“Culture of Compliance” Urged by FinCEN
Following months of rumors that the Financial Crimes Enforcement Network (FinCEN) is preparing to impose personal liability on officers, directors and employees for shortcomings in their financial institutions’ Bank Secrecy Act and Anti-Money Laundering (BSA/AML) compliance, the agency issued a special advisory, FIN-2014-A007, on the need to create a “culture of compliance.”
Stating that an institution with a poor culture of compliance is “likely to have shortcomings in its BSA/AML program,” the new Advisory outlines six steps an institution can take to strengthen its compliance culture. These steps, which reflect general lessons “gleaned” from recent FinCEN enforcement actions, are intended to be instructive to leadership of all financial institutions required to comply with the BSA – including banks, securities firms, money transmitters, insurance companies, casinos and others.
The first area is “engaged leadership,” including the board of directors, senior and executive management as well as owners and operators. The leaders are not only responsible for understanding the institution’s responsibility for BSA/AML compliance and creating a culture of compliance within the institution, but they also are expected to be visible, demonstrating their commitment and support for the compliance program. They should receive periodic training tailored to their roles and “remain informed of the state” of compliance within the institution.
Second, compliance staff must have sufficient authority and autonomy, and efforts to effectively manage and mitigate BSA/AML deficiencies and risks should not be compromised by revenue considerations. Using as an example Money Services Businesses (MSBs), which derive a significant percentage of revenue from agents, FinCEN said that if a principal MSB learns of possibly inappropriate agent activity, the activity should be thoroughly investigated with appropriate action taken – including termination of the agent – regardless of the impact on revenue.
Third, FinCEN noted that several recent enforcement actions involved institutions that had relevant information but failed to make it available to BSA/AML compliance staffing, possibly due to a lack of mechanism to share, a lack of appreciation as to why the information is important or an intentional decision not to share. The Advisory encouraged organizations to share information companywide as “there is information in various departments within a financial institution that may be useful and should be shared with the compliance staff.” The Advisory noted, for example, that casinos which develop significant information on their gaming customers for purposes of marketing or extending credit should share this information with the compliance staff for customer due diligence and suspicious activity monitoring.
Leadership should provide adequate resources, both human and technological, devoted to BSA/AML compliance (including sufficient staffing to handle alerts and appropriate automated systems for suspicious activity detection and monitoring). Likewise, to ensure an effective compliance program, it should be tested by an independent, qualified, unbiased internal or external person without conflicting business interests.
Finally, FinCEN said that leadership and staff at all levels of the institution should understand how their BSA/AML reports are used by law enforcement and others, and that “they are not simply generating reports for the sake of compliance.” The Advisory noted that they provide tips used to initiate investigations, expand existing investigations, promote international informational exchanges, or identify significant relationships, trends and patterns.
To read FIN-2014-A007, click here.
Why it matters:After the Advisory was issued, FinCEN director Jennifer Shasky Calvery remarked, “I can say without a doubt that a strong culture of compliance could have made all the difference,” in enforcement actions she has worked on. Ten days later, FinCEN announced an enforcement action against a casino employee, barring him from the casino industry for life and fining him. The FinCEN director noted that this “action not only stresses the importance of the culture of compliance, but also ensures that [this individual] will not have the opportunity to engage in similar misconduct in the future.”
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Auto Finance Company to Pay CFPB $2.75M for Inaccurate Credit Report Info
The Bureau of Consumer Financial Protection (CFPB) took action against an automotive finance company for allegedly knowingly providing inaccurate information to credit reporting agencies about consumers for years, fining the Texas-based company $2.75 million.
According to the CFPB, First Investors Services Group, which offers both direct and indirect auto purchase financing focusing primarily on subprime borrowers, was aware of flaws in its computer system that distorted the credit records of consumers in violation of the Fair Credit Reporting Act (FCRA) by furnishing incorrect information to credit reporting agencies – and failed to fix the problems.
The misinformation included inaccurate reports about how much consumers were paying toward their debt, incorrect dates of first delinquency, inflating the number of delinquencies when reporting borrowers’ previous 24 months of activity, and statements that some consumers had their vehicles repossessed when they had actually been voluntarily surrendered.
