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The Latest on Government Inquiries and Enforcement Actions

Government, Regulatory & Criminal Investigations Group
CFPB, Enforcement Actions, Judgments, News

Here to Stay? Appellate Court Rejects Challenges to CFPB

ConstitutionOn May 1, 2015, the U.S. Court of Appeals for the D.C. Circuit rejected a constitutional challenge to the Consumer Financial Protection Bureau’s (CFPB’s) authority.

In Morgan Drexen, Inc. v. CFPB, Morgan Drexen, Inc., which licenses its proprietary software to law firms and provides “live paraprofessional and support services,” and one of its attorney customers, Kimberly Pisinski, sued the CFPB in the U.S. District Court for the District of Columbia after the CFPB had notified Morgan Drexen that it was considering taking action against the company and its CEO for violations of the Consumer Financial Protection Act, 12 U.S.C. § 5536, and the Telemaketing Sales Rules, 16 C.F.R. § 310. The plaintiffs alleged that the CFPB’s independent structure under Title X of the Dodd-Frank Act is unconstitutional because the CFPB’s powers are too broad, the CFPB is headed by a single director removable only for cause, the CFPB is funded outside the normal appropriations process, and judicial review of the CFPB’s actions is extremely limited.

Affirming the U.S. District Court, the D.C. Circuit concluded that Pisinski lacked standing to assert her claims. Despite her assertions that the CFPB’s enforcement action against Morgan Drexen threatened her law practice and professional standing, the D.C. Circuit held that Pisinski could not show any injury. Specifically, the D.C. Circuit found that: (1) the CFPB had never threatened an enforcement action against Pisinski; (2) the CFPB’s enforcement action did not target an aspect of Morgan Drexen’s business that Pisinksi engages and supervises; (3) the CFPB’s enforcement action would not “terminate” or “enjoin” any part of Pisinski’s law practice; (4) there was no evidence showing that Morgan Drexen, despite the enforcement action, would not be able to provide paralegal services to Pisinski in the future; (5) concerns regarding the privacy of information received from Pisinski’s clients were unfounded; and (6) the CFPB’s enforcement action against Morgan Drexen had not inspired the Connecticut State Bar or any other organization to take disciplinary action against her. Accordingly, the D.C. Circuit found that Pisinski lacked the injury necessary for Article III standing, and it upheld the District Court’s decision to dismiss her claims.

The D.C. Circuit also affirmed the District Court in rejecting Morgan Drexen’s arguments. The court first found that, since Morgan Drexen could, and did, raise its constitutional challenges to the CFPB in the enforcement action, the District Court did not abuse its discretion when it dismissed Morgan Drexen’s claims. (In fact, the court noted that, since Morgan Drexen could not point to any inconvenience associated with litigating in California, the District Court properly “relieved it of litigating overlapping issues in two federal forums” and “fostered” judicial economy.) The D.C. Circuit also upheld the District Court’s rejection of Morgan Drexen’s declaratory judgment claim, holding that the District Court reasonably concluded that the importance of Morgan Drexen’s constitutional challenge “was counterbalanced by the importance of avoiding unnecessary constitutional decision-making.”

While the D.C. Circuit did not reach the merits of the plaintiffs’ claims, it did set forth a few of the challenges that anyone seeking to challenge the CFPB’s authority will have to overcome before mounting an attack. Its decision makes clear that third parties to an enforcement action will have a particularly difficult time challenging the CFPB’s authority, and it also makes clear that the CFPB likely will have its choice of forum regardless of who wins the race to the courthouse.


White House Opposes Bill Giving Small Businesses Greater Voice in CFPB Rulemaking

Last montiStock_000004688619Medium1h, the White House informed Congress that it opposes a bill passed by the House of Representatives designed to give small businesses a larger role in developing Consumer Financial Protection Bureau (CFPB) rules and regulations.

