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Bank Deregulation Bill Becomes Law: Economic Growth, Regulatory Relief, and Consumer Protection Act

On May 24, President Trump signed into law the most significant banking legislation since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010. The bill – named the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) – passed its final legislative hurdle earlier this week when it was approved by the U.S. House of Representatives. Identical legislation passed the U.S. Senate last March on a bipartisan basis.

The Act makes targeted, but not sweeping, changes to several key areas of Dodd-Frank, with the principal beneficiaries of most provisions being smaller, non-complex banking organizations.

Below is a summary of several key changes:

Higher SIFI Threshold – The controversial $50 billion asset threshold under Dodd-Frank is now $250 billion, affecting about two dozen bank holding companies. Under Section 165 of Dodd-Frank, bank holding companies with at least $50 billion in total consolidated assets were subjected to enhanced prudential standards. Under the Act, the enhanced prudential standards under Section 165 no longer apply to bank holding companies below $100 billion, effective immediately. Bank holding companies with total consolidated assets of between $100 billion and $250 billion will be exempted from such standards starting in November 2019, although the Federal Reserve retains the authority to apply the standards to any such company if it deems appropriate for purposes of U.S. financial stability or to promote the safety and soundness of the particular firm.

The increase in the Section 165 threshold does not eliminate the $50 billion threshold used in other areas of regulation and supervision, such as the Office of the Comptroller of the Currency’s (“OCC”) “heightened standards,” the “living will” regulations adopted by the Federal Deposit Insurance Corporation (“FDIC”) for insured depository institutions or the Federal Reserve’s capital plan rule pursuant to which it administers the CCAR process. However, it is expected that the federal banking agencies may reconsider the appropriateness of using the $50 billion asset threshold elsewhere.

The increase in this threshold is especially important because it may spark renewed interest in M&A opportunities among regional banks that have carefully managed growth to avoid crossing $50 billion or that have otherwise been reluctant to pursue transactions in light of the significant regulatory scrutiny that has accompanied applications by large acquirors.

Volcker Rule – The Volcker Rule is amended so that it no longer applies to an insured depository institution that has, and is not controlled by a company that has, (i) less than $10 billion in total consolidated assets and (ii) total trading assets and trading liabilities that are not more than 5% of total consolidated assets. All other banking entities, however, remain subject to the Volcker Rule. The other change to the Volcker Rule relates to the name-sharing restriction under the asset management exemption, which the Act modifies slightly by easing the prohibition on banking entities sharing the same name with a covered fund for marketing or other purposes. Going forward, a covered fund may share the same name as a banking entity that is the investment adviser to the covered fund as long as the word “bank” is not used in the name and the investment adviser is not itself (and does not share the same name as) an insured depository institution, a company that controls an insured depository institution or a company that is treated as a bank holding company. This change allows separately branded investment managers within a bank holding company structure to restore using the manager’s name on its advised funds.

The Act represents only the first set of changes to the Volcker Rule. The federal banking agencies are expected to release a proposal the week of May 28 to revise aspects of the regulations first adopted in late 2013.

