KOCHAM 6 June 14th 2019, - - PowerPoint PPT Presentation

KOCHAM 6월 세미나

최근 美 금융법규 변경동향과 가이드라인

Place Date

June 14th 2019, 12:00pm~14:30pm

한국무역협회 (KITA), 4층 컨퍼런스 룸 4th floor

460 Park Ave, New York, NY 10022

Topics

▪ Fed Regulatory Developments

• Proposed changes to control regulations under the Bank Holding

Company Act

• Status of revisions to the Volcker Rule
• Potential significance to Korean banks of Fed proposed changes to

enhanced prudential standards for foreign banks ▪ Update on Regulatory Environment in Washington including Dodd- Frank Reform and Regulatory Enforcement Policy ▪ Update on AML (Anti-Money Laundering) and OFAC (Office of Foreign Assets Control) ▪ Branch Conversions from DFS (Department of Financial Services) State to OCC (Office of the Comptroller of the currency) Federal License

Speakers

• Mr. Thomas Delaney

partner

• Mr. David Sahr

partner

• Mr. Donald Waack

partner

Recent US Regulatory Developments

• f Interest for Korean Financial Firms

Thomas J. Delaney

June 14, 2019 Partner +1 202 263 3216 tdelaney@mayerbrown.com

David R. Sahr

Partner +1 202 263 3332waac dsahr@mayerbrown.com

Donald S. Waack

Partner +1 202 263 3165 dwaack@mayerbrown.com

5

• Washington Update
• Federal Reserve Control Proposal
• Federal Reserve Tailoring Proposal for Foreign Banks
• Volcker Rule Update
• Federal Reserve and FDIC Proposals for Resolution Planning
• Recent Developments in AML & Sanctions

Agenda

6

• Definition of “control” is a fundamental aspect of the US Bank Holding

Company Act

– Determines which entities are subject to Section 4 of the BHCA – Determines which entities are “banking entities” subject to the Volcker Rule – Determines whether an investor in a bank/BHC must itself register as BHC

• Same framework applies for bank and nonbank investments
• Same framework applies for domestic (US) and foreign (non-US)

investments

Federal Reserve Control Proposal

7

• BHCA defines control as:

– Owning/controlling 25% or more of a class of voting securities – Controlling election of majority of directors, trustees, general partners – Having the power to exercise a “controlling influence” over another company, after notice and opportunity for hearing

• Controlling influence rules have developed for decades through

informal/unpublished Fed decisions on individual transactions

Federal Reserve Control Proposal

8

• Current Framework – Indicia of Control
• Limited actionable, written precedent outside a few “bright line” rules
• Lack of legal certainty for many investments/structures
• Impact on minority equity investments particularly pronounced in fintech sector

(business relationships)

• Resolution of controlling influence issues often requires protracted engagement

with Fed staff—both for new investments and divestitures of control

Federal Reserve Control Proposal

❑ Voting Shares ❑ Non-Voting Equity ❑ Board Representation ❑ Officer/Employee Interlocks ❑ Significant Business Relationships ❑ Contractual Covenants/Veto Rights

9

• Proposal to revise controlling influence rules issued by the Fed on April

23, 2019

– 60-day comment period will conclude on July 15

• Intent is to clarify and provide greater transparency and predictability

with respect to controlling influence determinations

– Articulating/formalizing current Fed policy – Adopting more flexible/relaxed standards in certain areas – Adopting more restrictive standards in other areas

Federal Reserve Control Proposal

10 10

Tiered Framework of Presumptions

Federal Reserve Control Proposal

11 11

• Tiered framework largely satisfies the objectives of clarity and transparency, though

maintains Fed’s general approach of focusing on potential rather than actual control

• Predictability will depend on Fed’s commitment to honor the presumptions

Absent unusual circumstances, the Board generally would not expect to find that a company controls another company where the first company is not presumed to control the second company under the [Proposal].

• Revival of presumption of non-control for investors holding less than 5% of voting shares

– No business relationships test, no controlling influence based on consent/veto rights (including rights arising in connection with a financing arrangement for the same company)

• More restrictive framework for investors holding 15%-24.99% of voting shares

– Control presumed if investor generates just 2% of revenues/expenses, has any non-market terms relationships, any limiting contractual rights, or any interlocks

Federal Reserve Control Proposal

12 12

Critiques of the Tiered Framework and Areas for Industry Comment

• Overall, business relationship limits still problematic for many BHC/FHC investors,

especially at higher end of the voting interest spectrum

– Particularly true for fintech and other startups with limited/unpredictable revenue – Query appetite among BHC investors for taking ~20% voting interest in a fintech or other portfolio company where business relationships are all but prohibited (2% of revenues/expenses)

