Industry Developments

FinCEN Urges Financial Institutions to Focus on Detecting Proceeds of Foreign Public Corruption

 

The Financial Crimes Enforcement Network (“FinCEN”) recently issued an advisory urging financial institutions (including certain cryptocurrency businesses) to implement controls to help detect proceeds of foreign public corruption. The Advisory describes the types of corrupt payments and arrangements that financial institutions should be looking for and identifies red flags to help those institutions detect and report suspicious transactions that may involve kleptocracy and foreign public corruption.

Targeting Corruption. FinCEN reemphasizes that fighting corruption is a priority for the Biden Administration (as Orrick discussed here) and focuses on the “crucial role” financial institutions play in “identifying corrupt activity and associated money laundering on the part of foreign public officials” and kleptocrats, which it describes as those who wield political power or influence to enrich themselves at the expense of their nation.1 “Foreign public corruption erodes public trust and disproportionately harms the most vulnerable in societies[,]” said FinCEN Acting Director Himamauli Das in the press release accompanying the Advisory. Das urged financial institutions to “remain vigilant and promptly report suspicious financial activity.”2

While the Advisory’s cautions relate to public corruption globally, FinCEN singles out Russia as a “particular concern,” describing “widespread” corruption in, and linked to, the country, and the role that Russian kleptocrats and oligarchs play in supporting Russian President, Vladimir Putin’s regime, including Russia’s invasion of Ukraine. The Advisory builds on FinCEN guidance issued in recent weeks concerning the use of digital assets (crypto) and ransomware and the purchase of luxury goods and high-value assets to evade Russia sanctions.

Types of Corruption. The Advisory provides an overview of kleptocracy and foreign public corruption under the umbrellas of (1) wealth extraction and (2) laundering illicit proceeds.

FinCEN describes two methods of wealth extraction. The first, bribery and extortion, includes payments to foreign officials to obtain or retain business or other benefits, and may include coercion by corrupt officials. These improper arrangements may involve third-party facilitators or shell companies to conceal the purpose and flow of payments. The second, misappropriation or embezzlement of public assets, includes the theft, diversion, or misuse of public assets or resources for personal benefit. This type of corruption may involve officials exploiting or deceiving parties that seek to do business with the government.

Under the category of laundering illicit proceeds, the Advisory highlights the use of shell companies and offshore financial accounts to obscure the ownership and origin of illicit funds or facilitate the payment of bribes or misuse of assets, and the purchase of real estate, luxury goods and other high-value assets to launder proceeds of corruption. The Advisory also highlights U.S. government efforts against Russian elites, including pursuing their real estate, private aircrafts, and yachts.

Red Flags. The Advisory offers a list of red flags (available here) to help financial institutions detect transactions associated with kleptocracy and public corruption. The flags concern opacity in awarding government contracts; transactions involving services to state-owned companies; foreign business conducted through personal accounts; foreign jurisdictions that appear unrelated to the work of, or high-value assets not commensurate with, a government official’s role; charges at above-market rates that lack supporting detail or that do not match the documentation; and the use of third parties, fictitious emails, or fraudulent documents to conceal the origin of funds or ownership.

Suspicious Activity Reporting. The Advisory concludes with a “reminder” of Bank Secrecy Act (“BSA”) obligations for financial institutions, including scenarios in which financial institutions must file a suspicious activity report (“SAR”). The Advisory also asks institutions to specifically cite this document (“CORRUPTION FIN-2022-A001”) to indicate a connection between the suspicious activities being reported and the activities described in the Advisory. It also notes existing guidance on BSA reporting requirements and due diligence.

Takeaways. Although the Advisory and its guidance are framed in general terms, the explicit links to Russia and the types of corruption highlighted both serve as yet another indication of the Administration’s focus on such ties. Third-party analysis of SAR filings suggests that certain financial institutions, such as cryptocurrency exchanges and other “money services businesses,” may not be meeting their obligations to file corruption-related SARs.3 This Advisory suggests that such SAR filing failures will likely receive additional scrutiny from FinCEN.

The Advisory confirms that financial institutions need to take care to identify possible links to Russia. While the “red flags” listed are likely familiar to those who work in the anti-corruption field, they serve as a reminder and warning. Financial institutions should continue to prioritize the establishment of risk-based controls and procedures that include reasonable steps that can help them understand their customers and meet regulators’ due diligence expectations.

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1 FinCEN Press Release, FinCEN Issues Advisory on Kleptocracy and Foreign Public Corruption, (April 14, 2022).

2 Id.

3 Alison Jimenez, Kleptocracy Suspicious Activity Reports, Dynamic Securities Analytics, Inc. (April 15, 2022).

CFPB Proposes Mortgage Servicing Changes to Prevent Wave of COVID-19 Foreclosures

 

On April 5, the Consumer Financial Protection Bureau (CFPB) proposed rule changes intended to prevent avoidable foreclosures as emergency federal foreclosure protections put in place due to the global pandemic expire. The rules aim to assist both borrowers and servicers to navigate an expected surge of borrowers exiting forbearance. The proposed rules (1) provide a pre-foreclosure review period that generally prohibits servicers from starting foreclosure until after December 31, 2021; (2) permit servicers to offer certain streamlined loan modification options to borrowers with COVID-19-related hardships based on the evaluation of an incomplete application; and (3) update required servicer communications to keep borrowers informed of their options. Release.

