The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Financial Crimes Enforcement Network, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively the “Agencies”) issued a Joint Statement on July 6, 2022, reminding banks[1] of the “risk-based approach to assessing customer relationships and conducting customer due diligence (CDD).”  The Joint Statement reminds banks that the Agencies consider a blanket approach of assessing customer risk, based solely on the type of customer (e.g., casino, auto dealer, etc.), to be inappropriate.  Specifically, the Joint Statement urges financial institutions not to simply ascribe the same level of risk to all customers of a particular type. Rather, banks must use a risk-based approach that evaluates the specific customer at issue when creating customer profiles and when establishing and maintaining customer relationships.  Further, the Joint Statement expresses a preference for enhanced monitoring rather than exiting customer relationships as part of de-risking.[2]

Continue Reading Bank Regulators Remind Financial Institutions Not to Take a One-Size Fits All Approach to Assessing AML Risks from Customer Relationships

On June 22, 2022, the Financial Crimes Enforcement Network (FinCEN) issued a Statement on Bank Secrecy Act Due Diligence for independent ATM owners and operators.  The purpose of the statement is to “provide clarity to banks on how to apply a risk-based approach to conducting customer due diligence (CDD) on independent Automated Teller Machine (ATM) owners or operators, consistent with the requirements set out in FinCEN’s 2016 CDD Rule.”

Under FinCEN’s 2016 CDD Rule, banks are required to establish and maintain written policies and procedures reasonably designed to identify and verify “beneficial owners of legal entity customers.”   This Rule extends to conducting CDD on independent ATM owners and operators who maintain bank accounts to supply cash for their ATMs and to settle the electronic funds transfers used to process ATM transactions.

Continue Reading FinCEN Issues Statement on BSA Due Diligence for Independent ATM Owners and Operators

On June 3, 2022, the Financial Crimes Enforcement Network (FinCen) issued an Advance Notice of Proposed Rulemaking  proposing public comment on the enactment of a no-action letter process.  This Advanced Notice follows FinCen’s Report to Congress submitted in June 2021 that was based on FinCen’s consultation with the Attorney General, State bank supervisors, State credit union supervisors, and other Federal agencies and regulators.  In its report, FinCen evaluated the difficulties it faces because of the overlap between its enforcement authority and other regulators.  FinCen also examined the benefits and concerns on how a no-action letter process could affect illicit finance risks.  FinCen stated that the primary benefits of a no-action letter process “are that it could promote a robust and productive dialogue with the public, spur innovation among financial institutions, and enhance the culture of compliance and transparency in the application and enforcement of BSA.”  Ultimately, FinCen concluded that it should establish a rulemaking to create a no-action letter process.

Continue Reading FinCEN Proposes No-Action Letter Process

On May 26, three days into her term as Vice Chair of the Federal Reserve, Lael Brainard testified about the Federal Reserve’s Examination of the Benefits and Risks of a U.S. Central Bank Digital Currency (CBDC) before the House Committee on Financial Services.  Vice Chair Brainard’s comments reinforced many of the themes from the Fed’s January 2022 discussion paper [1], echoing the need for “clear regulatory guardrails to provide consumer and investor protection” in the rapidly developing digital assets markets while the Federal Reserve considers whether future conditions may give rise to the need for the United States to adopt a CBDC.

Continue Reading Is the Future of the Dollar Digital? The Fed Talks Updating Greenbacks to the Blockchain

Fintech lender Opportunity Financial (“OppFi”) and the Department of Financial Protection and Innovation (“DFPI”), California’s financial-services regulator, filed dueling claims as they battle over state efforts to enjoin the company’s branded loans, which exceed California’s 36% interest-rate cap. This is the latest effort by fintech lenders to cement the True Lender Rule against state opposition.

Continue Reading Opportunity Financial’s Lawsuit Against California’s Financial-Services Regulator Signals Continued Fight Over “True Lender” Principles

Blockchain regulation continues to be the topic du jour, with increasing scrutiny from government agencies across the board. The latest comes from the New York State Department of Financial Services (DFS), which has been a leader in the space since the 2015 “BitLicense” framework under the New York Financial Services Law. On April 28, 2022, new DFS Superintendent Adrienne A. Harris issued fresh guidance encouraging cryptocurrency companies to adopt blockchain analytics tools as a best practice.

Continue Reading New York State Department of Financial Services Takes Aim at Blockchain Entities Circumventing Sanctions on Russia

Reflecting its determination to monitor the crypto markets, the Security and Exchange Commission has renamed the Cyber Unit the “Crypto Assets and Cyber Unit” and is nearly doubling its size from  30 to 50 members, according to a May 3 press release from the agency. The additional permanent positions will include investigative staff attorneys, trial lawyers, and fraud analysts, who will focus their efforts on prosecuting securities violations related to: crypto asset offerings; crypto asset exchanges; crypto asset lending and staking products; decentralized finance platforms; non-fungible tokens (NFTs); and stablecoins. In other words, the SEC will continue to target the full panoply of hot topics in the crypto world.

The expansion puts into effect SEC Chair Gary Gensler’s September comment to Senator Catherine Cortez Mastro of Nevada that the SEC could use “a lot more people” to regulate the 6,000 unique digital “projects” that may qualify as securities under the Howey test. The expanded Crypto Assets and Cyber Unit’s responsibilities will go beyond monitoring the ever-expanding and continually evolving crypto field. As Chair Gensler stated, “By nearly doubling the size of this key unit, the SEC will be better equipped to police wrongdoing in the crypto markets while continuing to identify disclosure and controls issues with respect to cybersecurity.”

The enhancement of the Crypto Assets and Cyber Unit put into action the SEC’s repeated signaling that it will crack down on securities laws violations in the crypto markets. With the increase in staff, stakeholders in the crypto space can expect to see an uptick in crypto-related enforcement actions in 2022. The agency has already brought numerous cases against companies that raised money through initial coin offerings, against crypto exchanges that trade unregistered tokens, and against crypto lending companies. It is also significant that in making this announcement, Chair Gensler specifically named nonfungible tokens (NFTs) as a regulatory priority. The SEC has yet to bring an enforcement action involving NFTs. It appears that the SEC hopes to change that.

On April 25, the Consumer Financial Protection Bureau announced that it will begin examining nonbank “covered persons” that it has determined pose risks to consumers. What is most striking about the announcement is not that the CFPB will start examining this category of nonbanks — it’s had that authority since its inception — but that the CFPB will publicly identify a nonbank as posing risk to consumers before the agency has even conducted its examination.

Read on for details and analysis of this development and implications for the fintech industry.

As tax season approaches, cryptocurrency investors and their advisors are facing heightened scrutiny. The New York State Office of the Attorney General recently announced its commitment to hold “cryptocurrency tax cheats accountable.” Taxpayers who fail to properly declare their crypto income could face treble damages, interest, and penalties under the New York False Claims Act, in addition to criminal prosecution and separate liabilities and penalties under the tax law.

Continue Reading Enforcers Eye Crypto Tax Dodgers, Their Accountants and Lawyers

On March 31, 2022, the Federal Deposit Insurance Corporation (FDIC) issued the March 2022 edition of its Consumer Compliance Supervisory Highlights. The publication provides a high-level overview of consumer compliance issues identified in 2021 through the FDIC’s supervision of state-chartered banks and thrifts that are not members of the Federal Reserve System.  It provides important guidance regarding compliance priorities for these financial institutions.

Continue Reading FDIC Consumer Compliance Supervisory Highlights for State and Community Banks