• No consideration given to presence of larger, countervailing (even majority) shareholders
• Proposal does not confirm that presumed non-controlling investments below 5% of voting

shares are also “passive” for purposes of section 4(c)(6)

• Concept of “limiting contractual rights” very broad; no allowance for rights related to

matters that would significantly and adversely affect a particular minority investor or class

• f minority investors

Federal Reserve Control Proposal

13 13

Presumptions Outside the Tiered Framework

• “Advise Plus 5” Presumption for Investment Funds

– Proposal would include a presumption of control whenever a BHC (i) serves as investment adviser to an investment fund and (ii) controls 5% or more of a class of voting securities or 25% or more of total equity – Would apply to both registered and unregistered funds – Seeding period exception, but limited to just one year (contrary to Volcker)

• Consolidation under US GAAP

– Proposal would include a presumption of control with respect to any entity that is required to be consolidated under US GAAP – Potentially significant impact on ABCP conduits in particular (FBOs)

Federal Reserve Control Proposal

14 14

Divestitures of Control

• Current Framework

– Traditionally, divesting control of an existing subsidiary required reduction of interest to at least 10% and often 5% of voting shares, with no other relationships

• Proposed Framework

– Retains general concept of residual control requiring that relationship be reduced to a level below what would have been permitted ex ante – But proposal would liberalize these standards, generally permitting recognition of divestiture at 15% and, after a two-year waiting period, at 15%-24.99% (if no presumptions are triggered)

Federal Reserve Control Proposal

15 15

Other Key Issues and Takeaways

• Downsides of Clarity and Transparency

– As “soft” law is committed to regulation through notice and comment rulemaking, more difficult to take positions with respect to certain “borderline” investments (including those outside the US with little or no US nexus or US supervisory interest) – Proposal may require potentially significant overhaul of BHCA compliance policies and procedures, monitoring systems, global mapping of relationships

• Rigid, Bright Line Approach

– No “credit” for the absence of other indicia of control (e.g., where an investor has no board member or where influence is limited by an unaffiliated, larger shareholder)

Federal Reserve Control Proposal

16 16

Other Key Issues and Takeaways

• Impact on Existing Investments/Structures

– No discussion in proposal regarding impact on existing investments and relationships or potential need for phase-in period/grandfathering – Not clear what the impact will be on entities that have entered into passivity commitments

• Activists and Other BHC Investors

– Same rules will apply to investors in publicly trades BHCs – More permissive environment for activist funds and other investors to seek change—e.g., board representation/roles, proxy contests

Federal Reserve Control Proposal

17 17

• Dodd-Frank Act § 165 imposed enhanced prudential standards (EPS) on larger

US BHCs/SLHCs and FBOs

• Korean banks operations in the US generally not large enough to be affected by

the Fed’s regulations implementing section 165

• The Fed’s proposed amendments would not change this
• Korean banks may have an interest in understanding the changes that would

affect FBOs with larger US presence

• The Fed is also requesting comment on whether it should impose standardized

liquidity requirements on US branches and agencies, but this is likely to be focused on larger branches

Federal Reserve Tailoring Proposal for Foreign Banks

18 18

• Dodd-Frank Act § 165 imposed enhanced prudential standards (EPS) on larger

US BHCs/SLHCs and FBOs

– Implemented by Regulation YY in 2014

• EGRRCPA § 401 increased threshold for applying EPS and authorized the Fed to

tailor application of EPS

• The Fed issued proposals in October 2018 to tailor EPS for US BHCs/SLHCs and

to modify liquidity and other EPS

• Comparable proposals for FBOs and IHCs issued in April 2019

– Comment period ending June 21

Federal Reserve Tailoring Proposal for Foreign Banks

19 19

• Purpose of the FBO proposal

– Align FBO rules with BHC/SLHC proposal consistent with national treatment and competitive equity – Implement EGRRCPA policy to tailor EPS to size and risk profile of financial institution – Implement Fed policy to make regulation more simple, transparent and efficient – Protect US financial stability from risk posed by US operations of FBOs

Federal Reserve Tailoring Proposal for Foreign Banks

20 20

• Summary of Impact of Proposal

– The size of and presence/absence of risk factors at US operations of FBOs will determine the level of stringency of EPS in three risk level “categories” – Both the FBO and its IHC are categorized on the basis of the combined US

• perations -- this means for example that the IHC can be subjected to higher EPS

(other than capital) by virtue of risk factors in the US branches and agencies – Meanwhile, the Fed is also asking for comment on whether branches and agencies should be subject to standardized liquidity requirements, i.e., LCR and NSFR, that apply to US banking organizations – The proposal would strengthen the trend towards ring fencing of an FBO’s US

