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Top Story Compliance Related

11/28/2023

Financial Intelligence Units announce international task force

FinCEN has announced it has joined twelve financial intelligence units (FIUs) in issuing a Public Statement on November 27, 2023, recognizing the formation of a task force of like-minded FIUs who aim to strengthen efforts to disrupt international financial flows to Hamas and other terrorist organizations. The task force was established immediately following the terror attacks by Hamas against Israel on October 7, 2023.

With regard to financial institutions and technology companies, the Public Statement states that the Task Force Members “recognize the importance of the private sector in achieving these goals, particularly in identifying and mitigating terrorists’ use of the global financial system. Close coordination with financial institutions and technology companies, to the furthest extent our respective authorities allow, is critical to identify and stop terrorist funding channels.”

11/27/2023

FDIC lists October enforcement actions

The FDIC has released a list of enforcement actions taken in October 2023. Included were three consent orders to pay civil money penalties, three consent orders to cease and desist, and two removal/prohibition orders :

  • Transportation Alliance Bank (DBA TAB Bank), Ogden, Utah, was ordered to pay a civil money penalty of $315,000 for deceptive practices involving a "rebate processing fee" for early payment of certain loans.
  • Paramount Bank, Hazelwood, Missouri, was assessed an $85,000 penalty for reporting inaccurate HMDA data for 2020 and 2021.
  • Range Bank, Marquette, Michigan, was assessed a $4,000 civil money penalty for failing to require escrow of flood insurance premium payments on four loans on which the bank collected escrow payments for taxes and homeowner's insurance premiums.
  • Herring Bank, Amarillo, Texas, was issued a cease and desist order (jointly issued with the Texas Department of Banking) due in part to weaknesses in access controls for IT and in its corporate bond accounting software.
  • Royal Business Bank, Los Angeles, California, was issued a cease and desist order (issued jointly with the California Department of Financial Protection and Innovation) related to the bank's Bank Secrecy Act/Anti Money Laundering Compliance Program.
  • TrustTexas Bank, SSB, Cuero, Texas, received a cease and desist order, issued jointly with the Texas Department of Savings and Mortgage Lending, for allegedly unsafe or unsound banking practices relating to interest rate risk exposure, deterioration in capital protection and earnings, and deficiencies in management and oversight by the Board.
  • Brian Ferris, a former loan officer of Berkshire Bank, Pittsfield, Massachusetts, received a corrected order of prohibition relating to his alleged participation in a conspiracy to defraud the bank by submitting fraudulent loan applications to the bank that were referred to him by two co-conspirators who operated a loan brokerage business.
  • Patricia Westmoreland, a former bank manager for Branch Banking and Trust Company, now known as Truist Bank, Charlotte, North Carolina, received an order of prohibition for allegedly embezzling approximately $201,000 and falsifying bank records.

11/27/2023

FinCEN Alert on COVID-19 employee retention credit fraud

FinCEN has reported its issuance, in coordination with IRS Criminal Investigation (IRS-CI), of alert FIN-2-23-Alert007 to financial institutions on fraud schemes related to the COVID-19 Employee Retention Credit (ERC). The alert provides an overview of typologies associated with ERC fraud and scams, highlights select red flags to assist financial institutions in identifying and reporting suspicious activity and reminds financial institutions of their reporting requirements under the Bank Secrecy Act (BSA).

“It is unfortunate that while the COVID-19 pandemic is behind us, fraud related to COVID-19 relief programs, like the ERC, continues to occur at a concerning scale,” said FinCEN Director Andrea Gacki. “We are issuing this alert in partnership with CI to remind financial institutions that it is critical that they remain vigilant in identifying and reporting related suspicious activity and to protect businesses from being taken advantage of by fraudsters.”

The ERC was authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act as a tax credit to encourage businesses to keep employees on payroll during the COVID-19 pandemic. CI has identified ongoing fraud and scams related to the ERC that, to date, have resulted in 323 investigations involving more than $2.8 billion of potentially fraudulent ERC claims throughout tax years 2020, 2021, 2022, and 2023. In response to the scope of the ERC fraud, in September 2023, the IRS announced an immediate moratorium through at least December 31, 2023, on processing new ERC claims in an effort to protect honest small business owners from scams.

