Laxmi Ramanath’s Post

Capital One, Discover, and the USA PATRIOT Act. When I heard and read the news of the proposed merger of Capital One and Discover, I thought of two things. First, section 327 of the USA PATRIOT Act of 2001 amended the Bank Holding Company Act and Federal Deposit Insurance Act to require the federal bank regulators to take into consideration the effectiveness of any insured financial services entity involved in a proposed merger transaction in combatting money laundering activities. I wondered, "would either of these companies have any current AML issues that would give the regulators cause for concern?" I then thought of the AML-related $390 million penalty that Capital One paid in January 2021. There was much written at the time about that penalty and the events that led up to it. FinCEN, which levied the 2021 fine, gave Cap One a "credit" of $100 million that Cap One had paid to the OCC in October 2018 as a penalty for what appeared to be different AML-related violations during the same time period (2008-2014) as the events that gave FinCEN heartburn. I was intrigued by these two penalties just over two years apart from two different agencies for two different groups of violations of the same statute. I didn't think those writing about the penalties were asking the right questions. So I wrote about it, and asked these three questions: Q1 – Why did the OCC’s 2018 penalty of $100 million not mention the 2008-2014 willful failures that FinCEN relied on for its 2021 $290 million penalty? Q2 – Why did it take FinCEN six years (since the OCC’s original 2015 Consent Order) to resolve violations that occurred from 2008 to 2014? Q3 – How did FinCEN settle on a fine of $390,000,000? FinCEN’s regulations have section-by-section penalty amounts in its regulations, and even mentioned these in its Enforcement Action. But it didn’t provide any detail on how it reached its penalty figures or why it gave credit for the $100,000,000 paid to the OCC if, as it appears, the OCC order covered different activity. https://lnkd.in/gwEQANS

Compliance external environment for the last two quarters of the year promises to be very hectic. On July 5, the White House Office of Information and Regulatory Affairs released its Spring 2024 Unified Agenda of Regulatory and Deregulatory Actions, or URA. This semi-annual report details each federal agency’s upcoming plans to issue or rescind regulations. The Consumer Financial Protection Bureau’s agenda includes four proposed rule actions, addressing the Fair Credit Reporting Act, or FCRA, mortgage servicing, the Financial Data Transparency Act and consumer financial product contracts under Regulation AA. The bureau released the initial part of its FCRA rulemaking last month. The proposed rules for mortgage servicing were released this week and the Financial Data Transparency Act is expected this month, with the Regulation AA proposal expected in September. The final rules on nonsufficient fund fees and Section 1033 data rights are projected for release in October. The final rule on overdraft fees is expected in January 2025 and will depend on the results of elections. In the Bank Secrecy Act/anti-money laundering space, we also expect the release of a final rule on certain exemptions for suspicious activity reports this month. Other notable dates for BSA/AML actions include a proposed rule by the federal banking agencies to conform their respective rules to the Financial Crimes Enforcement Network’s recently issued BSA program rule; August for FinCEN’s final AML/CFT rules applicable to investment advisers and certain real estate professionals, respectively; October for FinCEN’s revisions to the customer due diligence rule; and May 2025 for FinCEN’s proposed rule on 314(b) information sharing protections.

Proposed Changes to FCA Guidance re PEPs: UK PEPs should be considered to be lower risk than non-UK PEPs; clarify that non-executive board members of civil service departments should not be treated as PEPs; and allow greater flexibility in who can approve or sign off on PEP relationships, by no longer suggesting that the Money Laundering Reporting Officer should sign off on all PEP relationships, provided they continue to have oversight of all PEP relationships. https://lnkd.in/eTyP99KF

Keeping in view “Several critical irregularities in identifying & failure to report suspicious transaction in its branch”, one of the leading nationalized banks has been fined by the Financial Intelligence Unit-India (FIU-IND), an agency under the Union Finance Ministry responsible for enforcing anti-money laundering through a detail order. The penalty comes in the wake of finding Bank’s scrutiny insufficient on critical irregularities such as: 1)    Involving entities with a common registered address and identical beneficial owners. 2)    Further, having authorised capital only Rs 1 Lakh each these entities exhibited credit turnovers disproportionate to their declared business operations. 3)    Significant RTGS inflows from the accounts of the NBFC in question. 4)     Transferring of funds to other group entities of the NBFC. 5)    Filing of only one Suspicious Transaction Report (STR), despite having high volume of transaction and number of alerts. 6)     Closing of alerts with minimal justification Upon investigation, it is found by FIU-IND as follow: a)    Failure of bank to put in place system to detect and report suspicious transaction in violation of PMLA Act & Rules. b)    Failure to properly investigate and close alerts based on application of mind including consistent with knowledge of customers, its business, risk profiling and source of fund in respect of account in question. c)    Failure to review the due diligence measure of Bank including verifying again the identity of the customers and obtain information on the purposes and intended nature of the business relationship in respect of the account in question. d)   Failure to conduct customer due diligence of existing customers of bank on the basis of materiality & risk. e) Failure to evolve an internal mechanism to detect & report suspicious transaction. The FIU-IND directed Bank to implement following corrective measures: 1)    Comprehensive Review Mechanism: Bank shall have a comprehensive review of its due diligence procedure. It is recommended to have enhanced diligence be performed, particularly where newly opened accounts exhibit transaction volumes and velocities that are inconsistent with their declared business activities and turnover. 2)     Reassessment of internal mechanism: Bank shall reassess its internal mechanism & transaction monitoring approach, especially where a significant number of alerts are generated on a customer's accounts but are subsequently closed in a cursory manner. A copy of the order of the FIU-IND is attached herewith for information and learning of all.