• perations and would create more regulatory incentives for FBO’s to reduce their

US footprint

Federal Reserve Tailoring Proposal for Foreign Banks

21 21

• US risk profile factors used in determining the EPS category

– Combined US Assets: Sum of the consolidated assets of each top-tier US subsidiary of an FBO (excluding so-called “2(h)(2) companies”) and the total assets of each US branch and US agency – Cross-Jurisdictional Activity (“CJA”): Sum of the cross-jurisdictional assets and liabilities of an FBO’s combined US operations or its US IHC, excluding intercompany liabilities and collateralized intercompany claims – US Weighted Short-Term Wholesale Funding (“wSTWF”): Weighted amount of funding

• btained from wholesale counterparties, retail brokered deposits and sweeps with a remaining

maturity of one year or less, including exposures between the US operations and non-US affiliates – US Off-Balance Sheet Exposure: Difference between the total exposure and on-balance sheet assets of an FBO’s combined US operations – US Nonbank Assets: Sum of the assets of US nonbank subsidiaries and equity investments in unconsolidated US subsidiaries (excluding 2(h)(2) companies)

Federal Reserve Tailoring Proposal for Foreign Banks

22 22

• Category II: FBOs and IHCs with (i) $700B or more in combined US assets or (ii) $100B or

more in combined US assets and $75B or more in CJA would be subject to the following standards:

Federal Reserve Tailoring Proposal for Foreign Banks

FBO (Combined US Operations) US IHC Liquidity risk management requirements, including daily FR 2052a reporting Annual CCAR exercise and company-run and supervisory stress testing, including FR Y-14 reporting Monthly internal liquidity stress testing Annual capital planning, including assessment by Fed Liquid asset buffer requirements Monthly internal liquidity stress testing SCCL Modified SCCL Home-country capital stress testing US capital standards, including the SLR, CCB (if applicable) and AOCI recognition Risk committee, risk management and chief risk officer requirements Daily LCR and NSFR requirements

23 23

• Category III: FBOs and US IHCs that are not in Category II but have (i) $250B or more in

combined US assets or (ii) $100B or more in combined US assets and $75B or more of US nonbank assets, US wSTWF or US off-balance sheet exposure would be subject to the following standards:

Federal Reserve Tailoring Proposal for Foreign Banks

FBO (Combined US Operations) US IHC Liquidity risk management requirements, including monthly FR 2052a reporting Annual CCAR exercise and company-run and supervisory stress testing, including FR Y-14 reporting, but with biennial disclosure of company-run results Monthly internal liquidity stress testing Annual capital planning, including assessment by Fed Liquid asset buffer requirements Monthly internal liquidity stress testing SCCL Modified SCCL Home-country capital stress testing US capital standards, including the SLR and CCB (if applicable) Risk committee, risk management and chief risk officer requirements Daily LCR and NSFR requirements (reduced to 70 percent to 85 percent

• f the full requirements for IHCs with less than $75B in wSTWF)

24 24

• Category IV: FBOs and US IHCs that are not in Categories II or III but have at least $100B in

combined US assets would be subject to the following standards:

Federal Reserve Tailoring Proposal for Foreign Banks

FBO (Combined US Operations) US IHC Reduced liquidity risk management requirements but still including monthly FR 2052a reporting Biennial CCAR exercise and company-run and supervisory stress testing, including FR Y-14 reporting Quarterly internal liquidity stress testing Reduced annual capital planning, including assessment by Fed Reduced asset buffer requirements Quarterly internal liquidity stress testing SCCL (only if the FBO has $250B or more in total consolidated assets on a global basis) US capital standards Home-country capital stress testing Monthly LCR and NSFR requirements (reduced to 70 percent to 85 percent of the full requirements) if wSTWF is $50B or more Risk committee, risk management and chief risk

• fficer requirements

25 25

• Uncategorized: FBOs and US IHCs with at least $50B in global total consolidated assets

would not be assigned to one of the Categories but would remain subject to certain prudential standards, including the following:

Federal Reserve Tailoring Proposal for Foreign Banks

Uncategorized FBOs with these Assets Requirements Global Assets US Assets $250B or more Combined US assets

• f less than $100B

Would continue to be required to comply with US single-counterparty credit limits and home-country liquidity stress testing and capital requirements $100B or more US non-branch assets

• f $50B or more

Would continue to be required to establish a IHC $100B or more Combined US assets

• f $50B to $100B

Would continue to be required to satisfy US risk committee, chief risk officer and risk management requirements $100B or more Combined US assets