“Off-Ramp” Relief for Qualifying Community Banks – A depository institution or depository institution holding company with less than $10 billion in total consolidated assets will constitute a “qualifying community bank” under the Act. The benefit of such a designation is that the institution will be exempt from generally applicable capital and leverage requirements, provided the institution complies with a leverage ratio of between 8% and 10%. The federal banking agencies must develop this ratio and establish procedures for the treatment of a qualifying community bank that fails to comply. The regulators have the authority to determine that a depository institution or depository institution holding company is not a qualifying community bank based on the institution’s risk profile.
Stress Testing – The Act provides relief from stress testing for certain banking organizations. Notably, bank holding companies with total consolidated assets of between $10 billion and $250 billion will no longer need to conduct company-run stress tests. Bank holding companies with more than $250 billion in assets and nonbank companies deemed systemically important still need to conduct company-run stress tests, but are permitted to do so on a “periodic” basis rather than the previously required semi-annual cycle. As for supervisory stress tests, which are conducted by the Federal Reserve, bank holding companies with less than $100 billion are no longer subject to such stress tests. Bank holding companies with total consolidated assets between $100 billion and $250 billion are subject to supervisory stress tests on a periodic basis, while such firms with $250 billion or more in total consolidated assets and nonbank companies designated as systemically important remain subject to annual supervisory stress tests.
Risk Committees and Credit Exposure Reports – The Act raises the asset threshold that triggers the need for publicly-traded bank holding companies to establish a board-level risk committee, from $10 billion to $50 billion. In addition, the Act amends Dodd-Frank’s requirement that bank holding companies with at least $50 billion in assets and nonbank companies designated as systemically important submit credit exposure reports. Instead, the Act authorizes, but does not mandate, the Federal Reserve to receive reports from these firms, but with respect to bank holding companies, only those with more than $250 billion in assets are within scope.
Exam Cycle and Call Report Relief for Smaller Institutions – The Act increases the asset threshold for insured depository institutions to qualify for an 18-month on-site examination cycle from $1 billion to $3 billion. The Act also directs the federal banking agencies to adopt short-form call reports for the first and third calendar quarters for insured depository institutions with less than $5 billion in total consolidated assets and that meet such other criteria as the agencies determine appropriate.
Small BHC and SLHC Policy Statement – The asset threshold for the application of the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement is raised from $1 billion to $3 billion. As a result, those institutions with less than $3 billion in consolidated assets are not subject to consolidated capital requirements and have the benefit of less restrictive debt-to-equity limitations.
Flexibility for Federal Thrifts to Operate as National Banks – Federal savings associations with total consolidated assets of $20 billion or less (as of December 31, 2017) may elect to be subject to the same rights, privileges, duties, restrictions, penalties, liabilities, conditions and limitations that apply to a national bank, without having to convert their charters. As a result, institutions that make the election would be exempt from certain restrictions unique to savings associations, including asset-based limitations applicable to commercial and consumer loans, unsecured constructions loans, and non-residential real property loans. To make an election, a federal savings association must provide 60 days’ prior written notice to the OCC.
“Ability to Repay” Safe Harbor for Smaller Institutions – The Act provides a safe harbor from the “ability to repay” requirement under the Truth in Lending Act (“TILA”) for mortgage loans originated and retained in portfolio by an insured depository institution or insured credit union that has, together with its affiliates, less than $10 billion in total consolidated assets. However, mortgage loans that have interest-only, negative amortization or certain other features do not qualify for this ability-to-repay relief.
Capital Treatment for HVCRE Exposures – The Act eases the treatment for certain “high-volatility commercial real estate” (“HVCRE”) loans under U.S. Basel III capital rules. HVCRE exposures had been assigned a 150% risk-weight under the U.S. standardized approach, but the Act now restricts this higher risk-weight to those exposures that constitute acquisition, development and construction (“ADC”) loans meeting a new “HVCRE ADC loan” definition. Various loans are excluded from HVCRE ADC loan definition, including loans to finance the acquisition, development or construction of one- to four-family residential properties, community development project loans, and loans secured by agricultural land. In addition, loans to acquire, refinance or improve income-producing properties and commercial real estate projects that meet certain loan-to-value ratios are also excluded from the new HVCRE ADC loan definition.
Reciprocal Deposits – The Act excludes deposits received under a reciprocal deposit placement network from the scope of the FDIC’s brokered deposit rules if the agent institution’s total amount of reciprocal deposits does not exceed either $5 billion or 20% of the institution’s total liabilities. The exclusion applies generally to a bank that has a composite condition of outstanding or good and is well capitalized, but it may be relied upon by a bank that has been downgraded or ceases to be well capitalized if the amount of reciprocal deposits it holds does not exceed the average of its total reciprocal deposits over the four quarters preceding its rating or capital downgrade.
PACE Financing – The Act requires the Consumer Financial Protection Bureau (“CFPB”) to issue ability-to-repay rules under TILA to cover Property Assessed Clean Energy (“PACE”) financing. The Act defines such financing to include a loan that covers the costs of home improvements and which results in a tax assessment on the consumer’s real property. In developing these regulations, the CFPB must consult with state and local governments and PACE bond-issuing authorities.
Protections for Student Borrowers – The Act provides protections for student loan borrowers in situations involving the death of the borrower or cosigner and those seeking to “rehabilitate” their student loans. In particular, the Act amends TILA to prohibit a private education loan creditor from declaring a default or accelerating the debt of the student obligator solely on the basis of the death or bankruptcy of a cosigner. In addition, in the case of the death of the borrower, the holder of a private education loan must release any cosigner within a “reasonable timeframe” after receiving notice of the borrower’s death. The Act also amends the Fair Credit Reporting Act by allowing a borrower to request that a financial institution remove a reported default on a private education loan from a consumer credit report if the institution offers and the borrower successfully completes a loan rehabilitation program. The program, which must be approved by the institution’s federal banking regulator, must require that the borrower make consecutive on-time monthly payments in a number that, in the institution’s assessment, demonstrates a “renewed ability and willingness to repay the loan.”
Immunity from Suit for Disclosure of Financial Exploitation of Senior Citizens – The Act shields financial institutions and certain of their personnel from civil or administrative liability in connection with reports of suspected exploitation of senior citizens. The reports must be made in good faith and with reasonable care to a law enforcement agency or certain other designated agencies, including the federal banking agencies. Personnel covered by the immunity (which include compliance personnel and their supervisors, as well as registered representatives, insurance producers and investment advisors) must have received training in elder care abuse by the financial institution or a third party selected by the institution.
Mortgage Relief – The Act contains a number of provisions easing certain residential mortgage requirements, especially with respect to such loans made by smaller institutions. The Act amends the Home Mortgage Disclosure Act to exempt from specified public disclosure requirements depository institutions and credit unions that originate, on an annual basis, fewer than a specified number of closed-end mortgages or open-end lines of credit. The Act revises the Federal Credit Union Act to allow a credit union to extend a member business loan with respect to a one- to four-family dwelling, regardless of whether the dwelling is the member’s primary residence. The Act also amends the S.A.F.E. Mortgage Licensing Act of 2008 to allow loan originators that meet specified requirements to continue, for a limited time, to originate loans after moving: (i) from one state to another, or (ii) from a depository institution to a non-depository institution. Further, the Act exempts from certain escrow requirements a residential mortgage loan held by a depository institution or credit union that: (i) has assets of $10 billion or less, (ii) originated 1,000 or fewer mortgages in the preceding year, and (iii) meets other specified requirements.
Liquidity Coverage Ratio – The Act directs the federal banking agencies to amend their liquidity coverage ratio requirements to permit certain municipal obligations to be treated as higher quality “level 2B” liquid assets if they are investment grade, liquid and readily marketable.
Custodial Bank Capital Relief – The Act requires the agencies to exclude, for purposes of calculating a custodial bank’s supplementary leverage ratio, funds of a custodial bank that are deposited with a central bank. The amount of such funds may not exceed the total value of deposits of the custodial bank linked to fiduciary or custodial and safekeeping accounts.
Fair Credit Reporting Act – The Fair Credit Reporting Act is amended to increase the length of time a consumer reporting agency must include a fraud alert in a consumer’s file. The Act also: (i) requires a consumer reporting agency to provide a consumer with free “credit freezes” and to notify a consumer of their availability, (ii) establishes provisions related to the placement and removal of these credit freezes and (iii) creates requirements related to the protection of the credit records of minors.
Cyber Threat Report – Within one year of enactment, the Secretary of the Treasury must submit a report to Congress on the risks of cyber threats to U.S. financial institutions and capital markets. The report must include: (i) an assessment of the material risks of cyber threats, (ii) the impact and potential effects of material cyber attacks, (iii) an analysis of how the federal banking agencies and the Securities and Exchange Commission are addressing these material risks and (iv) a recommendation of whether additional legal authorities or resources are needed to adequately assess and address the identified risks.

