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NYDFS fines global money service $60 million for AML deficiencies
On January 4, New York Department of Financial Services (NYDFS) ordered one of the largest global money transfer services to pay $60 million for willfully failing to implement an effective anti-money laundering (AML) program. According to the consent order, between 2004 and 2012, three of the company’s New York locations allowed the company’s services to be used to pay debts to human traffickers based in China. Additionally, the order emphasizes that the company was aware of weaknesses in its compliance program for years and failed to implement controls that could have detected and prevented the payments in question. The NYDFS investigation resulted from a January 2017 settlement with the Department of Justice, which found that during the same time period (2004-2012), the company processed hundreds of thousands of transactions for company agents and others involved in an international consumer fraud scheme, as previously covered by InfoBytes. In addition to the fine, the order requires that the company put in place stricter AML compliance measures, including the creation of an Independent Compliance Committee of the Board of Directors.
FDIC Chairman Discusses Role of Research in Preventing Consumer Harm
On October 13, FDIC Chairman Martin J. Gruenberg spoke at the Seventh Annual FDIC Consumer Research Symposium in Arlington, Virginia. In prepared remarks, Gruenberg discussed his views on the importance of engaging with the independent research community to better understand “consumers’ capabilities, knowledge, and preferences for financial services, as well as their experiences in the financial services market.” According to Gruenberg, the FDIC’s current supervisory approach focuses on methods to “identify, address, and mitigate the risk of consumer harm” at supervised financial institutions, and include the following: (i) an examination process to evaluate whether an institution minimizes the risk of consumer harm by having appropriate policies and procedures and other measures in place to ensure its products and services are compliant with applicable law; (ii) a process to identify how consumers use the information in the context of a given product when establishing which disclosures to prioritize in a risk-based exam; and (iii) a system to analyze data collected through Call Reports, HMDA, and the Community Reinvestment Act designed to identify potential areas of risk and gain insight into supervised institutions’ operations.
Additionally, Gruenberg noted that research helps the FDIC identify opportunities to expand consumers’ access to mainstream financial services. According to recent FDIC data, 7 percent of households are unbanked and an additional 19.9 percent are underbanked—in total, 90 million Americans, or about 27 percent of households. The data, Gruenberg emphasized, “is regularly cited by financial institutions, non-profit organizations, and public officials as providing a basis for understanding the scope of economic inclusion challenges in their communities and as a starting point for considering approaches that can enhance economic inclusion.”
OCC Acting Comptroller Shares Thoughts on Opportunities to Reduce Regulatory Burdens
On October 5, OCC Acting Comptroller of the Currency Keith Noreika spoke before the 2017 Midsize Bank Coalition of America Chief Risk Officer Meeting to discuss opportunities for regulatory reform.
According to Noreika, one area of concern relates to the adverse effect arbitrary asset thresholds pose to the annual stress test requirements required under the Dodd-Frank Act because the burden “is not commensurate with the systemic risks presented by an institution.” Given the amount of diversity in the business models of banks who have around $10 billion in assets, “regulators need the ability and authority to tailor their supervision to the unique risks presented by individual banks.” Noreika suggested an approach that would give federal banking agencies the authority to tailor statutory stress testing requirements without an asset threshold, thus reducing the risk of banks growing beyond the threshold to offset increased costs or staying below the threshold to avoid unwelcome scrutiny.
Noreika also urged for interagency harmonization of guidance and policies to avoid conflicting regulatory guidance when addressing cybersecurity issues.
Additionally, Noreika addressed the CFPB’s arbitration rule as an example of the need to work “to ensure regulation is balanced and appropriate by speaking up when we see proposed rules that may adversely affect the business of banking, have systemic effects, or result in perverse unintended consequences.” Noreika stated that prior to the publication of the final arbitration rule, the OCC requested access to the data the CFPB used to develop and support the rule in order to conduct an independent review. However, it was not until after the rule was published that the CFPB made the data available. According to OCC findings, the rule will adversely impact consumers by increasing costs. Community banks, Noreika noted, will also bear the burden of increased legal costs from defending lawsuits.