• f less than $100B

Would continue to be required to comply with home-country capital stress testing requirements $50B to $100B N/A Would continue to be required to comply with US risk committee requirements

26 26

• US branches and agencies of FBOs currently are not subject to

standardized liquidity requirements (i.e., LCR and NSFR)

– Fed has requested comment on whether it should impose standardized liquidity requirements on US branches and agencies – Contemplates imposing LCR-like requirement, but also may impose NSFR-like requirement – Calculation might be based on size and risk profile of combined US

• perations or asset size of US branch network

– Would be subject to another round of notice and comment rulemaking before being adopted

Federal Reserve Tailoring Proposal for Foreign Banks

27 27

• May 2018 – Proposal to simplify and tailor Volcker Rule

– Substantially all of the reforms focused on proprietary trading – Some favorable developments (TOTUS liberalization); other significant problems (accounting prong) – Many questions but no material proposals on covered funds

• Unfavorable industry reaction; US regulators have indicated they will start over

with a new proposal

• No progress to date on foreign excluded fund/banking entity issue

– Current “no-action” relief expires July 21, 2019 – Likely that agencies will extend no-action relief in some form, timing and terms remain uncertain

Volcker Rule Update

28 28

• The Fed and FDIC issued a proposal in April 2019 to revise resolution

planning requirements for US BHCs and FBOs

• Korean banks that currently file annually would change to every three

years

• Resolution planning proposal would use the system of Categories from

the tailoring proposals

– Reduce the number of filers and frequency of submissions – Streamline the content required to be submitted in resolution plans – Revise the ways in which critical operations are identified

Federal Reserve and FDIC Proposals for Resolution Planning

29 29

• FDIC also issued a pre-proposal in April 2019 indicating its intent to

revise resolution planning requirements for US banks

– Would categorize US banks into “Groupings” (analogous to “Categories”) – Conceptually similar to the resolution requirements in the interagency proposal for US BHCs and FBOs

• Trade associations have asked for comfort in the interim that no

submissions will be required before the interagency proposal is finalized

– FDIC has already delayed the next round of submissions for US banks until after its rulemaking process is completed

Federal Reserve and FDIC Proposals for Resolution Planning

30 30

• AML Overview
• FinCEN Issues
• NY DFS Issues
• Enforcement Climate
• Issues Presenting Heightened Risk
• Sanctions Overview
• OFAC Guidance on Sanctions Compliance Programs
• Trade Finance – High Risk

AML and Sanctions Topics to be Covered

31 31

• Continues to be an implementation challenge for US banks and their

customers, particularly non-publicly traded entities, and non U.S. entities.

• Financial Institutions required to be in compliance by May 2018
• Intended to bring the US up to FATF and other international standards in terms
• f KYC requirements with respect to entity customers
• Now no longer sufficient to identify an entity as your customer, must also

identify significant owners and those who have operational control over the company

• Must conduct due diligence (background checks) up the chain of ownership

Beneficial Ownership Rule

32 32

• Significant Elements of the Rule

– Applies to formal banking relationships (not every banking service) – Covered entities include corporations, limited liability companies, or other entity that is created by the filing of a public document with a Secretary

• f State or similar office, a general partnership, and any similar entity

formed under the laws of a foreign jurisdiction that opens an account.

• Covers statutory trusts based on the fact that such trusts are created by a filing with a

Secretary of State or similar office

• A legal entity customer does not include sole proprietorships, unincorporated associations,
• r natural persons opening accounts on their behalf.

Beneficial Ownership Rule (continued)

33 33

• Focus is on those who own or control accounts owned by legal

entities:

– Ownership Prong: Each individual, if any, who directly or indirectly, through any contract arrangement, understanding, relationship or

• therwise, owns 25 percent or more of the equity interests of a legal

entity customer – Control Prong: A single individual with significant responsibility to control, manage or direct a legal entity customer, including:

• CEO, CFO, COO
• Managing Member, General Partner
• President, Vice President or Treasurer
• Any other individual who regularly performs similar functions

Who are defined to be Beneficial Owners?

34 34

• If a trust owns directly or indirectly, through any contract,

arrangement, understanding, relationship or otherwise, 25 percent or more of the equity interests of a legal entity customer, the beneficial

• wner for purposes of the regulation shall mean the trustee,

regardless of whether the trustee is a natural person or not (ownership/equity prong)

• To comply with the control prong, financial institutions are also

required to identify and verify a natural person trustee as the beneficial

• wner of the legal entity.

