FinCrimes Update - Summary, Volume 1, Issue 4



On June 5, the FDIC and a Delaware bank entered a consent order that prohibits the bank from entering into any new relationships with third-party prepaid card processors or prepaid card program managers until the FDIC approves a written report from the bank that details the steps taken by the bank to (i) implement new BSA compliance policies and procedures; (ii) improve staff training; (iii) implement controls sufficient to mitigate BSA and safety and soundness risk associated with prepaid card, credit card merchant acquiring, and ACH activities; and (iv) perform a BSA risk assessment. The order similarly restricts the bank’s activities related to credit card merchant acquiring and ACH merchant payment processing. The order does not prohibit the bank from issuing prepaid cards through existing distribution channels under existing contracts with third-parties, but does restrict certain activities related to existing credit card and ACH processing activities. In addition, the bank must (i) retain and designate BSA and OFAC officers; (ii) conduct a suspicious activity reporting look-back review; and (iii) submit periodic progress reports. Finally, the order requires increased board supervision of the bank’s BSA compliance program and mandates the creation of a board-level BSA committee.
On June 18, the U.S. Attorney for the District of Maryland announced that a federal judge ordered a bank to forfeit  $560,000 in drug proceeds laundered through the bank on which the bank failed to file currency transaction reports. The DOJ claimed that a member of a drug trafficking organization asked a teller at a Maryland bank branch to convert the proceeds from the sale of illegal drugs from small denomination bills to $100 bills, and paid the teller a one percent fee for each transaction for making the exchange without filing a currency transaction report. The government filed a civil action in February 2014 seeking forfeiture and alleging that the money was subject to forfeiture because the bank failed to file currency transactions reports on bank transactions in amounts in excess of $10,000, as required by law. The teller admitted that on each occasion she converted the bills without filing or causing anyone else at the bank to file a currency transaction report. She was sentenced to a month in prison followed by eight months of home detention for failing to file currency transaction reports on suspected drug proceeds, and must perform community service and forfeit the $5,000 she was paid in the scheme.
On June 25, the OCC published its semiannual risk report, which provides an overview of the agency’s supervisory concerns for national banks and federal savings associations, including operational and compliance risks. As in prior reports and as Comptroller Curry has done in speeches over the past year, the report highlights cyber-threats and BSA/AML risks. The OCC believes cyber-threats continue to evolve and require heightened awareness and appropriate resources to identify and mitigate the associated risks. Specifically, the OCC is concerned that cyber-criminals will transition from disruptive attacks to attacks that are intended to cause destruction and corruption. Extending another recent OCC theme, the report notes that the number, nature, and complexity of both foreign and domestic third-party relationships continue to expand, resulting in increased system and process interconnectedness and additional vulnerability to cyber-threats. The report also states that BSA/AML risks “remain prevalent given changing methods of money laundering and growth in the volume and sophistication of electronic banking fraud.” The OCC adds that “BSA programs at some banks have failed to evolve or incorporate appropriate controls into new products and services,” and again cautions that a lack of resources and expertise devoted to BSA/AML risk management can compound these concerns.
On June 20, Fannie Mae issued Servicing Guide Announcement SVC-2014-11, which reminds servicers that under a recent FinCEN rule, Fannie Mae is considered a financial institution subject to BSA requirements. The announcement advises servicers subject to the AML provisions of the BSA that they are obligated to be in compliance with the BSA, and to report to Fannie Mae: (i) all instances of noncompliance, compliance failures, or sanctions related to BSA/AML requirements; (ii) suspicious activity related to Fannie Mae loans or business activities; and (iii) changes in ownership interest. Servicers may implement these requirements immediately, but are required to do so no later than August 25, 2014.
On June 5, OFAC announced a Dutch aerospace firm has agreed to pay $21 million to resolve allegations that the company violated U.S. sanctions on Iran and Sudan. OFAC alleged that from 2005 to 2010, the company indirectly exported or re-exported aircraft spare parts to Iranian or Sudanese customers, which the company either specifically procured from or had repaired in the United States, and required the issuance of a license by a federal agency at the time of shipment. The company self-reported 1,112 apparent violations of the Iranian Transactions and Sanctions Regulations, and 41 apparent violations of the Sudanese Sanctions Regulations. The settlement includes the payment of a $10.5 million civil penalty to OFAC and the Department of Commerce’s Bureau of Industry and Security, a forfeiture of an additional $10.5 million pursuant to a deferred prosecution agreement reached with the DOJ, and the acceptance of responsibility for its alleged criminal conduct. OFAC stated that the base penalty for the alleged violations was over $145 million, however it agreed to a lower settlement after considering that the company self-disclosed the violations and the company: (i) had no OFAC sanctions history in the five years preceding the date of the earliest of the alleged violations; (ii) adopted new and more effective internal controls and procedures, and (iii) provided substantial cooperation during the investigation.
U.S. COMPANY SETTLES POTENTIAL CUBA TRAVEL SANCTIONS VIOLATIONS. On June 27, OFAC announced that Red Bull North America, Inc. agreed to pay $89,775 to settle potential civil liability for seven alleged violations of the Cuban Assets Control Regulations. OFAC alleged that during a short period in 2009, seven representatives of the company traveled to Cuba to film a documentary. According to OFAC production of the film, as well as the associated travel, was approved by company management. The company did not obtain prior authorization from OFAC. OFAC determined that the company did not voluntarily self-disclose the alleged violations and that the alleged violations constituted a non-egregious case. OFAC explained that he maximum penalty amount for the alleged violations was $455,000, and the base penalty amount was $105,000. The final agreed penalty reflects OFAC’s consideration of the following: (i) the company had prior knowledge of U.S. Cuba sanctions and allegedly took steps to conceal the transactions; (ii) the company is a U.S. subsidiary of a sophisticated multinational company with extensive experience in international trade; (iii) the company made a remedial response by instituting an OFAC compliance program; and (iv) the company has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the alleged unauthorized travel.