Apart from the changes in the thresholds for banks with assets above $100 billion, most of the Act’s provisions are effective immediately.

This post was written by Scott A. Cammarn and Mark Chorazak of Cadwalader, Wickersham & Taft LLP.

Read more news on banks at the National Law Review’s Finance Practice Group Page.

New York Court Has Sufficient Jurisdiction Over Foreign Bank Where Bank Purposefully Uses Correspondent Bank Account in New York

In a recent New York District Court decision in Official Comm. Of Unsecured Creditors of Arcapita Bank B.S.C. v. Bahr, Islamic Bank, 2016 U.S. Dist Lexis 42635 (S.D.N.Y. 2016), the court considered whether the use of a correspondent bank account provides a sufficient basis to exercise personal jurisdiction over a foreign bank. There, the Bahraini banks set the terms of investment placements and designated New York correspondent bank accounts to receiver the funds. The banks then actively directed the funds at issue into the New York accounts.

The Committee’s cause of action for the avoidance of preferential transfers arose from the use of the correspondent bank accounts. Hence, the heart of the claim was the receipt of the transferred funds in the New York correspondent bank accounts. The Bahraini banks deliberately chose to receive funds in US dollars and designated the correspondent bank accounts in New York to receive the funds. This deliberate choice made the exercise of jurisdiction constitutional. “Where, as here, the defendant’s in-forum activity reflects its ‘purposeful availment’ of the privilege of carrying on its activities here, the defendant has established minimum contacts sufficient to confer a court with jurisdiction over it, even if the effects of the defendant’s conduct are felt entirely outside of the United States.”

Thus, if a foreign party deliberately choses to use the US banking system to effectuate a transaction and a cause of action arises from that transaction, the foreign party can be forced to defend itself in the US courts.

Article By Eric (Rick) S. Rein of Horwood Marcus & Berk Chartered

New Internet Domain Names for Banks: What You Need to Know Now

The world of the Internet is in a state of change. In 2008, the Internet Corporation for Assigned Names and Numbers (ICANN), the administrator of the Domain Name System, approved a new program that enables the creation of an unlimited number of new generic Top-Level Domains (gTLDs). In response, a coalition of banks, insurance companies and financial services associations partnered to establish fTLD Registry Services, LLC (fTLD) in order to apply for and operate the .BANK gTLD on behalf of the global banking community. On September 25, 2014, fTLD was granted the right to operate .BANK as a new gTLD.

The .BANK gTLDs will open up much-needed real estate on the Internet, providing new marketing, branding and cross-selling opportunities for the banking community. Eligible institutions will be able to obtain domain name registrations with a .BANK suffix instead of .COM. In addition, fTLD will implement enhanced control systems to mitigate cyber risks from malicious activities over the Internet. For example, registrants will be required to include charter verification by the registrant’s regulator before they can register a domain name in the .BANK gTLD.

The registration system for the .BANK gTLD became available mid-May 2015 for banks with registered trademarks with ICANN’s Trademark Clearing House (TMCH). The figure below illustrates the timeline for obtaining .BANK gTLDs.

Domains will be awarded on a first-come, first-served basis in all registration periods. The Qualified Launch Program for Founders period was available for founding members of fTLD that have registered their trademarks in ICANN’s TMCH. The Sunrise period will be available for eligible members of the global banking community that have registered their trademark with ICANN’s TMCH. During the 30-day Sunrise period, banks that meet fTLD’s eligibility requirements will have an advance opportunity, before names are available to other eligible members of the banking community, to register domain names that are exact matches to their registered trademarks. The Founders period will be available to the founding members of fTLD that have yet to register their domains. Eligible members of the global banking community that do not meet the Sunrise or Founders requirements can then register their trademarks, on an ongoing basis, during the General Availability period starting June 24, 2015.

The .BANK gTLD provides new opportunities for marketing, branding and other promotional activities. However, once the Sunrise and Founders periods expire, domain names will be granted on a first-come, first-served basis. Institutions, therefore, should review their current marketing plan to determine if and when registration of the newly available .BANK domain names is appropriate.

ARTICLE BY James M. Kane, Daniel C. McKay, II, John E. Munro of Vedder Price

New York Proposes First State Bitcoin Regulations

One might have thought the biggest news in the digital currency world lately was Dell announcing that it was now accepting bitcoin. However, after a series of highly-publicized hearings in January, New York State rolled out its proposed regulations surrounding bitcoin and virtual currency – the first state in the nation to propose licensing requirements for virtual currency businesses.

The July 23rd New York State Register includes a Notice of Proposed Rule Making from the New York State Department of Financial Services (the “NYSDFS”) regarding the regulation of virtual currency (“Regulation of the Conduct of Virtual Currency Businesses,” No. DFS-29-14-00015-P). The proposed rule calls for the creation of the “bitlicense” which the NYSDFS has hinted at in the past. The state agency goals are two-fold: to protect New York consumers and users and ensure the safety and soundness of New York licensed providers of virtual currency products and services. Virtual currency is still a nascent industry that is generally unregulated outside of federal anti-money laundering regulations, and while anti-establishment bitcoin pioneers may revel in the “wild west” atmosphere of the digital currency, the NYSDFS feels that their proposed regulations will protect consumers from undue risk, encourage prudent practices for those engaged in virtual currency business activity and foster the growth of the New York financial sector.

The Notice, which refers to the full text of the proposed rule originally made available by NYSDFS on July 17th, marks the beginning of a 45-day window for public comment on the proposed rule. Interestingly, the NYSDFS concurrently released a copy of the proposed regulations on the social news site Reddit to elicit debate (note, Ben Lawsky, Superintendent of Financial Services at the NYSDFS, participated in a Reddit AMA (“Ask Me Anything”) session in February as the agency was developing the rules).

