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Sharper Lines Mean Tighter Nets: How the FinCEN’s Latest Priorities are Another Step to Increased Enforcement

In the latest sign that the federal enforcement apparatus is slowly but surely training its sights on white-collar professionals and businesses, particularly financial services, the Financial Crimes Enforcement Network (“FinCEN”) published a list of priorities last week. For the last few years, prosecutors have aggressively pursued allegations of corruption and fraud – at times too aggressively, in the views of many federal judges. Executives willing to roll the dice at trials have increasingly found receptive audiences in judges who have chastised prosecutors for bringing criminal charges where the lines demarking unlawful conduct were not so clearly drawn. The publication of the FinCEN priorities is another step in drawing those lines.

Developments This Year

Earlier this year, Congress overrode then-President Trump’s veto to pass the Anti-Money Laundering Act of 2020 (“AMLA”) which included greatly increased incentives for whistleblowers to report on money laundering and Bank Secrecy Act (“BSA”) violations, broadened BSA’s coverage to capture dealers of antiquities and cryptocurrency, and gave the U.S. Treasury Department and the U.S. Department of Justice authority to obtain records from foreign financial institutions.

Just over a month ago, on June 3, 2021, the White House published the Memorandum on Establishing the Fight Against Corruption as a Core United States National Security Interest (the “Memorandum”). In the Memorandum, President Biden sets forth a policy of “effectively preventing and countering corruption and demonstrating the advantages of transparent and accountable governance” and commits to “lead efforts to promote good governance; bring transparency to the United States and global financial systems; prevent and combat corruption at home and abroad; and make it increasingly difficult for corrupt actors to shield their activities.” The Memorandum directs 15 federal agencies to collaborate in a 200-day “interagency review” to enhance the government’s ability to fight corruption.

FinCEN’s AML/CFT Priorities

In one tangible result of those anti-corruption efforts, FinCEN published guidance for the financial services sector just a few weeks after the release of the Memorandum, in the form of the Statement on the Issuance of the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) National Priorities (the “Statement”) and Anti-Money Laundering and Countering the Financing of Terrorism National Priorities (the “AML/CFT Priorities”). The AML/CFT Priorities are applicable to all “covered entities” – financial service providers required to maintain an anti-money laundering program under the BSA – which includes banks, money services businesses, credit card system operators, loan and finance companies, and broker-dealers.[1] While the priorities are not expected to be addressed until the effective date of regulations,[2] we expect covered entities to begin consideration of the priorities in the course of any periodic updating processes. Indeed, FinCEN recommends in their statement that covered entities begin considering how to incorporate the AML/CFT Priorities into their compliance programs.

Echoing President Biden’s earlier policy statements, the eight priorities are (1) corruption; (2) cybercrime, including relevant cybersecurity and virtual currency considerations; (3) foreign and domestic terrorist financing; (4) fraud; (5) transnational criminal organization activity; (6) drug trafficking organization activity; (7) human trafficking and human smuggling; and (8) proliferation financing.[3] A high-level summary of the AML/CFT Priorities is available here.

These updated priorities come on the heels of an already-increasing appetite for white-collar prosecution. The aggressive push from the Department of Justice can be traced back to 2015, when then-Deputy Attorney General Sally Yates issued the Yates Memorandum, which made “[f]ighting corporate fraud and other misconduct . . . a top priority of the Department of Justice,” especially in prosecuting individuals. A year and a half and a change in administration later, the Department of Justice’s priorities turned elsewhere — largely to combatting violent crimes — but not before a new wave of white-collar prosecutions had already begun. As the Wall Street Journal recently documented, one of these cases led a judge to vacate a conviction against a Wall Street executive, remarking that the “government completely overreached,” and that the “lines have to be very clear, because when someone crosses a line and is likely to end up in jail, you want that line to be clear.”[4]  Other judges have remarked that federal authorities have been too eager to grab cash and assets before proving any wrongdoing.[5]  

Examples of judges reaching for the extreme remedy of overriding a jury verdict are increasingly common. The Third Circuit Court of Appeals earlier this year threw out convictions of four former bank executives because the key regulation underlying their convictions was ambiguous,[6] and the Second Circuit will soon decide whether to affirm a New York federal judge’s decisions to toss guilty verdicts against hedge fund executives based on, in that judge’s view, insufficient proof of criminal intent.[7] The Wall Street Journal noted that the federal prosecutors’ normally near-perfect batting average in getting convictions has slipped to just below 80% in Wall Street cases over the past five years. That is undoubtedly because proving intent in such cases, particularly against the backdrop of murky regulations, is challenging. 

