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On Wednesday, May 5, 2021, the Board of Governors of the Federal Reserve System (“Federal Reserve”) issued a notice requesting public comment on proposed guidelines articulating a series of principles to be used by Federal Reserve Banks in evaluating requests for Reserve Bank master accounts and payment services (the “Proposed Guidelines”). The Federal Reserve intends

On September 14, 2020, the Financial Action Task Force (“FATF”) — an inter-governmental anti-money laundering (“AML”) and counter-terrorist financing (“CFT”) standard-setting organization — issued a report on red flag indicators of money laundering and terrorist financing for virtual assets (the “Report”).

Based on over 100 case studies, the Report highlights potential red flag indicators of virtual assets being used for criminal activity.  The Report is the latest guidance related to FATF’s Focus on Virtual Assets and is meant to complement FATF’s June 2019 guidance on developing a risk-based approach to virtual assets and virtual asset service providers.


Continue Reading Financial Action Task Force (FATF) Issues Virtual Assets Red Flag Indicators of Money Laundering and Terrorist Financing

On July 22, 2019, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency (collectively, the “federal banking agencies”), and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a joint statement emphasizing their risk-focused approach to examinations of banks’ Bank Secrecy Act/anti-money laundering (“BSA/AML”) compliance programs (the “Statement”).  The Statement does not purport to create additional supervisory expectations for banks, but is meant to provide transparency into the risk-focused approach the agencies use for planning and performing BSA/AML examinations.  While the Statement largely restates existing rules and guidance and notes “it does not establish new requirements,” the fact that the agencies issued the statement may itself be an important, albeit implicit, acknowledgement of concerns expressed by some that BSA/AML examinations have become increasingly less risk-based in practice.

Continue Reading Federal Banking Agencies and FinCEN Release Statement on Risk-Focused BSA/AML Supervision

On May 9, 2019, the Financial Crimes Enforcement Network (“FinCEN”) published interpretive guidance to reiterate how FinCEN’s existing regulations relating to money services businesses (“MSBs”) apply to business models involving convertible virtual currencies (“CVCs”). The guidance is the most significant CVC-related guidance that FinCEN has released since its 2013 guidance on the application of money transmission regulations to CVC transactions. The guidance does not establish any new regulatory requirements but, rather, synthesizes FinCEN’s existing framework of regulations, administrative rulings, and guidance since 2011 and applies this framework to common business models involving CVCs.

Continue Reading FinCEN Issues Guidance to Synthesize Regulatory Framework for Virtual Currency

On May 9, 2019, the House Financial Services Committee (“HFSC”) unanimously approved an amendment in the nature of a substitute to H.R. 2514, the Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform Act (the “COUNTER Act” or the “Act”).  The COUNTER Act, introduced by Representative Emanuel Cleaver (D-MO) would be the first major reform of the Bank Secrecy Act, 31 U.S.C. §§ 5311 et seq. (“BSA”) and related anti-money laundering (“AML”) regulations since 2001.  The COUNTER Act will now move to the House floor for debate.  The HFSC postponed a vote on a related bill that is aimed at combating illicit financial activity in anonymous shell companies and that would require most corporations and limited liability companies to disclose beneficial ownership information at the time of incorporation.

Continue Reading House Financial Services Committee Passes BSA/AML Overhaul Legislation

On March 28, 2019, the House Financial Services Committee (“HFSC”) voted 45-15 to advance to the full House of Representatives the bill H.R. 1595, the “Secure and Fair Enforcement Banking Act of 2019” (the “SAFE Banking Act” or the “Act”).  The SAFE Banking Act would shield banks and credit unions from federal regulatory penalties for providing financial services to legitimate cannabis-related businesses and service providers.  The bill, sponsored by Representatives Ed Perlmutter (D-CO) and Denny Heck (D-WA), had nearly 150 cosponsors and passed as an amendment in the nature of a substitute on a bipartisan basis, with eleven Republicans voting in favor of the legislation.

Background

Although 47 states, plus the District of Columbia, have legalized or decriminalized some form of adult recreational, medical, or limited-medical marijuana or marijuana cannabidiol oil, the manufacture, distribution, or possession of marijuana is illegal under the federal Controlled Substances Act (“CSA”), except as authorized in very narrow circumstances.  The legal uncertainty resulting from the divergence in federal and state law has caused most large financial institutions to decline to provide financial services to cannabis-related businesses directly, as well as to many service providers of cannabis-related businesses, such as suppliers, landlords, and other vendors.  As a result, many cannabis-related businesses that operate legally under state law are forced to operate on a cash-only basis, which creates public safety risks and provides opportunities for money laundering and other financial crimes.