Over a three-year period, First Investors provided inaccurate data on 118,855 accounts, the CFPB estimated, even after being made aware of the issue in April 2011. When the company learned of the problem, it simply notified its vendor but did not take any additional steps, such as replacing the system or correcting the inaccurate information, the Bureau said, and continued to use the flawed system for years.
In addition to the monetary penalty, the company agreed to conduct a review of its accounts, correct inaccuracies, and inform consumers about any errors while explaining their right to dispute information and obtain a free credit report. The CFPB also required First Investors to provide sufficient staffing, facilities, systems, and information for the company to timely and completely respond to consumer disputes to achieve compliance with the FCRA, as well as establish an audit program.
To read the consent order, click here.
Why it matters:“First Investors showed careless disregard for its customers’ financial lives by knowingly distorting their credit profiles for years,” CFPB director Richard Cordray said in a statement about the action. “Companies cannot pass the buck by blaming a computer system or vendor for their mistakes. Today’s action sends a signal that the CFPB will hold companies accountable for sending inaccurate information to credit reporting agencies.” Notably, the inaccurate reports were due to problems at the third-party vendor, not at the lender. The action therefore reminds companies that the CFPB is holding entities responsible for the acts of their outsource partners.
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Ninth Circuit: AG’s Suit Challenging Add-On Products Stays in State Court
Lawsuits filed by the Hawaii Attorney General alleging that card issuers deceptively advertised add-on products belong in state court – and are not preempted by the National Bank Act (NBA), the Ninth U.S. Circuit Court of Appeals has ruled.
Hawaii’s Attorney General (AG) filed suit in state court against HSBC Bank, Capital One, Citigroup, JP Morgan Chase, Discover Bank, and Bank of America claiming that the defendants deceptively marketed and improperly enrolled customers in add-on credit card products, particularly payment protection plans.
Specifically, the complaints charged that the defendants enrolled cardholders in plans without their consent, even those that did not qualify for the plan’s benefits; confused customers with deceptive marketing, contract language, and billing; and targeted “vulnerable” populations such as subprime borrowers. Three state law causes of action were asserted: two violations of Hawaii’s unfair and deceptive trade practices statute and an unjust enrichment claim.
The defendants successfully removed the cases to federal court and the AG moved to remand. A federal district court judge denied the motion. The Class Action Fairness Act (CAFA) did not provide an independent basis for federal jurisdiction, the judge held, but at least one of the claims against each defendant was preempted by the NBA’s provisions prohibiting state law challenges to interest rates charged by national banks.
The AG appealed. He argued that the relevant provisions of the NBA, Sections 85 and 86, did not apply because his complaints did not invoke Hawaii’s usury law. Instead, he argued his complaint focused on the defendant’s allegedly deceptive marketing and advertising.
Agreeing with the AG, the Ninth Circuit reversed the district court’s denial to remand.
Sections 85 and 86 of the NBA completely preempt state law claims challenging interest rates charged by national banks.
The first two counts of the complaints alleged violations of Hawaii’s unfair and deceptive acts and practices statutes, “which govern business disclosure, contractual terms, and trade practices,” the unanimous panel wrote. “None of these provisions proscribes the interest that a financial institution may charge.” Side-stepping the issue of whether payment protection plan fees are interest, the court held the complaint did not actually challenge the interest rates charged by the issuers.
As for the unjust enrichment claim, even though the request for damages may well require the card providers to disgorge any financial gain from the fees in the form of civil penalties and restitution, the Ninth Circuit said that was irrelevant. “[I]f a plaintiff asserts a usury claim simply by virtue of requesting damages, the states’ settled authority ‘to regulate national banks in areas such as contracts, debt collection, acquisition and transfer of property, and taxation, zoning, criminal and tort law’ would be rendered meaningless,” the court said.
For their part, the defendants pointed to language in the complaints that they charged “over-the-limit fees” and that consumers received “virtually no benefit” from the products.
But the court disagreed, stating that the allegations were consistent with unfair and deceptive acts claims. “The Attorney General could have claimed that the card providers charged excessive fees,” the panel wrote. “But he did not; even if the facts in the complaints might support a Section 86 claim, that does not mean the Attorney General pleaded one.”
