Category Archives: Banking

FinCEN Releases Frequently Asked Questions Regarding Customer Due Diligence and Beneficial Ownership Requirements

by David S. Cohen, Franca Harris Gutierrez, Sharon Cohen Levin, Jeremy Dresner and Michael Romais

Last week the Financial Crimes Enforcement Network (FinCEN) issued much-anticipated Frequently Asked Questions (FAQs) that provide additional guidance to financial institutions relating to the implementation of the new Customer Due Diligence Rule (CDD Rule), set to go into effect on May 11, 2018.[1] In general, the FAQs clarify certain issues that have caused implementation challenges for financial institutions. While FinCEN’s earlier guidance provided a general overview of the CDD Rule—including the purpose of the rule, the institutions to which it is applicable, and some relevant definitions—the new FAQs provide greater detail for financial institutions seeking to comply with the CDD Rule. The FAQs are meant to assist covered financial institutions in understanding the scope of their customer due diligence (CDD) obligations, as well as the rule’s impact on their broader anti-money laundering (AML) compliance. While the guidance is helpful in clarifying some of FinCEN’s expectations, the implementation challenge lies in applying the CDD Rule to a financial institution’s specific products and services.

As financial institutions work to meet the CDD Rule’s fast-approaching May 11 compliance deadline, they should pay special attention to the following key areas summarized below. Continue reading

Ninth Circuit Rejects Challenges to a Cease-and-Desist Order Imposed by the FDIC for Violations of the Bank Secrecy Act

by Thomas C. Baxter Jr., Michael M. Wiseman, and Jordan M.H. Wish

Court Defers to the FDIC and the Bank Secrecy Act/Anti-Money Laundering Examination Manual in Rejecting a Rare Challenge by a Bank to an Agency-Imposed Cease-and-Desist Order

Summary

On March 12, in California Pacific Bank v. FDIC, the U.S. Court of Appeals for the Ninth Circuit refused to set aside a cease-and-desist order imposed by the Federal Deposit Insurance Corporation (the “FDIC”) on California Pacific Bank (“California Pacific”).[1]  The order requires the bank to comply with, and correct identified violations of, the Bank Secrecy Act (the “BSA”) by improving the bank’s BSA compliance program and Suspicious Activity Report (“SAR”) filing procedures.  In reaching its decision, the court deferred to the Bank Secrecy Act/Anti-Money Laundering Examination Manual, which is published by the Federal Financial Institutions Examination Council (the “FFIEC Manual”),[2] as a definitive statement of the regulatory requirements for satisfying BSA program obligations.  This deference along with an agency-friendly standard of review confirm the broad discretion that the FDIC and other federal banking agencies have in determining violations of the BSA and requiring related remedial actions. Continue reading

Increasing Regulatory Focus on Reforming Financial Institution Culture and Addressing Employee Misconduct Risk

by Brad Karp, H. Christopher Boehning, Susanna Buergel, Jessica Carey, Michael Gertzman, Roberto Gonzalez, and Grace Tiedemann

Since the financial crisis—and more recently in the wake of the Wells Fargo sales practices scandal and the benchmark manipulation enforcement actions—bank regulators in the United States and around the world have become increasingly focused on reforming institutional culture and pursuing other actions to mitigate employee misconduct risk. The Federal Reserve Board’s recent and unprecedented enforcement action against Wells Fargo, which we have discussed previously,[1] is a stark demonstration of regulators’ vigorous focus on these issues. In addition to misconduct that may take place against customers, counterparties, and markets, the recent attention on sexual harassment and employee treatment has also raised questions about the capacity of companies across sectors to address misconduct that takes place within the walls of the company itself. Continue reading