Federal Reserve Board Publishes FAQs on Certain Long-Standing Regulations

 

On March 31, the Board of Governors of the Federal Reserve System (Federal Reserve Board) published six sets of responses to Frequently Asked Questions (FAQs) consisting of existing legal interpretations regarding Regulations H, K, L, O, W and Y. Additional FAQs will be released periodically and posted to the agency’s website as part of an ongoing effort to increase transparency and enhance accessibility to Federal Reserve Board legal interpretations. ReleaseFAQs.

Federal Bank Regulators Issue Rule Supporting Treasury’s Investments in Minority Depository Institutions and Community-Development Financial Institutions

 

On March 9, federal bank regulatory agencies announced an interim final rule that supports the Treasury Department’s implementation of a program established by Congress to make capital investments in minority depository institutions and community-development financial institutions. The Treasury Department’s Emergency Capital Investment Program (ECIP) will support the efforts of these financial institutions to provide loans, grants and forbearance to small businesses, minority-owned businesses and consumers, especially in low-income and underserved communities, which may be disproportionately affected by COVID-19. Release.

FHFA Extends COVID-19 Forbearance Period and Foreclosure and REO Eviction Moratoriums

 

On February 25, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac (the Enterprises) are extending moratoriums on single-family foreclosures and real-estate-owned (REO) evictions until June 30, 2021. Moratoriums on single-family foreclosures apply to Enterprise-backed, single-family mortgages only, while moratoriums on REO evictions apply to properties that have been acquired by an Enterprise through foreclosure or deed-in-lieu-of-foreclosure transactions. The FHFA also announced that borrowers with a mortgage backed by Fannie Mae or Freddie Mac may be eligible for an additional forbearance extension for three additional months for up to 18 months. Further, COVID-19 Payment Deferral for borrowers with an Enterprise-backed mortgage can now cover up to 18 months of missed payments. Release.

Federal Reserve Board Clarifies Guidance as it Relates to Definitions for Minority Depository Institutions

 

On March 5, the Federal Reserve Board clarified guidance as it relates to definitions for minority depository institutions (MDIs) by expanding the MDI definition to include women-owned financial institutions, and highlighting resources available to MDIs through its Partnership for Progress (PFP) program. Release.

OCC, Board of the Federal Reserve and FDIC Publish Final Rule Implementing Net Stable Funding Ratio

 

On February 24, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC) published a final rule in the Federal Register implementing the net stable funding ratio. The rule implements a minimum stable funding requirement for covered institutions, with the intention of reducing the likelihood that disruptions to a covered institution’s regular sources of funding would affect such institution’s liquidity position in a way that could lead to systemic stress. The covered institutions include U.S. depository institution holding companies, depository institutions or U.S. intermediate holding companies of a foreign banking organization with more than $100 billion in total consolidated assets that meet certain asset size and risk factor requirements. Bulletin.

 

Board of the Federal Reserve Announces Final Rule Amending Regulation EE

 

On February 18, the Board of the Federal Reserve announced a final rule amending Regulation EE, which is intended to reduce risk and increase efficiency in the financial system. The final rule applies netting protections to a broader range of financial institutions. The expanded definition of financial institutions now includes swap dealers and security-based swap dealers, nonbank systemically important financial institutions, foreign banks and qualifying central counterparties, among other new additions. The final rule also made minor clarifications to the existing activities-based test in Regulation EE, which clarify the application of the test following a consolidation of legal entities. Release.

SEC Charges Rating Agency Morningstar with Failures of Disclosure and Internal Controls in CMBS Rating Model Adjustments

 

On February 16, the Securities and Exchange Commission (SEC) filed a civil action in federal district court in the Southern District of New York against the former credit ratings agency, Morningstar Credit Ratings LLC, regarding alleged failure to disclose and maintaining internal control provisions in violation of federal securities law in its CMBS ratings practice. The complaint alleges that, in 30 transactions rated by Morningstar between 2015 and 2016, Morningstar failed to disclose that its rating criteria permitted analysts to adjust property cash flow and valuation stresses on a “loan-specific basis,” which resulted in lower expected losses on CMBS classes and the assignment of credit ratings and failed to adequately maintain a system of internal controls to ensure adherence to its ratings criteria. The complaint alleges violations of the Securities Exchange Act of 1934 against Morningstar and seeks injunctive relief, disgorgement and civil penalties. Release.

OCC Approves Final Rule Regarding Effect of Supervisory Guidance

 

On February 16, the OCC approved a final rule that confirms that supervisory guidance, unlike statutes or regulations, does not create binding legal obligations for the public. The final rule reaffirms that the OCC does not take enforcement actions on the basis of non-compliance with supervisory guidance. The proposed rule was published on November 5 and was adopted without material change. The final rule becomes effective on March 15. Bulletin.