Finally, Noreika commented that banks continue to face challenges when trying to implement Bank Secrecy Act compliance programs and adapt to new requirements under TRID, HMDA, and the Military Lending Act.
FDIC Releases October List of CRA Compliance Examinations
On October 5, the FDIC published its monthly list of state nonmember banks recently evaluated for CRA compliance. The list reports CRA evaluation ratings assigned to institutions in July 2017 as required by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Of the 59 banks evaluated, six were rated “Outstanding,” 52 received a “Satisfactory” rating, and one was rated “Needs to Improve.” Monthly lists of all state nonmember banks and their evaluations that have been made publicly available may be accessed through the FDIC’s website.
FDIC Releases Revised Supervisory Appeals Guidelines, Updates FAQs on New Accounting Standards, and Announces FFIEC Industry Outreach Website
On September 6, the FDIC released revised guidelines (FIL-42-2017) for appeals of certain material supervisory determinations to expand the circumstances under which banks may submit an appeal with the Division Directors and the Supervision Appeals Review Committee. The guidelines apply to all FDIC-supervised depository institutions. As previously reported in InfoBytes, the guidelines will provide consistency with the appeals processes of other federal banking agencies and will, among other things, (i) permit the appeal of the level of compliance with an existing formal enforcement action; (ii) provide that formal enforcement-related actions or decisions do not affect a pending appeal; (iii) allow for additional opportunities for appeal rights available under the guidelines with respect to material supervisory determinations in certain circumstances; (iv) annually publish the Division Directors’ material supervisory determinations decisions and (v) draw up other limited technical and conforming amendments. With the issuance of these guidelines, the FDIC is rescinding FIL-52-2016 (“FDIC Seeks Comment on Bank Appeals Guidelines”) and FIL-113-2004 (“FDIC Appeals Processes’).
On the same day, the FDIC also issued FIL-41-2017, which presents updates to its “Frequently Asked Questions on the New Accounting Standard on Financial Instruments—Credit Losses” for financial intuitions and examiners. The FAQs apply to all FDIC-supervised banks, savings associations, and community institutions. The updates address topics such as “qualitative factors, data to implement [credit loss methodology], purchased credit-deteriorated assets, the evaluation of the public business entity criteria, the mechanics of adopting the standard for Call Report purposes, and collateral-dependent loans.” They also contain a reminder to institutions that credit loss methodology can be scaled base on an institution’s size, and encourage readiness and preparation plans to transition to the new accounting standard.
Finally, the FDIC also issued FIL-40-2017 to announce the Federal Financial Institutions Examination Council’s (FFIEC) new Industry Outreach website, which was created as a way for financial institutions, trade associations, third-party providers, and consultants to access information related to supervisory guidance and regulations. The website will also provide information on FFIEC-sponsored webinars.
FDIC Issues First Quarter 2018 CRA Examination Schedule, Releases September List of CRA Compliance Examinations
On August 31, the FDIC issued its Community Reinvestment Act (CRA) Examination Schedule for the Fourth Quarter of 2017 and First Quarter of 2018. The FDIC stated that the banks listed on the schedules were chosen for CRA examinations based on their asset size and CRA rating, and that absent reasonable cause, institutions with $250 million or less in assets and a CRA rating of “Satisfactory” would be examined no more than once every 48 months, and those institutions with a CRA rating of “Outstanding” would be examined no more than once every 60 months. The FDIC noted that due to recent natural disasters, some examinations may be delayed.
Separately, the FDIC published its monthly list of state nonmember banks recently evaluated for CRA compliance. The list reports CRA evaluation ratings assigned to institutions in June 2017 as required by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Of the 67 banks evaluated, 6 were rated “Outstanding,” 59 received a “Satisfactory” rating, and 2 were rated “Needs to Improve.” Monthly lists of all state nonmember banks and their evaluations that have been made publicly available can be accessed through the FDIC’s website.
