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Top Story Compliance Related

10/01/2020

FinCEN seeks comments on CDD and EDD requirements

FinCEN published [85 FR 61104] in the September 29 Federal Register a 60-day notice to renew the Office of Management and Budget (OMB) control number assigned to the regulatory requirements to conduct due diligence and enhanced due diligence over foreign correspondent accounts and private banking accounts.

In the notice, FinCEN proposes for review and comment a methodology to expand the scope of future estimates of cost and time for purposes of the Paperwork Reduction Act to be more granular in the estimates of resources expended to comply with these regulatory requirements. The notice requests feedback from the industry on or before November 30, 2020.

10/01/2020

Morgan Stanley pays $5M for SHO violations

The SEC announced yesterday it had settled charges against Morgan Stanley & Co. LLC for violations of Regulation SHO, the regulatory framework governing short sales. According to the SEC’s order, the structure of Morgan Stanley’s prime brokerage swaps business resulted in violations of teh regulation. As set forth in the SEC Administrative Order, Morgan Stanley hedged synthetic exposure to swaps by purchasing or selling the securities referenced in the swaps, and it separated its hedges into two aggregation units – one holding only long positions, and the other holding only short positions. According to the order, Morgan Stanley was able to sell its hedges on the long swaps and mark them as “long” sales without concern for Reg SHO’s short sale requirements.

10/01/2020

OCC updates TILA exam procedures booklet

The OCC has issued Bulletin 2020-84 announcing its issuance of a revised "Truth in Lending Act" booklet of the Comptroller's Handbook to reflect revised interagency examination procedures adopted by the Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC). The Bulletin rescinds OCC Bulletin 2018-31, “Truth in Lending Act: Revised Comptroller's Handbook Booklet and Rescissions.”

10/01/2020

New and amended OFAC sanctions regulations

OFAC has posted a notice of recent actions announcing it is adding new Part 520 to 31 CFR Chapter V regulations [85 FR 61816] to implement Executive Order 13928 of June 11, 2020 (“Blocking Property of Certain Persons Associated With the International Criminal Court”).

In addition, OFAC is amending the Weapons of Mass Destruction Proliferators Sanctions Regulations and Iranian Transactions and Sanctions Regulations at 31 CFR Parts 544 and 560 [85 FR 61823].

The new regulation and the amendments to Parts 544 and 560 are effective upon publication today in the Federal Register,

10/01/2020

Fed proposes update to capital planning requirements

The Federal Reserve Board has invited public comment on a proposal that would update the Board's capital planning and stress testing requirements in Regulations Y, LL, and YY to be consistent with other Board rules that were recently modified.

The Board has finalized a framework that sorts large banks into different categories based on their risks, with rules that are tailored to the risks of each category. The current proposal updates the Board's capital planning requirements—which help ensure that firms plan for and determine their capital needs under a range of different scenarios—to reflect that new framework. In particular, firms in the lowest risk category are on a two-year stress test cycle and not subject to company-run stress test requirements and the proposal reflects those changes. The proposal also would seek comment on the Board's existing capital planning guidance applicable to all firms.

The proposed rule, which would not change firms' capital requirements, has a comment period that will end November 20, 2020.

PUBLICATION UPDATE: Published at 85 FR 63222 in the October 7, 2020, Federal Register

10/01/2020

Treasury continues targeting facilitators of Assad regime

On Wednesday, Treasury announced that it took action against key enablers of the Assad regime that are associated with the Fourth Division of the Syrian Arab Army, the Syrian General Intelligence Directorate, and the Central Bank of Syria. Specifically, Treasury's Office of Foreign Assets Control (OFAC) added three individuals and 13 entities to the Specially Designated Nationals and Blocked Persons List, pursuant to Syria sanctions authorities.

At the same time, the State Department acted against three Syrian persons pursuant to Section 2 of Executive Order (E.O.) 13894, “Blocking Property and Suspending Entry of Certain Persons Contributing to the Situation in Syria.”

For identity information on the six individuals and 13 entities added to the SDN List, and another individual added under the Cuba sanctions, plus information on a new Syria General License, see BankersOnline's OFAC Update.

09/30/2020

Credit ratings agency pays $2M+ for lack of controls

The Securities and Exchange Commission announced yesterday that the credit ratings agency Kroll Bond Rating Agency Inc. (KBRA) has agreed to pay more than $2 million to settle separate charges relating to the rating of commercial mortgage-backed securities (CMBS) and of collateralized loan obligation combination notes (CLO Combo Notes). According to the order pertaining to CMBS ratings, KBRA permitted analysts to make adjustments that had material effects on the final ratings but did not require any analytical method for determining when and how those adjustments should be made. Further, the order finds that there was no requirement for recording the rationale for those adjustments. The order finds that KBRA’s internal control structure failed to prevent or detect the ambiguity in KBRA’s record of its methodology for determining the CMBS ratings, such as a comparison of the methodology to the analysis used for specific transactions.