Treatment of Trusts

35 35

• In general covered institutions are not required to look through a

pooled investment vehicle to identify and verify the identity of any individuals that own 25 percent or more of its equity interest

• Impractical due to the way the ownership of pooled investment

vehicles fluctuates

• However, under the control prong institutions are required to identify

those with significant responsibility to control manage or direct the vehicle, such as the portfolio manager, commodity pool operator or general partner

Treatment of Pooled Investment Vehicles

36 36

• An investment company, as defined in section 3 of the Investment Company Act
• f 1940, registered with SEC
• An SEC-registered investment adviser, as defined in section 202(a)(11) of the

Investment Advisers Act of 1940

• An exchange or clearing agency, as defined in section 3 of the SEA, registered

under section 6 or 17A of that Act

• Any other entity registered with the SEC under the SEA
• A registered entity, commodity pool operator, commodity trading advisor, retail

foreign exchange dealer, swap dealer, or major swap participant, defined in CEA, registered with CFTC

• A public accounting firm registered under section 102 of the Sarbanes-Oxley

Act

Legal Entities Not Covered by the Beneficial Ownership Rule

37 37

• A bank holding company, as defined in section 2 of the Bank Holding

Company Act of 1956 (12 USC 1841) or savings and loan holding company, as defined in section 10(n) of the Home Owners’ Loan Act (12 USC 1467a(n))

• A pooled investment vehicle operated or advised by a financial

institution excluded from the definition of legal entity customer under Rule (see above)

• An insurance company regulated by a State
• A financial market utility designated by the FSOC under Title VIII of the

Dodd-Frank Act

Legal Entities Not Covered by the Beneficial Ownership Rule (continued)

38 38

• A foreign financial institution established in a jurisdiction where the

regulator of such institution maintains beneficial ownership information regarding such institution;

• A non-U.S. governmental department, agency or political subdivision

that engages only in governmental rather than commercial activities; and

• Any legal entity only to the extent that it opens a private banking

account subject to 31 CFR 1010.620.

Foreign Entities Not Covered by the Rule

39 39

• Two pieces of guidance issued earlier this month:

– Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies – Advisory on Illicit Activity Involving Convertible Virtual Currency

• Objective is to warn CVC entities that have not registered as MSBs that they may

nevertheless be subject to MSB regulation

• Also warns those, including banks who deal with CVC entities that they may have additional

due diligence obligations even if their status as a bank exempts them from MSB regulation

• Available on FinCEN website

FinCEN Crypto Currency Guidance

40 40

• Whether an entity is a money transmitter depends on the facts of circumstances
• f the business activity, not on what a label that the industry or a particular

business may use to define the activity

• Creators or sellers of CVC platforms may be exempt from FinCEN regulations

that apply to such activities but nevertheless subject to money transmitter regulation based on other activities

• FinCEN’s regulation does not limit or qualify the scope of the term “value that

substitutes for currency.” It can be created either (a) specifically for the purpose

• f being used as a currency substitute or (b) originally for another purpose but

then repurposed to be used as a currency substitute by an administrator (in centralized payment systems) or an unincorporated organization, such as a software agency (in decentralized payment systems).

Interpretive Guidance Key Considerations

41 41

• In either case, the persons involved in the creation and subsequent

distribution of the value (either for the original purpose or for another purpose) may be subject to additional regulatory frameworks (other than the BSA, such as SEC registration) that govern licensing and chartering obligations, safety and soundness regulations, minimum capital and reserve requirements, general and financial consumer and investor protection, etc. When subject to these other regulatory frameworks, the person may be exempted from MSB status but be covered as a different type of financial institution under FinCEN regulations.

Interpretive Guidance Key Considerations (cont.)

42 42

• Additionally entities that may be exempt from MSB regulation may

nevertheless become subject to that regulatory regime if they engage in activities that based on facts and circumstances constitute money transmission.

– Accordingly, if a broker or dealer transfers funds (represented as fiat currency or Convertible Virtual Currency) between a customer and a third party that is not part

• f a currency or commodity transaction, such transmission of funds is no longer a

fundamental element of the actual transaction necessary to execute the contract for the purchase or sale of the currency or the other commodity, and the broker or dealer becomes a money transmitter. – This regulatory interpretation extends to persons intermediating in the purchase and sale of securities or futures.

Interpretive Guidance Key Considerations (cont.)

43 43

• The guidance reiterates much of what FinCEN has previously issued in terms of activities

that constitute money transmission

• FinCEN explained that money transmission regulations can apply to the following:

– P2P exchangers, including those that are natural persons

• Not P2P online trading platforms
• Note 2018 enforcement actions against Powers and Khorashadizadeh and Ghorbaniyan

– Hosted wallet providers – CVC Kiosks – Decentralized distributed applications (DApps) – Anonymizing service providers that provided anonymity enhanced CVC

• Travel Rule Compliance

– CVC Payment Processors operating outside a clearance system

Interpretive Guidance Key Considerations (cont.)

