Financial Services Law

DOJ Charges Operators of Unregistered Bitcoin Exchange with Failure to File SARs on Bitcoin Sales to Victims of Ransomeware

Why it matters

The AML compliance community is still wrestling to understand the full implications of an indictment filed against two men who allegedly operated a Bitcoin exchange that had not been registered as a money services business with the Financial Crimes Enforcement Network. The charge of operating an unregistered MSB itself was almost mundane for an industry under heavy law enforcement scrutiny. Instead, the questions surround the charge that the individuals failed to file Suspicious Activity Reports (SARs) on activity involving customers who needed Bitcoin to pay Ransomware to prevent encryption of their computer data by hackers. The indictment also alleges that the two defendants had undue influence on a federally insured credit union that handled the exchange's banking operations for a period of time, including the decision to provide a banking relationship to a payment processor for the Bitcoin exchange, and that they tried to "trick" major financial institutions about the nature of their business.

Detailed discussion

According to the recently unsealed criminal complaint filed in New York federal court, Anthony R. Murgio and Yuri Lebedev operated, a Bitcoin exchange that charged consumers a fee to exchange Bitcoins for cash. The indictment charged the two with operating an "unlicensed" money services business and failing to file any suspicious activity reports on Bitcoin exchange transactions involving victims of Ransomware. Allegedly, the defendants knowingly exchanged at least $1.8 million Bitcoins for cash for customers that they knew were engaged in criminal activity as well as individuals who claimed they were "Ransomware" attack victims needing Bitcoins to "pay off" cybercriminals to regain access to their computer system.

The two defendants (as well as various co-conspirators) allegedly tried to evade detection and "trick" major financial institutions with a business operated by setting up a fake front company (the "Collectibles Club") and website. In addition, one of the defendants also allegedly "obtained beneficial control" of a federal credit union, installing the other defendant on the institution's board of directors and transferring's banking operations to the credit union. The credit union then allegedly functioned as a "captive bank for their unlawful business." One of the defendants also helped a payment processor open an account at the credit union and use the account to process more than $30 million per month in ACH transactions for and "other purported businesses."

The indictment notes that in January 2015, the National Credit Union Administration discovered the operation and forced the credit union to cease engaging in unlawful activity. One of the defendants allegedly then managed to find "new, overseas payment processing channels" for the business.

The charges each carry a maximum prison sentence of five years. Murgio could be facing more time, with additional charges of one count of money laundering and one count of willful failure to file a suspicious activity report (maximum sentences of 20 and five years, respectively).

To read the complaint in U.S. v. Murgio, click here.

To read the complaint in U.S. v. Lebedev, click here.

To read the DOJ press release, click here.

back to top

Something Else to Complain About: CFPB to Share Monthly "Snapshot" of Consumer Complaints

Why it matters

Already unhappy with the Consumer Financial Protection Bureau's (CFPB) creation of a public database of complaints featuring consumer narratives, financial institutions now have even more to worry about: monthly "snapshots" issued by the agency about the complaints. The CFPB announced that it will issue monthly reports intended to "highlight key trends" in consumer complaints submitted to the Bureau, with data on complaint volume and company performance, including a list of the companies the agency received the most complaints about and the most complained-about products. In addition to sharing statistics each month, the agency said it will focus on a particular product and geographic location. For the July snapshot, the CFPB took a closer look at debt collection complaints and the complaints filed by consumers in Milwaukee, Wisconsin. In the debt collection ecosystem, the Bureau said consumers complain about the collection of debts not owed and the communication tactics used by collectors; as for Milwaukee, the CFPB reported that the city generates a high number of debt collection complaints and lower mortgage and credit reporting complaints than the national average. Although debt collection was an obvious first target, the CFPB in future snapshots is likely to focus on more mainstream products and services, including home loans, credit cards and add-on products.

