Office of the Comptroller of the Currency (OCC)

OCC Presages Regulators’ Joint Statement on Banks Using Technological Innovation to Comply with BSA/AML Obligations

Second Post in a Two-Part Series

In our first post in this series, we described how the U.S. Senate Committee on Banking, Housing, and Urban Affairs (the “Banking Committee”) met in open session late last week to conduct a hearing on “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform.” The Banking Committee heard the testimony of, and questioned, representatives from the FinCEN, the OCC, and the FBI. The partial backdrop of this hearing is that Congress is considering a draft bill, the Counter Terrorism and Illicit Finance Act (“CTIFA”), which proposes the most substantial overhaul to the Bank Secrecy Act (“BSA”) since the PATRIOT Act.   As we have noted, three individuals testified at this hearing:

  • Kenneth A. Blanco, Director of FinCEN (written remarks here);
  • Steven D’Antuono, Section Chief of the FBI’s Financial Crimes Section (written remarks here); and
  • Grovetta Gardineer, Senior Deputy Comptroller for Compliance and Community Affairs of the OCC (written remarks here).

In our first post, we discussed some of the tensions which emerged during the hearing between the OCC, which emphasized attempting to ease BSA regulatory burdens, particularly for small- to medium-sized community banks, and FinCEN and the FBI, which stressed the value of BSA filings to law enforcement. Today, we discuss the some of the less contentious – although still critical – issues addressed during the hearing, which covered much of the current AML landscape:

  • exploration by financial institutions of technological innovation, including artificial intelligence, in order to comply more efficiently with their BSA/AML obligations;
  • identification of the beneficial owners of legal entities; and
  • the role of real estate in money laundering schemes.

Continue Reading More on AML Reform: Artificial Intelligence, Beneficial Ownership and Real Estate

Regulators Spar Over BSA Reporting Thresholds and Regulatory Review for FinCEN

First Post in a Two-Part Series

Late last week, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (the “Banking Committee”) met in open session to conduct a hearing on “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform.” The Banking Committee heard the testimony of, and questioned, representatives from FinCEN, the OCC, and the FBI. This was the fourth hearing held in 2018 by the Banking Committee on the state of the Bank Secrecy Act (“BSA”) framework and its effective implementation by regulators and law enforcement. The partial backdrop for this hearing is that Congress is considering a draft bill, the Counter Terrorism and Illicit Finance Act (“CTIFA”), which proposes the most substantial overhaul to the BSA since the PATRIOT Act, and which contains provisions regarding many of the same issues discussed during the hearing.

In this hearing, we heard from three individuals:

  • Kenneth A. Blanco, Director of FinCEN (written remarks here);
  • Steven D’Antuono, Section Chief of the FBI’s Financial Crimes Section (written remarks here); and
  • Grovetta Gardineer, Senior Deputy Comptroller for Compliance and Community Affairs of the OCC (written remarks here).

In this post, we will discuss the issues which appeared to generate the most sparks between the OCC—which emphasized attempting to ease BSA regulatory burdens, particularly for small- to medium-sized community banks—and FinCEN and the FBI, which stressed the value of BSA filings to law enforcement. In our next post, we will discuss some of the less contentious (although still critical) issues addressed at the hearing, which broadly canvassed many of the most pressing BSA/AML issues currently facing financial institutions and the government.  These issues are: (i) the exploration by financial institutions of technological innovation, including artificial intelligence, in order to comply more efficiently with their BSA/AML obligations; (ii) the identification of the beneficial owners of legal entities; and (iii) the role of real estate in money laundering schemes.

The tension during the hearing between FinCEN and OCC at times was palpable, and the divides in partisan thinking on the direction of certain aspects of AML reform were apparent. Although there seemed to be consensus on the importance of the beneficial ownership rules and other issues, senators and regulators alike disagreed about increasing the $5,000 and $10,000 respective reporting threshold for the filing of Suspicious Activity Reports (“SARs”) and Currency Transaction Reports (“CTRs”).

