted that a federal system would create an unlevel playing field compared to a state system where “a small company can enter the system, scale up, and be competitive with an innovative idea.”
Lastly, the FCA representative, Christopher Woolard, emphasized that fintech firms participating in the country’s sandbox program are “fully regulated” and probably the U.K.’s “most heavily supervised,” noting that the FCA believes “sandbox firms have to work in the real world from day one.” Additionally, Woolard asserted that the sandbox program is making a difference in the market stating that of their 110 tests, 80 percent of the firms that enter the program go on to fully operate in the market. He concluded asserting, “we believe that around millions of consumers have [] access to new products [] geared around better value or greater convenience.”
Court dismisses FDCPA action after plaintiff admits possibility of late charges
On June 20, the U.S. District Court for the Eastern District of New York granted a debt collector’s motion to dismiss in an FDCPA action after the plaintiff conceded that it was possible for late charges to be imposed on his account in the future. The consumer filed an action against the debt collector after he received a collection notice stating that, “[a]s of the date of this letter, you owe the total balance due reflected above. Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater.” The consumer argued the letter violated the FDCP’s prohibition on using any false, deceptive, or misleading representation or means in connection with the collection of any debt, because the debt was not subject to the imposition of late charges, because his original creditor, the Department of Education, allegedly “‘did not have the legal or contractual authority to assess late charges on the [debt],’ and [the debt collector] was ‘never authorized . . . to charge or add late charges to the balance of the [debt].’” After discussing conflicting precedents, the court noted that it need not reach the issue because the plaintiff conceded that it would be possible for his account to be assessed late charges in the future should he rehabilitate his debt and subsequently fail to make timely payments. Because late charges could “conceivably be assessed” the debt collector’s letter was not inaccurate, as the plaintiff alleged and therefore, the court dismissed the action.
Court says debt collector’s name doesn't violate FDCPA
On June 18, the U.S. District Court for the Eastern District of Washington granted summary judgment in favor of a debt collector, concluding the debt collector did not violate the FDCPA by using the name “State Collection Service.” The class action alleged the debt collector’s name “gave the false impression that the debt collection company was in some way associated with the State of Washington in violation of the FDCPA.” The debt collector moved for summary judgment. Upon review of the debt collector’s written and oral communications with the plaintiff, the court noted that using the term, “State” in its name, or omitting the term “Inc.” from its name are not deceptive or misleading as a matter of law. Moreover, the court stated, “even if [the debt collectors]’s use of the term ‘State’ or omission of ‘Inc.’ could be construed as faintly misleading, it was not a material misrepresentation that affected Plaintiff’s ability to ‘intelligently choose’ her response to the collection notice.” Additionally, because all of the debt collector’s communications identified the original creditor and the amount of the debt, the court found that “the least sophisticated debtor would not be misled by [the debt collector]’s use of the name ‘State Collection Service.’”
OFAC amends Venezuela-related general licenses; temporarily extends two Ukraine-related general licenses
On June 26, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced General License (GL) 13B, which supersedes and replaces GL 13A. GL 13B expires on October 25. Additionally, OFAC extended the expiration date to November 8 of two Ukraine-related GLs by issuing GL 13L, which supersedes GL 13K, and GL 15F, which supersedes GL 15 E. OFAC also noted that GL 15F includes a new authorization for certain safety-related activity.
Visit here for continuing InfoBytes coverage of actions related to Venezuela, and here for actions related to Ukraine.
Split 9th Circuit reverses dismissal of class action alleging bank-assisted fraud
On June 24, the U.S. Court of Appeals for the 9th Circuit reversed the dismissal of a non-customer class action against a California bank alleging the bank knowingly assisted a fraudulent scheme, in violation of California law. The class action asserts eight claims against the bank under California law, including aiding and abetting fraud and conspiracy to commit fraud, for allegedly “knowingly assist[ing] a $125 million fraudulent scheme” initiated by one of the bank’s clients. The district court dismissed the action, holding the consumers “had not pleaded sufficient facts giving rise to a plausible inference that [the bank] knew [its client] was misappropriating funds.”
On appeal, the 9th Circuit disagreed, concluding the consumers plausibly alleged specific allegations concerning the bank’s actual knowledge of the client’s misappropriation and fraud. The appellate court noted that while generally banks owe no duty to non-customers under California law, an exception exists when a bank “‘knowingly makes itself a party to a fraud, [it] must make good the loss that results from the misappropriation.’” The appellate court concluded that several allegations made by the consumers were plausible based on the bank using “atypical banking procedures,” which included “repeatedly making advances at [the client]’s request without obtaining supporting documentation or verifying that [the client] used the advanced proceeds appropriately (despite indications to the contrary) and extending maturity dates on short-term loans year after year (even when [the client] was in default).”
In dissent, a panel judge argued that the consumers made no specific allegations of the bank’s actual knowledge of the fraud, noting that the complaint is “vague and lengthy” and just “a series of common banking practices dressed up in ominous language.” Additionally, the judge noted that California courts traditionally only find actual knowledge in “‘extreme circumstances,’” and have previously “refused to hold banks liable in far more egregious cases than this.”