Account opening costs increases by $6.82

Last week ended with Merrill Lynch being probed for not detecting money laundering facilitated by its financial advisors. This is in addition to the FA being investigated by FINRA and, likely, will have licenses revoked or fined heavily. What caught my attention in a sentence in the a roundup paragraph in a Reuters article regarding this issue.

In December 2014, FINRA ordered two brokerage units of Wells Fargo & Co (WFC.N) to pay a joint $1.5 million fine for failing to verify 220,000 new accounts during a nine-year period.

This comes out to a fine of $6.82 per account not verified. This is less than minimum wage. Considering this fine covers a period of nine years, this is a relatively cheap. Many of those accounts might not even be open anymore, so, that would also mean Wells Fargo not having to go through the proper verification process for all of the 220,000.


Is your firm’s account verification process inadequate and willing to pay $6.82 nine years from now to fix it?


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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Cantwell-King-McCain-Warren to re-up Glass-Steagall

Sens. Elizabeth Warren (D-Mass.), John McCain (R-Ariz.), Maria Cantwell (D-Wash.) and Angus King (I-Maine) proposed a 21st Century Glass-Steagall, which would separate commercial banking with investment banking. Sen. Warren has published a fact sheet, which we publish here in its entirety.

21st CENTURY GLASS-STEAGALL ACT

Fact Sheet

The original Glass-Steagall, the Banking Act of 1933, was introduced in reponse to the financial crash of 1929. Starting in the 1980s, regulators at the Federal Reserve and the Office of the Comptroller of the Currency reinterpreted longstanding legal terms in ways that slowly broke down the core function of the bill – a wall between investment and depository banking to curb risk. In 1999, after 12 attempts at repeal, Congress passed the Gramm-Leach-Bliley Act to repeal the core provisions of Glass-Stegall.

The 21st Century Glass-Steagall Act would reduce risk in the financial system and dial back the likelihood of future financial crises.

  • Returning basic banking to the basics. The 21st Century Glass-Steagall Act separates traditional banks that offer savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial services, such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. The bill also separates depository institutions from products that did not exist when Glass-Steagall was originally passed, such as structured and synthetic financial products including complex derivatives and swaps.
  • Countering regulatory loopholes for risky activities. The 21st Century Glass-Steagall Act specifies what activities are considered the “business of banking” to prevent national banks from engaging in risky activities, and bars non-banking activities from being treated as “closely related” to banking. Over time, the Office of the Comptroller of the Currency and the Federal Reserve used these terms to allow traditional banks and bank holding companies to engage in a wider and wider range of high-risk activities. This bill would end those practices.
  • Taking on “Too Big to Fail.” The 21st Century Glass-Steagall Act cannot end “Too Big to Fail”on its own, but it moves the financial institutions in the right direction by making them smaller and safer. By separating depository institutions from riskier activities, large financial institutions will shrink in size and will not be able to relly on federal depository insurance as a safety net for their high-risk activities. Although some financial institutions might be large, they would no longer be intertwined with traditional depository banks, reducing the implicit government guarantee of a bailout.
  • Enforcing Glass-Stegall. The 21st Century Glass-Steagall Act institutes a five-year transition period and penalties for violating the law.

Does this proposal to separate commercial banking and investment banking forget that it was repealed because foreign banks were eating into the global financial services market share?
With China having half of the largest global banks, will this separation effectively bar the US from becoming the greatest financial center?
Is giving up much of this market a risk we are willing to take?


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


How could the Iran-nuclear deal affect your compliance department?

Flag of Iran

Assuming your bank performs transactions for people with international connections, Americans are barred from doing most types of transactions with Iran interests because of the economic sanctions. There are several sets of economic sanctions on Iran and only the the set that were implemented because of the nuclear activity were lifted. Practically, very little has changed for your bank, so, very little has changed for your compliance department.

Even, still, the elation alone is building interest in investment and trade activity with Iran. American entities with subsidiaries in Europe are likely to try to get around these sanction by claiming European sovereign rule. But this only works if the subsidiary can prove that it is not controlled by the American umbrella.

There’s no way to prove this. Just the fact that the subsidiary is a subsidiary and not a joint venture or minority interest deems it American jurisdiction on transactions because the net income is accounted for here in the States.

Minority interest is where things get tricky. If a client is doing business with an entity which has American minority interests and does business with Iran, then that’s territory that requires some legal analysis. The reason for the complication is even though there are many situations where Americans may have minority interests in European entities that will do business with Iran, one of those entities could be a fund that is specifically initiated to do that business. Wealth Americans have access to foreign markets without working through the American markets. It is possible that an American investor can buy into a Iran direct investment fund in London using his British assets. If he is able to do this, then he adds a legal entity layer. He will own a majority interest in an entity that is investing into a fund as a minority investor.

Your department will have to decide whether American jurisdiction applies to ownership of legal entities or if business will benefit the American.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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Black Market Peso Exchange (BMPE)

Black Market Peso Exchange (BMPE) is a way of laundering money, or to make illegitimately earned monies seem legit, hiding the criminal activity that created the income.

Diagram of Black Market Peso Exchange from Chase & Associates, Inc.