The proposed rule appears to be drafted to carefully exclude merchants and bitcoin miners from the scope of the licensing requirement, but include exchanges, digital wallet services, merchant service providers and others in the virtual currency ecosystem. It imposes many of the same types of requirements that we already have in the area of money transmission and clearing house services, including capital requirements, anti-money laundering safeguards, and “know your customer” type issues. It also includes requirements with respect to business continuity and cyber security issues.

This alert will outline some of the major elements of the “bitlicense” regulations.

Who’s Covered?

Under the proposed regulations, “Virtual Currency Business Activity” means any one of the following activities involving New York or a New York resident:

(1) receiving Virtual Currency for transmission or transmitting the same;

(2) securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;

(3) buying and selling Virtual Currency as a customer business;

(4) performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or

(5) controlling, administering, or issuing a Virtual Currency.

Such “virtual currency businesses” would have to obtain a license from the agency before engaging in any such business activity, though persons chartered under the New York Banking Law to conduct exchange services and are approved by the NYSDFS to engage in virtual currency business activity would be exempt. As previously mentioned, the proposed rules seemingly excludes consumers who buy goods and services with digital currency, merchants who accept digital currency and bitcoin miners from the scope of the licensing requirement, but explicitly include digital currency exchanges, digital wallet apps and services, merchant service providers, virtual currency issuers, and other similarly situated businesses. Specially, the agency is not seeking to regulate virtual currency used solely on online gaming platforms or digital units used exclusively for customer affinity or rewards program, but cannot be converted into fiat currency.

Other Important Requirements

Application Details: Applicants would have to submit financial, insurance and banking particulars; organization charts and background reports for the principal officers and stockholders (along with fingerprints for officers, principals and employees); and an explanation of the methods used to calculate the value of virtual currency in fiat currency, among other things. Upon filing of an application, the agency will investigate the financial condition and responsibility of the applicant before issuing the bitlicense, and may revoke the license on sufficient grounds. Moreover, if the licensee wants to make a “material change” to an existing product or service, it would need the NYSDFS’s prior approval; similar approval would be required in the event of any changes of control or mergers and acquisitions.
Compliance: Applicants would have to comply with all federal and state laws and regulations, appoint a compliance officer to monitor activity within the business, and maintain written compliance policies relating to anti-fraud, anti-money laundering, cybersecurity, and privacy and data security. In addition, virtual currency businesses would have to submit quarterly financial statements and audited annual financial statements to the NYSDFS.
Capital Requirements: The proposed regulations do not outline specific capital requirements. Rather, the text suggests that licensee shall maintain levels of capital as the NYSDFS determines is sufficient to ensure financial stability, taking into account basic financial barometers. The proposed regulations also would require licensees to only invest earnings in high-quality investments with maturities of up to one year, such as certificates of deposit regulated under U.S. law, money market funds, state or municipal bonds, or U.S. Gov’t securities.
Anti-Money Laundering: Each licensee would be expected to enforce an anti-money laundering program with adequate internal controls and training, as well as a written policy reviewed and approved by the licensee’s board. Under the regulations, virtual currency records would have to include records containing the identity and physical addresses of the parties involved, the amount of the transaction, the method of payment, the date(s) on which the transaction was initiated and completed, a description of the transaction, and special reports of any aggregate daily transactions that exceed $10,000 or otherwise involve suspicious activity. Covered businesses would also have to conduct adequate due diligence on new customers, with enhanced scrutiny for foreign entities. Such regulations are presumably similar to the March 2013 Financial Crimes Enforcement Network (“FinCEN”) Guidance (FIN-2013-G001), which clarified that federal anti-money laundering regulations covering “money services businesses” also applied to virtual currency exchanges.
Examinations: Each licensee would have to permit the NYSDFS to examine the licensee’s accounting and operations at least once every two years to determine financial stability, business soundness and compliance.
Cybersecurity: Under the bitlicense regulations, each licensee would have to establish an effective cybersecurity program for their electronic systems and maintain a written cybersecurity policy that covers data and network security, data governance, access controls, business continuity and disaster recovery, customer privacy, vendor management, and incident response, among others. Licensees would also have to appoint a Chief Information Security Officer responsible for implementing the cybersecurity program and also submit an annual report assessing the cybersecurity program.
Protection of Customer Assets: The regulations would require each licensee to maintain a bond or trust account for the benefit of its customers in an amount acceptable to the NYSDFS, and hold virtual currency of the same type and amount the licensee is storing for a customer. The licensee would be prohibited from selling or encumbering virtual currency assets stored on behalf of a customer.
Consumer Protection: The proposed regulations require certain disclosures before a consumer may enter into a transaction, including disclosure of the material risks associated with digital currency (e.g., digital currency is not legal tender, transactions are generally irreversible, values may fluctuate, and cyberattacks are a real concern), the general terms and conditions of conducting business with the licensee, and a detailed receipt following the completion of any transaction.

Looking Ahead

All entities involved in or planning on being involved in virtual currency-related businesses should study this proposed rule carefully. There is still an opportunity to voice concerns and have the final rule reflect any issues that the NYSDFS views as important (for example, some commentators have suggested that the regulations should contain exemptions for smaller digital currency start-ups that handle small transactions, while the Bitcoin Foundation suggests that the comment period should be open for a longer period of time to allow the industry to digest the proposal). It is likely that whatever is enacted in New York will be used as a model in other states that wish to enact a similar virtual currency licensing structure. Moreover, the regulations, as they stand today, require that any entity engaged in a “virtual currency business activity” would have to apply for a license within 45 days of the effective date of the regulations or risk being deemed to be conducting an unlicensed virtual currency business, further suggesting the importance in getting up to speed with the emerging digital currency regulatory environment in New York. It remains to be seen how onerous the final regulations and compliance obligations will be to both established digital currency service providers and start-ups alike.

