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OFAC sanctions organizations controlled by the Supreme Leader of Iran
On January 13, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against two purportedly charitable organizations controlled by the Supreme Leader of Iran, as well as their leaders and subsidiaries, for, among other things, allegedly controlling assets expropriated from political dissidents and religious minorities in order to benefit senior Iranian government officials. The OFAC sanctions were taken pursuant to Executive Order 13876 and follow sanctions issued last November against a conglomerate of roughly 160 holdings in key sectors of Iran’s economy (covered by InfoBytes here). As a result of the sanctions, all property and interests in property belonging to the sanctioned persons subject to U.S. jurisdiction are blocked and must be reported to OFAC. U.S. persons are generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons. OFAC further warned foreign financial institutions that knowingly conducting or facilitating significant transactions for or on behalf of the designated persons could subject them to U.S. correspondent account or payable-through sanctions.
Brainard weighs benefits and risks of using AI in financial services industry
On January 12, Federal Reserve Governor Lael Brainard spoke at the AI Academic Symposium hosted by the Fed’s Board about the increased use of artificial intelligence (AI) in the financial services industry. Brainard reflected that since she first shared early observations on the use of AI in 2018 (covered by InfoBytes here), the Fed has been exploring ways to better understand the use of AI, as well as how banking regulators can best manage risk through supervision while supporting the responsible use of AI and providing equitable outcomes. “Regulators must provide appropriate expectations and adjust those expectations as the use of AI in financial services and our understanding of its potential and risks evolve,” Brainard noted, adding that the Fed is currently collaborating with the other federal banking agencies on a potential request for information on the risk management of AI applications in financial services.
Emphasizing the “wide ranging” scope of AI applications, Brainard commented that financial services firms have been using AI for operational risk management, customer-facing applications, and fraud prevention and detection. Brainard also suggested that machine learning-based fraud detection tools could also have the potential to increase the detection of suspicious activity “with greater accuracy and speed,” while potentially enabling firms to respond in real time. Brainard also acknowledged the potential of AI to improve accuracy and fairness of credit decisions and improve overall credit availability.
However, Brainard also discussed AI challenges, including the “black box problem” that can arise with complex machine learning models that “operate at a level of complexity” which is difficult to fully understand. This lack of model transparency is a central challenge she noted, stressing that financial services firms must understand the basis on which a machine learning model determines creditworthiness, as well as the potential for AI models to “reflect or amplify bias.” With respect to safety and soundness, Brainard stated that “bank management needs to be able to rely on models’ predictions and classifications to manage risk. They need to have confidence that a model used for crucial tasks such as anticipating liquidity needs or trading opportunities is robust and will not suddenly become erratic.” She added that “regulators must provide appropriate expectations and adjust those expectations as the use of AI in financial services and our understanding of its potential and risks evolve.”
National bank settles DACA discrimination class action
On January 8, the U.S. District Court for the Northern District of California granted final approval to a settlement resolving allegations brought by a national class and a California class against a national bank concerning the denial of credit to recipients who held valid and unexpired Deferred Action for Childhood Arrivals (DACA) status. In a motion for preliminary settlement filed last June, the plaintiffs claimed that the bank allegedly determined DACA recipients to be ineligible for direct auto financing because of their noncitizen status, even though “[t]here is no federal or state law or regulation that prohibits banks from lending to non-citizens generally, or DACA recipients specifically, based on their status as non-citizens.” The bank moved to dismiss, claiming the plaintiffs failed to plead facts sufficient to state claims under the Equal Credit Opportunity Act and the Fair Credit Reporting Act. The parties engaged in discovery, but ultimately agreed to stay the case and engaged a mediator to assist with settlement discussions.