Detailed discussion

The Consumer Financial Protection Bureau (CFPB) began accepting consumer complaints in July 2011, initially limited to credit card products. Since then, however, the Bureau has continued to add new categories of products, including mortgages, bank accounts and services, private student loans, auto and other consumer loans, credit reporting, debt collection payday loans, money transfers and, most recently, prepaid cards and nonbank products. As of July 1, 2015, the Bureau has handled 650,700 complaints.

Earlier this year, the Bureau introduced the addition of narratives to the Consumer Complaint Database, allowing consumers to publish details about their problem with a financial institution. While the CFPB argued that the "natural extension" of the complaint process would spur competition among businesses, the industry expressed concern about reputational damage resulting from the disclosure of complaints that were unverified.

Expanding the potential negative publicity for financial institutions: the addition of monthly "snapshots" released by the agency.

"Consumer complaints are the CFPB's compass and play a central role in everything we do. They help us identify and prioritize problems for potential action," director Richard Cordray said in a statement. "These monthly reports will enable us to share that data with the public more regularly, so that everyone can benefit from the information."

The monthly reports will reveal complaint volume, product trends, state-specific information, and spotlight one consumer product and one geographic location for a deep dive, the CFPB said. For the first monthly report, the agency reviewed data as of July 1, 2015.

Of the 23,400 complaints handled by the Bureau, more than 7,400 of them—or roughly 32 percent—were about debt collection, making it the most complained-about category, followed by mortgages (upwards of 4,700 complaints) and credit reporting, with about 4,300 complaints. The CFPB noted that consumer loan complaints showed the greatest percentage increase, nearly doubling over the course of a year from an average of 660 complaints to 1,020 complaints per month.

The number of complaints filed in each state fluctuated, with Hawaii, West Virginia, and Maine experiencing an increase in volume (up 41, 38, and 38 percent, respectively), while South Dakota, Iowa, and Rhode Island trended downward in complaints, at a rate of 40, 14, and 12 percent, respectively.

Each snapshot will also feature a list of the most complained-about companies. For this category, the Bureau currently uses a three-month rolling average of complaints, with data lagging behind the other complaint data in the report to reflect the 60-day period given to companies to respond to complaints. The CFPB questioned how to "normalize" complaint data for the size and volume of larger businesses, issuing a Request for Information asking for public input on how to achieve this goal, with a comment period open until August 31.

Turning to the monthly product spotlight, the Bureau focused on debt collection. After handling more than 163,000 debt collection complaints, the CFPB found the most common reason for grievances is the collection of debts not owed, followed by the communication tactics used by collectors (being contacted too frequently or at inconvenient times of the day, for example).

For the geographic component of its spotlight, the agency reviewed data from Milwaukee, Wisconsin. "Highlighting one particular region or location can spur people into creating their own localized reports and seeing what consumers in their own areas are saying about the financial marketplace," the CFPB said. Of the 650,700 complaints handled by the Bureau over the last four years, just 1 percent—or about 7,700—were filed by consumers in Wisconsin. Of those, 34 percent came from consumers in the Milwaukee metro area.

Debt collection again ranked first as the most common complaint from Milwaukee, although consumers in the metro area submit fewer mortgage complaints (26 percent versus 28 percent), the CFPB reported, and fewer credit reporting complaints (12 percent versus 15 percent), than the national average.

To read the CFPB's Monthly Complaint Report for July 2015, click here.

To comment on the Bureau's Request for Information to normalize company data, click here.