Currently, the CFPB does not consult with small businesses and lenders before adopting rules and regulations that affect them. Instead, CFPB Director Richard Cordray and other top officials often meet with a 25-member Consumer Advisory Board to discuss potential regulation of the financial sector. Topics discussed at these meetings, which are not open to the public or the press, include new banking rules, new mortgage regulations, rules impacting auto and payday lenders, and government enforcement actions against creditors.

HR 1195, introduced by Rep. Robert Pittenger, R-N.C., would amend the Consumer Financial Protection Act of 2010 and establish a new Small Business Advisory Board to provide the CFPB with information on emerging small business concerns and exert some influence over rulemaking. The Small Business Advisory Board would consist of 15 to 20 members representing the small business concerns of financial products and services providers. The bill also would establish a Credit Union Advisory Council and a Community Bank Advisory Council. These new advisory boards would be funded through a small reduction – 0.1 percent – in the amount of funds the CFPB is permitted to draw from the Federal Reserve over the next 10 years.

The White House cited this reduction in CFPB spending to offset the cost of the new small business advisory boards as the reason for its opposition to the bill. Congress also has experienced pressure from Americans for Financial Reform, a group created by Sen. Elizabeth Warren to reform the banking and financial system. Letters to Democrats in Congress have solicited opposition to the bill, and these letters have been signed by lobbyist groups such as La Raza, National Community Reinvestment Coalition, Greenlining Institute, National People’s Action, and Service Employees International Union (SEIU).


CFPB Enforcement Action Appeals: Quick Resolution with Unchecked Discretion

On March 77006468.jpeg9, 2015, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray presided over oral argument in the first appeal hearing of an administrative enforcement action.   The appeal involves two companies that allegedly gave and received millions in payments through a “captive” mortgage reinsurance arrangement. Administrative Law Judge Cameron Elliot’s recommended decision concluded that these payments were “kickbacks” in violation of the Real Estate Settlement Procedures Act. The companies and the CFPB filed notices of appeal, and Director Cordray allotted each party 30 minutes to present argument for the appeal.

CFPB’s Rules of Practice for Adjudication Proceedings explain the process for appealing an ALJ’s recommended decision to the CFPB director. A party must perfect an appeal of a recommended decision if the party intends to seek judicial review of the director’s final decision, and a recommended decision does not become final until it is reviewed by the CFPB director. In other words, the CFPB director is given an ironically critical role in an adjudication process that claims to be run by an “independent judicial office” within the CFPB.

The rules provide specific deadlines for appealing and suggest that the director’s final decision could issue in less than six months after a party files a notice of appeal:

Requirement Deadline
Party must file notice of appeal with the Office of Administrative Adjudication 10 days after hearing officer issues a recommended decision
Opening brief must be filed to perfect the appeal 30 days after hearing officer issues recommended decision
Responsive briefs are due to be filed 30 days after service of opening brief
Reply briefs are due to be filed 7 days after service of the responsive brief
Office of the Administrative Adjudication will notify the parties that the case has been submitted for final CFPB decision Expiration of the time permitted to file reply brief
Director will issue a final decision, unless within that time the director orders that the proceeding be remanded 90 days after Office of Administrative Adjudication notifies the parties that the case is submitted for final CFPB decision

Although targets of a CFPB administrative action may appreciate the timeliness of receiving an appeal decision, they should be wary of some of the rules that provide a huge home-court advantage to the agency in an appeal proceeding. In particular, the rules provide the CFPB director with unlimited discretion in reaching his decision:

  • The rules provide no applicable standard of review to be applied by the director in reviewing a recommended decision.
  • At any time prior to issuing the final decision, the director may raise and determine any other matters outside the scope of the issues specified in the notice(s) of appeal as long as the director deems the issues to be “material.”
  • The director may schedule oral argument if the director determines it would be helpful, and the rules do not set restrictions as to the time limitations for oral arguments.