Under the terms of the settlement, the bank is required to provide verified California class members up to $2,500 per claim and national class members up to $300 pending submission of a valid claim. The settlement also provides injunctive relief, a service award to the class representative, attorneys’ fees and costs, and settlement administration costs. Additionally, the bank will amend its direct auto lending practices in order “to extend loans to current and valid DACA recipients on the same terms and conditions as U.S. citizens,” and will provide class counsel an annual status report detailing the status of its programmatic relief for a two year period.
SEC issues whistleblower awards totaling over $1.1 million
On January 7, the SEC announced whistleblower awards totaling over $1.1 million in separate enforcement actions. According to the first redacted order, the SEC awarded three whistleblowers nearly $500,000 for providing information in two related enforcement actions. Information voluntarily provided by the first whistleblower—a company outsider—prompted the opening of the investigation, while the second and third whistleblowers provided significant information contributing to the success of the actions, while also assisting investigative staff.
In the second redacted order, the SEC awarded a whistleblower nearly $600,000 for voluntarily providing information leading to a successful enforcement action, assisting Commission staff, and repeatedly reporting “concerns internally in an effort to correct the problems at the company.”
In the third redacted order, a whistleblower was awarded more than $100,000 for providing independent analysis leading to a successful enforcement action. The whistleblower, among other things, “used information from various publicly available documents to calculate an estimate of an important metric for [the company],” and then “showed that the [c]ompany’s disclosures regarding that metric were implausible.” According to the SEC, this is the fifth individual who received an award based on independent analysis in fiscal year 2021.
The SEC has now paid approximately $737 million to 133 individuals since the inception of the program.
OFAC sanctions individuals and entities for Russian-linked election interference
On January 11, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against seven individuals and four entities that are allegedly part of a Russia-linked foreign influence network associated with a Russian agent previously designated for his attempt to influence the 2020 U.S. presidential election. The individuals and entities associated with the Russian agent are now being similarly designated pursuant to Executive Order 13848 for “having directly or indirectly engaged in, sponsored, concealed, or otherwise been complicit in foreign influence in a United States election.” As a result, all property and interests in property belonging to, or owned by, the identified individuals and entities subject to U.S. jurisdiction are blocked, and “any entities that are owned, directly or indirectly, 50 percent or more by the designated entities, are also blocked.” U.S. persons are generally prohibited from dealing with any property or interests in property of blocked or designated persons.
OFAC announces several actions related to securities transactions involving Chinese military companies
On January 8, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued General License (GL) 1—“Authorizing Transactions Involving Securities of Certain Communist Chinese Military Companies.” This license permits transactions and activities otherwise prohibited by Executive Order (E.O.) 13959 involving “publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of an entity whose name closely matches the name of a Communist Chinese military company identified in the Annex to E.O. 13959” but does not appear on OFAC’s Non-SDN Communist Chinese Military Companies List. Authorization is granted through 9:30 am eastern standard time, January 28. The Non-SDN Communist Chinese Military Companies List was also updated the same day.
OFAC also recently published several new frequently asked questions related to E.O. 13959. Specifically, FAQ 862 states that U.S. persons are not required “to divest their holdings in publicly traded securities (and securities that are derivative of, or are designed to provide investment exposure to, such securities) of the Communist Chinese military companies identified in the Annex to E.O. 13959 by January 11, 2021.” FAQ 863 explains that U.S. persons are permitted to engage in activity related to the following services: “custody, offer for sale, serve as a transfer agent, and trade in covered securities.” Meanwhile, FAQ 864 clarifies that E.O. 13959’s prohibitions apply to “publicly traded securities (or any publicly traded securities that are derivative of, or are designed to provide investment exposure to, such securities)” of any entities with names that exactly or closely match the name of an entity identified in the aforementioned annex. Additionally, FAQ 865 clarifies that “[m]arket intermediaries and other participants may engage in ancillary or intermediary activities that are necessary to effect divestiture” from publicly traded securities of Communist Chinese military companies during relevant wind-down periods or that are otherwise not prohibited under E.O, 13959.
