United States financial institutions should respond to negative media coverage of current and former associates of President Donald Trump by reassessing the compliance challenges, affected customers and transactions present but refrain from automatically classifying anyone linked to the head of state as high risk, according to Dan Stipano, former deputy chief counsel for the Office of the Comptroller of the Currency, or OCC.
From a broader view, the growing cost of maintaining and upgrading compliance programs and the increasingly dire consequences of compliance failures will continue fueling the “de-risking” trend despite federal efforts to stem it, he said.
Stipano, now an attorney with Buckley Sandler in Washington, D.C. spoke about these issues and more with ACAMS moneylaundering.com reporter Valentina Pasquali. What follows is an edited transcript of their conversation.
Recent months have seen a steady flow of negative news concerning President Donald Trump and his current and former associates, including his former campaign manager, Paul Manafort, who is now under investigation for allegedly laundering money. Should financial institutions treat this negative news as they would any other negative news for purposes of due diligence and begin enhanced screening of all parties involved?
Dan Stipano: They definitely need to take that information into account in terms of assessing the risks that are posed by their customers, though I do not think that you should automatically put a customer into a higher-risk category just because there is a negative news story. But it should invite some additional scrutiny.
If you go back and look at some of the account activity and discover transactions that are at least unusual, if not suspicious, you may want to consider adjusting the customer’s risk rating and level of monitoring.
Federal regulators have in the past four or so years issued a stream of statements urging financial institutions to refrain from terminating their relationships with entire categories of customer to mitigate their exposure to anti-money laundering-related risks. Is the effort bearing fruit yet?
DS: I think the government’s efforts are well intended and helpful, and it is encouraging that this issue has attention at very high levels, but I do not know that there has been significant improvement when it comes to de-risking, which is a very vexing problem—far easier to diagnose than to solve.
I have always believed that the root causes have to do with the costs of compliance and the consequences of getting it wrong. As long as the compliance costs are very high on a relationship, but the relationship is not terribly profitable for the institution, there is going to be an economic incentive to close the account. The other aspect of it is that if you do stay in the relationship and get it wrong the consequences could be severe.
Additionally, we are in a situation right now where virtually all the large banks in the United States are under enforcement actions for Bank Secrecy Act violations, and some are under deferred prosecution agreements and have been fined hundreds of millions of dollars. When you have that kind of an environment, it is understandable that banks are going to be very risk averse. When it comes to de-risking, I do not think there will be significant improvements until something is done to address the costs and the consequences.
The OCC issued a bulletin on de-risking in October instructing financial institutions to assess whether a foreign jurisdiction may be underserved by the U.S. financial system before terminating these types of accounts. Do federal regulators have the ability to pursue enforcement actions against financial institutions that are found to have disregarded these instructions?
DS: This is an interesting question. Federal banking agencies have to identify either an unsafe or unsound banking practice or violations of a law, regulation or order to be able to take an enforcement action. The question I would raise, particularly looking at the OCC’s best-practices paper on de-risking, is what would happen if an institution began closing accounts without first taking any of the steps cited in the guidance? Is there a point where this might raise to the level of being treated as an unsafe or unsound practice? I think at least theoretically it could be, but I am not aware of any agency that has taken an action like that.
Is the federal government's establishment of a "fintech" charter a significant development?
DS: I think it is very significant. A lot of these businesses are going to be around for a while, and I think that in many ways they represent the future of banking and financial services in the United States and around the world. We are in a very interesting period because many of these companies are still in a start-up stage and it is very hard to predict who the winners and who the losers are going to be.
We also have a situation where regulators are competing with each other to be the chartering authority. The OCC has been very proactive on this front, but the states, New York in particular, have also been very aggressive in asserting their authority. I think at this point it remains to be seen how it plays out but I do think that this is something that is very real and significant.
Does the establishment of a charter inherently require fintechs to obtain one before continuing operations?
DS: Any company that is in business in the United States is going to want to be chartered or incorporated somewhere, if for no other reasons than for liability purposes. In the banking business, we have something called the dual banking system, where you have a choice, you can get a federal charter from the OCC or you can get a charter from a state. Fintech companies—for example, marketplace lenders or digital currency firms—operate in a space that is very closely related to traditional banking.
What the OCC has said is they are willing to entertain applications for a federal charter for fintech entities as long they are doing some activity that is part of the business of banking. It would be a limited-purpose charter because they presumably would not be fully exercising all the powers that a national bank would have.
I think there are advantages and disadvantages to a national charter versus a state charter and I think a lot of these companies are weighing all these pros and cons and trying to decide what makes the most sense for them.
