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March 7, 2017

Global Trends:

The whirlwind that was 2016 continues to spin as we kick off 2017. With a year full of leaks, new regulations, a rising economic world power and a new U.S. president, we re-examine these events and consider how the future of the regulatory and banking worlds will be impacted.

On Inauguration Day, the Assistant to the President and Chief of Staff, Reince Priebus, sent out a memorandum issuing a regulatory freeze, noting that heads of executive departments and agencies should “send no regulation to the Office of the Federal Register (the “OFR”) until a department or agency head appointed or designated by the President after noon on January 20, 2017, reviews and approves the regulation” and that any regulations that have not yet taken effect will be delayed by at least 60 days. What does this mean for regulations that are currently pending? FinCEN’s Beneficial Owner Final Rule, with which covered financial institutions must comply by May 2018, most likely will not be impacted since it is part of a previous regulation and was technically effective in July 2016. Renewal of FinCEN’s title insurance GTOs was approved on February 23, 2017, and thus was also not affected. Additionally, certain regulations were classified under the freeze as exempt due to “emergency situations or other urgent circumstances relating to health, safety, financial, or national security matters.” However, other nonexempt regulations like FinCEN’s proposed rule requiring RIAs to have AML programs could potentially be delayed.

On February 3, the President issued an executive order on the “Core Principles for Regulating the United States Financial System,” which, after a cursory glance, proves to be consistent with his promises to fight back against the big banks of Wall Street and put money in the pockets of the average hard-working American. However, looking more closely at the White House’s actions since his days in office, there may be some confusion surrounding the real intention of these principles.

Below we have noted some especially conflicting examples taken directly from the Principles followed by the White House’s recent actions:

“(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth”

The Fiduciary Rule, protecting retirement account customers, is likely to disappear after an executive ordered review.

“(b) prevent taxpayer-funded bailouts”

President Trump plans “to be cutting a lot out of Dodd-Frank,” which was designed to avoid such financial crises by increasing banks’ capital requirements.

“(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry”

Among specific aspects of Dodd-Frank that President Trump plans to rescind, the Volcker Rule — “which bans banks from making risky bets with their own money” — is on the chopping block.

Although some of these initial actions may raise some eyebrows, only time will tell what ultimate direction the Trump administration will take. Below we have highlighted some of the major regulation themes alongside the oversight enhancement that occurred during the Obama years compared to the expected trends that the White House will follow in 2017 onward.

The gold flatlined arrows above can be interpreted as neutral or unknown. However, with President Trump’s inclusion in the Panama Papers last year, we imagine that he will have something to say about beneficial ownership disclosure in the future. Regarding foreign correspondent banking, some believe that his “America First” policy could potentially make de-risking even more of a problem despite the OCC’s and FATF’s new guidance on the subject. Similarly, it is hard to say what overall trend sanctions will follow. While President Trump is open to trade with countries such as Russia, other countries like Iran are being added to the list.

One topic that both supporters and critics alike can agree upon is that during his campaign President Trump voiced his advocacy for policies and regulations related to anti-money laundering, drug trafficking, financing of terrorism, bribery and corruption, and cybersecurity. Nevertheless, let’s not forget the $10 million civil penalty filed by FinCEN against President Trump’s own bankrupt Taj Mahal casino last year for deliberately failing to file 50 percent of its SARs for several years. Additionally, in the past few weeks, the now Republican-controlled Senate voted to repeal an anti-bribery rule targeted to combat corruption between energy companies and foreign governments, which President Trump is expected to sign off on shortly.

As previously mentioned, the overhaul of Dodd-Frank will likely result in decreased regulation surrounding proprietary trading. Consumer protection regulation is also on the decline in regards to the impending Fiduciary Rule disposal (noted above) and bill recently introduced to repeal the CFPB’s prepaid card rule. On his first day in office, President Trump canceled former President Obama’s last-minute economic policy actions that would have cut FHA premiums for first-time homebuyers, thus upholding the theme of deregulation.

A more overarching regulatory change we can anticipate seeing in the news soon is a bill set for reintroduction that will remove the ability of federal agencies to promulgate new rules and regulations. This bill would overturn the 1984 Chevron Doctrine, which allowed for judicial deference to agencies such as the Federal Reserve, FDIC and OCC.