11/27/2023

Agencies extend comment period on large bank long-term debt proposal

The Federal Reserve Board, FDIC, and OCC have jointly announced that they will extend until January 16, 2024, the comment period on their long-term debt proposed rule to improve the resolvability of large banks and enhance financial stability. The agencies extended the comment period to allow interested parties more time to analyze the issues and prepare their comments.

Comments on the proposal were originally due by November 30.

11/22/2023

CFPB approves pilot disclosure for construction loans

The CFPB has posted a blog article announcing the agency has approved an application from the Independent Community Bankers of America (ICBA) that marks the first step for piloting disclosures for construction loans. Under this program, the CFPB authorizes parameters for in-market testing of alternatives to required disclosures.

The ICBA applied under the program for a template covering the CFPB’s Know Before You Owe Disclosures. In particular, the ICBA asked to test certain adjustments to the existing mortgage disclosures in the unique context of construction loans, for which the CFPB’s disclosures were not primarily designed. The application noted that, in particular, many first-time homebuyers in rural areas build their homes instead of buying existing homes, and consequently, the challenges of using the current disclosures in the construction loan context may impact rural areas more acutely. The CFPB solicited comments on the ICBA’s application in February and made a decision to approve the template after reviewing the public feedback.

The CFPB waiver template issued to the ICBA indicates that the ICBA application aims to increase the availability of affordable single-close construction-to-permanent loans, i.e., a loan transaction that combines a construction phase loan with a permanent mortgage loan once the home is built, and employs a single closing and single set of closing costs. ICBA believes that consumer understanding of construction loans would be improved by disclosures that ICBA views as more specifically tailored to such loans, and that more community banks would offer such loans if they could use such disclosures. ICBA further believes its proposed alternative LE and the CD will more fully disclose all the various components of a single-close construction-to-permanent loan. In an attachment to the Application, ICBA described in detail its proposed changes to the LE and CD for construction loans.

Individual lenders can apply for approval to test the alternative disclosures for construction loans. In deciding whether to approve individual lender applications, the CFPB will carefully evaluate a lender’s plan to test the effectiveness of these disclosures. The CFPB looks forward to reviewing any lender applications.

11/22/2023

Treasury announces $4.3B in settlements with virtual currency exchange Binance

The Department of the Treasury has announced that it has, through FinCEN, OFAC, and IRS-CI, taken unprecedented action to hold Binance Holdings Ltd. and its affiliates accountable for violations of the U.S. anti-money laundering and sanctions laws that protect American national security and the integrity of the international financial system. Binance is the world’s largest virtual currency exchange, responsible for an estimated 60% of centralized virtual currency spot trading.

Binance settled with FinCEN and OFAC for violations of the Bank Secrecy Act and apparent violations of multiple sanctions programs. The violations include failure to implement programs to prevent and report suspicious transactions with terrorists — including Hamas’ Al-Qassam Brigades, Palestinian Islamic Jihad (PIJ), Al Qaeda, and the Islamic State of Iraq and Syria (ISIS) — ransomware attackers, money launderers, and other criminals, as well as matching trades between U.S. users and those in sanctioned jurisdictions like Iran, North Korea, Syria, and the Crimea region of Ukraine. By failing to comply with AML and sanctions obligations, Binance enabled a range of illicit actors to transact freely on the platform. These settlements are part of a global agreement simultaneous with Binance’s resolution of related matters with the Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC).

FinCEN's settlement agreement assesses a civil money penalty of $3.4 billion, imposes a five-year monitorship, and requires significant compliance undertakings, including to ensure Binance’s complete exit from the United States. This settlement is the largest penalty in U.S. Treasury and FinCEN history.

OFAC’s settlement agreement assesses a penalty of $968,618,825 and requires Binance to abide by a series of robust sanctions compliance obligations, including full cooperation with the monitorship overseen by FinCEN, in settlement of Binance's potential liability for 1,667,153 apparent violations of multiple OFAC-administered sanctions programs. The settlement amount reflects OFAC’s determination that the Apparent Violations were not voluntarily self-disclosed and that Binance’s conduct was egregious. The settlement amount also reflects Binance’s settlements with the Department of Justice (DOJ), the Financial Crimes Enforcement Network (FinCEN), and the Commodity Futures Trading Commission (CFTC).