back to top

Senator Shelby's Push for Financial Regulatory Reform

Why it matters

Five years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, efforts on Capitol Hill seek to continue to turn back many of its regulatory restrictions. Sen. Richard Shelby (R-Ala.), Chairman of the Senate Banking Committee, in June introduced Senate Bill 1484, or the Financial Regulatory Improvement Act of 2015, which would provide a safe harbor for banks under the qualified mortgage rules and increase scrutiny of the Federal Reserve Board of Governors. The legislation would also impact small and medium banks by changing some of the rules established under Dodd-Frank, such as extending the period between examinations, providing an exemption from the Volcker Rule's trading restriction for banks with less than $10 billion in assets, and potentially allowing banks under the $500 billion mark to avoid heightened regulation including stress tests. As an indication of his efforts to get the plan passed, however possible, Sen. Shelby also included the proposal in the 2016 Financial Services Appropriations Bill, which was approved by the Senate Appropriations Committee in late July. "We will have two trains running here," Sen. Shelby said. "We're open to discussions with the Democrats … and I hope this will show we're serious about this." However, Democrats have objected to the plan, which they say will return to the pre-Dodd-Frank days of lax oversight, and the White House has warned President Barack Obama would veto the law if it were passed. Given the partisan problems, the chance of passage looks unlikely. To avoid a filibuster in the Senate, Sen. Shelby would need a significant increase in Democratic support that does not appear to exist.

Detailed discussion

In June, Sen. Richard Shelby (R-Ala.) introduced the Financial Regulatory Improvement Act of 2015, proposing multiple changes to the existing regime. Among the changes:

  • Increased supervision of the Federal Reserve. Pursuant to the legislation, the Federal Open Market Committee (FOMC) would be required to send Congress a quarterly report with details of the agency's data and analysis that form the basis of the Fed's policy decisions. Currently, the agency only provides reports twice a year. The chairperson of the Fed would still appear before Congress on a bi-annual basis and would fill the currently empty position of vice chairman of supervision. The FOMC would also take over the power to set the interest rate paid to banks on reserves in the central banks from the Federal Reserve Board. In addition, the head of the New York Fed would need Senate confirmation.
  • Safe harbor under the qualified mortgage rules. As long as a bank assumes the risk of the home loans by holding them in its own portfolio, the bill would grant a safe harbor from the qualified mortgage rules promulgated by the Consumer Financial Protection Bureau.
  • Regulatory changes for small and medium banks. Small banks would be subject to decreased oversight under S.B. 1484, with fewer quarterly reporting requirements and an exemption from the Volcker Rule's trading restrictions for banks with less than $10 billion in assets. Small insured depository institutions would face less frequent regulatory exams by raising the asset threshold of $500 million to $1 billion, qualifying more banks for the 18-month on-site exam cycle. The proposed law would bump up the threshold established by Dodd-Frank to subject banks to stricter requirements, such as stress tests from $50 billion to more than $500 billion assets. For those banks that fall between the $50 billion and $500 billion mark, regulators would have the discretion to decide whether or not to impose heightened regulations, guided by factors such as the size of the bank, the institution's international reach, and its overall complexity.
  • Privacy notice exception. The bill would amend the Gramm-Leach-Bliley Act's requirement to provide annual written notice of a financial institution's privacy policy. A bank would be exempt from the requirement if it shares nonpublic personal information only in accordance with specified requirements, has not changed its policies and practices with respect to disclosing nonpublic personal information since the most recent disclosure was provided, and otherwise provides customers access to the most recent disclosure in electronic or other form.
  • Nonbank financial institutions. Nonbank entities are currently designated "systemically important" by the Financial Stability Oversight Council (FSOC), earning them heightened regulatory scrutiny. Sen. Shelby's proposal would create additional steps in the process before the label could be applied, allowing the entity to submit a "remedial plan" to address the concerns of the FSOC. If a company is labeled as systemically important, the FSOC must vote to renew the designation after five years or the label would be removed.

To read the Financial Regulatory Improvement Act of 2015, click here.

back to top

For the First Time in 50 Years, U.S. and Cuban Banks Unite

Why it matters

A Florida bank has connected with a Cuban bank to allow direct transactions between the financial institutions—the first time such transfers will be possible in 50 years. Stonegate Bank, based in Pompano Beach, Florida, signed a deal with Banco Internacional de Comercio SA establishing a correspondent banking relationship in the wake of new regulations issued earlier this year by the federal government. As a step toward normalizing diplomatic relations with the island, the Department of Commerce and the U.S. Department of the Treasury amended the Cuba sanctions to permit U.S. financial institutions to process credit and debit card transactions for travel, enroll merchants, and open accounts with Cuban banks to ease transaction processing. The agreement between the banks "is another step in terms of normalizing commercial relations between the U.S. and Cuba," Stonegate president and CEO David Seleski said in a statement. "The ability to move money easily between the two countries will only increase trade and benefit American companies wishing to do business in Cuba." As the scope of diplomatic relations and ties increase, we expect more financial institutions to look at Cuba and industries connected with Cuba for growth opportunities.

