Category Archives: Financial Institutions

Removing Implicit Bank Subsidies to Make the Financial System Fairer

by Sebastian Schich 

The views expressed within this post are those of the author alone and do not represent those of the OECD or its member countries.

A decade after the global financial crisis, most of the financial regulatory reform package to make the system stabler and fairer has been completed. The agenda is is now changing to evaluation of reform effects. This post draws on a recent article on implicit bank debt guarantees [1] and asks whether the progress in limiting them has made the financial system fairer.

The financial regulatory reform, designed and subsequently rolled out over the past decade following the global financial crisis, is explicitly described as an attempt to make the international financial system fairer. In defining what is involved in this goal, the Financial Stability Board (FSB),[2] an international body set up in April 2009 to monitor and make recommendations about the global financial system, refers to large banks at the centre of the financial system that did not internalize the social costs that their excessive risk-taking created. Gains of risk-taking activities were privatized and losses socialized. A fairer system involves funding conditions that are more closely aligned with the riskiness of the entities. In other words, there would be no room for implicit bank debt guarantees. Continue reading

Fintech in 2019: Five Trends to Watch

by Steven Gatti, David Adams, Peter Chapman, Laura Nixon, Paul Landless, Jack Hardman, and Brian Harley

Technology continues to have an enormous impact on financial services and the pace of change shows no signs of abating. Following the bold predictions we made last year, we highlight the five stand-out trends for fintech in 2019.

1. CRYPTO CRACKDOWN

There has been massive growth in the market for cryptoassets such as Bitcoin and tokens issued in initial coin offerings (ICOs), but market participants have faced uncertainty as to whether cryptoassets may be regulated financial products (and subject to scrutiny by regulatory authorities). Enforcement investigations globally have largely focused on issues of fraud, but now, there’s a renewed focus on guarding the regulatory perimeter (i.e. ensuring businesses carrying on regulated activities have the appropriate authorisation) .  Disputes and enforcement cases are arriving in courts across the globe.

What’s next?

Continue reading

AML Information Sharing in a Technology-Enabled and Privacy-Conscious World

by Kevin Petrasic, Paul Saltzman, Jonah Anderson, Jeremy Kuester, John Wagner, Rebecca Copcutt, and John Timmons

Financial firms play an integral role in preventing, identifying, investigating and reporting criminal activity, including terrorist financing, money laundering, and many other finance-related crimes. It is a critical role that depends on financial firms having the information they need to identify and report potentially suspicious activity and provide other relevant information to law enforcement. However, there are significant barriers to information sharing throughout the US anti-money laundering (“AML”) regime. These barriers limit the effectiveness of AML information sharing within a financial institution, among financial institutions, and between financial institutions and law enforcement.

Much has changed in the 17 years following the passage of the USA PATRIOT Act (“Patriot Act”), which, among other things, sought to enable greater information sharing among law enforcement, regulators and financial institutions regarding AML risks. Of note, Section 314(a) of the Patriot Act and its implementing regulations (“Section 314(a)”) enables federal, state, local and European Union law enforcement agencies to reach out to US financial institutions through the US Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to locate accounts and transactions of persons that may be involved in terrorism or money laundering. Section 314(b) of the Patriot Act and its implementing regulations (“Section 314(b)”) provides a limited safe harbor for financial institutions to share information with one another in order to better identify and report potential money laundering or terrorist activities. Continue reading

Trends in U.S. Sanctions Enforcement During the Trump Administration

by Dr. Bryan R. Early and Keith A. Preble

U.S. Economic Sanctions Policy

Economic sanctions are coercive foreign policy tools that work by disrupting otherwise profitable commerce between the governments imposing them and their targets. In order to be effective, governments imposing sanctions must obtain the compliance of their constituents, or the sanctions will not harm their targets as intended. Complying with sanctions is costly for companies not only in terms of the commerce they disrupt, but also with respect to the investments required to prevent unintentional violations. Thus, as policy tools, economic sanctions inherently create costly compliance obligations for companies. Given that employing sanctions appears to run counter to U.S. President Donald Trump’s goal of reducing regulatory burdens on U.S. firms, it is surprising that he has heavily relied upon threatening and imposing sanctions as part of his administration’s foreign policy.