It is really no different than other common forms of laundering money but a term was created to capture the massive amount of activity that takes place to clean drug money.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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Bank Resolution Plan

http://www.hotelroomsearch.net/
Basel, Switzerland

You may or may not have heard about something called a Resolution Plan. A requirement from Title 1, Section 165(d) of the Dodd-Frank Act, any bank holding company with assets greater than $50 Billion is required to have one submitted to the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). The Plan is specifically fulfilling the requirement in subsection 1 of the section. It has three enumerated requirements and one catch all requirement. The enumerated requirements are: the extent to which the institution is adequately protected from nonbank subsidiary risks; descriptions of the org structure, assets, liabilities and other obligations; and enumerate collateral with which securities are guaranteed. The catch all requirement just states the institution must provide “any other information that the Board of Governors and the Corporation jointly require by rule or order.”

This is a yearly exercise banks must pass in order to keep their bank charters. The idea is that the two major insurers of these institutions receive enough information so that there is enough insurance to cover for any losses by depositors and debtees. Unlike regular insurance plans, the insurance premium won’t go up. That has been taken off of the table. Instead, the institution could be required to increase its ability to cover for the risks.

The risks are measured using Basel 3 standards. Metrics such as CCAR and CVar are used to determine a financial instrument’s ownership and level of risk. So, basically this is an exercise in accounting, primarily, and finance, secondarily.

Despite the title of the section, it is left up to the Fed and the FDIC to figure out if a resolution plan can be derived from the requirements. That is to say, the “Resolution Plan and Credit Exposure Report,” submitted by the institution does not actually contain a plan on how to resolve a dissolution of the institution. It provides information with which the Fed and FDIC can do so.

For banks that are smaller and simpler, FDIC is implementing a plan to perform the exercise itself, taking the burden of performance off of these other institutions that do not face direct risks from collateralized securities.

Credit Unions have their own equivalent to the FDIC called National Credit Union Administration (NCUA). There are some similar rules for credit unions but because of the limited offerings credit unions are allowed to provide, the risks are inherently lower, therefore, the standards are lower.

This short explanation is a good start to understanding the goals DFA Title 1 Section 165 (d)1.

BitCoin Enthusiasts Celebrate Regulation

from Bloomberg
Benjamin Lawsky, Superintendent of New York Financial Services

Last month, New York Department of Financial Services announced that it will start regulating digital currencies.

Normally, people groan at the news of more regulation. However, digital currencies are on the fringe and seek legitimization. Being regulated is a clear sign of impact.

BitCoin enthusiasts mostly cheered on the news, even though for many, mainstream regulation and economy is something they oppose.

Wall Street is on the fence about this. The banks are given another product they can trade, but at the cost of possible loss of control in that market. Banks sit as members of the Federal Reserve Banks, making them part of the money supply. Digital currencies are decentralized and if there is a center of power for them, it would be Silicon Valley.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book Money Laundering: How criminals got paid and got away.


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Many Banks Cut Clients Over Money Laundering Fears

http://robertkaplinsky.com/work/drug-money/
(credit: Robert Kaplinsky)

Many banks have cut clients over money laundering fears. With fewer clients, low interest rates and low volatility, there are less ways for financial institutions with multiple lines of businesses can earn money. Bank of America, Citigroup and JPMorgan Chase combined cut 50,000 jobs in 2014. Industry wide, some have reported 80,000 cuts. Profits are up at banks because of the job cuts, not because of improving economy.

One area that hasn’t seen a decline in headcount is Compliance. All compliance-related areas of the bank (Compliance, Legal, Risk, Controls, Audit) have all seen headcount increases. For many of the areas, skills from other areas of the bank is quite transferable. Knowledge as well.

But knowledge of AML is particularly lax. And, sadly, many of the top decision makers are not versed enough in AML issues to figure out a way to restructure the organization to keep clients. So, the only thing they can do is to cut clients.

While this might be good for the domestic banking industry, on the long run, this will be bad when these firms are trying to compete with their large Chinese competitors. The five largest Chinese banks have an edge on AML programs, should they choose to implement it: government support.

Because Chinese banks are essentially government owned, AML programs in these institutions can implement government level standards even with bank secrecy laws. This integrated approach is at the risk of bank secrecy laws, but it also means that even without knowledge of AML, top decision makers can decide to keep all clients and adjust AML programs as the government sees fit.

This issue has been playing out the last few years because the US has been seeking ways to punish Chinese bank clients through their correspondent accounts for revenue from counterfeit products they sell. The measure should really be tied to counterfeit products that are made, not those that are sold, but that’s especially difficult since the US government has no jurisdiction in production abroad. But US laws allow extra-jurisdictional reach on banking when correspondent bank accounts are in the US. But, of course, Chinese banks are against this. So is the Chinese government. On the other hand, the Chinese government doesn’t want their economy to be so heavily depended on counterfeit products. So, the conundrum is for the Chinese government. The US is enforcing the type of laws they would like to implement, but the punishment will be doled out in the US. If the Chinese government also pursues this, the punishment will be on both sides. And the Chinese government also has to look out for the short term economy, which is heavily depended on counterfeits.

So, at least US and European banks can breath one sigh a relief: the clients they are dropping must find banks within the western government jurisdictions because shifting the economics of counterfeit financing and transactions would provide more leverage to implement more stringent AML programs on the institutions that currently do not have such programs.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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