Parties are permitted to file a petition for reconsideration of the director’s final decision, but the rules limit the petition to addressing only new questions raised by the final decision that the party did not have the opportunity to previously address in briefing or oral argument. A response to the petition is not permitted unless requested by the director.

The rules also allow parties to seek judicial review of the director’s final decision, but provide no guidance as to that review.

As we await the first appeal decision by a CFPB director, it will be enlightening to see how the CFPB director uses (or abuses) his unfettered discretion.

Charging, DOJ Policy

The Department of Justice Hammers Away at Corporate Cooperation

Government-Regulatory-and-Criminal-Investigations.jpgFor at least the second time in recent weeks, the Justice Department’s criminal division chief delivered lengthy public remarks on what the department expects from companies choosing to cooperate with federal investigators. In a speech at the New York Bar Association’s Fourth Annual White Collar Crime Institute last week, Assistant Attorney General Leslie Caldwell returned to the topic of corporate cooperation. It was the latest in a string of speeches from DOJ on this subject.

Under the department’s Principles of Federal Prosecution of Business Organizations (also known as the Filip Factors), federal prosecutors may consider a company’s cooperation when charging a company or resolving a case. The Principles flesh this out, but with these speeches, DOJ is “pounding the pavement on cooperation,” Ms. Caldwell said, and increasing transparency on what that means. Dovetailing this effort, DOJ is also adding more detail on Filip Factor considerations in resolution documents like deferred prosecution agreements (DPAs).

Building upon comments from earlier speeches about what’s essential to cooperation credit (or antithetical to it), Ms. Caldwell noted the following:

  • Cooperative internal investigations have “universal” features.
    • Through those internals, companies learn the relevant facts.
    • Companies provide those facts, good or bad, to the government.
    • The facts include those about individuals responsible for the misconduct, regardless of rank.
    • Companies provide the evidence in a timely fashion.
  • Cooperation means “helping to remove and overcome the barriers to identifying and producing the relevant information” that DOJ needs for a “meaningful” investigation. This may mean providing documents to DOJ that it could otherwise obtain through litigation or the compulsory process. She criticized, in particular, companies’ “kneejerk invocation of foreign data privacy laws” and warned that DOJ had made a point of learning more about foreign data privacy laws and would question overbroad assertions.
  • Companies that “boil the ocean” may not earn cooperation credit for doing so. Unnecessarily broad or costly investigations also may delay resolution. Company counsel should talk with prosecutors about ways to focus investigations so they can avoid wasting time and energy on facts and conduct outside DOJ’s investigative scope.
  • Cooperation is more than compliance with a subpoena. Cooperation is also more that public talking points, whitewashing of facts on individuals, or withholding information on potential wrongdoing just because companies or their counsel can imagine an innocent explanation.
  • Cooperative companies are “equally forthcoming” to all involved regulators and enforcement entities. Providing inconsistent or incomplete information across authorities involved in an investigation will impact DOJ’s “cooperation” evaluation.
  • Cooperation may not earn a company maximum credit but it will earn them something. Companies that choose to cooperate and share relevant information quickly, have a “real chance” of declination, but even imperfect cooperation can yield a less draconian outcome. By the same token, cooperation that is slow, incomplete and not fully candid, and comparatively reactive instead of proactive, may be defective, diminishing available credit.

Ms. Caldwell insisted that, by laying out these suggestions and admonitions, DOJ was not telling company counsel how to run an investigation. Company counsel is not expected to play the FBI agent, and DOJ recognizes the place for zealous advocacy. It is asking for “thoughtful, reasonable steps” toward providing a “full and accurate picture of what happened.”

As helpful as it is that DOJ is defining cooperation here and elsewhere, the transparency is short on specific prescriptions. Instead of firming up the Principles, these speeches offer morsels of advice, caveated and case-specific – more cautionary tale than affirmative guidance. Perhaps that’s the nature of the law in this area. Perhaps that’s what all sides ultimately want: flexibility and nuance. Still, it remains to be seen whether DOJ’s transparency on this score results in more “orderly” investigations and mutually beneficial cooperation.