Detailed discussion

In 1960, President Dwight D. Eisenhower imposed the first trade embargo on Cuba, with diplomatic relations between the countries ending in January 1961. More than 50 years later, a Florida bank looks to make history as the first financial institution to engage in direct transactions with a bank on the island.

Stonegate Bank signed a deal with Havana-based Banco Internacional de Comercio SA (BICSA), establishing a correspondent banking relationship between the entities that will allow individuals and businesses to transfer money between the two countries.

The Florida-based Stonegate is the first to make a move after the federal government passed regulations to encourage diplomatic relations between the countries. Last December, President Barack Obama and Cuban leader Raul Castro announced the countries had resumed diplomatic ties. The "outdated" sanctions policy in place since the Cold War had failed, the President said, lifting restrictions on activities like travel, trade, telecommunications, interstate money exchange, and third-country financial transactions.

In January, the Department of Commerce and Department of the Treasury followed suit with new regulations that allowed U.S. banks to open correspondent accounts in Cuban banks and permitted American travelers to use credit and debit cards on the island.

However, with the U.S. trade embargo still intact (requiring Congressional approval to lift it) banks have been cautious about starting a relationship with a Cuban financial institution, particularly as the country remained on the list of state sponsors of terrorism until May 29, when it was officially removed.

Stonegate was the first U.S. bank to make a move, initiating the relationship with BICSA by agreeing to handle an account for the Cuban embassy to help with visas and other diplomatic matters. The bank then decided to take the leap into a formal correspondent relationship, recognizing an opportunity. Without an existing direct link between the two countries' financial institutions, businesses were forced to rely upon letters of credit using third-country banks.

The relationship between Stonegate—which has 21 banking offices in Florida with $2.27 billion in assets and $1.93 billion deposits as of June 30—and BICSA (established in 1993, with more than 600 correspondent relationships already in place) eliminates that hurdle and could encourage other banks to take a closer look at Cuba.

For more on the Treasury and Commerce regulatory amendments to the Cuba sanctions, click here.

back to top

DoD Releases Final Military Lending Act Regulations

Why it matters

The Department of Defense (DoD) released its final rule amending the implementing regulations of the Military Lending Act (MLA), incorporating a broader range of credit products under its coverage and potentially implicating lenders outside the scope of loans to servicemembers. The DoD issued proposed regulations last year that expanded the scope of existing rules to cover more types of loans (such as payday loans, vehicle title loans, deposit advance loans, and credit cards) and prohibit binding arbitration. After a public comment period, the agency made some changes from the proposal, providing credit card issuers with an additional year to achieve compliance (until Oct. 3, 2017, while other creditors must be ready on Oct. 3, 2016), allowing credit unions and depository institutions some breathing room from an interest rate cap, and adding a second safe-harbor option for creditors to rely upon consumer reports. Although the rules are intended to provide consumer protections to servicemembers, consumer groups are likely to assert that all consumers should have similar protections, and all companies extending consumer credit would be well advised to familiarize themselves with the new regulations.

Detailed discussion

In 2006, the passage of the Military Lending Act (MLA) capped the interest rate on covered loans to active duty servicemembers at 36 percent (referred to as the Military Annual Percentage Rate (MAPR)), required disclosures to inform servicemembers of their rights, and prohibited the use of arbitration clauses in contracts with servicemembers.

The law also provided the Department of Defense (DoD) with the power to define the scope of credit covered by the statute. Initially, the agency used a narrow definition of credit that covered only three products: closed-end payday loans for no more than $2,000 and a term of 91 days or fewer; closed-end auto title loans with a term of 181 days or fewer; and closed-end tax refund anticipation loans.

