A recent court opinion emphasizes the sensitive issues involved in terminating potentially difficult employees — or, from the employee’s or perhaps the government’s perspective, in terminating whistleblowers who were retaliated against for being willing to point out compliance failures. Although this competing dynamic applies across all industries, a recent opinion from the U.S. Federal District Court for the Eastern District of Louisiana, Kell v. Iberville Bank, addressed such a situation in the Anti-Money Laundering (“AML”)/Bank Secrecy Act (“BSA”) context, in which a bank’s former compliance officer sued her former employer for allegedly terminating her in retaliation for raising uncomfortable issues about claimed insider abuse and the alleged failure to file a Suspicious Activity Report (“SAR”). Continue Reading Case Highlights Potential Protections for BSA Whistleblowers
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.
Second Part in a Two-Part Series
The Tale of an AML BSA Exam Gone Wrong
As we have blogged, the Ninth Circuit Court of Appeals recently upheld the decision of the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) to issue a cease and desist order against California Pacific Bank (the “Bank”) for the Bank’s alleged failure to comply with Bank Secrecy Act (“BSA”) regulations or have a sufficient plan and program in place to do so.
In our first post, we described how the Ninth Circuit rejected the Bank’s constitutional challenge to the relevant regulation, and accorded broad deference to the FDIC in its interpretations of its own regulations, expressed in the form of the Federal Financial Institutions Examination Council Manual (“FFIEC Manual”). This post discusses the Court’s review of the Bank’s challenge under the Administrative Procedures Act to the FDIC’s factual findings of AML program failings.
The California Pacific opinion provides a significant piece of guidance for banks questioning the adequacy of its BSA compliance program: consult and abide the FFIEC Manual. Furthermore, it demonstrates that no shortcuts are permitted when it comes to establishing and maintaining a BSA compliance program. The BSA and the FDIC’s regulations contain firm guidelines and the FFIEC Manual puts banks of all sizes on notice of what compliance is expected of them. The independence of both the AML compliance officer and of testing; adequate risk assessments of customer accounts; and the correction of prior regulator findings of AML deficiencies are key. Continue Reading Ninth Circuit Court of Appeals Outlines BSA Compliance Obligations and How One Small Bank Failed to Meet Them
Court Defers Heavily to the FDIC and the FFIEC Manual
First Part in a Two-Part Series
The Ninth Circuit Court of Appeals recently upheld the decision of the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) to issue a cease and desist order against California Pacific Bank (the “Bank”) for the Bank’s alleged failure to comply with Bank Secrecy Act (“BSA”) regulations or have a sufficient plan and program in place to do so.
This decision, California Pacific Bank v. FDIC, provides a nearly step-by-step analysis of what is required of banks under the BSA and a vivid illustration of an Anti-Money Laundering (“AML”) program that did not pass muster in the eyes of a regulator. It highlights the general rules that banks of all sizes, but particularly smaller community banks, must keep in mind concerning their compliance programs – size does not matter and you are on notice of what compliance entails.
Importantly, and before upholding the FDIC’s factual findings regarding the Bank’s violations, the Ninth Circuit first rejected the Bank’s claim that the regulation at issue (which required the Bank to implement an AML compliance program which complied with the “four pillars” of such a program) was unconstitutionally vague. Moreover, the Ninth Circuit found that the FDIC has broad discretion when interpreting this regulation, described by the Court as “ambiguous.”
This post will summarize the case and the key role played by the Federal Financial Institutions Examination Council Manual (“FFIEC Manual”) in both the Court’s rejection of the constitutional challenge and the broad deference which the Court accorded to the FDIC and its interpretation of its own regulations. The second post will turn to the Bank’s alleged AML program failings and the Bank’s challenges to the FDIC’s many factual findings. Continue Reading Ninth Circuit Court of Appeals Rejects Constitutional Challenge to AML Compliance Program Regulation
In its Summer 2017 issue of Supervisory Insights, published last week, the Federal Deposit Insurance Corporation (“FDIC”) provides some insight into its examination process and outcomes for Bank Secrecy Act (“BSA”)/Anti-Money Laundering (“AML”) compliance in an article entitled The Bank Secrecy Act: A Supervisory Update (“Supervisory Update”). Although the Supervisory Update also summarizes the BSA and its history, we will focus here on the discussion of FDIC examinations. Continue Reading FDIC Provides Some Statistics on Violations Found During BSA/AML Exams: One Percent of Exams Lead to Formal Enforcement Actions
In his remarks during last week’s launch of Case Western Reserve School of Law’s Financial Integrity Institute, FDIC Chairman Martin J. Gruenberg spoke on the historical context of today’s BSA/AML regulatory framework and the FDIC’s role in promoting and maintaining financial integrity. The Financial Integrity Institute describes its mission as seeking “to advance financial integrity globally by conducting and promoting at the highest standards research, education and professional excellence in anti-money laundering, anti-corruption, targeted sanctions and countering the financing of terrorism and international tax evasion policies and practices.”
Chairman Gruenberg recounted the legislative history of money laundering and terrorist financing laws and reminded us that the BSA was originally developed to address the lack of data needed by law enforcement to prosecute financial crimes. The regulatory framework has evolved over time in response to continual technological advancements and the increasing volume and sophistication of financial crime being perpetrated. “[W]hat began as currency transaction reporting requirements to identify citizens evading tax payments,” he said, “has evolved into required BSA/AML compliance programs, suspicious activity monitoring, and new reporting requirements to identify money laundering and terrorist financing, among other financial crimes.” The Chairman also observed that anti-money laundering efforts continue to take on an increasingly international aspect, and that evolving technologies constitute a “double-edged sword” because they can represent new means to either commit, or detect and prevent, financial crime.
In his speech, the Chairman also touched on the FDIC’s supervisory program. He stated that the FDIC evaluates not only an institution’s compliance with the BSA but also whether an institution has established a “culture of compliance.” He further remarked that the BSA/AML compliance program failures seen by the FDIC “often reflect a failure on the part of an institution’s directors or senior management to establish a tone of compliance that permeates the institution.”
We previously have blogged about the regulatory focus on the importance of cultivating a culture of robust BSA/AML compliance within financial institutions. Chairman Gruenberg’s remarks suggest that this focus is not likely to diminish in the near future. As such, it is prudent for financial institutions to keep efforts to develop a culture of compliance top of mind. In particular, the Chairman noted that the FDIC looks for whether directors demonstrate strong corporate governance and have a general understanding of the BSA/AML regulations and the risks posed to their institution, and whether senior management and employees understand the importance of BSA/AML compliance.
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