Continue Reading FinCEN, OCC and FBI Offer Diverging Views on AML Reform in U.S. Senate Testimony

Five U.S. regulatory agencies—the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”)—released on October 3, 2018 an Interagency Statement on Sharing Bank Secrecy Act Resources (the “Statement”). This guidance addresses instances in which certain banks and credit unions can enter into “collaborative arrangements” to share resources to manage their Bank Secrecy Act (“BSA”) and anti-money laundering (“AML”) obligations more efficiently and more effectively.

The Statement contemplates banks sharing resources such as internal controls, independent testing, and AML/BSA training (it does not apply to collaborative arrangements formed for information sharing among financial institutions under Section 314(b) of the U.S. Patriot Act). Such resource sharing contemplates reducing costs and increasing efficiencies in the ways banks manage their BSA and AML obligations. The Statement clearly is addressed primarily to community banks, for which the costs of AML/BSA compliance can be significant, and which presumably engage in “less complex operations [and have] lower risk profiles for money laundering or terrorist financing.” The Statement potentially represents another step in an ongoing AML reform process, which increasingly acknowledges the costs of AML compliance to industry. Continue Reading Federal Banking Agencies Encourage BSA Resource Sharing

The Federal Banking Agencies (“FBAs”) — collectively the Office of the Comptroller of the Currency (“OCC”); the Board of Governors of the Federal Reserve System (“Federal Reserve”); the Federal Deposit Insurance Corporation (“FDIC”); and the National Credit Union Administration (“NCUA”) — just issued with the concurrence of FinCEN an Order granting an exemption from the requirements of the customer identification program (“CIP”) rules imposed by the Bank Secrecy Act (“BSA”) under 31 U.S.C. § 5318(l) for certain premium finance loans. The Order applies to “banks” — as defined at 31 C.F.R. § 1010.100(d) — and their subsidiaries which are subject to the jurisdiction of the OCC, Federal Reserve, FDIC, or NCUA.

The Order generally describes the CIP rules of the BSA, which at a very high level require covered financial institutions to implement a CIP “that includes risk-based verification procedures that enable the [financial institution] to form a reasonable belief that it knows the true identify of its customers.” This process involves gathering identifying information and procedures for verifying the customer’s identity. Further observing that, under 31 C.F.R. § 1020.220(b), a FBA with the concurrence of the Secretary of the Treasury may exempt any bank or type of account from these CIP requirements, the Order proceeds to exempt loans extended by banks and their subsidiaries from the CIP requirements when issued to commercial customers (i.e., corporations, partnerships, sole proprietorships, and trusts) to facilitate the purchases of property and casualty insurance policies, otherwise known as premium finance loans or premium finance lending.

The key to the exemption — similar to other narrow exemptions previously issued by FinCEN in regards to the related beneficial ownership rule (as we have blogged, see here and here) — is that these transactions are perceived as presenting a “low risk of money laundering.” This finding is repeated throughout the Order, and is rooted in arguments made in letters submitted to FinCEN and the FBAs by a “consortium of banks.”

More specifically, the Order explains that premium finance loans present a low risk of money laundering, and therefore are exempt from the CIP rules, because of the following considerations and “structural characteristics,” raised either by the consortium of banks and/or the government itself:

  • The process for executing a premium finance loan is highly automated, because “most . . . loan volume is quoted and recorded electronically.”
  • These loans typically are submitted, approved and funded within the same business day and are conducted through insurance agents or brokers with no interaction between the bank and borrower — which means that this process renders it difficult for banks to gather CIP-related information efficiently.  These practical problems are exacerbated by the frequent reluctance of insurance brokers and agents — driven by data privacy concerns — to collect personal information.
  • Property and casualty insurance policies have no investment value.
  • Borrowers cannot use these accounts to purchase merchandise, deposit or withdraw cash, write checks or transfer funds.
  • FinCEN previously exempted financial institutions that finance insurance premiums from the general requirement to identify the beneficial owners of legal entity customers.
  • FinCEN previously exempted financial institutions that finance insurance premiums that allow for cash refunds from the beneficial ownership requirements.
  • FinCEN previously exempted commercial property and casualty insurance policies from the general BSA compliance program rule for insurance companies.
  • The exemption “is consistent with safe and sound banking.”