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Supreme Court: Checking in on Bank Fraud

In Loughrin v. United States, U.S. Supreme Court, No. 13-316, the Supremes approved the application of the federal bank fraud statute to a relatively unsophisticated check cashing scheme, leading to the collective hand-wringing by a host of internet commentators who decried the federalization of state crimes and runaway prices at Whole Foods. The defendant in the underlying case was a pillar of the community named Kevin Loughrin, who stole and altered checks so that he could buy merchandise at his local Target stores, leading to six federal bank fraud charges. According the case record, Loughrin intended to buy merchandise with the checks and return them for cash refunds. Let’s face it, this was not the world’s most enterprising criminal.

What was enterprising, however, was Loughrin’s argument that he intended to target Target and not a federally-insured financial institution. According to Loughrin, a conviction for bank fraud required that prosecutors prove intent to defraud the banks on which the checks were drawn. Otherwise, suggested Loughrin, the federal bank fraud statute would extend to ordinary, unsophisticated frauds that simply involve payment by check – an area that was typically left to prosecution by the states.

Setting aside the debate between the breadth and scope of federal criminal laws (sorry, breathless internet commentators!), I’d instead like to talk about how bank fraud may not be bank fraud even though it’s bank fraud. Make sense? No? Hmm. Let me try again.

The Supremes cleared up that bank fraud applies to things like Loughren’s moronic basic check cashing scheme because of the use of checks, right? And this helps with the definition of what bank fraud actually is and what conduct bank fraud actually covers. But while the crime of bank fraud has become a little more clear, there is still absolutely no straightforward way of figuring out whether your local U.S. Attorney’s Office will actually prosecute the case or not.

“What?” you say indignantly. “But crime has been committed! Criminals must be punished! Heads must roll!” Oh, I agree. And you would be hard pressed to find people who do not agree (criminals have terrible lobbyists). But charging decisions are left entirely to the discretion of local U.S. Attorney’s offices, which must balance Department of Justice priorities with local priorities, office staff, and agency resources. So while a bank fraud of $30,000 in Billings, Montana may capture federal attention, the same fraud in Los Angeles, California, is likely going to be declined by federal prosecutors. The problem becomes more acute when the arbitrary lines bisect the same bustling metropolis, like what happens between the Northern and Eastern District of Texas or between the Southern and Eastern Districts of New York. It is entirely possible, for example, that federal prosecution in the Dallas area depends on where a criminal decides to exit Highway 75.

Does that sound arbitrary? If so, it’s because it is. But it’s the system that we have. And because of that system, bank fraud may not be bank fraud . . . even though it’s bank fraud.

Article By:

Shamoil T. Shipchandler

Of:

Bracewell & Giuliani LLP

Bank Regulators Require Changes to Tax Allocation Agreements

Acting in response to divergent results in recent court decisions, the Federal bankregulatory agencies have adopted an Addendum to their longstanding rules regardingincome tax allocation agreements between insured depository institutions (“IDI”) and their parent holding companies^.[i]The Addendum requires holding companies and their IDI subsidiaries to review their existing income tax allocation agreements and to add a specified provision. The review and modifications must be effected as soon as reasonably possible, which the regulators expect to be prior to October 31, 2014.

Background

Most banks and thrift institutions holding deposits insured by the Federal Deposit Insurance Corporation (“FDIC”) are subsidiaries in a holding company structure. The Federal and State income tax returns of these IDI, as members of a consolidated group, are usually filed by the holding company parent. Refunds and other tax benefits of the consolidated group attributable to the IDI subsidiaries received by a parent holding company must be allocated to the IDI subsidiaries.

Since 1998, the Board of Governors of the Federal Reserve System (“Board”), the Office of the Comptroller of the Currency, and the FDIC (collectively, the “Agencies”) have applied uniform rules regarding such allocations. They are set forth in their Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure (the “Policy”)^.[ii]

The Policy generally mandates that inter-corporate settlements between an IDI and its parent holding company be conducted in a manner that is no less favorable to the IDI than if it were a separate taxpayer. It also establishes a supervisory expectation that a comprehensive written tax allocation agreement will be entered into between a parent holding company and its IDI subsidiaries.

Among other things, the Policy specifies that a parent holding company that receives a tax refund from a taxing authority holds such funds as agent for the members of the consolidated group. It also requires that neither the tax allocation agreement nor the corporate policies of the parent holding company should purport to characterize refunds attributable to an IDI subsidiary received from a taxing authority as being property of the parent.

Addendum to the Policy

In several holding company bankruptcies since 2008, the FDIC has been unsuccessful in recovering for IDI subsidiaries tax refunds received and held by the parent holding company. In those cases, the courts have interpreted the applicable tax allocation agreement as creating a debtor-creditor relationship between the parent holding company and its IDI subsidiaries. Those courts have reached that result notwithstanding the Policy and its mandate that a parent holding company act as an agent for its IDI subsidiaries.^[iii]Although other decisions have interpreted tax allocation agreements consistently with the Policy, the Agencies determined to modify the Policy and require additional action by holding companies and IDI with a view to avoiding such situations in future.

Under the Addendum to the Policy, each tax allocation agreement must be reviewed and revised to ensure that it explicitly acknowledges an agency relationship between the holding company and its subsidiary IDI with respect to tax refunds and does not contain any other language to suggest a contrary intent. A sample paragraph which the Agencies regard as sufficient is included in the Addendum.

The Addendum to the Policy also makes clear that tax allocation agreements are subject to the requirements of Sections 23A and 23B of the Federal Reserve Act. Among other things, this means that the parent holding company must promptly transmit tax refunds received from a taxing authority to its subsidiary IDI. An agreement that permits a parent holding company to hold and not promptly transmit tax refunds owed to an IDI may be regarded by the Agencies as inconsistent with Section 23B, and may subject the holding company and IDI to supervisory action. Similarly, an agreement that fails to clearly establish the agency relationship between the parent holding company and its IDI subsidiaries may be treated as subject to the loan collateralization and other requirements of Section 23A.