Further, the “state law claims here were independent of and did not ‘merely duplicate rights and remedies available under’ Sections 85 and 86,” the court concluded. “The unfair and deceptive practice claims targeted alleged marketing misrepresentations. The unjust enrichment claims arose from the purported failure to obtain consent before enrolling consumers in debt protection products. Regardless of the rates charged, the banks had independent state law obligations to obtain consent from and not to deceive consumers. These claims are not preempted by the National Bank Act.”
The panel found additional support in a decision from the Fifth U.S. Circuit Court of Appeals decided last year in a similar case filed by the Mississippi AG, as well as federal courts in California, Iowa, Mississippi, and West Virginia.
Affirming the district court, the Ninth Circuit also ruled that CAFA did not provide jurisdiction for the suits, as the AG filed them as civil enforcement actions and specifically disclaimed class status.
To read the opinion in Hawaii v. HSBC Bank, click here.
Why it matters: The decision is a victory for the Hawaii AG, sending the case back to state court and allowing it to move forward in lieu of preemption under the NBA. Through careful pleading and avoiding allegations based on the actual rate of interest charged by the card issuers, both the Hawaii and Mississippi AGs have found a way to keep their lawsuits against the banks alive. But for banks, these cases are creating an ever-increasing hole in the preemption protections of the NBA.
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Merchants Ask Supreme Court to Consider Interchange Fees
A coalition of merchants and retailers has requested that the U.S. Supreme Court weigh in on interchange fees.
In March, the D.C. Circuit Court of Appeals upheld the rules promulgated by the Board of Governors of the Federal Reserve capping fees on debit interchange and establishing antiexclusivity requirements for payment card networks.
The rules, issued by the Board of Governors at the direction of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Durbin Amendment, imposed a cap of 21 cents plus 0.5 percent of a transaction’s value when consumers use a debit card.
Trade groups, including the National Association of Convenience Stores (NACS) and the National Retail Federation, sued. A federal district court struck down the rules, writing that “the Board completely misunderstood the Durbin Amendment’s statutory directive and interpreted the law in ways that were clearly foreclosed by Congress.”
But a unanimous three-judge panel reversed the ruling, finding the rules reasonable.
Refusing to give up the fight, the NACS, joined by other trade associations and retailers, filed a writ of certiorari asking the Justices to consider whether the Board of Governors properly implemented the Durbin Amendment’s interchange fee limitations by allowing banks to recover their fixed costs of operating debit card programs. (The groups declined to appeal the ruling on antiexclusivity requirements.)
“This Court should not countenance the Board’s disregard of Congress’s will,” the groups wrote, calling the D.C. Circuit’s ruling “a significant legal error” with “multi-billion dollar consequences for millions of parties every year.”
The petition makes three arguments in favor of Supreme Court review: that the Durbin Amendment prohibits the interchange fee standard adopted by the Board; the federal appellate panel afforded the Board the incorrect standard of deference; and the “surpassing importance” of the issue necessitates the Court’s intervention.
The Durbin Amendment includes a prohibition on banks charging interchange fees for costs “which are not specific to a particular electronic debit transaction.” That language is unambiguous, the petitioners told the Court, and should not include the fixed costs of computer equipment and software that make it possible to provide debit card services. Such costs are not specific to a particular transaction any more than costs specific to a particular meal include the cost of a stove, they told the Justices.
Too much deference was given to the Board of Governors’ rulemaking authority because the D.C. Circuit analogized the process to ratemaking, the groups wrote. Instead, the Board should have been denied any level of deference, as its interpretation of the Durbin Amendment was “incoherent” and conflicted with the plain language of the statute.
Lastly, the NACS emphasized the importance of the issue and the “massive” financial effect of the rule, which applies to more than 30 billion regulated transactions a year. “The D.C. Circuit’s approval of the Board’s egregious misinterpretation of the Durbin Amendment substantially harms a large swath of American businesses, as well as American consumers, every single day,” the petitioners wrote.
To read the certiorari petition in NACS v. Board of Governors of the Federal Reserve System, click here.
Why it matters:Overturning the rules promulgated by the Board of Governors of the Federal Reserve capping fees on debit interchange and establishing antiexclusivity requirements for payment card networks could substantially change the impact of the Durbin Amendment. Will the U.S. Supreme Court take up the issue of interchange fees? The answer will remain unknown until the Federal Reserve files its reply brief (due September 19) and the Justices add the case to their list for consideration.
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