On June 23, the DOJ released a transcript of a message delivered by Attorney General Eric Holder in which he pledged to continue investigations of financial institutions “that knowingly facilitate consumer scams, or that willfully look the other way in processing such fraudulent transactions.” These investigations are part of the DOJ’s “Operation Choke Point,” which has faced from financial institutions and their advocates on Capitol Hill, and which payday lenders recently filed suit to halt. Opponents of the operation assert that the DOJ investigations, combined with guidance from prudential regulators, are targeting lawful businesses and cutting off their access to the financial system. In his remarks, the AG promised that the DOJ will not target “businesses operating within the bounds of the law,” but vowed to continue to pursue “a range of investigations into banks that illegally enable businesses to siphon billions of dollars from consumers’ bank accounts in exchange for significant fees.” Mr. Holder stated that he expects the DOJ to resolve some of these investigations in the coming months.   


On June 4, the U.S. Court of Appeals for the Second Circuit vacated and remanded a district court’s decision to reject a proposed settlement between the SEC and a financial institution in a securities fraud suit. SEC v. Citigroup Global Markets Inc., No. 11-5227, 2014 WL 2486793 (2d Cir, Jun. 6, 2014). In November 2011, the SEC and the financial institution entered into a consent judgment to resolve allegations that the institution violated securities laws in connection with certain mortgage-backed securities. Consistent with the SEC consent judgment convention at the time, the institution did not admit or deny any of the allegations as part of the agreement. Judge Jed Rakoff of the Southern District of New York rejected the agreement and held that because the parties agreed to settle without the institution having to admit or deny any of the underlying factual allegations, the settlement would deprive the public “of ever knowing the truth in a matter of obvious public importance,” and the court lacked evidence sufficient to determine whether the agreement was in the public interest. On appeal, the Second Circuit held that the proper standard for reviewing a proposed enforcement agency consent judgment is whether the proposed consent decree is fair and reasonable, and in the event the agreement includes injunctive relief, whether “the public interest would not be disserved.” The court held that in evaluating whether an SEC consent decree is “fair and reasonable” one must review (i) the basic legality of the decree; (ii) whether the terms are clear; (iii) whether the decree resolves the actual claims in the complaint; and (iv) whether the decree is “tainted by improper collusion or corruption.” The court also ruled that the district court abused its discretion by requiring that the agreement establish the “truth” of the allegations, explaining that trials are meant to determine truth, while consent decrees are about “pragmatism.” Finally, the court held that the district court abused its discretion to the extent that it withheld approval of the settlement because it believes the SEC failed to bring the proper charges, which is the exclusive right of the SEC to decide.
On June 10, the U.S. Court of Appeals for the District of Columbia affirmed the district court’s decision not to enjoin the federal government from pursuing alleged False Claims Act violations against a bank that argued such claims were precluded by the terms of the National Mortgage Settlement. United States v. Bank of Am. Corp., No 13-5112, 2014 WL 2575426 (D.C. Cir., Jun. 10, 2014). The bank sought to halt a suit filed by the government in the Southern District of New York (SDNY), in which the government alleges that the bank’s certification of loans as eligible for FHA insurance under the FHA’s Direct Endorsement Lender Program violated the False Claims Act. The bank asserted that the National Mortgage Settlement contains a comprehensive release for certain liability with respect to its alleged FHA mortgage lending conduct. The appeals court held that the agreement releases only the narrower category of liability for loans based on allegations that the bank’s annual certification was false without regard to whether any such loans contain material violations of HUD-FHA requirements, , and held that distinct loan-level violations for such loans would provide an independent basis for liability. However, the appeals court agreed that the SDNY must construe the government’s complaint and “ensure that the claims are litigated in a manner that comports with the [National Mortgage Settlement] Release’s limitations.” The appeals court agreed with the bank that some of the government’s claims “tread on the verge of the released claims, referencing false annual certifications explicitly.” The appeals court noted that the government repeatedly conceded that, to comport the SDNY suit with the National Mortgage Settlement release terms, “material violations do need to be demonstrated with respect to individual loans,” and cautioned the government that, should prosecution of its claims depart from that concession, the bank may seek appropriate relief.