Compliance, Inspections, SEC

SEC Division of Investment Management Issues Cybersecurity Guidance for Investment Funds and Advisers

The Government-Regulatory-and-Criminal-Investigations.jpgU.S. Securities and Exchange Commission’s (“SEC”) Division of Investment Management (“Division”) recently released a Guidance Update (“Guidance”) highlighting the importance of cybersecurity for registered investment companies (“funds”) and registered investment advisers (“advisers”). In the Guidance, the Division identified a number of measures for funds and advisers to consider in addressing cybersecurity risk and rapid response capability.

Conducting Periodic Assessments

The assessment would assist in identifying potential cybersecurity threats and vulnerabilities to facilitate prioritization and mitigation of risk. It should focus on:

  • the nature, sensitivity, and location of information;
  • internal and external cybersecurity threats to and vulnerabilities of the firm’s information and technology systems;
  • security controls and processes currently in place;
  • the impact of any compromise to the information or technology systems; and
  • the effectiveness of the governance structure for the management of cybersecurity risk

Creating a Strategy Designed to Prevent, Detect, and Respond to Cybersecurity Threats

The strategy, which should be tested routinely to enhance its effectiveness, could include:

  • controlling access to various systems and data through management of user credentials, authentication and authorization methods, tiered access, network segregation, firewalls and/or perimeter defenses;
  • utilizing data encryption;
  • protecting against the loss or exfiltration of sensitive data by restricting use of removable storage media and deploying monitoring software;
  • using data backup and retrieval; and
  • developing an incident response plan.

Implementing the Strategy

The strategy could be executed through:

  • developing and circulating written policies and procedures;
  • training regarding applicable threats and measures to prevent, detect, and respond to such threats;
  • monitoring of compliance with cybersecurity policies and procedures; and
  • educating clients and investors on how to reduce exposure to cybersecurity threats concerning their accounts.

In identifying these measures, the Division recognized that the relevance and usefulness of certain measures depend on the funds’ and advisers’ particular circumstances, including the nature and scope of the business, and that it is not possible to anticipate and prevent every cyber attack. In addition, funds and advisors who rely upon service providers in carrying out their operations should consider assessing whether the service providers have protective cybersecurity measures in place.

Given the SEC’s continued focus on cybersecurity issues and the likelihood of more inspections focused on cybersecurity, funds and advisers should review their cybersecurity programs and consider implementing some of the recommendations the Guidance offers. Funds and advisers need to identify and account for their respective compliance obligations under the federal securities laws and mitigate exposure to cyber-related compliance risks through compliance policies and procedures that are reasonably designed to prevent violations of the federal securities laws. As the Guidance reminds us, appropriate planning may assist in mitigating the impact of a cyber attack and complying with the federal securities laws.

The full text of the SEC Division’s Guidance document is available on the SEC’s website.

CFPB, Enforcement Actions

National Mortgage Servicer Pays CFPB and FTC $63 Million to Settle Claims Over Alleged Servicing Violations

Government-Regulatory-and-Criminal-Investigations.jpg On April 21, 2015, the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) announced a joint enforcement action and joint order with a national mortgage servicer. The CFPB and FTC alleged that the servicer failed to honor loan modifications transferred from other servicers and insisted that borrowers pay their original, higher monthly payments; demanded payments before providing loss mitigation options; delayed decisions on short sales; harassed and threatened overdue borrowers; and used deceptive tactics to charge consumers convenience fees.

To resolve the action, the servicer agreed to pay $48 million in restitution to borrowers and a $15 million civil penalty. It also agreed to correct the practices that were the subject of the complaint and the joint order, as well as establish and maintain a comprehensive data integrity program and refrain from violating the Fair Debt Collection Practices Act, the Fair Credit Reporting Act and the Real Estate Settlement Procedures Act.