To ensure that Binance fulfills the terms of its settlement — including that it does not offer services to U.S. persons — and to ensure that illicit activity is addressed, Treasury will retain access to books, records, and systems of Binance for a period of five years through a monitor. Failure to live up to these obligations could expose Binance to substantial additional penalties, including a $150 million suspended penalty, which would be collected by FinCEN if Binance fails to comply with the terms of the required compliance undertakings and monitorship. The Settlement Agreement also explicitly states that in the event OFAC determines that a material breach of, or misrepresentation in, the agreement has occurred, including due to a failure to perform the Compliance Commitments of the Settlement Agreement, OFAC may, following notice to Binance, seek to impose on Binance an additional penalty up to the statutory maximum of over $592 Billion.

As noted, OFAC took this action concurrently with DOJ, FinCEN, and the CFTC. Binance’s obligation to pay $898,618,825 of the settlement amount for its Apparent Violations will be deemed satisfied by payment to DOJ for the ITSR violations arising out of the same pattern of conduct during the same period of time.

The Justice Department announced that, as part of its plea agreement to settle criminal charges, Binance has agreed to forfeit $2,510,650,588 and to pay a criminal fine of $1,805,475,575 for a total financial penalty of $4,316,126,163. Binance separately has also reached agreements with the CFTC, FinCEN, and OFAC, and the Department will credit approximately $1.8 billion toward those resolutions.

11/22/2023

FinCEN Exchange on Russia's attempts to evade export controls

FinCEN yesterday reported on its November 16 virtual FinCEN Exchange — co-hosted by OFAC and the Department of Commerce's Bureau of Industry and Security (BIS) — to discuss attempts by Russia to evade export controls. The Exchange included representatives from small- to mid-size financial institutions, law enforcement, and government agencies.

FinCEN Exchanges enhance law enforcement feedback and help financial institutions more effectively implement their anti-money laundering programs. This FinCEN Exchange exemplified the ongoing U.S. Government effort to further constrain and prevent Russia from accessing the international financial system and conduct economic activity to fund its invasion of Ukraine.

FinCEN listed information it has issued on this topic to provide red flags to assist financial institutions in identifying suspected illicit activity:

FinCEN continues to encourage all financial institutions to register under USA PATRIOT Act Section 314(b) and to form associations to engage in voluntary information sharing [see 31 C.F.R. 1010.540]. Section 314(b) information sharing can reveal networks of illicit activity that no single financial institution can detect alone, compounding the benefits for both the financial institution and law enforcement. In fiscal year 2023, there were more than 7,600 314(b) registered financial institutions, making extensive network analysis possible.

11/21/2023

Kraken charged for operating unregistered

On Monday, the Securities and Exchange Commission reported it has charged Payward Inc. and Payward Ventures Inc., together known as Kraken, with operating Kraken’s crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency.

According to the SEC’s complaint, since at least September 2018, Kraken has made hundreds of millions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Kraken intertwines the traditional services of an exchange, broker, dealer, and clearing agency without having registered any of those functions with the Commission as required by law. Kraken’s alleged failure to register these functions has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.

The SEC’s complaint also alleges that Kraken’s business practices, deficient internal controls, and poor recordkeeping practices present a range of risks for its customers. Kraken allegedly commingles its customers’ money with its own, including paying operational expenses directly from accounts that hold customer cash. Kraken also allegedly commingles its customers’ crypto assets with its own, creating what its own auditor had identified as “a significant risk of loss” to its customers.

In February of this year, Kraken agreed to cease offering or selling securities through crypto asset staking services or staking programs and pay a civil penalty of $30 million. [Editor's note: According to The Motley Fool, “staking” is the way many cryptocurrencies verify their transactions, and it allows participants to earn rewards on their holdings; crypto staking involves committing one's crypto assets to support a blockchain and confirm transactions.]

11/20/2023

CFPB orders Toyota Motor Credit to pay $60M

This morning, the CFPB announced it has ordered Toyota Motor Credit Corporation to pay $60 million in consumer redress and penalties for operating an illegal scheme to prevent borrowers from cancelling product bundles that increased their monthly car loan payments. The company is alleged to have withheld refunds or refunded incorrect amounts on the bundled products and knowingly tarnished consumers’ credit reports with false information. The CFPB ordered Toyota Motor Credit to stop its unlawful practices, pay $48 million to harmed consumers, and pay a $12 million penalty into the CFPB’s victims relief fund.

Toyota Motor Credit Corporation is the United States-based auto-financing arm of the Toyota Motor Corporation, and is headquartered in Plano, Texas. It is one of the largest indirect auto lenders in the United States, with nearly five million customer accounts and more than $135 billion in assets as of October 2022.