44 44

• Potentially outside the definition of money transmission:

– CVC trading platforms and decentralized exchanges

• No buying and selling for others
• No hosted wallets

– ICOs

• When raising investment funds for new projects such as development of

DApps

• Not operating DApps

– Pre-mining of CVC for the purchase of goods and services by the CVC creator

Interpretive Guidance Key Considerations (cont.)

45 45

• Red Flags for those dealing with CVC entities:

– Darknet Marketplaces – Unregistered P2P Exchangers – Unregistered foreign-located MSBs – Unregistered CVC Kiosks – Activity that leverages CVC Kiosks

• Consider SAR filing obligations

Interpretive Guidance Key Considerations (cont.)

46 46

• Effective January 1, 2017

– Certifications Required by April 15, 2018 and annually thereafter – Executed by Board or Senior Officer

• Heightened personal risk
• Responded to identified shortcomings in transaction monitoring systems
• Institutions required to maintain transaction monitoring program

– Based on risk assessment – Reviewed periodically – Appropriate matching of BSA/AML risks to institution's business, products, services and customers – Detection scenarios

NY DFS Part 504

47 47

• Institutions required to maintain transaction monitoring program (cont.)

– End-to-end pre and post implementation testing of transaction monitoring systems

• Governance
• Data mapping
• Transaction coding
• Detection scenario logic
• Model validation
• Data input/Program output

– Alert investigation protocols – Ongoing analysis to assess relevancy of detection scenarios

NY DFS Part 504 (cont.)

48 48

• Transaction Monitoring Programs are required to address the following

elements:

– Identification of all data sources that contain relevant data – Validation of the integrity, accuracy and quality of data to ensure that accurate and complete data flow through the transaction monitoring program – Governance and management oversight, including policies and procedures governing changes to the transaction monitoring program – Vendor selection processes (to the extent 3rd party vendors are utilized) – Adequate funding – Qualified personnel (including outside consultants) – Periodic Training

NY DFS Part 504 (cont.)

49 49

• First examinations under Part 504 are now occurring
• Open Questions

– Will Board/Managers be held responsible for identified deficiencies? – To what extent will disagreements over validation methodologies result in enforcement action?

• Will the failure to file SARs result in a de facto finding that transaction

monitoring systems are defective?

NY DFS Part 504 (cont.)

50 50

• AML (and OFAC) compliance remain areas of supervisory concern but not to

the same extent as pre- 2016 climate

• Fewer large cases with onerous burdens

– But see - - Society General (November 2014) – $1.34 billion in penalties to US authorities for sanctions violation – $95 million to NY DFS for penalties related to AML compliance in NY Branch – FRB independent consultant

• Drop in cases may be that most of the large foreign banks have been subjected

to major penalties over the past 5-10 years

• Many continue to work through their settlement obligations but as a result of

those actions, there is a perception that compliance practices at most banks have improved.

Enforcement Climate

51 51

• Will enforcement actions move to regional banks?

– Under the Trump Admin, enforcement fervor seems to have diminished – NY DFS says it remains committed to vigorous enforcement

• MSBs more likely to be targets of enforcement action because of more lax

compliance culture

– Role in human trafficking and processing proceeds of crime

• Monitors or Independent Consultants are now common aspects of settlement

agreements involving the Federal Reserve, DOJ and NY DFS

– They are expensive, disruptive and often regard their assignment as a very lucrative

• pportunity

Enforcement Climate (cont.)

52 52

• Institutions are finding it difficult to achieve completion with settlement

agreements because Monitors or IC define what is satisfactory completion

• An added complication is that as examinations occur while a monitor or

independent consultant is in place, deficiencies cited during the course of examinations (MRAs) often are added by ICs or Monitors as additional conditions to be satisfied

– This stance is justified on the basis that such agreements should viewed in a "wholelistic" manner rather than by their specific terms alone.

• Outgrowth is that Monitorships are extended, as are the effective terms of

settlement agreements.

– DFS long regarded as one of the most difficult agencies to deal with in this regard

Enforcement Climate (cont.)

53 53

• The vast majority of enforcement actions for AML and US sanctions violations

for the past 10 years have been against non-US banks

• The majority of non-US banks have the key operations licensed in New York
• NY DFS has been one of the most aggressive enforcement agencies to take on

banks

• The climate has caused many non-US banks to consider relicensing branch
• perations from New York to a federal license administered by the Office of the

Comptroller of the Currency (OCC)

Responsive Strategies to Anti-Foreign Bank Enforcement Climate

54 54

• MUFG

– November 2017, MUFG applied for an OCC branch license – MUFG had been operating under a DFS consent order that it was having difficulty closing out – Feared additional enforcement action from NY DFS – Sought the federal license option for more consistent supervision

• No monitor

– NY DFS Objected

• Initiated litigation against OCC and MUFG to block move
• DFS asserted that legal standards not met, and OCC overstepped its authority
• Case pending but MUFG now being supervised by the OCC.