In a statement addressing the settlement, Mark J. O’Brien, chairman and chief executive officer of Walter Investment, of which the servicer is a wholly owned mortgage servicing subsidiary, emphasized that the servicer “ha[s] been and continue[s] to be committed to properly serving homeowners and helping them remain in their homes. We continue to develop and deploy best practices in our servicing operations and believe these standards will serve us well as we partner with our consumers to support them in their goal to achieve sustainable homeownership.”

This recent enforcement action is yet another indication of the CFPB’s ongoing scrutiny of mortgage servicers.

CFPB, Compliance, Financial Regulation, News, Regulation, Uncategorized


iStock_000010878337MediumA recently released Consumer Financial Protection Bureau (CFPB) plan meant to end “payday debt traps” is meeting serious criticism from industry experts who say the rule, as proposed, would seriously limit short-term borrowing options for American consumers.

According to the CFPB, the proposed rulemaking would require lenders to take steps to ensure that consumers are capable of repaying their loans. The proposal is meant to tackle loans that can cause a “spiral of debt” when a consumer is unable to repay, often leading to exorbitant penalties and additional borrowing that can drag a consumer deeper into debt.

Critics of the proposal say it will limit Americans’ access to credit, both by requiring lenders to refuse to issue credit under certain circumstances, and by driving short-term lenders out of business. Consumers benefit from choice and are capable of making rational decisions regarding debt, critics have said.

Last week, all but one of Florida’s delegates to the U.S. House of Representatives issued a letter criticizing the proposed rules and urging the CFPB to use Florida’s payday lending laws as a model. “… [W]hile we strongly support meaningful and robust safeguards to prevent predatory lending practices in this market, we have continually insisted that any regulatory framework established be carefully balanced with the need to provide consumers with access to a range of financial services,” the representatives wrote in a letter addressed to CFPB Director Richard Cordray.

The CFPB’s proposed rulemaking targets payday lenders, vehicle title lenders and companies offering deposit advance products and certain high-cost installment loans and open-end loans. Under the rule, covered lenders must employ one of two approaches.

The first option, termed “debt trap prevention,” requires the lender to review the consumer’s income, financial obligations and borrowing history in order to determine at the outset whether the borrower is able to repay the loan, including interest, principal and fees. This plan also imposes a 60-day waiting period between loans unless the lender documents changes to the borrower’s financial circumstances that would allow for repayment without re-borrowing.

The second option, termed “debt trap protection,” requires the lender to provide affordable repayment options, as well as imposing a “cooling off” period between loans and limiting the number of loans a borrower can receive in a single year. Under this plan, the consumer’s vehicle cannot be used as collateral, the debt cannot exceed $500 and there cannot be more than one finance charge.

Certain of the proposed rules also would apply to lenders issuing credit products with interest rates exceeding 36 percent and terms longer than 45 days where payment is made via direct access to the consumer’s bank account or paycheck or where the lender takes a security interest in the consumer’s vehicle.

Finally, the proposed rules prevent lenders from withdrawing money directly from borrowers’ bank accounts unless they notify the borrower at least three days before the withdrawal. This rule is meant to reduce the number of overdraft fees imposed on consumers who have insufficient funds in their accounts.

Now that the CFPB has announced its proposed rulemaking, it will convene a Small Business Review Panel, during which time the CFPB will accept comments from industry representatives, advocacy groups and government officials. Members of the public will have an opportunity submit written comments once the CFPB publishes the proposed rule.

For a summary of the proposed rules, click here.

