Office of the Comptroller of the Currency (OCC)

On September 8, the Office of the Comptroller of the Currency (“OCC”) published an extension of its notice and request for comment (the “Notice”) in the Federal Register regarding changes to the OCC’s Money Laundering Risk System (the “MLR System”)  The Notice indicates that the OCC is inviting greater scrutiny of customers and transactions involving

On July 6, the Financial Crimes Enforcement Network (“FinCEN”), The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively, “the Agencies”) issued a Joint Statement to “remind” banks that they, of course, should apply a risk-based approach to assessing customer relationships and conducting customer due diligence (“CDD”).

The Joint Statement appears to echo FinCEN’s June 22 Statement on Bank Secrecy Act Due Diligence for Independent ATM Owners or Operators (“ATM Statement”), in which FinCEN also “reminded” banks that “that not all independent ATM owner or operator customers pose the same level of money laundering, terrorist financing (ML/TF), or other illicit financial activity risk, and not all independent ATM owner or operator customers are automatically higher risk.”

Combined – and although generally worded – these publications appear to urge financial institutions (“FIs”) to not pursue broadly-applied “de-risking” strategies.  De-risking is the term for a FI’s decision to terminate a business relationship, or refuse to do business, with a type of customer because that type is associated with a perceived heightened risk of involvement in money laundering or terrorist financing.  Indeed, both new publications caution FIs against turning away potential customers, or closing the accounts of existing customers, on the basis of general customer types.  However, regulators themselves have been criticized for encouraging de-risking by driving highly risk-adverse decisions by FIs, who are unwilling to take the chance and assume the compliance costs of doing business with specific customers who may in fact be “legitimate,” but whose risk profile is deemed to be high due to their group affiliation.  Some front-line regulatory BSA/AML examiners arguably may review a FI’s compliance in a narrow and check-the-box manner versus a more holistic approach, and will not truly value broader societal and equity issues such as the need for equal access to the global financial system, particularly by certain industries and persons living in less-developed countries.  Accordingly, although these new publications are welcome, it might have been better if they had been more explicit – particularly because it is arguably ironic for regulators to be chiding FIs for conforming to de-risking behavior that regulators themselves have encouraged.

Continue Reading  FinCEN and Federal Functional Regulators Issue Coded Warnings Against De-Risking

On June 23, 2022, the Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective (SRP) for spring 2022.  In the SRP, the OCC opines on its current safety and soundness concerns for banks under its regulatory umbrella, focusing on Russia sanctions, climate-related risk, and rising inflation.  Despite these challenges, the OCC believes that “[b]anks’ financial condition remains strong and positioned to deal with the economic headwinds.”

Of special note, the OCC also believes compliance risk is “heightened” for Bank Secrecy Act/Anti-Money Laundering (BSA/AML) and Office of Foreign Assets Control (OFAC) compliance because of world events and compliance staffing concerns.  In addition, the OCC warns that banks face an “elevated” risk of cyber attacks and fraud or cybersecurity risks related to digital assets.

Continue Reading  OCC Highlights Risks Associated with Compliance Staffing Concerns, Russia Sanctions, Environmental Crimes, Cyber Attacks and Digital Assets

On May 19, 2022, the Associate Director of the Enforcement and Compliance Division of the Financial Crimes Enforcement Network (“FinCEN”), Alessio Evangelista, spoke at the Chainalysis Links Conference in New York City on the topic of “The Intersection of Cryptocurrencies and National Security.”  Associate Director Evangelista stressed “responsible innovation” by the cryptocurrency industry, in order to protect consumers and national security interests, as well as to combat cybercrime and other illicit financial activity.  Associate Director Evangelista also denied that FinCEN’s enforcement efforts represent a “gotcha” enterprise.