But the FinCEN priorities, along with the AMLA and the Memorandum, may indicate an intent by regulators to ratchet up the pressure. Notably, on July 6, 2021, after listing cybercrime as one of the priorities, FinCEN hired Michele Korver, a former federal prosecutor, as its first “Chief Digital Currency Advisor.”[8] Enhanced regulations yet to come will help prosecutors extract resolutions from companies and pursue individual prosecutions through trial. When those lines become more focused, verdicts are more likely to stand.

Next Steps

A robust AML/CFT program likely includes elements of the AML/CFT Priorities, but the FinCEN guidance provides helpful information that covered entities should take into consideration – and that covered entities can use to direct internal resources to specific areas of concern. The AML/CFT Priorities also highlight increased national focus on domestic terrorism and cybersecurity, the latter already front-page news from a recent spate of high-profile and critical infrastructure ransomware and hacking attacks. While compliance with the above AML/CFT Priorities is not yet required, covered institutions are encouraged to begin investigating workable solutions for implementation without overburdening compliance and regulatory teams. Starting early to update policies, procedures, and systems can minimize friction when regulations are finalized and implemented.


[1] Separate statements were published for non-bank financial institutions by FinCEN, and jointly for banks and credit unions by 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. See 31 CFR Chapter X; see also summary of covered entities provided in AML/CFT Priorities, FN 6.

[2] Regulations must be promulgated within 180 days after the establishment of the priorities. 31 U.S.C. § 5318(h)(4)(D) (as amended by the Anti-Money Laundering Act of 2020 § 6101(b)(2)(C)).

[3] Priorities.

[4] Aruna Viswanatha & Dave Michaels, Flaws Emerge in Justice Department Strategy for Prosecuting Wall Street, Wall St. J. (July 5, 2021), https://www.wsj.com/articles/flaws-emerge-in-justice-department-strategy-for-prosecuting-wall-street-11625506658.

[5] The Wall Street Journal Editorial Board, Guilty Until Proven Innocent (July 7, 2021), https://www.wsj.com/articles/guilty-until-proven-innocent-11625697428.     

[6] United States v. Harra, 985 F.3d 196 (3d Cir. 2021).

[7] United States v. Mark Nordlicht, et al., No. 16 CR 640 (BMC), (Dkt. No. 799) (E.D.N.Y. 2019); Second Circuit Docket Nos. 19-3209 & 19-3207. 

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Happy Holidays: CFPB Advisory Opinions!

December 7, 2020

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On November 30, 2020, the Consumer Financial Protection Bureau (“CFPB”) set forth procedures for the issuance of advisory opinions provided as interpretive rules to resolve regulatory uncertainty, effective immediately. Under this new advisory opinion schema, the CFPB concurrently released two advisory opinions: one on earned wage access products and one on private education loans.

Advisory Opinions

A request for an advisory opinion must include:

  • Identity of the person or entity seeking the opinion, or the person or entity submitted a request on behalf of a third part (e.g., outside counsel, in which case clients need not be identified);
  • Statement about the absence of investigation or litigation;
  • All material facts about an actual fact or course of action that is (a) within the CFPB’s purview and (b) that the person or entity is engaged in or is planning to engage in;
  • A description of the uncertainty or ambiguity, including (a) identification of the regulatory or statutory provision at issue; (c) a proposed interpretation of the law or regulation; and (d) an explanation of why that proposed interpretation is an appropriate resolution of the uncertainty or ambiguity;
  • Identification of information that should be treated as confidential.