CFPB, Compliance, Financial Regulation, Legislation

CFPB Remains Noncommittal Regarding Restrained Enforcement Period for TILA/RESPA Integrated Disclosures Rule

iStock_000004688619Medium-thumb-225x149-186.jpgThe TILA/RESPA integrated disclosures (TRID) rule issued by the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Wall Street Reform and Consumer Protection Act takes effect on August 1, 2015. Once effective, the TRID will drastically alter, among other things, the pre-closing disclosures that creditors, mortgage brokers and settlement agents must provide to borrowers under Real Estate Settlement Procedures Act (RESPA) and the Truth-In-Lending Act (TILA) upon receipt of an application from a consumer for a closed-end credit transaction secured by real property.

Among other changes to the existing pre-closing procedures, the TRID provides for the following “integrated disclosures” in lieu of various documents traditionally utilized under RESPA and TILA for certain qualifying loans: (1) the Loan Estimate, which is intended to replace RESPA’s good faith estimate (GFE) and TILA’s truth-in-lending (TIL) disclosures; and (2) the Closing Disclosure, which is intended to replace the HUD-1 settlement statement and final TILA statement. The Loan Estimate must be delivered within three days after receipt of a consumer’s completed application for a closed-end consumer credit transaction. The Closing Disclosure must be provided to consumers at least three business days before consummation of the loan. For non-qualifying loans, the GFE, TIL and HUD-1 will remain in use after August 1, 2015.

Although the CFPB intended the integrated disclosures to simplify the process and avoid confusion for consumers entering into closed-end credit transactions, the TRID is proving equally problematic for creditors in terms of implementation and compliance. For example, the integrated disclosures are significantly different from the standardized GFE, TIL and HUD-1, which merely require the creditor or its agents to complete only the applicable portions of those forms. Moreover, compliance with the TRID requires the creditor to retain evidence of compliance with the integrated disclosure provisions of the TRID after consummation of the transaction. If a mortgage broker receives a consumer’s application, the mortgage broker may provide the Loan Estimate to the consumer on the creditor’s behalf but the creditor remains legally responsible for any errors or defects. See § 1026.19(e)(1)(ii). The same is true for a settlement agent’s provision of the Closing Disclosure. See § 1026.19(f)(1)(v). These are only a few of the issues that have forced creditors to, in some cases, completely revamp their respective policies and procedures in connection with closed-end consumer credit transactions.

Various lenders have announced the creation of special departments and processes – including the generation, delivery and retention of the integrated disclosures in lieu of outsourcing the task to mortgage brokers or settlement agents – to ensure TRID compliance and minimize the litigation risks and enforcement concerns stemming from the TRID rules. However, many creditors will be unable to test these new processes and procedures until the August 1, 2015, effective date. The reason: The TRID provides that, for transactions where the application is received prior to August 1, 2015, creditors must use the current disclosure requirements and existing forms (TIL, GFE, HUD-1). In other words, the TRID does not provide for early compliance to test the creditors’ policies, procedures and technology with regard to the integrated disclosures until the TRID’s effective date of August 1, 2015.

This lack of gradual transition to the new integrated disclosures has caused many lawmakers and trade organizations to question whether the CFPB should implement a non-enforcement period to allow creditors to adjust their processes to comply with TRID after August 1, 2015. On March 3, 2015, CFPB Director Richard Cordray provided testimony before the House Financial Services Committee in connection with the CFPB’s sixth Semi-Annual Report and responded to questions from Representatives Randy Neugebauer (R-Texas) and Brad Sherman (D-California) as to whether the CFPB would consider a 60-day soft enforcement period after August 1, 2015. In response, Director Cordray remained noncommittal but indicated that a period of restrained enforcement would not be followed. Director Cordray stated that “[p]eople will have had 21 months to implement this regulation,” and additionally stated that the CFPB “won’t come in day one and bring the hammer down, but people should take the Aug. 1 date seriously.” On March 27, 2015, Representatives Neugebauer and Blaine Luetkemeyer (R-Missouri) drafted an open letter to Director Cordray requesting a hold-harmless period through December 31, 2015. The American Land Title Association (ALTA) similarly requested a five-month restrained enforcement period to allow creditors to tweak their processes in connection with problems that arise the during the preliminary stages of TRID’s effective period, citing the fourth-month non-enforcement period that the CFPB granted when the GFE and HUD-1 settlement statements were revised in 2010. More recently, on April 15, 2015, the Escrow Institute of California (EIC) joined in a letter from 17 other trade associations led by the Mortgage Bankers Association and ALTA asking the CFPB to implement restrained enforcement through December 31, 2015.