Conclusion

The Addendum the Agencies have made to the Policy does not represent a change in supervisory approach to these issues. It is a clarification in light of adverse bankruptcy experience and constitutes a reaffirmation of the Policy. Parent holding companies and IDI subsidiaries should arrange for a review of their existing tax allocation agreements and the inclusion in those agreements of the provision specified in the Addendum to the Policy. Action is required as soon as reasonably possible, but in any event before October 31, 2014.

Article By:

John K. Lawrence

Of:

Dickinson Wright PLLC

_{[i] Board Press Release (June 13, 2014). The Addendum will be published in the Federal Register.}

_{[ii] 63 Fed. Reg. 64757 (Nov. 23, 1998).}

_{[iii] See, e.g., FDIC v. Siegel (In re IndyMac Bancorp, Inc.), 2014 WL 1568759 (9^th Cir., 2014).}

Office of Foreign Assets Control Publishes New Syria and Ukraine Sanctions Regulations; Designates Russian Bank For its Involvement in Syrian Unrest

The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) recently published a final rule amending and reissuing in their entirety the Syrian Sanctions Regulations (“SSR”), 31 C.F.R. Part 542. The reissued SSR contain six new general licenses, including one that authorizes the provision by a U.S. person or from the United States of services ordinarily incident to the supply to Syria of non-U.S. food, medicine, and medical devices that are non-sensitive in nature.

In addition, OFAC last week issued new Ukraine-Related Sanctions Regulations to implement executive orders that the Administration issued in March 2014, and designated a Russian bank (Tempbank) and the Chairman of its Management Committee (Mikhail Georgievich Gagloev) for providing material support and services to the Government of Syria.

Background on Syrian Regulations

Syria has been the target of U.S. economic sanctions since it was designated as a state sponsor of terrorism in 1979. The SSR, which first went into effect in April 2005, constitute one of the primary regulatory regimes that implements these sanctions. (The Commerce Department’s Export Administration Regulations (“EAR”) also broadly prohibit, absent licensing, exports and reexports to Syria of most items, other than food and non-sensitive medicines, that are of U.S.-origin or that incorporate more than de minimis U.S.-origin content.) Since the original issuance of the SSR in 2005, the Bush and Obama Administrations have issued executive orders broadening the U.S. sanctions against Syria by imposing new blocking measures and other trade restrictions. OFAC also has issued a number of general licenses authorizing certain otherwise prohibited transactions. These developments had created a complex patchwork of authorities imposing sanctions on Syria. OFAC’s overhaul of the SSR combines many of these authorities into a single, unified, and up-to-date set of regulations.

Incorporated Executive Orders

The reissued SSR, which went into effect on May 2, 2014, incorporate asset-blocking measures and other trade restrictions imposed under six executive orders issued between 2006 and 2012. As a result, Section 542.201 of the SSR now requires the blocking of all property and interests in property of the Government of Syria (including its agencies, instrumentalities, and controlled entities) that are or hereafter come into the United States or the possession or control of a U.S. person, as well as such assets of Specially Designated Nationals (“SDNs”) sanctioned because they were determined to have undertaken activities specified in the executive orders. U.S. persons may not transfer, pay, export, withdraw, or otherwise deal in such blocked property. Consistent with OFAC guidance with respect to numerous sanctions programs, SSR § 542.411 clarifies that if a person whose assets are blocked under Section 542.201 owns, directly or indirectly, a 50 percent or greater interest in an entity, that entity’s assets are also blocked even if that entity is not added to the SDN List.

The SSR also now contain certain other trade restrictions originally imposed by

Executive Order 13582 (effective August 18, 2011), which we discussed in our e-alert of August 19, 2011. These restrictions prohibit:

U.S. persons, wherever located, from making new investments in Syria (§ 542.206) ;
The export, reexport, sale, or supply, directly or indirectly, by a U.S. person or from the United States of any services to Syria (§ 542.207);
The importation into the United States of Syrian-origin petroleum or petroleum products (§ 542.208);
U.S. persons from engaging in any transaction or dealing related to Syrian-origin petroleum or petroleum products (§ 542.209); and
U.S. persons from approving, financing, facilitating, or guaranteeing a transaction by a foreign person that would be prohibited if performed by a U.S. person or within the United States (§ 542.210).

General LIcenses and Statements of Licensing Policy

In addition to incorporating prior executive orders, the reissued SSR incorporate (at Sections 542.509 through 542.520 and 542.523) a number of general licenses that were previously posted on OFAC’s website, and add six new general licenses and three new statements of licensing policy. The new general licenses authorize the following transactions:

With certain limitations, the receipt of payment of professional fees and reimbursement of incurred expenses for the provision of authorized legal services to or on behalf of the Government of Syria and other blocked parties (§ 542.508);
All transactions in the United States between U.S. persons and persons who have been granted certain categories of U.S. visas; services in connection with the filing of applications for such visas; and services provided by accredited U.S. graduate and undergraduate degree-granting institutions for the filing and processing of applications to enroll in the institutions, and the acceptance of payments for submitted applications to enroll and tuition from persons ordinarily resident in Syria (§ 542.521);
Otherwise prohibited transactions between blocked SDNs and employees, grantees, or contractors of the U.S. federal government that are for official government business (§ 542.522);
The following services provided in the United States to non-Syrian carriers transporting passengers or goods to or from Syria (but not the Government of Syria or blocked parties): bunkers and bunkering services, services supplied or performed in the course of emergency repairs, and services supplied or performed under circumstances which could not be anticipated prior to the carrier’s departure for the United States (§ 542.524);
The provision by a U.S. person or from the United States of services ordinarily incident to the supply to Syria of non-U.S.-origin food, medicine, and medical devices that would be classified EAR99 if subject to the EAR (§ 542.525); and
Certain services related to conferences, performances, exhibitions, or similar events in the United States or a third country attended by persons who are ordinarily resident in Syria, other than the Government of Syria or blocked parties (§ 542.526).