Federal Reserve Takes Severe and Unprecedented Action Against Wells Fargo: Implications for Directors of All Public Companies

by Edward D. Herlihy, Richard K. Kim, and Sabastian V. Niles

In a stinging rebuke, the Federal Reserve on February 2nd issued an enforcement action barring Wells Fargo from increasing its total assets and mandating substantial corporate governance and risk management actions.  The Federal Reserve noted in its press release that Wells will replace three current board members by April and a fourth board member by the end of the year.  In addition, the Federal Reserve released three supervisory letters publicly censuring Wells’ board of directors, former Chairman and CEO John Stumpf and a past lead independent director.  These actions are a sharp departure from precedent, both in their severity and their public nature.  They come on the heels of significant actions already taken by Wells, including appointing a former Federal Reserve governor as independent Chair and replacing a number of independent directors as well as its General Counsel.  Continue reading

Supreme Court Grants Certiorari on the Constitutionality of SEC ALJ Appointments– What This Means for the Securities Industry

by Matthew C. Solomon, Alexander Janghorbani, and Richard R. Cipolla

On January 12, 2018, the Supreme Court granted a writ of certiorari in Raymond J. Lucia Cos., Inc. v. SEC, No. 17 130,[1] a case raising a key constitutional issue relating to the manner in which the U.S. Securities and Exchange Commission’s (SEC or Commission) appoints its administrative law judges (ALJs).  The Court will decide “[w]hether administrative law judges of the [SEC] are Officers of the United States within the meaning of the Appointments Clause.”  The answer to this question matters because if SEC ALJs are “officers,” then they should have been appointed by the Commission itself instead of hired through traditional government channels—and the Commission only exercised its ALJ appointment authority in late-2017.  Although the question is limited to SEC ALJs, any decision could also impact ALJs at other agencies government-wide.

At this point, both the petitioner and the Solicitor General (SG) actually agree that ALJs are officers.  In its response to the cert petition raising this issue in Lucia, the SG, in an about-face, had abandoned the SEC’s long-held defense of the manner in which it appoints its ALJs.  Up until now, in an attempt to fend off an asserted constitutional defect in their AJL’s method of appointment, the SEC has argued (with SG approval) that ALJs are “mere employees” of the SEC, and not “officers.”  The day after the SG dropped this position—and with no warning in its briefing—the Commission took the step to appoint the current ALJs.[2]   Continue reading

Response to Professor Sepinwall’s Article on Sentencing Reforms

by Lee S. Richards

In a recent post to this blog, Professor Amy Sepinwall made a startling argument.  Reflecting on the debate between liberals and conservatives over the Sentencing Reform and Corrections Act of 2016, she strongly suggested that the Act’s strengthening of the mens rea element in criminal cases should be limited to the disadvantaged and not extended to “the already advantaged.”  She applauded the proposed bill for providing “deserved fairness for the disadvantaged,” but appeared to lament the fact that a more stringent mens rea requirement under that bill would be available for “some senior corporate management ‘fat cats,’” as well.  This position is consistent with her defense of the “responsible corporate officer” doctrine, which does away with any mens rea requirement in certain cases against high level corporate officers. Continue reading

New York DFS Pursues $630 Million Fine Against Bank for Alleged Anti-Money Laundering and Sanctions Compliance Failures

by Brad S. Karp, H. Christopher Boehning, Jessica S. Carey, Michael E. Gertzman, Roberto J. Gonzalez, Richard S. Elliott, Rachel Fiorill and Karen R. King

On August 28, 2017, the New York State Department of Financial Services (“DFS”) announced a “Notice of Hearing and Statement of Charges” that seeks to impose a nearly $630 million civil penalty against Habib Bank Limited and its New York Branch (“the Bank”) based on allegations of persistent Bank Secrecy Act/anti-money laundering (“AML”) and sanctions compliance failures.[1] A hearing is scheduled for September 27, 2017 before Cassandra Lentchner, DFS’s Deputy Superintendent for Compliance. The Bank – the largest bank in Pakistan – has contested DFS’s allegations and indicated that it plans to challenge the penalty and surrender its DFS banking license, thus eliminating its only U.S. branch.  DFS also issued two related orders, which (1) expanded the scope of a review of prior transactions for AML and sanctions issues, that was already underway under the terms of an earlier consent order; and (2) outlined the conditions under which the Bank could surrender its DFS banking license, including the retention of a DFS-selected consultant to ensure the orderly wind down of its New York Branch.