So far, the CFPB and Director Cordray have been unwilling to provide a clear stance as to whether a period of restrained enforcement will be implemented, despite the drastic changes required from creditors in order to comply with the TRID. For the time being, creditors should be prepared to implement their process and technology changes on August 1, 2015, in order to avoid the stiff civil and regulatory consequences of noncompliance with the integrated disclosure requirements unless and until the CFPB provides further guidance.

CFPB, Compliance, Enforcement Actions, Financial Regulation, News

CFPB Fines Military Allotment Processor $3.1 Million

Government-Regulatory-and-Criminal-Investigations.jpgLast week, the Consumer Financial Protection Bureau (CFPB) filed a consent order with Fort Knox National Co. and its subsidiary Military Assistance Co. (MAC), alleging that the companies duped U.S. military service members into paying millions of dollars in hidden fees.

Fort Knox National Co., through MAC, is one of the largest processors of military allotments in the nation. Through the allotment system, service members can arrange to have payments to creditors and family members deducted directly from their paychecks. The arrangement facilitates the transfer of funds for service members who may not have easy access to banks or ATMs. In a press release the CFPB noted that “[t]he allotment system was created to help deployed service members send money home … at a time when automatic bank payments and electronic transfers were not yet common bank services.” According to the CFPB, many creditors and lenders “have in recent years been known to direct service members to use the system to collect payments straight from service member earnings.”

The CFPB alleges that MAC routinely charged fees for certain services, but failed to disclose the fees to service members. For instance, MAC allegedly charged processing fees ranging from $3 to $5 when it sent correspondence to service members regarding their account balances. Additionally, MAC allegedly charged recurring fees for residual balances that accumulated in participants’ accounts where debts had been repaid in full but service members failed to stop the automatic deduction from their paychecks. The CFPB alleges that, as a result of these undisclosed practices, “[t]ens of thousands of service members had their money slowly drained from their accounts.”

The consent order requires the companies to pay $3.1 million in relief to affected service members, which could amount to restitution of more than $100 per victim. Fort Knox National Co. began winding down MAC’s allotment business in 2014.

Anti-Money Laundering, Compliance, Financial Crimes, Financial Regulation, FinCEN Guidance, Suspicious Activity Reports

AML Compliance Developments in the Gaming Industry

iStock_000010878337MediumExecutives of regulated entities often lament that fulfilling compliance obligations interferes with their ability to operate their business. However, an extensive (and extended) regulator investigation with the potential for civil and / or criminal penalties can present an even greater obstacle to running a business.

Trends over the last year in the gaming industry suggest that Title 31 compliance remains a key focus of the industry’s primary federal regulator, the Financial Crimes Enforcement Network (FinCEN). As a result, executives tasked with compliance at financial institutions such as casinos should be mindful of recent events that, taken together, may warrant a fresh look at the anti-money laundering (AML) compliance program currently in place.

Remarks of FinCEN Director. Nearly one year after DOJ entered into a non-prosecution agreement (NPA) with Las Vegas Sands Corporation stemming from its failure to file suspicious activity reports – casinos (SARCs), in June 2014 FinCEN Director Jennifer Shasky Calvery delivered remarks at the 2014 Bank Secrecy Act conference. Among her remarks, she urged casinos to “continue their progress in thinking more like other financial institutions to identify AML risks.” She emphasized the need for casinos to “embrac[e] a risk-based approach to anti-money laundering (AML) efforts,” in part through customer due diligence efforts and awareness of their source of funds. In her concluding remarks, Director Shasky Calvery said, “We are counting on you to control for [money laundering and terrorist financing] risks.”

