FinCEN Issues Advisory on FATF’s Updated Recommendations
On October 31, FinCEN published an advisory on the international Financial Action Task Force’s (FATF’s) updated list of jurisdictions with serious regulatory deficiencies in anti-money laundering and combatting the financing of terrorism (AML/CFT). The advisory focused on North Korea (DPRK) and Iran, and FinCEN reminded financial institutions of their obligations when dealing with those jurisdictions.
- DPRK: FinCEN noted that FATF urges its members to implement countermeasures against the DPRK because of a shared concern that money is being used to finance DPRK’s nuclear and ballistic missile programs. Financial institutions are expected to close DPRK banks operating within their borders and to terminate relationships with DPRK banks. FinCEN reiterated that the UN and the U.S. Department of the Treasury Office of Foreign Assets Control (OFAC) maintain sanctions on DPRK.
- Iran: FinCEN underlined FATF’s call to implement enhanced due diligence (EDD) with Iran. EDD includes obtaining information on business relationships, transactions with Iranian citizens, and reasons for intended transactions. FinCEN noted the FATF’s disappointment with Iran’s progress in implementing enhanced regulation, particularly because Iran’s Action Plan under the FATF is largely incomplete after Iran failed to meet a January 2018 deadline. Specific action items for Iran that remain to be addressed are:
- adequately criminalizing terrorist financing;
- identifying and freezing terrorist assets;
- ensuring a sufficient and enforceable customer due diligence procedure;
- ensuring full independence of the country’s Financial Intelligence Unit;
- demonstrating that authorities are identifying and sanctioning unlicensed money/value transfer service providers;
- ratifying and implementing the Palermo and Terrorist Financing Conventions;
- ensuring that financial institutions verify that wire transfers have sender/recipient information;
- establish a wide range of penalties for money laundering offenses; and
- ensuring sufficient legislation and procedures for the confiscation of property.
Near the end of its advisory, FinCEN noted that The Bahamas, Botswana, and Ghana had been added to the FATF’s list of jurisdictions lacking effective AML/CFT regulation. The other countries on the list are Ethiopia, Pakistan, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, and Yemen. The Bahamas, Botswana, and Ghana have committed to working with the FATF to address deficiencies in their existing AML/CFT policies and strength regulation.
FDIC to Establish Office of Innovation to Address FinTech
Speaking at an American Bankers Association conference, Chairman Jelena McWilliams of the Federal Deposit Insurance Corporation (FDIC) said that the FDIC plans to launch an Office of Innovation to provide a more approachable environment for banks to innovate and adopt financial technology (fintech). The Chairman stated that the existing regulatory framework has discouraged banks from innovating and seeks to encourage and foster fintech adoption particularly among community banks. The FDIC has already established the industrial loan company, a specialized banking charter for which some firms have applied. Square notably withdrew its application to create a depository bank under this scheme but stated that it plans to file at a later date. Another way in which the FDIC plans to encourage innovation is by working with technology companies to improve banks’ processing services and efficiency. Chairman McWilliams also expressed the need to examine current regulation–specifically how the FDIC regulates banks’ third-party vendor relationships.
CSBS Re-Files Its Lawsuit Challenging the OCC’s Special Charter to FinTech Firms
The Conference of State Bank Supervisors (CSBS) has renewed its challenge to the Office of the Comptroller’s (OCC’s) Nonbank Charter Program for nondepository FinTech firms. On October 25, the CSBS refiled its lawsuit in the U.S. District Court for the District of Columbia (the D.C. Court) seeking declaratory and injunctive relief to stop the OCC from issuing special purpose national bank charters to FinTech firms, which the CSBS and New York’s Department of Financial Services (DFS) view as an unnecessary and unlawful overreach by the OCC. The CSBS and DFS both filed lawsuits in 2017 challenging the OCC’s special charter, but the D.C. Court dismissed both suits in April 2018 for lack of standing and ripeness. The Court perceived the lawsuit as premature, given that the OCC had not yet determined whether it would accept applications for Nonbank Charter Program. But in July 2018, the OCC finalized its charter and announced that it would indeed begin accepting applications. In response, the NYDFS re-filed its lawsuit in September 2018 once again challenging the OCC charter, and the CSBS followed by re-filing its substantively similar lawsuit this month. NYDFS has expressed its support for the newly-filed CSBS suit.
The CSBS lawsuit states that accepting deposits is the defining characteristic of a bank, and that the OCC’s Nonbank Charter Program would pull nonbank FinTech companies into the national banking regulatory system, thereby removing them from state regulation. CSBS argues that the OCC lacks the authority under the National Bank Act to charter nondepository firms without an express authorization from Congress. The lawsuit also says that individual states have historically and successfully regulated nondespository financial institutions and the OCC’s special charter program violates the Tenth Amendment to the U.S. Constitution by preempting state law. Specifically, the CSBS argues that stricter state laws regulating consumer protections would no longer apply to firms operating under the charter. The OCC has responded that the charter would not preempt state law, and state laws regulating usury, antidiscrimination, fair lending, debt collection, taxation, zoning, crime and torts would still apply to firms. No companies have yet been approved as special purpose national banks under the charter, but the OCC said it is discussing potential applications with interested FinTech firms.
The Federal Reserve Maintains Skepticism of Cryptocurrency Bitcoin
New York DFS Approves Bitlicense for Bitcoin ATM Operator
Hong Kong Announces Plan to Regulate Virtual Assets and Sandbox for Trading Platforms
The above is a summary of one of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.