Two years into the Trump Administration, we can begin to see evidence of how this tension in President Trump’s policy preferences has affected the implementation of U.S. sanctions. Despite the fiery rhetoric directed at the targets of U.S. sanctions, our research indicates that the U.S. Department of Treasury’s Office of Foreign Asset Control (OFAC) has adopted a softer stance on sanctions enforcement during the Trump Administration than during his predecessors’ administrations. The major area in which OFAC’s recent enforcement policies have been more stringent is in punishing foreign sanctions violators. This suggests that OFAC has resolved the tension between reducing regulatory burdens on U.S. firms and President Trump’s sanctions preferences by focusing more of its attention on punishing foreign firms instead of American ones for violating sanctions. Continue reading

Court Upholds SEC Authority and Finds Broker-Dealer Liable for Thousands of Suspicious Activity Reporting Violations

by H. Christopher Boehning, Jessica S. Carey, Michael E. Gertzman, Roberto J. Gonzalez, David S. HuntingtonBrad S. Karp, Raphael M. Russo, Richard S. Elliott, Rachel M. Fiorill, Karen R. King, Anand Sithian, and Katherine S. Stewart

Decision Provides Rare Judicial Guidance on SAR Filing Requirements

On December 11, 2018, the Securities and Exchange Commission (SEC) obtained a victory in its enforcement action against Alpine Securities Corporation, a broker that cleared transactions for microcap securities that were allegedly used in manipulative schemes to harm investors.[1] Judge Cote of the U.S. District Court for the Southern District of New York issued a 100-page opinion partially granting the SEC’s motion for summary judgment and finding Alpine liable for thousands of violations of its obligation to file Suspicious Activity Reports (SARs).[2]

Because most SAR-related enforcement actions are resolved without litigation, this decision is a rare instance of a court’s detailed examination of SAR filing requirements.  The decision began by rejecting—for a second time[3]—Alpine’s argument that the SEC lacks authority to pursue SAR violations.  The court then engaged in a number of line-drawing exercises, finding that various pieces of information, as a matter of law, triggered Alpine’s SAR filing obligations and should have been included in the SAR narratives.  This mode of analysis, which applies the SAR rules under the traditional summary judgment standard, may appear to contrast with regulatory guidance recognizing that SARs involve subjective, discretionary judgments.[4]

Although the decision has particular relevance in the microcap context, all broker-dealers—and potentially other entities subject to SAR filing requirements—may wish to review the court’s reasoning for insight on a number of SAR issues, including the adequacy of SAR narratives and the inclusion of “red flag” information. Among other cautions, the decision illustrates the dangers of relying on SAR “template narratives”[5] that lack adequate detail.

More broadly, the SEC’s action against Alpine is another indicator of heightened federal interest in ensuring broker-dealer compliance with Bank Secrecy Act (BSA) requirements. For example, last month the U.S. Attorney for the Southern District of New York brought the first-ever criminal BSA charge against a broker-dealer, noting that this charge “makes clear that all actors governed by the Bank Secrecy Act—not only banks—must uphold their obligations.”[6] Continue reading

An Unintended Consequence of Tax Enforcement: More (And Better) Bank Lending?

by John Gallemore and Martin Jacob

Corporate tax enforcement has become a critical issue for many governments in recent years, given the massive amount of lost revenues and budget deficits. There is empirical evidence that corporate tax avoidance has increased over the past decades. [1] Some countries have responded by increasing coordination to combat tax avoidance. For example, the OECD countries created the Base Erosion and Profit Shifting (BEPS) project. At the same time, the IRS has seen its budget reduced in recent years. [2]

While policymakers have considered multiple remedies for combating aggressive corporate tax avoidance, such as withholding rules and information sharing, the IMF notes that “auditing remains crucial.” [3] Consistent with this idea, to aid the implementations of BEPS in developing countries, the OECD and the United Nations Development Program jointly started the Tax Inspectors Without Borders initiative to encourage greater investments in tax return audit capacity and to improve actual audit results. [4]

The obvious outcome of greater tax enforcement is a reduction in aggressive corporate tax avoidance. However, it is less clear whether and how tax enforcement affects firms and their stakeholders beyond tax payments. Understanding these “tax enforcement spillovers” is critical in assessing the overall net benefit of tax enforcement. Continue reading