Understanding SEBI's KYC Requirements for F&O Trading: Ensuring Investor Protection In the dynamic world of financial markets, investor protection is paramount. SEBI's stringent Know Your Client (KYC) requirements for activating Futures & Options (F&O) segment trading ensure only qualified investors participate in this high-risk trading segment. Importance of KYC in Financial Markets KYC verifies identity, assesses financial capability, and mitigates risks, reducing fraudulent activities and financial losses. Mandatory KYC Documents for F&O Activation Before activating an investor’s F&O trading account, brokers must collect: Proof of Identity (POI): Aadhaar Card, PAN Card, Passport, Voter ID, Driving License. Proof of Address (POA): Aadhaar Card, Passport, Voter ID, Driving License, utility bills, bank statement, or passbook. Photograph: Recent passport-sized photo. Additional Documentation for F&O Segment Additional financial proofs ensure investors can handle F&O trading risks: Income Proof: Salary slips, Form 16, ITR, bank statements, or demat account holding statements. Bank Account Proof: Cancelled cheque, passbook, or bank statement. Financial Disclosure: Disclosure of financial assets and liabilities. Compliance and Regulatory Oversight Brokers must ensure clients meet these KYC requirements before activating F&O accounts. SEBI and exchanges conduct regular audits to enforce compliance. Non-compliance can result in severe penalties, including fines and suspension. Risks of Non-Compliance Non-compliance exposes brokers and investors to risks: Financial Penalties: Substantial fines. Operational Disruptions: Suspension of broker operations. Investor Losses: Inexperienced investors may incur significant losses. Conclusion SEBI's KYC requirements for F&O segment activation maintain market integrity and ensure investor protection. By adhering to these guidelines, brokers foster a secure trading environment. Investors should ensure their brokers follow these requirements to safeguard their investments. Share your thoughts on SEBI’s KYC requirements and how they’ve impacted your trading journey. Let's work together towards a transparent and secure financial ecosystem #FuturesAndOptions #KYC #FinancialCompliance #MarketIntegrity #InvestorAwareness #RiskManagement #FinancialMarkets #Trading #KotakSecurities #Investing #Regulations

FinCEN Assesses Record $1.3 Billion Penalty against TD Bank "TD Bank willfully failed to establish an adequate AML program. The Bank did not invest sufficient time, money, or managerial resources in the creation and maintenance of TD Bank’s AML program, nor did the Bank take sufficient steps to ensure TD Bank’s ongoing compliance with the BSA. As described more fully below, TD Bank failed to devote sufficient resources to BSA compliance, and refused to invest in improvements to address such gaps when they were deemed too costly, thus allowing illicit activity to flow through the Bank. TD Bank vastly underinvested in its AML compliance efforts, with TD Bank knowingly spending an order of magnitude less than its peers." "The Bank’s inattention to, and underinvestment in, its AML program, including the failures of its AML management, led to willful failures during the Relevant Time Period across each pillar of its AML program: (i) ineffective oversight and management of TD Bank’s compliance obligations by the individual—its BSA Officer—responsible for coordinating and monitoring the Bank’s day-to-day compliance with the BSA, including the BSA Officer’s failure to timely and properly escalate material issues and failures by the Bank’s Board to provide adequate resources for the BSA Officer to discharge their duty of assuring the Bank’s compliance with the BSA; (ii) inadequate internal controls, most notably failure to ensure appropriate transaction monitoring; (iii) failure to properly train its staff on AML typologies and risks the Bank knew were associated with the products and services the Bank offered; (iv) deficient risk based customer due diligence, including missing blatant disparities between customers’ actual activity and what would reasonably be expected based on available information; and (v) insufficient independent testing that failed to reasonably identify material gaps. " "TD Bank’s failure to conduct appropriate testing and gap assessments of its transaction monitoring system led these monitoring gaps to persist for well over a decade. " Alex Oxford Muse Zhou Bryan A. Cheung☁️ https://lnkd.in/g-fpjRFQ