The new general license found at Section 542.525 is a particularly noteworthy development, as it eliminates an anomaly in the prior sanctions regime’s licensing requirements. Under the general license now found at Section 542.510, U.S. persons are authorized to be involved in and facilitate the supply to Syria of food, medicines and medical devices authorized for supply to Syria by the U.S. Commerce Department. However, because the Commerce Department regulations do not apply to exports to Syria of most non-U.S.-origin items that contain 10 percent or less U.S. content by value, U.S. persons were not permitted by the OFAC general license to facilitate the supply of such non-U.S.-origin items to Syria; rather, a specific OFAC license was required. The new general license authorizes the provision of services by a U.S. person or from the United States related to the export and reexport to Syria of non-U.S.-origin food, medicines, and medical devices that would be classified EAR99 if subject to the EAR.

In addition, three new statements of licensing policy contained in the SSR clarify that specific licenses may be issued by OFAC on a case-by-case basis authorizing: (1) certain transactions involving Syria’s telecommunications sector that are otherwise prohibited by the SSR, in order to enable private persons in Syria to better and more securely access the Internet (§ 542.527); (2) certain transactions involving Syria’s agricultural sector that are otherwise prohibited by the SSR, in order to strengthen that sector in light of Syria’s food “insecur[ity]” (§ 542.528); and (3) certain transactions that are otherwise prohibited by Sections 542.206 through 542.210 of the SSR, including new investment related to Syrian petroleum and petroleum products for the benefit of the National Coalition of Syrian Revolutionary and Opposition Forces (§ 542.529).

New Syria Related Designations

In addition to reissuing the SSR, on May 8, 2014, OFAC announced 10 new Syria-related designations. These designations included six Syrian government officials and two Syrian refineries. OFAC also designated a Russian Bank (Tempbank) and the Chairman of its Management Committee (Mikhail Georgievich Gagloev) pursuant to Executive Order 13582 for providing material support and services to the Government of Syria, including the Central Bank of Syria and SYTROL, Syria’s state oil marketing firm. The Treasury Department statement announcing the designations noted that Tempbank has provided millions of dollars and facilitated the provision of financial services to the Syrian regime, and that Mr. Gagloev personally travelled to Damascus to make deals with the Syrian regime on behalf of Tempbank.

As a result of these designations, U.S. persons are generally prohibited from engaging in any transactions or dealings with these parties, and the property and property interests of these parties that are or come into the United States or the possession or control of a U.S. person are blocked. Further, the sanctions apply to any entity in which any designated person owns a 50 percent or greater interest (regardless of whether such entity is itself designated).

Publication of Ukraine Related Sanction-Regulations

Also on May 8, OFAC issued new Ukraine-Related Sanctions Regulations at 31 C.F.R. Part 589 to implement executive orders issued in March 2014 (EOs 13660, 13661, and 13662, which were the subject of our prior e-alerts on March 6, 2014, March 18, 2014, and March 21, 2014).

The newly issued regulations, which were effective immediately, do not substantively change the scope of the Ukraine-related sanctions program, but do provide directions for management of blocked funds and property, definitions, interpretations, and limited general licenses. The general licenses authorize transactions such as certain transfers of property between blocked accounts in a U.S. financial institution, debits from blocked accounts by a U.S. financial institution for normal service charges, the provision of certain legal services, the receipt of certain payments for the provision of authorized legal services, and the provision of emergency medical services in the United States.

OFAC stated that these regulations were being published in abbreviated form, and that it intends to supplement them with a more comprehensive set of regulations, which may include additional definitions, interpretive guidance, general licenses, and statements of licensing policy.

Article by:

Of:

Covington & Burling LLP

Blowing The Whistle On Fraud In The Banking Industry [VIDEO]

The Department of Justice very actively pursues cases involving fraud in the banking industry, and through a law known as the Financial Institutions Anti-Fraud Enforcement Act, is authorized to pay very substantial rewards to whistleblowers that provide the Department of Justice with information about such fraud.

The law covers both fraud on banks, but also fraud by banks. It also covers other types of unlawful conduct effecting banking, such as embezzlement of bank funds, or the payment of kickbacks to bank loan officers.

Under this banking whistleblower program, the Department of Justice can pay whistleblower awards of up to 30% of the amounts recovered by the government in banking fraud cases.

The law has a number of very unique procedures that govern how information has to be presented to the Department of Justice, which must be followed by a whistleblower who wishes to preserve his or her right to receive a reward. The whistleblower must also file a sworn statement with the Department of Justice, here in Washington, D.C. at its main headquarters, pursuant to those procedures. It is also recommended that a qui tam whistleblower under this banking fraud program submit a legal memorandum to the Department of Justice, explaining the legal theories behind the case.

If you have information concerning a potential case involving banking fraud, do not hesitate to take action. It is possible that you might be able to bring your own lawsuit under the Financial Institutions Anti-Fraud Enforcement Act, acting as a whistleblower on behalf of the US government. Before filing your lawsuit, be sure to consult with an attorney familiar with the intricacies of this law, as these attorneys are best equipped to help protect your rights and help you gain your share of any monetary reward from a potential settlement.

Article By:

Whistleblower Practice Group

Of:

Tycko & Zavareei LLP

UK Financial Conduct Authority (FCA) Issues First Fine Under New Anti-Money Laundering Regime

Financial Conduct Authority fines Standard Bank £7.6 million for failures in its anti-money laundering controls, underlining the importance of both having and implementing adequate policies in relation to money laundering.

On 22 January, the UK Financial Conduct Authority (FCA) published a decision notice^[1] imposing a £7.6 million fine on Standard Bank PLC, the UK subsidiary of South Africa’s Standard Bank Group.^[2] The fine was issued for failures relating to Standard Bank’s anti-money laundering (AML) policies and procedures for corporate customers connected to politically exposed persons (PEPs).^[3] This is the first AML fine issued under the FCA’s new penalty regime and the first such fine by the FCA—or its predecessor, the Financial Services Authority—in relation to commercial banking activity.