CFPB Releases Updated Compliance Management Procedures in Supervision and Examination Manual
On August 30, the CFPB posted revisions to its Compliance Management Review Examination Procedures—part of its Supervision and Examination Manual—that is intended to provide guidance for institutions when developing and maintaining compliance management systems (CMS). The Bureau advises that to maintain legal compliance, institutions must integrate and support an effective CMS “into the overall framework for product design, delivery, and administration across their entire product and service lifecycle,” and are required to manage relationships with service providers to ensure compliance with applicable federal consumer financial laws. The CFPB notes that an effective CMS is comprised of two interdependent control components: (i) “Board and Management Oversight”; and (ii) a “Compliance Program,” including policies and procedures, training, monitoring and/or auditing, and consumer complaint response processes. Updates have been made to the Examination Report Template–which provides the scope of review and consumer compliance rating based on the findings of the exam—and the Supervisory Letter Template–which references matters requiring attention or that need to be corrected based on the Bureau’s review.
Regulators Coordinate Review of Volcker Rule Application to Foreign Funds
On July 21, five U.S. financial regulators announced that they would not take action against foreign banks for qualifying foreign excluded funds, subject to certain conditions, under the Volcker Rule for a period of one year as they review the treatment of these types of funds under current implementing regulations. The regulators, which include the Federal Reserve Board, FDIC, OCC, SEC, and Commodity Futures Trading Commission, issued a joint statement to address concerns raised as to whether certain foreign excluded funds may fall within the definition of “banking entity” under the Bank Holding Company Act and therefore be subject to the Volcker Rule.
“A number of foreign banking entities, foreign government officials, and other market participants have expressed concern about the possible unintended consequences and extraterritorial impact of the Volcker Rule and implementing regulations for certain foreign funds,” according to the joint statement. The regulators noted that the review will allow time to consider the appropriate course of action to address these concerns, including whether congressional action may be necessary.In addition, the regulators stressed that the joint statement “does not otherwise modify the rules implementing section 619 [of the Dodd-Frank Act] and is limited to certain foreign excluded funds that may be subject to the Volcker Rule and implementing regulations due to their relationships with or investments by foreign banking entities.”
Global Bank and U.S. Subsidiaries Fined $246 Million for Deficiencies in Internal Foreign Exchange Trading Controls
On July 17, the Board of Governors of the Federal Reserve (Board) fined a global bank and two of its U.S. subsidiaries $246 million for allegedly lacking appropriate oversight and controls to ensure the bank’s foreign exchange (FX) trading activities were in compliance. According to the cease and desist order, the Board alleged that the bank’s “deficient policies and procedures” prevented it from detecting unsafe and unsound conduct and communications between bank traders and traders at other financial institutions concerning their trading positions. In addition to the fine, the bank is required to improve its oversight and controls over its FX trading activities, submit a written plan to improve its compliance risk management program, and provide an enhanced written internal audit program, subject to Board approval. Furthermore, the bank is prohibited from re-employing any individuals involved in the illegal communications.
It was noted in the order that the bank conducted a review of its FX trading activities covering the investigation time period, identified and reported the illegal conduct to the Board and the Federal Reserve Bank of New York, and fully cooperated with the investigation. Improvements to address identified deficiencies have already begun.
ABA, CFPB to Host Webinar for Financial Institutions on New HMDA Submission Platform
On July 17, the ABA and CFPB announced a joint webinar on August 8 at 2:00 pm EDT, which will instruct compliance, operations, and loan processing professionals on how to use the new platform for submitting HMDA data. The webinar will provide an overview of the new tool and data collection process that all financial institutions must use to submit HMDA data beginning January 1, 2018 for data collected during 2017 and going forward.
Notably, however, on July 14, the CFPB issued a request for comments on proposed amendments to its HMDA reporting threshold for calendar years 2018 and 2019 to ease the burden on small-volume lenders. The comment period ends July 31, 2017. (See previous InfoBytes summary here.)