The Federal Reserve Bank of Philadelphia (the “Philly Fed”) recently executed an agreement (the “Agreement”) with Pennsylvania-based Customers Bank (and its Customers Bancorp, Inc. holding entity) (collectively, “Customers”).  According to the Agreement, “the most recent examinations and inspections” of Customers by the Philly Fed identified “significant deficiencies” related to the bank’s risk management practices, Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance, and regulations issued by the Office of Foreign Assets Control (“OFAC”).  

The source of these alleged deficiencies is alluded to by the Agreement, which immediately highlights two “digital assets-friendly” elements of Customers’ business model:

  • Customers’ “digital asset strategy”, i.e., “offering banking services to digital asset customers”; and, relatedly,
  • Customers’ facilitation of “dollar token activities,” which refers to the bank’s operation of an “instant payments platform” that allows the bank’s commercial clients “to make tokenized payments over a distributed ledger technology system” – though only to other Customers’ commercial clients.

The Agreement calls for Customers to submit a number of plans to the Philly Fed by October 5, 2024, several of which explicitly require the Philly Fed’s approval.

The Agreement includes what might now be considered boilerplate requirements to repair and enhance existing BSA/AML compliance and customer due diligence procedures – including adequate staffing (both in quantity and training) and resources brought to bear.  The Agreement focuses on beneficial ownership identification and robust Suspicious Activity Report (“SAR”) filing procedures. But it also requires that Customers submit for approval a plan specifically aimed at “improv[ing] risk management practices with respect to [Customers’] digital asset strategy.”

And the Agreement specifies certain elements that must be a part of any such plan, including:

  • Ensuring that the employees responsible for the digital asset strategy possess “appropriate subject matter expertise”;
  • Establishing a consistent and regularly updated risk assessment and rating methodology for evaluation of current and proposed partners, products, lines of business, etc.; and
  • Ensuring that Customers “has adequate controls in place to conduct its dollar token activities in a safe and sound manner.”

The Agreement also requires Customers to engage a Philly Fed-approved independent third party consultant to review the bank’s transaction monitoring activity for spring and summer 2023, in order to determine whether Customers was properly identifying and reporting suspicious activity in that period. The consultant will generate a written report of findings which will be provided to Customers’ board of directors and the Philly Fed simultaneously. The Agreement allows for the possibility that, based on the consultant’s report, Customers may be directed to conduct additional time period reviews.

Finally, and not insignificantly, Customers is required to give the Philly Fed 30 days written notice before it engages in any new actions regarding its digital asset strategy (including any new “strategic initiative, product, service, or relationship with third parties”), as well as before it experiments with any instant payments platform or network other than its existing platform. While the Agreement takes pains to stress that such written notice “shall not be construed” as asking for permission, it should be apparent to all parties that for the foreseeable future any such action should not be taken lightly, or without the expectation of intense and lengthy scrutiny.

In the wake of this agreement, Customers has announced the appointment of Allen Love as Chief Compliance and AML Officer. The bank’s press release explicitly states that Love will “immediately begin work on strengthening” BSA/AML protocols for the bank’s digital asset business in support of its agreement with the Philly Fed and the Commonwealth. Love is identified as a former Special Agent for the IRS Criminal Investigation Division.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.