Shortly after Associate Director Evangelista’s speech, Acting Comptroller of the Currency Michael J. Hsu discussed vulnerabilities in the cryptocurrency framework and recent volatility with stablecoins in pointed remarks at the DC Blockchain Summit 2022.  Describing himself as a “crypto skeptic,” Acting Comptroller Hsu acknowledged the potential value of innovation presented by crypto, but repeatedly bemoaned a “hyped-based” crypto economy, and stressed that “hype is not harmless.”

Combined, these speeches leave no doubt that regulators are exceedingly focused on digital assets and cryptocurrencies, and in particular are increasingly focused on consumer protection concerns, beyond the usual illicit finance and terrorist financing concerns.

Continue Reading  FinCEN and OCC Address Cryptocurrency:  Responsible Innovation and Pervasive Hype

The Office of the Comptroller of the Currency (“OCC”) entered into a Consent Order (available here) with Anchorage Digital Bank (“Anchorage”), which requires Anchorage to create a compliance committee and take steps to remediate alleged shortcomings with respect to the implementation and effectiveness of Anchorage’s Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) program.  Notably, Anchorage will pay no civil penalty.

Anchorage is not any regular entity overseen by the OCC:  it is a cryptocurrency custodian.  As we will discuss, the timing of the Consent Order indicates that even when regulators permit crypto activities by financial institutions, they remain cautious, particularly as to BSA/AML compliance.  The OCC’s actions send a clear message that regulated entities offering emerging technology financial services must adhere to the same BSA/AML monitoring and reporting requirements as more traditionally regulated entities.
Continue Reading  OCC Targets BSA/AML Compliance by Anchorage Digital Bank – Only 15 Months After Granting National Trust Bank Charter to the Crypto Custodian

Consent Order Stresses that Only Three AML Analysts Struggled to Review 100 “Alerts” Per Day, Each – and Notes in Passing that “Outside Examiners” Blessed the Bank’s AML Program for the Same Five Years that the Bank Allegedly Maintained a Willfully Deficient Program

On December 16, 2021, the Financial Crimes Enforcement Network (“FinCEN”) entered into a Consent Order with CommunityBank of Texas, N.A. (“CBOT”), in which CBOT admitted to major shortcomings with respect to the implementation and effectiveness of its anti-money laundering (“AML”) program. The monetary penalties imposed on CBOT are substantial: FinCEN assessed an $8 million penalty, although CBOT will receive credit for a separate $1 million penalty to be paid to the Office of the Comptroller of the Currency (“OCC”).

The Consent Order, available here, offers valuable insight into FinCEN’s reasoning for its enforcement actions.  According to the Consent Order, CBOT has a regional footprint and operates several branches in Texas.  It serves small and medium-sized businesses and professionals.  And, in the “back of the house,” CBOT established a typical AML system designed to detect and escalate alerts for suspicious activity for investigation and potential filing of Suspicious Activity Reports (“SARs”). However, FinCEN alleged that over a period of at least four years, CBOT “willfully” failed to effectively implement its AML, program, leading to a failure to file SARs and otherwise detect specific suspicious activity.  As detailed below, many of the alleged shortcomings of CBOT’s AML program flowed from a lack of compliance resources and personnel between 2015 and 2019: too few analysts were assigned to review and investigate potentially suspicious transactions, and as a result, downstream investigations and due diligence suffered, including an alleged failure to file at least 17 specific SARs.

Because the detailed Consent Order offers a somewhat rare opportunity to glean FinCEN’s reasoning behind its enforcement actions generally, we explore the alleged failures in some detail below.  Then, we summarize key details of the Consent Order, offer key takeaways, and note several questions that the Consent Order still leaves unresolved.
Continue Reading  FinCEN Assesses Civil Penalty Against CommunityBank of Texas for AML Program Weaknesses

As anticipated, the Office of the Comptroller of the Currency, the Federal Reserve Board, and the FDIC recently approved and released the Final Rule Requiring Computer-Security Incident Notification (“Final Rule”).  The Final Rule is designed to promote early awareness and stop computer security incidents before they become systemic.  It places new reporting requirements on both