But the agency felt that lenders were structuring products to evade the limits, and the agency therefore determined a broader scope of coverage was necessary, proposing amendments to its MLA implementing regulations last September.

Moving application of the MLA away from a product-by-product approach toward a more comprehensive alignment with credit products, the regs expanded the protections of the Act to additional financial services including payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards.

The MLA was also extended to active duty servicemembers and their families when seeking credit subject to the requirements of the Truth in Lending Act (TILA), with the exception of purchase-money loans and loans secured by real estate.

Other changes: the 36 percent MAPR now limits charges for most ancillary add-on products (such as credit insurance, debt suspension, and debt cancellation contracts), military borrowers receive additional disclosures, and creditors are prohibited from including an arbitration provision in contracts with servicemembers, requiring military borrowers to waive their rights under the Servicemembers Civil Relief Act (SCRA) for products covered by TILA, or providing a payroll allotment as a condition of obtaining credit.

After a public comment period, the DoD made some tweaks to the proposal.

Credit card issuers were granted a one-year reprieve to achieve compliance. The final rule takes effect on Oct. 1, 2015, applicable to consumer credit transactions or accounts consummated or established after Oct. 3, 2016, with a one-year extension until Oct. 3, 2017 for credit card issuers.

In addition, the Final Rule permits credit unions and insured depository institutions to exclude an application fee for short term, small-amount loans from the computation for the 36 percent MAPR cap under certain circumstances. And creditors now have a second safe harbor option to use a consumer credit report to determine if a consumer is a covered borrower (the proposed rule only featured a safe harbor for a determination based on information from the MLA database).

Enforcement of the regulations will be provided by the Consumer Financial Protection Bureau or the Federal Trade Commission. If an agreement is found to violate the MLA, it will be considered void from inception; knowing violations of the statute constitute a misdemeanor. A private right of action exists for plaintiffs to recover statutory damages of $500 per violation with the possibility of punitive damages and attorney's fees.

To read the DoD's Final Rule, click here.

back to top

D.C. Circuit Lets Challenge to CFPB Move Forward

Why it matters

Is the Consumer Financial Protection Bureau (CFPB) constitutional? After other courts across the country have found the agency's structure to be valid or ruled that plaintiffs lack standing, one bank's challenge to the CFPB will move forward after the D.C. Circuit Court of Appeals reversed dismissal of the lawsuit. In its suit, Texas-based State National Bank of Big Spring argues that independent agencies must be led by multiple members (such as the five Commissioners of the Federal Trade Commission) and not a single person, as is the case with CFPB director Richard Cordray. The bank also asserted that Congress's broad delegation of authority in the Dodd-Frank Wall Street Reform and Consumer Protection Act that created the CFPB violated the non-delegation doctrine and that President Obama's Congressional recess appointment of Cordray was unlawful. A federal district court tossed the suit for lack of standing but a panel of the D.C. Circuit reinstated the case, holding that Big Spring had standing to sue because some of the products offered by the bank are subject to CFPB regulation—despite the fact the bank has not been subject to an enforcement action by the CFPB. The court declined to revive other claims in the case, including challenges to the Financial Stability Oversight Council and the new liquidation authority granted to other federal regulators under the Dodd-Frank Act.

Detailed discussion

The Dodd-Frank Act established the CFPB. The CFPB is an independent agency that regulates consumer financial products and services and is headed by a single director.

Texas-based State National Bank of Big Spring filed suit challenging the constitutionality of the new agency on multiple grounds. The bank asserts that independent agencies must be headed by multiple members rather than by a single person and that the broad delegation of authority to the CFPB violated the non-delegation doctrine.

The bank also contested the constitutionality of President Barack Obama's appointment of director Richard Cordray. The Senate did not act on the President's nomination of Cordray for six months, so President Obama used his recess appointment power to appoint Cordray during a three-day intra-session Senate recess. Relying on the U.S. Supreme Court's decision in NLRB v. Noel Canning, State National argued that Cordray's appointment was unlawful.