Under Regulation 20(1) of the Money Laundering Regulations 2007, regulated institutions, such as banks, must establish and maintain “appropriate risk-sensitive policies and procedures” on customer due diligence measures and ongoing monitoring of business relationships, amongst others. The policies must be aimed at preventing money laundering and terrorist financing. Guidance issued by the Joint Money Laundering Steering Group states that enhanced due diligence (EDD) should be applied where a corporate customer is linked to a PEP, such as through a directorship or shareholding, as it is likely that this will put the customer at higher risk of being involved in bribery and corruption.

As part of its investigation into Standard Bank, the FCA reviewed a sample of 48 corporate customer files, which all had a connection with a PEP, and discovered “serious weaknesses” in the application of the bank’s AML policies and procedures. The FCA found that, from 15 December 2007 to 20 July 2011, Standard Bank breached the Money Laundering Regulations 2007 by failing to take reasonable care to ensure that all aspects of its AML policies were applied appropriately and consistently to its corporate customers connected to PEPs. In particular, the FCA found that Standard Bank did not consistently carry out adequate EDD measures before establishing business relationships with corporate customers linked to PEPs and did not conduct the appropriate level of ongoing monitoring for existing business relationships by updating its due diligence. The FCA noted the failings were particularly serious because the bank dealt with corporate customers from jurisdictions regarded as posing a higher risk of money laundering and because the FCA had previously stressed the importance of AML compliance to the industry.^[4] The gravity of the failings was underlined by the FCA’s director of enforcement and financial crime, who stated that “[if banks] accept business from high risk customers they must have effective systems, controls and practices in place to manage that risk. Standard Bank clearly failed in this respect”.

This is the first AML case to use the FCA’s new penalty regime, which applies to breaches committed from 6 March 2010 and under which larger fines are expected. The FCA’s decision notice sets out how it determined the level of the fine, by reference to a five-step framework (as outlined in the Decision Procedure and Penalties Manual).^[5] The FCA considered the fact that the bank and its senior management cooperated in the investigation and took significant steps to remediate the problems, including seeking advice from external consultants, to be a mitigating factor. In addition, Standard Bank’s decision to settle the matter at an early stage of the investigation resulted in a 30% discount on the fine. The original penalty was £10.9 million.

The FCA’s action against Standard Bank illustrates the increasingly tough approach taken by the UK authorities against financial crime and shows that the FCA is willing and able to enforce AML legislation. Banks and regulated firms are encouraged to ensure that they have effective policies and procedures against money laundering in place and that these are being adhered to.

_{[1]. View the FCA’s notice here.}

_{[2]. The sale of Standard Bank to the Industrial and Commercial Bank of China has been agreed to and is likely to be completed during the fourth quarter of 2014.}

_{[3]. A “PEP” is defined in the Money Laundering Regulations 2007 as “an individual who is, or has, at any time in the preceding year, been entrusted with a prominent public function”, or immediate family members and known close associates of such individuals.}

_{[4]. The FSA published a Consultation Paper on 22 June 2011, availablehere, focusing on how banks manage money laundering risk in higher risk situations. It also published a Policy Statement on 9 December 2011, available here, providing guidance on the steps firms can take to reduce their financial crime risk.}

_{[5]. View the manual here.}

Article by:

Kevin Robinson

Nicholas “Nick” Greenwood

Richard Ellison

Of:

Morgan, Lewis & Bockius LLP

JPMorgan Chase Pays $614 Million for Submitting False Claims in Mortgage Loans Case

The Department of Justice (DOJ) announced last week that JPMorgan Chase, the largest bank and financial institution in the country, will pay a $614 million settlement to the US government to resolve allegations that it approved thousands of unqualified home mortgage loans for government insurance and refinancing. According to the DOJ, JPMorgan knowingly created and guaranteed non-compliant mortgage loans submitted for insurance coverage by the Department of Housing and Urban Development’sFederal Housing Administration (FHA), and the Department of Veterans Affairs (VA), which cost the government millions of dollars when the loans defaulted.

According to the lawsuit, beginning in 2002, JPMorgan falsely claimed that loans it had created and guaranteed were qualified for FHA and VA insurance and coverage. As a consequence of JPMorgan’s falsifications, both the FHA and the VA incurred huge monetary losses when the unqualified loans failed, due to the fact that the FHA and VA had to cover the associated losses of the loans.

The FHA’s program allows lower income borrowers to purchase homes by insuring qualified loans made by participating lenders, such as JPMorgan, against losses if the loans later default. However, a participating lender may only submit creditworthy loans to the FHA if they meet certain requirements and they must maintain a quality control program that can prevent and correct any deficiencies in the lender’s financing practices. The VA’s program is similar in this regard—it provides similar assistance to veterans, service members and spouses.

JPMorgan allegedly approved thousands of loans for government insurance or refinancing that did not meet the requirements of the FHA and VA, and also failed to report hundreds of loans it identified as having been affected by fraud or other defects. The government also alleged that the bank regularly submitted loan data that lacked reliability, due to the fact that they were not based on actual documents or other information the bank should have possessed when its employees submitted the data to the government.

As part of the settlement, JPMorgan admitted that it approved thousands of FHA loans and hundreds of VA loans that were not supposed to be eligible for FHA or VA insurance because they did not meet the applicable agency financing requirements, and that it had been doing so for over a decade. The bank further admitted that it failed to inform the FHA and the VA when its own internal reviews discovered more than 500 unreliable loans that never should have been submitted for FHA and VA insurance.

This settlement resolves allegations in a complaint filed by a private whistleblower.

Article by:

Whistleblower Practice Group

Of:

Tycko & Zavareei LLP

Tag: bank

Bank Deregulation Bill Becomes Law: Economic Growth, Regulatory Relief, and Consumer Protection Act

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