Florida amends licensing application procedures
On December 29, the Florida Department of Financial Services, Office of Financial Regulation (the “Office”) amended rules related to the application procedures for prospective loan originator, mortgage broker , and mortgage lender licensees to provide an additional 45 days for submission of additional application information and to provide for the disposition of incomplete applications. Specifically, the amended rules allow the Office to grant an extension request of up to an additional 45 days to submit any requested information during the application process, so long as the request is made within the initial 45-day deadline. Should a license applicant fail to provide the additional requested information within the approved timeframe, the application will be removed from further consideration by the Office and closed. The amended rules are effective January 18.
California proposes changes to Escrow Law
Recently, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed regulations (and accompanying statement of reasons) seeking to amend the state’s Escrow Law to clarify (i) the meanings of personal property and prohibited compensation; (ii) maintenance of books and preservation of records; and (iii) the annual report requirements. Among other things, the proposal adds “gametic material” to the definition of personal property to clarify that escrow agents may conduct transactions that hold and disburse funds under assisted reproduction agreements. Additionally, the update to the escrow books and records provisions are to “ensure that CPAs may participate in engagements to meet the annual audit report requirement for Escrow Law licensees without violating any rule of professional conduct.” Comments on the proposed regulatory amendments are due by February 15.
FDIC codifies appointment of ALJs
On January 12, the FDIC published a final rule amending 12 CFR Part 308 to codify the agency’s “practice of having certain adjudicative functions performed by an inferior officer of the United States appointed by the FDIC’s Board of Directors.” The clarification follows a 2018 U.S. Supreme Court decision in Lucia v. SEC, which held that SEC administrative law judges (ALJs) are “inferior officers” subject to the Appointments Clause (Clause) of the Constitution (covered by InfoBytes here). The FDIC notes that while the Lucia decision did not directly affect the agency or FDIC ALJs, the Board has chosen to “formally appoint the ALJs that preside over FDIC enforcement proceedings.” The final rule, which also makes other technical edits to the agency’s rules of practice and procedure to update outdated references to certain position titles, becomes effective immediately.
Multi-national bank settles FCPA and commodities fraud charges for $130 million
On January 8, the DOJ announced it had entered into a deferred prosecution agreement with a German-based multi-national financial services company (company), in which the company agreed to pay more than $130 million to resolve an investigation into violations of the Foreign Corrupt Practices Act (FCPA) and a separate investigation into a commodities fraud scheme.
According to the DOJ, between 2009 and 2016, the company admitted to knowingly and willfully conspiring to conceal payments to business development consultants (BDC) which were actually bribes to foreign officials in order to obtain business. The company admitted that employees agreed to “misrepresent the purpose of payments to BDCs and falsely characterize[d] payments to others as payments to BDCs” in violation of the FCPA’s books, records, and accounts provisions. Additionally, company employees failed to implement adequate internal accounting controls in violation of the FCPA by, among other things, (i) failing to conduct meaningful due diligence regarding the BDCs; (ii) paying BDCs who were not under contract with the company at the time; and (iii) paying BDCs without adequate documentation of the services purportedly performed.
Additionally, the DOJ stated that between 2008 and 2013, the company’s precious metal traders engaged in a scheme to defraud other traders on the New York Mercantile Exchange Inc. and Commodity Exchange Inc. by placing orders to buy and sell precious metals futures contracts with the intent to cancel those orders before execution. The company previously settled with the CFTC in January 2018 for substantially the same conduct (covered by InfoBytes here).
Of the total $130 million penalty, the company will pay a criminal penalty of nearly $80 million to the DOJ in relation to the FCPA violations, and will pay $43 million in disgorgement and prejudgment interest to the SEC to settle allegations that the company violated the FCPA’s books and records and internal accounting controls provisions. The company will pay over $7.5 million in relation to the commodities scheme, for criminal disgorgement, victim compensation, and a criminal penalty. The DOJ noted that the company received full credit for cooperation with the investigations and for significant remediation.