– Many other non-US banks considering a similar move

– Some awaiting the outcome of the MUFG litigation

Responsive Strategies to Anti-Foreign Bank Enforcement Climate (cont.)

55 55

• Reduce supervisory complexity

– Instead of potentially multiple state regulators sharing supervision with the Fed, all US banking operations supervised by OCC with limited Fed back-up

• Opportunity for fresh start with new regulator
• OCC more flexible in approving new products and more experienced in

supervision

Benefits of a Federal License

56 56

• Less risk of politicization and uncoordinated enforcement

– State regulators more likely to be influenced by political and other agendas, often resulting in uncoordinated and costly enforcement actions resulting in more excessive penalties than the federal regulators would impose

• In the current US political environment, Democratic state regulators more likely

to be active in implementing new requirements to upstage the federal government, e.g., recent controversial AML and cybersecurity initiatives in New York

Benefits of a Federal License (cont.)

57 57

• General interagency policy is that conversations should not undermine existing

enforcement actions (i.e. conversion will not be approved if it is intended to evade state obligations)

• Where ongoing agreements are in place, OCC has stated it will review whether

“substantial compliance” has been achieved

• OCC has signaled that it will consider permitting a conversion even while post-

enforcement remediation is continuing (including a monitorship) if it is satisfied that progress is being made

How OCC Deals with Enforcement Actions

58 58

• If OCC determines that further corrective action is necessary, it may permit the

conversion subject to continuing corrective actions under its own enforcement authorities

– Note additional order imposed against MUFG

• OCC unlikely to consider and application if any new enforcement

investigations/actions are pending

• OCC will take into account views of FRB/affected state supervisors

How OCC Deals with Enforcement Actions (cont.)

59 59

1. Increased market interest in banking Cannabis businesses

– Providing banking services – Underwriting IPOs

• Huge Potential Business

– Cannabis Legal in over 40 states to some degree – Potential market includes producers and retailers – Investors anxious to enter

• Impediments

– Cannabis Remains a Controlled Substance Under Federal Law and therefore an illegal drug – Cole memo withdrawn by then Attorney General Sessions

• But FinCEN SAR policy for dealing with Cannabis businesses remains in place

Additional Issues Presenting AML Risk

60 60

• Possible Remedies

– Banking Committee in the House of Representatives has approved the SAFE Act

• Must be passed by full House and also the US Senate, then signed by the President
• Would allow banks to provide services to Cannabis companies
• Not clear if credit card companies are covered
• Also uncertain if non-FDIC insured institutions (industrial loan companies and branches of foreign

banks) would be covered

• Current Status

– Banking Cannabis companies is a risk

• Action by FinCEN and federal regulators unlikely if FinCEN guidance is followed
• Uncertain if a US Attorney trying to make a name for him or herself would bring a case

Additional Issues Presenting AML Risk (cont.)

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2. Baltic Money Laundering

• The Organized Crime and Corruption Reporting Project (OCCRP), a non-profit

media organization, reviewed a vast collection of leaked documents and reported on a massive Russian money laundering operation covering more than a decade (2005 – 2016)

• The so-called “Troika Laundromat” involved a number of schemes intended to

assist Russian residents to circumvent local currency control regulations and transfer billions in assets, including some reportedly of questionable provenance, to Western banks

• Once the largest and most prestigious Russian investment Bank, the Troika

Dialog, was at the center of this scandal, creating dozens of shell companies for its customers to layer and disguise ownership of funds before funneling them to Baltic banks

Additional Issues Presenting AML Risk (cont.)

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• Ukio Bankas (now defunct) was reportedly the main Baltic bank used to open

accounts in the name of offshore entities, receive and layer the funds, and ultimately transfer those funds to Western banks

• In some cases, fictitious contractual documentation was supplied in support of

these transfers

• The media has recently published a number of articles about other Nordic

European banks having involvement in the Troika Laundromat

Additional Issues Presenting AML Risk (cont.)