In other world news, the dust is starting to settle after the “shock doctrine” of demonetization in India this past November. What started out as a tactic for Prime Minister Narendra Modi to fight corruption and counterfeiting by voiding current 500 and 1,000 rupee notes (86 percent of the currency in circulation) with only 50 days to redeem for new currency, transformed into something more advantageous to the economic future of the nation. Since the citizens were pressed for time and mediums for rupee exchange, many were forced to open bank accounts for the first time and merchants and service industry workers started using e-wallets to manage their transactions.

With great changes in a country comes public upheaval — waiting in bank lines for hours on end and “riot-like conditions” took form. The struggling poor, whose employers had no cash to pay their workers, therefore had no money to pay for food and Modi took on criticism for this reason. Additionally, the goal of weakening the black market by filtering out the illicit cash did not really come to fruition as the dirty money was seemingly cleaned. Yet a positive side effect of economic digitalization is that as peoples’ money is now more traceable, it is also more taxable; we have already seen a notable increase in tax collections. Although projected growth rates were slashed for this year, in the long run many believe that India will benefit from demonetization as estimates for gross domestic product (GDP) growth increase over time (FY 2017–2018 at 7 percent, FY 2018–2019 at 7.6 percent, FY 2019–2020­­ at 7.8 percent). This year we can expect to see more reform surrounding black money and the potential introduction of the long-awaited Goods and Services Tax (GST).


State of the Market:

When it comes to NYDFS Part 504, not much has changed in 2017. Although the hype around the release on January 1 of the new final rule generated a lot of buzz in the financial industry, the majority of information covered by the new regulation is in line with the prevailing best practices for BSA / AML and sanctions compliance. Criminal prosecution, a looming penalty in the original draft, was dropped from the final rule as the DFS was unable to secure prosecuting authority in this space.

The newest provision of Part 504 requires an annual certification to be executed by a senior officer or board member attesting to the regulated institution’s compliance with the regulation. Annual certification is attainable by conducting a full-year program evaluation — via a business as usual (BAU) function, a project management office (PMO) or a third party — mapping existing coverage to the updated provisions in the new rule, identifying existing AML controls and ultimately managing any necessary remediation efforts. Integral to an updated and compliant program is an emphasis on quality data management and data integrity, as well as the need for banks to be constantly aware of emerging risks.

For foreign banks operating in the state of New York, the story is slightly different. The 504 guidelines require the institution’s local, New York-based legal entity to sign off on the annual certification of compliance — not an officer from the home office. To the extent needed, U.S. representatives for these foreign institutions will need to encourage transparency within their broader organization by establishing clear lines of communication with their home office’s transaction monitoring services team in order to reduce and manage the risk of noncompliance in the U.S. market. Foreign institutions that resist this form of indirect regulation by the New York regulator may find themselves in need of qualified officers that are willing to take on this new burden.


Prescriptive Advice:

We have found that organizations are most successful when AML activities, including know your customer (KYC) / customer due diligence (CDD), transaction monitoring, and investigation policies and procedures, are part of a continuously evolving and maturing BSA / AML compliance program. Programs that rise and fall as an organization responds to regulatory actions — through consent orders or matters requiring attention (MRAs) — tend to lack a holistic view of compliance measures and, if not maintained, fall into obscurity or quickly become outdated.

The current trajectory of regulation will steadily and firmly push institutions toward solidifying their AML compliance programs and ensuring accuracy and quality of data. Opportunities are abundant for compliance, legal and regulatory professionals to focus now on building and developing the groundwork for programs that will allow them to stay ahead of regulations. Strong data management, which is an integral factor in maintaining a healthy AML compliance program, facilitating annual reevaluations and certifications, and being at the forefront of KYC / CDD procedures, is critical to an institution’s success. Supplemented with recent advances in technology, institutions can provide a more transparent view into and understanding of the data inherent to their compliance efforts. 

The challenge that many programs will still need to face, however, is one of data ownership.  The line that is often drawn between the creators of data in an institution (line of business/product owners) and the consumers of that information, such as AML compliance, will need to be redrawn if there is any chance for effective AML data management.

Better transparency into AML programs and a stronger focus on organization-wide data management benefits everyone — the AML / compliance professionals, the institution, the regulators and the customers — and through the advances in technology and the diligent work of professionals, it is an achievable goal for all.