FinCEN Advisory (Culture of Compliance). In August 2014, FinCEN issued an advisory seeking “to highlight the importance of a strong culture of BSA/AML compliance for senior management, leadership and owners of all financial institutions subject to FinCEN’s regulations.” To encourage a culture of compliance, FinCEN recommends that: (1) leadership be engaged, (2) compliance not be compromised by revenue interests, (3) information be shared throughout the organization, (4) leadership dedicate adequate human and technological resources to its Bank Secrecy Act (BSA)/AML compliance efforts, and (5) an AML program be effective and tested by an independent and competent party (FIN-2014-A007).

AGA Best Practices. In response to the heightened emphasis on casinos as “financial institutions”, in December 2014 the American Gaming Association (AGA) published its Best Practices for Anti-Money Laundering Compliance. The AGA described the document as “an attempt to distill the practices” that casinos and Internet gaming sites have adopted to meet their Title 31 obligations, with the goal of providing “a resource for industry and law enforcement to help guide their efforts to protect the gaming industry . . . from money launderers and others involved in illegal activity.” The AGA made these guidelines available to all gaming entities, not just AGA members or those members that contributed to this effort.

FinCEN Guidance. Also in December 2014 (on the eve of the Super Bowl, no less), FinCEN responded to a letter from the president and CEO of the AGA regarding sports betting. In the response, FinCEN reminded casinos of their obligation to identify third parties to transactions in currency transaction reports (CTRs) and, if applicable, in SARCs. FinCEN cautioned that the “failure to identify a third party on whose behalf a transaction is conducted” – including wagering activity – “may constitute a violation of the casinos’ recordkeeping and reporting obligations under the BSA.” The AGA, in January 2015, announced that it “welcomes continued guidance from FinCEN to protect against attempts to use casinos for money laundering and illicit financing.”

Trump Enforcement Action. In early 2015, Trump Taj Mahal (Trump), entered into a Consent Order, carrying a $10 million civil penalty, with FinCEN for willful violations of BSA requirements. These included Trump’s failure to: (1) implement and maintain an effective AML program; (2) report suspicious activity; (3) properly file CTRs; and (4) maintain adequate records. In several instances, the conduct cited in the Consent Order had been identified previously by regulators in examinations; however, Trump failed to implement adequate corrective measures.

Significantly Increased SARC Filings. FinCEN recently released its updated “SAR Stats” for financial institutions, including casinos. The statistics reveal the same trend we have seen over the past two years: dramatic increases in the number of SARCs filed. For January, February and March 2015, there were 26.6%, 29.3%, and 17.0% increases, respectively, over the previous year’s comparable months. For the three years ended March 31, 2015, the most common suspicious activity types were: (1) minimal gaming with large transactions; (2) altering transactions to avoid CTR threshold; (3) structuring (other); (4) multiple transactions below CTR threshold; (5) refusing or avoiding request for documentation; (6) suspicion concerning source of funds; and (7) suspicious use of EFT / wire transfers. These categories accounted for nearly 60% of all SARCs filed.

The above developments reflect the continued evolution of the view of casinos – most importantly in the eyes of their regulator, FinCEN – less as entertainment venues and more as traditional financial institutions subject to the obligations imposed by the BSA and its implementing regulations under Title 31. These developments also reflect efforts by casinos to increase their compliance efforts. Coming in such a compressed time period, gaming entities still have an opportunity to reexamine their BSA / AML compliance programs, perhaps through the independent testing contemplated by the regulations and recent FinCEN guidance. Such testing alone may indicate to the regulator a commitment to a culture of compliance; it also may identify gaps and offer an opportunity to close them prior to a regular FinCEN examination. McGuireWoods attorneys have experience with casino AML guidance and are happy to discuss the current (and rapidly evolving) regulatory environment.