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• As a result of continued press coverage, several large financial institutions have

been the subject of governmental inquiries:

– Danske Bank is reportedly being investigated by US authorities including the SEC, DOJ, and Treasury for its potential involvement in the Troika Laundromat – Swedbank is under investigation by European authorities – In February of 2018 FinCEN issued a finding that ABLV Bank of Latvia was

• rchestrating money laundering schemes, and issued a proposed rulemaking to

prohibit the opening or maintaining of a correspondent account in the United States for, or on behalf of, ABLV Bank. The Financial Times called ABLV “Latvia’s biggest non-resident bank,” and reported that ABLV had been forced into liquidation within weeks of FinCEN’s finding

Additional Issues Presenting AML Risk (cont.)

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• Other banks named in the press as having potential involvement in the Troika

Laundromat include:

– Moldinconbank, Trasta Komercbanka, DNB, Norvik, Handelsbanken, ABN Amro, and Raiffeisen

• The Troika Laundromat scandal has reinforced the importance of robust

transaction monitoring and related controls as a cornerstone to a successful and protective AML compliance program

Additional Issues Presenting AML Risk (cont.)

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• OFAC Beginning to Adopt Approach of Banking Agencies
• May 2019 – Issued Guidance Instructing those subject to US Sanctions to Adopt

a Risk-Based Approach to Sanctions Compliance

– Each Sanctions Compliance Program should comprise five essential elements

• Management commitment
• Risk assessment
• Internal controls
• Testing and auditing
• Training

– Sound familiar? – Existence of a Program, presumably deemed effective, can mitigate OFAC penalties – Presumably the absence of such a program will lead to more severe penalties and could result in violations being termed egregious.

OFAC Initiatives

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• Implications for Senior Management

– Must set tone from the top – Have record of being involved, including ensuring adequate resources

• Sanctions based Risk Assessments to be more pervasive

– This is an area where FIs have a lead

• Open Issues

– Will banking regulators begin to take a more aggressive approach to OFAC compliance exams – Will OFAC ride along in exams of some institutions

• To what extent will the existence of Compliance Programs mitigate penalties.

OFAC Initiatives (cont.)

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• Historically an area of high risk
• Challenge is to understand customers, supply chain intermediaries and counter-

parties

• Who is your customer's customer?

– Your customer commits to comply with US sanctions requirements – On sells to another buyer who does business in complicated areas (middle east) – Trade documentation may later indicate that goods financed by bank ultimately land in sanctioned country

Trade Finance

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• Who is your customer's customer? (cont.)

– What is your obligation to

• Investigate
• Mitigate
• Escalate
• Report

– No clear cut answers but OFAC is clearly evaluating such situations carefully

Trade Finance (cont.)

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Thomas J. Delaney

Tom Delaney is co-leader of Mayer Brown's Global Financial Services Regulatory & Enforcement practice. He assists both US and international firms anticipate and resolve regulatory, supervisory and structural impediments to their corporate

• bjectives. Tom oversees the conduct of internal investigations

and defends financial services firms that are the subject of enforcement proceedings and Congressional investigations. In addition to financial services firms, Tom has advised foreign governments on their establishment of regulatory and enforcement systems that conform with international standards, including those specified by such bodies as the OECD’s Financial Action Task Force. Full bio here.

Partner, Washington DC E tdelaney@mayerbrown.com T +1 202 263 3216

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David R. Sahr

David Sahr advises domestic and foreign financial institutions on establishing and expanding their operations in the United States as well as on related regulatory, enforcement and compliance matters. He represents banks and their affiliates before federal and state agencies, including the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission. He assists financial institutions in the development and sale of new products including compliance with state and federal banking, securities and commodities laws. David also advises and represents foreign banks on federal legislative developments affecting their US banking and non-banking operations. David has worked closely with banks and trade associations on the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). He has advised numerous clients on their response to the regulatory implementation

• f Dodd-Frank, including drafting comment letters on new capital rules, the

Volcker Rule and new derivatives regulations. Full bio here. Partner, Washington DC E dsahr@mayerbrown.com T +1 202 263 3332

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Donald S. Waack

Donald Waack counsels globally active financial services firms on their most challenging regulatory, transactional, and enforcement matters. Don devotes the majority of his practice to advising banks, bank holding companies, and

• ther financial institutions on complex strategic and regulatory matters,

including investment authority issues and activities restrictions; regulatory capital; swaps market regulation; affiliate transactions and lending limits; and proprietary trading and private fund restrictions arising under the Volcker Rule. He assists financial services clients with structuring significant investments and provides strategic advice and regulatory support for mergers and acquisitions and other complex transactions. Don also counsels hedge funds, private equity funds, and other firms regarding investments in the commercial banking sector and transactions with banks and other regulated counterparties. In connection with his regulatory counseling practice, Don works frequently with the staffs of the major federal and state bank regulatory agencies. Full bio here. Partner, Washington DC E dwaack@mayerbrown.com T +1 202 263 3165