Each advisory opinion will be specific to the facts provided, which the CFPB will not generally investigate independently, making it important that the request include a clear description of any material facts. Where the advisory opinion permits for a safe harbor, as provided for in the Truth in Lending Act (“TILA”), Equal Credit Opportunity Act, Electronic Fund Transfer Act, Real Estate Settlement Procedures Act, and Fair Debt Collection Practices Act, that fact will be explained in the advisory opinion. The scope and terms of an advisory opinion will be set out in the advisory opinion itself.

The CFPB will weigh multiple factors in determining whether to issue an advisory opinion on a specific topic, including issues that it has previously noted that are of significant importance or where clarification would provide significant benefit, and where the CFPB has not previously addressed a highlighted ambiguity. Conversely, the CFPB may decide an advisory opinion is not the appropriate tool for responding to an inquiry. In particular, issues where the CFPB is actively investigating or enforcing a related matter or a rulemaking is proposed or being planned.

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Crypto Goes Mainstream: OCC Says Banks Can Provide Crypto Custody Services

On Wednesday, July 22, 2020, Acting Comptroller of the Currency Brian Brooks reaffirmed his interest in being seen as an agent of modernization in a letter clarifying the authority of national banks and federal savings associations to provide cryptocurrency services for customers.

The letter from the Office of the Comptroller of the Currency (“OCC”) discusses the increasing acceptance of cryptocurrency, and especially Bitcoin, as a method of payment and form of investment. It acknowledges a correlating growing demand for “safe places, such as banks, to hold unique cryptographic keys associated with cryptocurrencies on behalf of customers and to provide related custody services.” Three reasons – a safe way to hold cryptocurrency keys; a secure storage service; and custodian services for assets managed by investment advisors – are cited in the letter as driving the demand for cryptocurrency custody services.

The safekeeping services are described as a modernization of special deposit and safe deposit boxes, falling within “longstanding authorities to engage in safekeeping and custody activities.” Thus, “the authority to provide safekeeping services extends to digital activities and, specifically, that national banks may escrow encryption keys used in connection with digital certificates because a key escrow service is a functional equivalent to physical safekeeping.”

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Can Standards and Voluntary Certification Help Community Banks and Fintechs Grow, Together?

July 28, 2020

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COVID-19 has laid bare the need to have good technological solutions for the systems and services upon which we rely. In the financial sector, perhaps more than many others, the pace of innovation is beholden to regulatory parameters, but there is some optimism that Fintechs can help fill the gap in traditional financial products, especially in emerging markets. As in our in recent post about digital banking modernization by the OCC, regulators are feeling out the interest in certain programs. On Monday, July 20, 2020, the FDIC announced a request for public input on a certification program to “promote the efficient and effective adoption of innovative technologies at FDIC-supervised financial institutions.”

More specifically, the FDIC is seeking input regarding whether the development of relevant standards in connection with a voluntary certification process could be applied to third-party models and whether such standards would allow more financial institutions, particularly community banks, to engage with third parties that provide these models, including Fintechs. Such a voluntary certification program could, in theory, reduce costs of doing business for both the financial institutions and providers of models and permit FDIC supervision resources to be used more efficiently and effectively.

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OCC Continues Digital Banking Modernization

The Office of the Comptroller of the Currency’s (“OCC”) attention to modernizing regulation to better accommodate innovative products and industries is continuing full steam ahead since our recent post about a potential payments charter. In the weeks since we posted that article, Brian Brooks has become the acting Comptroller of the Currency, so it should come as no surprise that his goals are garnering some attention.

On Thursday, June 6, the OCC issued a notice of proposed rulemaking seeking public comment to update its rules for national bank and federal savings association activities and operations and an advance notice of proposed rulemaking seeking comment on rules on national banks’ and federal savings associations’ (banks) digital activities. These releases confirm that the agency is “reviewing its regulations on bank digital activities to ensure that its regulations continue to evolve with developments in the industry.”

As part of a substantial modification of the regulatory system, the OCC seeks comment on additional flexibility for banks with respect to permissible derivatives activities, tax equity finance transactions, corporate governance, anti-takeover provisions, capital stock issuances and repurchases, and participation in financial literacy programs.