We are pleased to update that a team led by our Deputy Chairman Chee Meng Tan, SC, including Partners Manoj Pillay Sandrasegara and Kai Yun Tan, has successfully defended our High Court win for our client Oversea-Chinese Banking Corporation Ltd, in a US$30.4 million letter of credit claim brought by a beneficiary. The Singapore Court of Appeal has affirmed the High Court’s decision that fraud on the part of the beneficiary had been made out. Importantly, the Court of Appeal commented that the law should “call a fraud a fraud”, and clarified that the fraud exception to an issuer’s obligation to pay under an LC does not bear a higher threshold than the standard applicable to other financial instruments such as independent guarantees. This is one of the rare decisions in which issuer banks had successfully managed to establish the fraud exception on the beneficiary’s part; there are many lessons for issuer banks and traders to be drawn from the “red flags” found by the High Court, and affirmed by the Court of Appeal. The Court of Appeal has now made it clear that the standard of fraud should not be so narrow as to allow a beneficiary to bury its head “ostrich-like in the sand”, and benefit from its struthious belief in the truth of its representations. We highlight the salient points of the Court of Appeal’s decision in this update. The full decision by the Court of Appeal can be found here: https://lnkd.in/gkVWnjpZ   Click on the link below to view the full update. We appreciate that there is significant market interest on the implications of this decision. Does this decision now make it easier for issuer banks to refuse payment under an LC? If an LC bank suspects fraud, what questions should the LC bank ask and where should the LC bank look? What should traders and LC banks do to manage fraud risks in the light of this decision? If you would like a more detailed discussion on this decision, please feel free to reach out to the above Partners for clarification.

FIU collects Rs. 14 Mn in penalty Part 1 The Financial Intelligence Unit has collected penalties amounting to Rs. 14 Mn in total from 27 September to 31 December 2023 on three Financial Institutions namely; MMBL Money Transfer (Pvt.) Ltd., Bank of Ceylon, and People’s Bank read a press statement issued yesterday. Accordingly, MMBL Money Transfer (Pvt.) Ltd., on 3 November 2023 was imposed to Rs. 1 million for the failure of the company to adhere to Financial Transactions Reporting Act No. 6 of 2006 (FTRA) and Financial Institutions (Customer Due Diligence) Rules No. 1 of 2016 (CDD Rules) by not implementing a mechanism to monitor activities of its agents and to verify whether such agents are operating in line with the AML/CFT requirements of the Country. The penalty was settled on 14 November 2023. The administrative penalty of Rs. 6 million was imposed for the failure of the BOC to adhere to the requirements of the FTRA and CDD Rules. The Bank had failed to obtain approval from its senior management when entering into business relationships with several Politically Exposed Persons (PEPs). Further, there were significant delays in obtaining senior management’s approval when entering into business relationships with PEPs. The Bank had failed to prevent individuals designated under Regulation 4(7) of the United Nations Regulations No.1 of 2012 pursuant to United Nations Security Council Resolution (UNSCR) 1373 from conducting any transaction and freeze funds, financial assets or economic resources without delay as per Regulation 5 of United Nations Regulation, No.1 of 2012 and the Order published in the Extraordinary Gazette Notification No.1863/25, dated 22 May 2014, by the Competent Authority. The Bank had failed to inform full particulars of the funds, other financial assets and economic resources held by designated customers, to the FIU immediately, as per the requirements of the FIU/UNSCR-1373/Directives No.1 issued to all LBs and LFCs by the FIU. An administrative penalty of Rs. 7 million was imposed for the failure of the People’s Bank to comply with the suspension orders issued by the FIU and the orders which were subsequently extended by the High Court of Colombo under Section 15(3) of the FTRA as the Bank has conducted debit transactions through suspended accounts. The Bank had also failed to obtain approval from its senior management when entering into business relationships with several PEPs. Further, there were significant delays in obtaining senior management’s approval when entering into business relationships with PEPs. Source: The Morning #FIU #FinanceInsights #FinanceNews

Unable to conduct proper AML practice such as failed to apply special measures when the risk is high, the American national bank is fined $9,185,000 by FINTRAC. Good lesson for all FI to conduct proper AML practices, especially when dealing with potential high-risk client.

What does it cost a virtual currency exchange to maintain and update its AML program documentation? According to FinCEN ... $49 a year. How much time goes into maintaining and updating AML program documentation? According to FinCEN ... 1 hour a year. This is another one of those "hope-nobody-notices" notices that FinCEN is required to publish in the Federal Register where they request (but don't want to get) comments on the "renewal without change" of a particular regulatory requirement they've imposed on the private sector. In this case, it's a subset of the AML program requirements for seven of the twelve species of financial institutions that have AML program requirements. One of the seven is MSBs - virtual currency exchanges are a subset of MSBs. With this, FinCEN assumes that CEOs of these financial institutions are paid, on average, $91 an hour ... compliance officers are paid, on average, $35 an hour. FinCEN will adjust these laughably ludicrous time and cost estimates IF THEY GET COMMENTS FROM MSBs, mutual funds, insurance companies, dealers in precious metals, operators of credit card systems, and loan or finance companies. I hope someone steps up. BTW ... this is the "public inspection" version of the notice. The actual notice will be published on April 22nd. You'll be able to find it at https://lnkd.in/gbZRnQYh https://lnkd.in/gmVmysyb