Also unconstitutional: the Financial Stability Oversight Council (FSOC) created by the Dodd-Frank Act, which possesses statutory authority to designate certain "too big to fail" financial companies for additional regulation.

Eleven state Attorneys General (Alabama, Georgia, Kansas, Michigan, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Texas, and West Virginia) joined State National's lawsuit, challenging the Dodd-Frank Act's grant of new liquidation authority to the Federal Deposit Insurance Corporation (FDIC), Department of the Treasury, and the Federal Reserve Board of Governors on the basis that the new authority violates both non-delegation and due process principles. The states contended that they had standing to challenge the law because the possibility that the government might exercise its new liquidation authority in the future has caused the value of the states' investments in bank-issued securities to be worth less.

At the federal court level, a judge dismissed the suit, finding that none of the plaintiffs had standing and that their claims were not ripe. On appeal to the D.C. Circuit Court of Appeals, a three-judge panel reversed dismissal of some of the claims.

State National "is not a mere outsider asserting a constitutional objection to the Bureau," the court said. "The Bank is regulated by the Bureau."

For example, the CFPB promulgated the Remittance Rule in 2012, imposing disclosure requirements on institutions that offer international remittance transfers—a product provided by State National Bank. "The Bank indeed alleged that it must now monitor its remittances to stay within the safe harbor, and the monitoring program causes it to incur costs," the panel wrote, satisfying the injury-in-fact requirement for standing.

As for ripeness, the panel said "it would make little sense to force a regulated entity to violate a law (and thereby trigger an enforcement action against it) simply so that the regulated entity can challenge the constitutionality of the regulating entity."

Similarly, the bank had standing to contest Cordray's recess appointment, the court held, with the same reasons satisfying the ripeness issue. The court did not consider the impact of Director Cordray's eventual Senate confirmation and his subsequent ratification of the actions that he took while serving under the recess appointment, leaving that to the district court.

However, the court affirmed the lower court's ruling that the bank lacked standing to challenge the FSOC. State National has not been designated as an entity too big to fail, but one of its competitors has been. State National argued that it was indirectly harmed because the designation gives their competitor a reputational subsidy and allows them to raise money at lower costs than it otherwise could, negatively impacting State National's ability to compete.

But the panel found the "novel theory" of reliance on competitor standing was not sufficient to satisfy the standing requirement. "The Bank cites no precedent suggesting that a plaintiff has standing to challenge a regulation that merely imposes enhanced regulatory burdens on the plaintiff's competitor," the court wrote. "[T]he link between (i) the enhanced regulation of the competitor, (ii) any alleged reputational benefit to them, and (iii) any harm to State National Bank is simply too attenuated and speculative to show the causation necessary to support standing."

Finally, the court considered whether the states had standing to object to the Dodd-Frank Act's orderly liquidation authority, namely that the orderly liquidation authority could deprive them of uniform treatment mandated by the Bankruptcy Code if one of the companies they are invested in is liquidated or reorganized by the government.

Finding several problems with the theory, the court explained that it required multiple "ifs": "the State plaintiffs will be affected by the orderly liquidation authority only if a company in which they are invested is liquidated or reorganized by the Government, and only if the States are then treated different from other similarly situated creditors."

"[B]y the State plaintiffs' logic, virtually any investor could raise a pre-bankruptcy constitutional challenge to any bankruptcy-related statute, on a theory that the value of the investor's investments would be higher if the challenged provision were deemed unconstitutional," the court said. Accordingly, the states lacked standing to pursue their constitutional claims and such claims were not ripe for review.

The panel remanded the case for the Bank and the CFPB to brief the merits of the surviving constitutional challenges.

To read the opinion in State National Bank of Big Spring v. Lew, click here.

back to top



pursuant to New York DR 2-101(f)

© 2022 Manatt, Phelps & Phillips, LLP.

All rights reserved