Toyota Motor Credit provides financing for consumers buying cars through Toyota dealerships, and also offers optional products and services sold with the vehicles. Dealerships often sell the products and services as a bundled package to consumers and then add them onto car loan contracts. Bundled products include Guaranteed Asset Protection (GAP), which covers the difference (or gap) between the amount a consumer owes on an auto loan and what their insurance pays if the vehicle is stolen, damaged, or totaled. Toyota Motor Credit also offers Credit Life and Accidental Health (CLAH) coverage, which covers the remaining balance if a borrower dies or becomes disabled, and vehicle service agreements, which reimburse borrowers for parts and service beyond what is covered by the manufacturer warranty. The cost of the bundled products, financed by Toyota Motor Credit, averaged between $700 and $2,500 per loan. Including these products in a vehicle sale or lease can significantly increase the loan amount, monthly payment, and finance charge. Toyota Motor Credit profits from the sale of these products by collecting more finance charges on the increased loan amount.

The Bureau alleges that thousands of consumers complained to Toyota Motor Credit that dealers had lied about whether these products were mandatory, included them on contracts without the borrowers’ knowledge, or rushed through paperwork to hide buried terms. Nevertheless, Toyota Motor Credit devised a scheme to retain the revenue from these products by making it extremely cumbersome to cancel, and then failed to provide proper refunds for consumers who succeeded in cancelling. The company also falsely told consumer reporting companies that borrowers had missed payments, and it failed to correct consumer reporting errors it knew were wrong.

Toyota Motor Credit’s alleged actions violated the Consumer Financial Protection Act’s prohibition against unfair and abusive acts and practices, as well as the Fair Credit Reporting Act and its implementing regulation. Today’s order describes in detail how the company is alleged to have harmed consumers, including by:

  • Directing consumers to a dead-end cancellation hotline: Toyota Motor Credit prevented many consumers from cancelling product bundles by making the process unreasonably difficult. Consumers who wanted to cancel over the phone were directed to a “retention hotline” operated by employees whose primary objective was to dissuade such cancellations. Between 2016 and 2021 alone, Toyota Motor Credit funneled more than 118,000 consumer calls through this hotline. Representatives on the hotline were instructed to keep promoting the products until a consumer had verbally requested to cancel three times, at which point the representatives would tell the consumer that it was only possible to cancel by submitting a written request.
  • Delaying refunds by applying them to principal payments: Instead of issuing a refund check or lowering the monthly payment amount upon a consumer’s cancellation of bundled products, Toyota Motor Credit applied the refund amount as an additional payment toward principal, reducing the number of monthly payments. Applying the refund in this way effectively delayed the return of the consumer’s money until the end of the sale or lease agreement term. The company used this fact to discourage cancellations, telling consumers on the retention hotline that their monthly payments would not decrease and that they would not receive direct refunds.
  • Withholding refunds or providing inaccurate refund amounts: Toyota Motor Credit failed to refund prepaid GAP and CLAH premiums to consumers who paid off the loan or ended the lease before the end of the contract. Toyota Motor Credit also relied on faulty calculations which resulted in incorrect refunds for consumers who canceled their vehicle service agreements.
  • Furnishing false data to consumer reporting companies: Toyota Motor Credit falsely reported customer accounts as delinquent for failure to make monthly account payments even though customers had already returned leased vehicles, and the company did not promptly correct the negative information it had sent to consumer reporting companies even though it knew it was wrong. Toyota Motor Credit also failed to maintain reasonable policies and procedures to ensure payment information it sent to consumer reporting companies was accurate.

11/20/2023

Iran-aligned militias in Iraq sanctioned

On Friday, the Treasury Department announced that OFAC was designating six individuals affiliated with the Iran-aligned militia group (IAMG) Kata’ib Hizballah (KH) based in Iraq. Trained, funded, and supported by Iran’s Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF), KH is behind a spate of recent attacks against the United States and partners in Iraq and Syria following the attacks by Hamas against Israel. The U.S. Department of State was also designating Kata’ib Sayyid al-Shuhada (KSS) and KSS leader Hashim Finyan Rahim al-Saraji. KSS, another Iraq-based IAMG that receives support from the IRGC, has planned and been involved in attacks against U.S. personnel in Iraq and Syria.

For the names and identification information of the designated parties, see the November 17, 2023, BankersOnline OFAC Update.

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