In addition, the OCC seeks comment on a significant number of banking issues related to digital technology and innovation. The OCC asks whether current legal standards are sufficient flexible, whether they create undue hurdles, and whether there are other areas they should cover. Their requests for comments also touch on current questions, namely whether the pandemic has brought any concerns to light and what issues are unique to smaller institutions – which performed well with the rollout of the SBA’s Paycheck Protection Program, but may encounter hard times to come.

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Coming Up: A National Non-Depository Payments Charter?

Brian Brooks, Chief Operating Officer of the Office of the Comptroller of the Currency (“OCC”) said on Monday that he believes the OCC should investigate the viability and utility of a non-depository payments charter: “One of the things I think we have to ask ourselves as an agency is, if it makes sense to have a non-depository lending charter, which was the original fintech concept, would it also make sense to have a non-depository payments charter?”

In his talk, given as part of the Consensus: Distributed virtual conference, Brooks focused on cross-border concerns that are particularly salient to crypto companies. He notes that we may have come to a point where the traditional state-federal divisions of licensing and oversight authority are less relevant, particularly in the crypto space. Brooks says there is an argument that “crypto looks a lot like banking for the twenty-first century,” in which case a single national license may provide modern update to the current patchwork of laws, which is burdensome and time-consuming for both payments companies and state regulators.

Brooks said “one of [his] missions at the OCC . . . is to investigate the extent to which over time it makes sense to think of crypto companies like banks and to think of charter types that might be appropriate for crypto companies.” While Brooks’ comments focused on crypto in mentioning a payments charter, he noted Stripe and PayPal as non-blockchain payments companies, which would presumably also be covered by such a payments charter.

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The Paycheck Protection Program: Managing Fair Lending Risks

The past few weeks have seen increasing scrutiny of the lenders and borrowers participating in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), including by the Treasury Department, SBA Inspector General, U.S. Department of Justice, and Congress with the Special Inspector General for Pandemic Recovery surely soon to follow.

Against this backdrop, the Consumer Financial Protection Bureau (“CFPB”) has recently raised concerns related to fair lending for lenders participating in the PPP. On May 6, 2020, the CFPB issued guidance related to the timing for Equal Credit Opportunity Act (“ECOA”)-mandated adverse action notices under the PPP. On April 27, 2020, the CFPB published a statement in which the Bureau emphasized that lenders must comply with ECOA when extending small business credit, outlining key bases for discrimination claims under ECOA and encouraging women and minority-owned businesses who feel they have suffered lending discrimination to submit complaints to the CFPB through its complaint portal.

The CFPB’s recent focus on institutional fair lending compliance accords with that of federal banking regulators. For example, on April 27, 2020, the Office of the Comptroller of the Currency released “OCC Bulletin 2020-45,” which, among other things, encourages institutions to “prudently document their implementation and lending decisions” under the SBA’s PPP.

Given recent regulatory focus on fair lending compliance in connection with PPP lending, banks and other lenders should consider the following proactive risk mitigation steps.

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SBA PPP April 14 Interim Final Rule Guidance

April 16, 2020

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On April 14, 2020, the SBA published an interim final rule that provides additional guidance regarding topics of confusion among both Payroll Protection Program (“PPP”) lenders and borrowers. This new rule supplements the first interim final rule, which was issued by the SBA on April 2, 2020, and specifically addresses the eligibility of self-employed individuals, partnerships, director-owned businesses, and legal gambling businesses. This post covers the updates detailed in the new interim final rule, based on the latest guidance from the SBA as of April 16, 2020.

Self-Employed Individuals

Eligibility

The new interim final rule makes clear that an individual may be eligible for a PPP loan if the individual:

  1. was in operation as a business on February 15, 2020;
  2. is an individual with self-employment income (such as an independent contractor or a sole proprietor);
  3. has a principal place of residence in the United States; and
  4. filed or will file a Form 1040 Schedule C for 2019.

The SBA has communicated that it will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.

We note that individuals should be aware that participation in the PPP may affect eligibility for state-administered unemployment compensation or unemployment assistance programs.

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