Although this exemption is narrow and somewhat technical, it represents yet another step in an apparent trend by FinCEN and the FBAs to ease the regulatory demands, albeit in a very targeted fashion, imposed under the BSA.  Clearly, the key argument to be made by other financial institutions seeking similar relief is that the particular kind of financial transaction at issue presents a “low risk of money laundering.”

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please also check out Ballard Spahr’s Consumer Finance Monitor blog, which comprehensively covers financial regulation and litigation involving the CFPB, Federal Agencies, State Agencies, and Attorneys General. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

OCC Identifies AML/BSA and Cyber Threats as Elevated Risks Facing Banks

Last week, the Office of the Comptroller of the Currency (“OCC”) published the Spring 2018 Semiannual Risk Perspective (the “Report”), which uses up-to-date data to identify risks to U.S. banks and measure their compliance with applicable laws and regulations.  The Report concluded that some of the OCC’s primary concerns are with banks’ abilities to comply with the anti‑money laundering (“AML”) laws and regulations, as well as to manage risks associated with cybersecurity threats.

Many of the OCC’s observations and recommendations remained the same from its Fall 2017 report, about which we previously blogged, begging readers to wonder what will spur less conversation and potentially more action among OCC-supervised banks or concrete guidance by the OCC.  Regardless, a common thread running throughout both reports is the potential risk presented to financial institutions by emerging technologies, which carry the simultaneous blessing and curse of business opportunities and compliance risks. Continue Reading OCC Report: Same Threats, Different Season

Incorporation Solidifies Customer Due Diligence as “Fifth Pillar” to BSA/AML Compliance Program

May 11, 2018 was the much anticipated effective date for the Customer Due Diligence (“CDD”) Requirements for Financial Institutions Rule (the “Beneficial Ownership Rule”) issued by the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). On the same day, the Federal Financial Institutions Examination Council (“FFIEC”) released two updates to the Bank Secretary Act/Anti-Money Laundering (“BSA/AML”) examination manual that incorporate and clarify the CDD Requirements and Beneficial Ownership Rule.  The FFIEC is an interagency body that is “empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions.”  The FFIEC examination manual drives the principles and obligations of covered financial instructions in creating BSA/AML compliance programs.  The new updates further clarify the FinCEN rules and solidify CDD as the fifth pillar of the BSA/AML compliance regime.

As we previously blogged here, when FinCEN announced its final rule on CDD requirements it established two important requirements for covered financial institutions.  First, the covered financial institutions were required to establish procedures to identify and verify the beneficial owners of all legal entity customers. Second, the rule required covered financial institutions to adopt ongoing risk-based CDD procedures as part of their AML compliance programs – including developing and updating customer risk profiles and conducting ongoing AML monitoring.  We previously provided practical guidance to aid covered financial institutions in preparing for implementation of these two requirements.  Now we will highlight the key considerations of FFIEC examination manual addressing these topics.  Of particular interest, the new FFIEC examination manual provisions state in part that regulatory examiners are not supposed to engage in second-guessing specific decisions; rather, during an examination “the bank should not be criticized for individual customer decisions unless it impacts the effectiveness of the overall CDD program, or is accompanied to evidence of bad faith or other aggravating factors.” Continue Reading FFIEC Manual Incorporates Beneficial Ownership Rule and CDD Requirements