What are the implications for traditional banks doing businesses with fintech firms?
DS: They are in an interesting position, too. Fintechs can be viewed as their partners, but also as their competitors. I think there are certain competitive advantages to the fintech model that banks will have to consider, such as efficiencies that come with operating online as opposed to doing traditional brick-and-mortar banking. Therefore, I think this probably will push all of the industry in a direction that is going to be more automated, less face-to-face, probably faster and more efficient than where we are now. In a way that is a good thing because it helps keep costs down. At the same time it raises these compliance challenges, including in the anti-money laundering and Bank Secrecy Act arena.
The number of enforcement actions from the three federal banking regulators and the Financial Crimes Enforcement Network declined significantly in 2016, as did the average value of all associated monetary penalties. Do you think this is an anomaly or does it reflect a more laissez-faire regulatory approach?
DS: It is a combination of things. For one, as I mentioned earlier, we have a situation where virtually all of the large banks are already under enforcement actions for BSA/AML violations. As the regulators discover new problems, rather than put new enforcement actions on these institutions, they will typically ask them to amend their action plans under the existing order. That, to a certain extent, holds down the numbers, especially with respect to the bigger institutions.
The other thing is, while one way of achieving corrective action is by taking an enforcement action, regulators can also take a host of other steps that are not made public, for example exam reports, supervisory letters, Matters Requiring Attention and other informal measures that the public does not get to see.
The last thing I would say is that with all the enforcement and remedial actions that have been put in place over the last five or six years, you would like to believe they are having some kind of positive effect on overall compliance, so that might account for some of that decline, too. But I do not think regulators are easing up.
An industry group earlier this year put forward an ambitious proposal for the overhaul of the U.S. AML and counterterrorist financing reporting regime. What do you make of this effort?
DS: First of all, I would applaud them for issuing a report. As I have been advocating for some time, right now is a good moment to take a look at the Bank Secrecy Act and the whole regulatory regime we have in place. It is almost 50 years old. All the changes that have been made over that period of time have been additive. It started off as a measure against tax evasion, then it became the primary weapon against drug trafficking and money laundering, then we added terrorist financing to it and we continued to add, human smuggling and elder abuse and on and on. It is starting to feel some of the weight of all of that, and that is why we are seeing things like de-risking happening and some of the biggest banks in the country struggling, spending upwards of a billion dollars a year and still not achieving full compliance.
So, it is showing signs that it is time for a review.
FinCEN's new customer due diligence rule and beneficial ownership requirements take effect next year. Do you think these will pose a significant challenge for financial institutions?
DS: While the rule does a reasonable job of balancing law enforcement and regulatory requirements with concerns about the regulatory burden, there are grey areas. FinCEN put out an FAQ, which is helpful. They probably should do another one because we continue to get some questions where the answers are not clear from either the text of the regulation, the preamble or the FAQ guidance.
Trump has pledged to cut red tape and reduce regulations. He has also spoken negatively about the Foreign Corrupt Practices Act and similar laws, and put in place a regulatory freeze immediately after taking office. What do you make of these positions and how they may affect rules and enforcement in the AML/CTF and corruption space?
DS: I do think that the administration will be sensitive to some of the concerns expressed by banks and other financial institutions about the regulatory burden, particularly by the community banks, which have been complaining loudly for some time about the cost of compliance. It is leading to some unfortunate consequences like de-risking, so I think the White House will be sensitive to that.
At the same time, though, the BSA is closely intertwined with interests of law enforcement and national security and fighting terrorism, all of which are stated priorities of this administration, so it is hard for me to imagine that there would be any kind of significant rollback on the enforcement side when it comes to BSA/AML.
How much influence can the White House wield over regulatory agencies and bureaus like FinCEN, the Fed, the FDIC and OCC? Does it vary from regulator to regulator?
The biggest effect will be from the individuals appointed to fill these key positions. The directorship of FinCEN is still open, there are multiple governorships opened on the board of governors of the Federal Reserve, the comptroller’s term expires in a few weeks and they have not nominated anybody to take that job. So, I think we will have a better idea of what the impact will be and what the agenda will be when we see these roles filled.
DS: The effect may indeed vary some. The banking agencies are independent, and are deliberately set up that way so that they can make supervisory judgments about the institutions they regulate without regard to political issues and interference from the White House. So the impact on the federal banking agencies beyond who they put in charge would be very different from, say, a department like Treasury or an office like FinCEN, which are much more involved in promoting the goals of an administration.