Agencies Issue “Crypto Asset Roadmap” for 2022 Guidance, and OCC Confirms Prior Interpretive Letters on Crypto – So Long as Supervisory Regulators Do Not Object

The Board of Governors of the Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) (collectively, the “Agencies”) issued on November 23 a short Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (“Joint Statement”), which announced – without further concrete detail – that they had assembled a “crypto asset roadmap” in order to provide greater clarity in 2022 to banks on the permissibility of certain crypto-asset activities.  Only the week before, the Chief Counsel for the OCC issued Interpretive Letter #1179, which confirmed that a bank could engage in certain cryptocurrency, distributed ledger and stablecoin activities – consistent with prior OCC letters – so long as a bank shows that it has sufficient controls in place, and first obtains written notice of “non objection” by its supervisory office.  This post will discuss both publications.

There is great overlap between the bank activities referenced in the Joint Statement and Interpretive Letter #1179.  The 2022 clarity promised by the “roadmap” presumably will supersede, once issued, Interpretive Letter #1179, which appears to function as a general stop-gap until the 2022 publications hopefully provide more detail regarding exactly how banks can attain compliance.

Federal banking regulators have been busy in this space.  These pronouncements come closely on the heels of a Report on Stablecoins issued earlier in November by the Agencies and the U.S. President’s Working Group on Financial Markets, which delineated perceived risks associated with the increased use of stablecoins and highlighted three concerns: risks to rules governing anti-money laundering (“AML”) compliance, risks to market integrity, and general prudential risks.
Continue Reading  Federal Bank Regulators Focus on Crypto Assets and Blockchain Activities

Travel Rule and Beneficiary Information Continues to Challenge Virtual Asset Service Providers

In late October, the Financial Action Task Force issued its long-awaited updated guidance on Virtual Assets and Virtual Asset Service Providers (“FATF Guidance”), an extremely lengthy and detailed document setting forth how virtual asset service providers (“VASPs”) and related virtual asset activities fall within the scope of FATF standards for anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”).  The FATF Guidance is important to VASPs worldwide, as well as the more traditional financial institutions (“FIs”) doing business with them.  Because of its great breadth, we focus here only on its comments regarding implementation of the so-called “Travel Rule” for virtual assets.  This portion of the FATF Guidance is particularly relevant to the U.S. because, as we have blogged, the Financial Crimes Enforcement Network (“FinCEN”) proposed regulations in 2020 – still pending – which would change the Travel Rule by lowering the monetary threshold for FIs from $3,000 to $250 for collecting, retaining, and transmitting information related to international funds transfers, and explicitly would make the Travel Rule apply to transfers involving convertible virtual currencies.

The FATF Guidance has additional relevance to U.S. VASPs and FIs because, this month, the U.S. President’s Working Group on Financial Markets (“PWG”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller (“OCC”) (together, “the U.S. Agencies”) issued a Report on Stablecoins (the “Report”).  Stablecoins are digital assets designed to maintain stable value as related to other reference assets, such as the U.S. Dollar.  In the Report, the U.S. Agencies delineate perceived risks associated with the increased use of stablecoins and highlight three types of concerns: risks to rules governing AML compliance, risks to market integrity, and general prudential risks.  We of course will focus here on the Report’s discussion of AML risks, particularly because it repeatedly invokes the FATF Guidance, thereby illustrating the increasing efforts by governments to seek a global and relatively coordinated approach to addressing AML/CFT concerns regarding virtual assets.
Continue Reading  Global Developments in AML and Virtual Assets:  FATF Guidance and the Travel Rule, and U.S. Pronouncements on Stablecoins

The OCC, FDIC, and Federal Reserve Board have issued a guide that is intended to assist community banks in conducting due diligence when considering relationships with financial technology (fintech) companies (Guide).

The issuance of the Guide follows the agencies’ July 2021 release of proposed interagency guidance for banking organizations on managing risks associated with third-party