The SAFE Banking Act

The SAFE Banking Act would create several important protections for depository institutions and federal and state credit unions (collectively, “depository institutions”) that provide financial services to cannabis-related legitimate businesses (“CRLBs”), which is defined broadly to include any individual or company that engages in a wide range of cannabis-related activities in accordance with state law.  These protections would also apply to CRLB service providers, defined broadly to include entities that sell goods or services to CRLBs or provide any business services, including the sale or lease of real or any other property, or any other ancillary service relating to cannabis (“Service Providers”).  Specifically, the Act would prohibit federal banking regulators from:

  • Terminating or limiting the deposit insurance or taking any other adverse action under section 8 of the Federal Deposit Insurance Act (which authorizes regulators to take enforcement actions against institutions) solely because the depository institution provides financial services to a CRLB or Service Provider;
  • Prohibiting, penalizing, or otherwise discouraging a depository institution – or entity performing a financial service for or in association with a depository institution – from providing financial services to a CRLB or Service Provider;
  • Recommending, incentivizing, or encouraging a depository institution not to offer, or to downgrade or cancel, financial services solely because the account holder is or becomes a CRLB or Service Provider, or an employee, owner, or operator of a CRLB or Service Provider; and
  • Taking any adverse or corrective supervisory action on a loan made to a CRLB or Service Provider, or an employee, owner, or operator of – or owner or operator of real estate or equipment leased to – a CRLB or Service Provider.

Importantly, the Act provides that for purposes of the Money Laundering Control Act of 1986 (18 U.S.C. §§ 1956, 1957) “and all other provisions of Federal law,” the proceeds from a transaction conducted by a CRLB or Service Provider shall not be considered proceeds from an unlawful activity solely because the transaction was conducted by a CRLB or Service Provider.  Moreover, a depository institution – or entity performing a financial service for or in association with a depository institution that provides a financial service to a CRLB or Service Provider – (and their officers, directors, and employees) “may not be held liable pursuant to any federal law or regulation” solely for providing financial services to a CRLB or Service Provider, or investing income derived from such services in states where cannabis is legal.


Continue Reading House Financial Services Committee Passes Cannabis Banking Bill

Innovation in financial services continues to move at a rapid pace. The significant increase in the number of fintech companies in recent years has highlighted a burgeoning market with significant economic potential, and a commercial need to create efficiencies and modernize the provision of financial products and services. Federal and state financial services regulators remain

On December 6, 2018, the Federal Deposit Insurance Corporation (“FDIC”) released a series of documents relating to the process for chartering a de novo FDIC-insured depository institution.

  1. A request for information (“RFI”) on all aspects of the FDIC’s deposit insurance application process. The RFI seeks comments on the transparency and efficiency of the application

On November 28, 2018, Federal Deposit Insurance Corporation (“FDIC”) Chairman Jelena McWilliams delivered keynote remarks regarding resolution planning requirements at the 2018 Annual Conference of The Clearing House and Bank Policy Institute.  Chairman McWilliams repeatedly emphasized that the failure of a financial institution should be dealt with through bankruptcy.  She stated that she strongly supports legislation that would establish a more tailored, transparent process for large financial firms under the Bankruptcy Code.  According to McWilliams, “[t]he FDIC stands ready to work with Congress and hopes to see such a measure signed into law.”  Additionally, the FDIC is considering refinements to the Orderly Liquidation Authority (the process created in the Dodd-Frank Act as an alternative to bankruptcy for large financial institutions), including recommendations from the Treasury Department published earlier this year.

Notably, Chairman McWilliams described two rulemaking that are expected in the coming months regarding resolution plans required by:

  • Section 165(d) of the Dodd-Frank Act for bank holding companies (“BHCs”) with $50 billion or more in total consolidated assets (“165(d) resolution plans”); and
  • The FDIC rule for insured depository institutions (“IDIs”) with $50 billion or more in total consolidated assets (“IDI resolution plans”).


Continue Reading FDIC Previews Changes to Resolution Plan Requirements

On October 31, 2018, the Board of Governors of the Federal Reserve System (“Board”) released two draft notices of proposed rulemaking (“NPRs”) to tailor its enhanced prudential standards (“EPS”) in accordance with Section 401 of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”).

One NPR, issued by only the Board, would tailor the application of EPS relating to capital stress testing; risk management; liquidity risk management, liquidity stress testing, and liquidity buffer requirements; and single-counterparty credit limits to U.S. bank holding companies (“BHCs”) and apply EPS as tailored to covered savings and loan holding companies (“SLHCs”).  The other NPR, a joint proposal with the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”), would tailor requirements under the agencies’ regulatory capital rules, the liquidity coverage ratio (“LCR”) rules, and proposed net stable funding ratio (“NSFR”) rules.  At the Board’s open meeting, Governor Brainard voted against the NPRs, saying in her prepared remarks that the proposals go beyond the provisions of EGRRCPA.

The proposals would establish a revised framework for applying EPS to large U.S. banking organizations, with four categories that reflect the different risks of covered firms in each category:

  • Category IV Firms: $100-$250 billion in total assets and does not meet Category I, II or III standards.
  • Category III Firms: $250 billion-$700 billion in total assets or $100 billion-$250 billion in total assets with $75 billion or more of a risk-based indicator (weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposure), and does not meet Category I or II standards.
  • Category II Firms: $700 billion or more in total assets or cross-jurisdictional activity of $75 billion or more, and does not meet Category I standard.
  • Category I Firms: U.S. global systemically important BHCs.
    Continue Reading Federal Reserve Releases Proposals to Tailor Enhanced Prudential Standards