Last week, the Office of the Comptroller of the Currency (“OCC”) released its semiannual risk report (“Report”) highlighting credit, operational, and compliance risks to the federal banking system.  The Report focuses on issues that pose threats to those financial institutions regulated by the OCC and is intended to be used as a resource to by those financial institutions to address the key concerns identified by the OCC.  Specifically, the OCC places cybersecurity and Anti-Money Laundering (“AML”) among the top concerns highlighted in the Report.  The Report further observes that the total number of enforcement actions by the OCC against banks — instituted for any kind of alleged violations — have declined steadily after peaking in 2009. Continue Reading OCC Report: Cybersecurity and Money Laundering Threats are the Key Risks Facing Banks

FinCEN recentlty announced entry of a $2 million assessment against Lone Star National Bank, a private bank operating out of Texas, for the bank’s allegedly willful violations of the Bank Secrecy Act (“BSA”) and inadequate Anti-Money Laundering (“AML”) monitoring programs.  The primary violations relate to Lone Star’s alleged failure to comply with due diligence requirements imposed by Section 312 of the USA PATRIOT Act in establishing and conducting its correspondent banking relationship with a Mexican bank.  As a result of Lone Star’s insufficient due diligence and AML program, the Mexican bank was “allowed to move hundreds of millions of U.S. dollars in suspicious cash shipments through the U.S. financial system in less than two years.”  The FinCEN’s announcement warns that this “action underscores the dangers that institutions face when taking on international correspondence activities without properly equipping themselves” to manage the enhanced obligations that arise with such relationships.

This new FinCEN assessment underscores the continued regulatory interest in the AML risks presented by correspondent banking relationships. We therefore first will provide a brief overview of correspondent banking relationships and the enhanced regulatory attention often paid to them. Armed with this context, we then will analyze the findings and lessons learned from the Lone Star assessment, including the value touted by FinCEN of Lone Star’s efforts to cooperate with its own investigation. Further, this new assessment suggests that the U.S. government does not always present a consistent voice regarding correspondent banking relationships: although the U.S. Treasury has tried to encourage financial institutions in general to not “de-risk” and thereby terminate correspondent banking relationships, we see that enforcement agencies continue to penalize institutions in individual cases for not mitigating sufficiently the risks of correspondent banking. Continue Reading FinCEN Fines Texas Bank $2M for Alleged Failure to Vet and Monitor Mexican Correspondent Banking Relationship – But Touts Bank’s Cooperation

As widely reported, the Spanish police raided last year the Madrid offices of the Chinese state-run Industrial and Commercial Bank of China (“ICBC”), the world’s biggest bank by assets. In the nearly 18 months following that raid and the numerous arrests made at that time, very little information about this money laundering investigation became known publically. That is, until Reuters recently published a lengthy article resulting from its review of “thousands of pages of confidential case submissions” and its “interviews with investigators and former ICBC employees.” The article raises numerous questions regarding the enforcement of European money laundering laws against Chinese banks operating abroad, as well as certain unique political and diplomatic considerations that may exist in those enforcement efforts. Below, we will compare these efforts with similar U.S. enforcement efforts, which are potentially gaining steam. Continue Reading High-Profile Spanish Money Laundering Investigation of Chinese Bank Raises Questions About Future of Similar U.S. Enforcement

The Supreme Court granted certiorari on April 3 to decide whether Jordan-based Arab Bank may be liable for claims including allegations that its New York branch processed transactions for known terrorists. While the central issue before the Court will be the scope of the Alien Tort Statute (“ATS”) – namely whether it permits corporate liability for violations of international law – Jesner v. Arab Bank also illustrates how alleged AML/BSA failures can lead to yet another avenue for secondary legal liability for financial institutions, as we previously have noted in other contexts. Depending on the outcome of the Court’s opinion in Jesner, such U.S. exposures may extend to foreign financial institutions even when the alleged conduct occurs primarily abroad.Detail view of the United States Supreme Court Continue Reading Weighing Corporate Liability under the Alien Tort Statute: What it Means for AML/CFT Controls