On June 19, the CFPB and the DOJ announced parallel enforcement actions against a federal savings bank that allegedly violated ECOA in the offering of credit card debt-repayment programs and allegedly engaged in deceptive marketing practices in the offering of certain card add-on products. The bank will pay a total of $228.5 million in customer relief and penalties to resolve the allegations. Read more…
On June 12, the CFPB announced its latest RESPA enforcement action, adding to one of the CFPB’s most active areas of enforcement. In this case, the CFPB required a New Jersey title company to pay $30,000 for allegedly paying commissions to more than twenty independent salespeople who referred title insurance business to the company. The matter was referred to the CFPB by HUD. Read more…
On June 17 the DOJ, the CFPB, HUD, and 49 state attorneys general and the District of Columbia’s attorney general announced a $968 million consent judgment with a large mortgage company to resolve numerous federal and state investigations regarding alleged improper mortgage origination, servicing, and foreclosure practices. The company agreed to pay $418 million to resolve potential liability under the federal False Claims Act for allegedly originating and underwriting FHA-insured mortgages that did not meet FHA requirements, failing to adhere to an effective quality control program to identify non-compliant loans, and failing to self-report to HUD the defective loans it did identify. The company also agreed to measures similar to those in the National Mortgage Settlement (NMS) reached in February 2012.  In particular, the company will (i) provide at least $500 million in borrower relief in the next three years, including by reducing the principal on mortgages for borrowers who are at risk of default, reducing mortgage interest rates for current but underwater borrowers, and other relief; (ii) pay $50 million to redress its alleged servicing violations; and (iii) implement certain changes in its servicing and foreclosure activities to meet new servicing standards. The agreement is subject to court approval, after which compliance with its terms, including the servicing standards, will be overseen by the NMS Monitor, Joseph A. Smith Jr.   


On June 25, New York Attorney General (AG) Eric Schneiderman announced the filing of a civil suit against a large international bank alleging that, from 2011 to the present, the bank violated the Martin Act by making false statements to clients and the investing public about how, and for whose benefit, the bank operates its private securities trading venue, i.e. its dark pool. The AG claims that the bank actively sought to attract high frequency traders to its dark pool, and provided such traders advantages over others trading in the pool, while telling clients and investors that it implemented special safeguards to protect them from such high-frequency traders. Specifically, the AG alleges that the bank: (i) falsified marketing materials purporting to show the extent and type of high frequency trading in its dark pool; (ii) falsely marketed the percentage of high frequency trading activity in its dark pool; (iii) made a series of false representations to clients about its “Liquidity Profiling” service; (iv) falsely represented that it routed client orders for securities to trading venues in a manner that did not favor its own dark pool; and (v) secretly provided high frequency trading firms informational and other advantages over other clients trading in the dark pool. The suit seeks an order requiring the bank to pay damages, disgorge amounts obtained in connection with the alleged activities, and make restitution of all funds obtained from investors in connection with the alleged acts.
On June 16, Massachusetts Attorney General (AG) Martha Coakley announced that a large mortgage servicer agreed to provide $3 million in borrower relief and pay $700,000 to the Commonwealth to resolve allegations that the servicer failed to provide certain notices to homeowners, as required by state law, and that it unlawfully foreclosed on certain properties. Specifically, the AG alleged that the servicer failed to send state-mandated notices to homeowners in default, and failed to execute proper mortgage assignments, filed in the Massachusetts Registry of Deeds, as required by Massachusetts law. The agreement also resolves claims that a servicer acquired by the settling servicer allegedly initiated foreclosures when it did not hold the actual mortgages, a violation of Massachusetts law, as established by a 2011 state supreme court decision. As described in the AG’s announcement, the agreement requires the servicer to properly execute documents filed in connection with foreclosure proceedings, and to mail to residents notices that are in compliance with applicable statutes and regulations.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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