The order relating to CLO Combo Notes finds that KBRA’s policies and procedures were not reasonably designed to ensure that it rated CLO Combo Notes in accordance with the terms of those securities. The CLO Combo Notes included a defined “Rated Balance” amount and also directed that noteholders were entitled to receive cash flows from the underlying components of the CLO Combo Note after the Rated Balance was reduced to zero. KBRA’s ratings of CLO Combo Notes were limited to repayment of the Rated Balance amount of each CLO Combo Note and did not reflect the risk associated with any cash flows payable to holders of the CLO Combo Note over and above the Rated Balance, even though such amounts could materialize, and would be payable to the holders of the CLO Combo Note.

09/30/2020

J. P. Morgan Securities sub admits fraudulent trading

The Securities and Exchange Commission has announced charges against J.P. Morgan Securities LLC, a broker-dealer subsidiary of JPMorgan Chase & Co., for fraudulently engaging in manipulative trading of U.S. Treasury securities. J.P. Morgan Securities admitted the findings in the SEC's order, and agreed to pay disgorgement of $10 million and a civil penalty of $25 million to settle the action.

The Justice Department and the Commodity Futures Trading Commission announced parallel actions against JPMorgan Chase & Co. and certain of its affiliates for engaging in manipulative trading in the precious metals and U.S. Treasuries futures and cash markets. A total of more than $920 million, including amounts for criminal restitution, forfeiture, disgorgement, penalties, and fines, is to be paid across the three actions. The DOJ entered into a three-year deferred prosecution agreement with JPMorgan Chase & Co., whereas the CFTC announced settlements with J.P. Morgan Chase & Co., JPMorgan Chase Bank, N.A., and JPMorgan Securities.

09/30/2020

Operation Corrupt Collector announced

The Federal Trade Commission, along with more than 50 federal and state law enforcement partners, has announced a nationwide law enforcement and outreach initiative to protect consumers from phantom debt collection and abusive and threatening debt collection practices. This crackdown encompasses more than 50 enforcement actions against debt collectors engaged in these illegal practices brought by the FTC, three federal partners, and partners from 16 states. The initiative, called Operation Corrupt Collector, includes five FTC law enforcement actions, including two newly announced cases and settlements in three prior actions. The two new FTC cases allege that companies were trying to collect debts they cannot legally collect or that a consumer does not owe—a practice known as phantom debt collection.

09/30/2020

Blanco encourages specificity in COVID-19-related SARs

In remarks delivered yesterday during a virtual AML conference, FinCEN Director Kenneth Blanco encouraged attendees to read FinCEN's advisories related to COVID-10 medical fraud, imposter scams, and cyber-related crime. He said that the most common trend FinCEN is seeing in COVID-19 related SARs involves fraudsters targeting multiple COVID-19 related government stimulus programs, employing money mules and cyber techniques. The largest share of COVID-19 SARs addresses fraud against federal or state COVID-19 stimulus programs. Stimulus programs intended to benefit both individual taxpayers and small businesses have been targeted for fraud, with multiple Automated Clearinghouse (ACH) payments disbursed to a single account representing the most common financial pattern reported in SARs.

Blanco recommended that SARs be specific in describing the activity being reported, to make them as useful as possible for law enforcement. Detailed information can help get SARs routed to the correct investigative team. For example, reports of medical scams like fake test kits, non-delivery of goods, and price gouging go to a specialized team of attorneys and investigators across the government. Specificity in the SAR about the fraudulent or suspicious medical aspects, both in the narrative and by checking box 34z, will get a SAR to this team more quickly.

For consumer related fraud, especially targeting the elderly or other vulnerable individuals with a COVID-19 related scam, such as a fake COVID relief charity or bogus person-in-need scam, specificity in SARs is also encouraged. Using the SAR check box 38d for elder financial exploitation will expedite getting the SAR to the right team.

Regarding SARs reporting suspected fraud in government programs, Blanco said vague references to “stimulus” or “CARES Act” or “benefit” in SARs hinder FinCEN's ability to get the information into the hands of the right team. The more specific filers are in their SAR narratives, the faster their reports will get to the right investigators. For example:

  • If the suspicious activity is related to an ACH payment from a state unemployment insurance program, filers should clearly mention COVID19 UNEMPLOYMENT INSURANCE FRAUD in field 2 of the SAR (Filing Institution Note to FinCEN) as well as in the narrative. This will make it much easier for the SAR to get to law enforcement teams working with the states on unemployment fraud.
  • If the activity involves a counterfeit check or ACH payment for the EIDL program, filers should clearly mention COVID19 EIDL FUNDS FRAUD in field 2 of the SAR and state this in the narrative, because there are specific prosecutorial teams working on EIDL fraud.

Blanco said that, from February 1 to September 12, banks and credit unions filed over 64,000, or about 71 percent, of all COVID-19-related SARs.

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