The severity of the language and proposed penalty in DFS’s statement of charges reflects the large number and extent of alleged compliance failures at the Bank, which DFS claims persisted for more than a decade, despite agreements with DFS and the Federal Reserve Board of Governors (“Federal Reserve”). According to DFS, these failures are “serious, persistent and apparently affect the entire [Bank] enterprise” and indicate a “dangerous absence of attention by [the Bank’s] senior management for the state of compliance at the New York Branch.”

This enforcement action illustrates that a DFS-regulated institution’s failure to show steady progress in remedying identified concerns can have significant and franchise-threatening consequences. We describe the enforcement action in more detail below, including the numerous compliance failures alleged by DFS. Continue reading

A “Wells Fargo” Briefing for the Audit Committee

by Michael W. Peregrine

The Board’s audit committee is well advised to receive an update on the risk and compliance lessons from the recent Wells Fargo sales practices controversy. The general counsel, teaming with the chief risk & compliance officer, would be well suited to deliver this update. As well-chronicled in the recently released special investigative report (“Report”), the “20/20” lessons from the controversy transcend the financial services industry, to offer value to corporate boards across industry sectors. These lessons demonstrate how matters of organizational structure, corporate culture, and risk identification and reporting can coalesce in undisciplined circumstances to create significant corporate exposure. In several respects, these lessons prompt comparisons to the conclusions reached by investigative counsel in the GM ignition switch controversy of 2014. This comparison may help underscore the basic risk oversight message to the audit committee; i.e., that these issues have arisen in several of the largest U.S. companies and may arise again without proper supervision. Continue reading

An Alternative to Clawbacks: William Dudley’s 2014 Proposal for Deferred Compensation at Financial Institutions

by Carmi Schickler

In the wake of its fraudulent account scandal, Wells Fargo announced in April 2017 that it would claw back additional compensation from former CEO John Stumpf and former head of community banking Carrie Tolstedt. All told, the total amount of clawed back compensation at Wells Fargo has now reached $180 million.

However, such clawbacks remain the exception rather than the norm. Unlike most financial firms, Wells Fargo has a particularly powerful clawback policy on its books. Furthermore, the Wells Fargo clawbacks only occurred almost three years after the Board of Directors became aware of the malfeasance, and only in response to intense shareholder pressure against the Board of Directors.

As John Coffee and others have pointed out, extreme incentive compensation has led to many of the financial industry scandals that we have seen in recent years. Even the possibility of clawbacks does not seem to be changing the corporate culture in large financial institutions. As a result, it may be time to reconsider a stronger alternative to clawbacks: more widespread use of deferred compensation. Continue reading

Personal Liability for Compliance Officer in MoneyGram Settlement: Powerful Motivator or Chilling Deterrent?

by Erin Schrantz, Anouck Giovanola, and Justin Spiegel

On May 4, 2017, the U.S. Attorney’s Office for the Southern District of New York (“SDNY”) and the Financial Crimes Enforcement Network (“FinCEN”) announced the settlement of civil claims brought under the Bank Secrecy Act (“BSA”) against the former Chief Compliance Officer of MoneyGram International, Inc. (“MoneyGram”), Thomas Haider, stemming from MoneyGram’s failure to implement and maintain an effective anti-money laundering (“AML”) program or to timely file suspicious activity reports (“SARs”).[1]  The settlement represented the resolution of the first-ever suit filed by the federal government against an individual compliance officer in the finance industry,[2] and is likely to add fuel to increasing anxiety regarding the Department of Justice’s (“DOJ”) willingness to hold corporate executives liable for compliance failings. Continue reading