SEC Adopts Disclosure Rules on Hedging Policies

by Heather L. Coleman, Matthew M. Friestedt, and Marc Treviño

Requires Description of any Hedging Policies or Practices Adopted, Not Specified Transactions; Will Apply to Most Companies Beginning in 2020

SUMMARY

On December 18, 2018, the SEC adopted rules requiring disclosure of policies and practices regarding hedging for directors, officers and employees of U.S. public companies.  These rules require public companies to describe, in any proxy or information statement relating to director elections, any practices or policies they have adopted regarding the ability of its directors, officers or employees to engage in transactions that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities of the public company or its affiliates. The rules cover both equity securities granted as part of compensation and those otherwise held directly or indirectly.

The final rules do not require any company to prohibit hedging transactions or to otherwise adopt hedging policies and do not require disclosure of any particular hedging transactions.

These rules will generally apply to proxy and information statements with respect to the election of directors during fiscal years beginning on or after July 1, 2019, although there is a one-year transition period for emerging growth companies and smaller reporting companies. Continue reading

FinCEN and Federal Financial Institution Supervisory Agencies Issue Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing

by Jonathan J. Rusch

FinCEN and Federal Financial Institution Supervisory Agencies Issue Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing

On December 3, 2018, the Financial Crimes Enforcement Network (“FinCEN”) and the four federal financial institution supervisory agencies[1] (“the agencies”) issued a joint statement (“Joint Statement”) encouraging banks (i.e., banks, savings associations, credit unions, and foreign banks) “to consider, evaluate, and, where appropriate, responsibly implement innovative approaches to meet their Bank Secrecy Act/anti-money laundering (BSA/AML) compliance obligations, in order to further strengthen the financial system against illicit financial activity.”[2] Continue reading

Perspectives on Regulating Systemic Risk

by Steven L. Schwarcz

Whether the macroprudential regulation enacted to protect the stability of the financial system is sufficient to prevent another crisis is uncertain. Although much of that regulation represents good faith and, in many cases, highly thoughtful efforts to control systemic risk, its primary focus is on banks and other systemically important financial institutions (“SIFI”s). This entity-based approach may be too narrow because it largely ignores other critical elements of the system, such as financial markets.

Furthermore, influenced by political and media pressure to assign blame for the financial crisis, some of the entity-based regulation is itself imperfect. A major focus of that regulation, for example, is on controlling morally hazardous risk-taking by SIFIs that deem themselves “too big to fail” (“TBTF”). Capital requirements epitomize this approach, protecting SIFIs against losses by requiring them to hold minimum levels of capital. However, the ability of capital requirements to control systemic risk is unclear. The cost of capital requirements is also uncertain; some argue they impose no public costs, others argue to the contrary. Continue reading

OFAC Reaches Settlement with Cobham Holdings, Inc. for Violations Resulting from Deficient Screening Software

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

On November 27, 2018, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) announced a nearly $90,000 settlement agreement with Virginia-based Cobham Holdings, Inc. (“Cobham”), a global provider of technology and services in aviation, electronics, communications, and defense, on behalf of its former subsidiary, Aeroflex/Metelics, Inc. (“Metelics”).[1] The settlement involves three shipments of goods through distributors in Canada and Russia to an entity that did not appear on OFAC’s Specially Designated Nationals and Blocked Persons List (the “SDN List”), but was blocked under OFAC’s “50% rule” because it was 51% owned by a company sanctioned under the Russia/Ukraine sanctions program. This is the second OFAC action of which we are aware that has relied on the 50% rule.  The apparent violations appear to have been caused by Metelics’s (and Cobham’s) reliance on deficient third-party screening software.

While difficult to predict, OFAC’s decision to pursue this action—involving only three shipments, a violation of the 50 percent rule, and where the root cause of the apparent violations is attributable to deficient sanctions screening software—may signal a raising of OFAC’s compliance expectations, consistent with Treasury Under Secretary Sigal Mandelker’s warning in a recent speech that private sector companies “must do more to make sure [their] compliance systems are airtight.”[2]

Below, we describe the settlement, OFAC’s penalty calculation, and several lessons learned. Continue reading