February 2023 RECAP – The development to know in banking, fintech and crypto – financial services

by James · March 15, 2023

In traditional banking: (1) FinCen warns against an increase in mail theft-related check fraud; (2) the CFPB urges the Supreme Court to review the 5th Circuit’s finding that the CFPB’s funding structure is unconstitutional; (3) OCC revises guidance on branch closings and changes of control; and (4) Regulators reinforce the need to act now in preparation for the end of LIBOR.

Table of Contents

FinCen warns against an increase in mail theft-related check fraud

On February 27, 2023, the Financial Crimes Enforcement Network (“FinCen”) issued an alert warning financial institutions of a nationwide increase in mail theft-related check fraud schemes. Mail theft-related check fraud generally refers to the fraudulent negotiation of checks stolen from the US Mail. FinCen issued this notice to ensure that Suspicious Activity Reports (“SARs”) filed by financial institutions properly identify and report suspected check fraud schemes that may be linked to mail theft in the United States. The FinCen report provides an overview of the latest increase, highlights selected red flags to help financial institutions identify and report suspicious activity, and reminds financial institutions of their reporting requirements under the Bank Secrecy Act (“BSA”). Red flags noted by the FinCen report include:

Uncharacteristically large withdrawals from a customer’s account via check to a new payee.

Customer complains that checks were stolen from the post office and then deposited into an unknown account.

Customer complaints that checks were sent by mail were never received by the intended recipient.

Checks used to withdraw money from a customer’s account appear to be of a noticeably different check stock than the check stock used by the issuing bank and the check stock used for known, legitimate transactions.

Existing customer with no check deposit history has new sudden check deposits and withdrawals or transfers of funds.

Uncharacteristic, sudden, abnormal depositing of checks, often electronically, followed by rapid withdrawal or transfer of funds.

Examination of suspect checks reveals faded handwriting beneath darker handwriting, giving the impression that the original handwriting has been overwritten.

New customer opens an account which is apparently used only for depositing checks followed by frequent withdrawals and transfers of funds.

A non-customer attempting to cash a large check or multiple large checks in person.

A financial institution is required to file a SAR if it knows, suspects or has reason to suspect that a transaction conducted or attempted by, at or through the financial institution involves funds derived from illegal activity; is intended or performed to conceal funds derived from illegal activity; is designed to avoid regulations promulgated under the BSA; lacks a business or apparent lawful purpose; or involves the use of the financial institution to facilitate criminal activity. FinCen requests that financial institutions indicate a connection between the suspicious activity being reported and the activities highlighted in the alert by including the key term “FIN-2032-MAILTHEFT” in SAR field 2, as well as in the narrative, and by selecting SAR field 34 (d) (check fraud). Financial institutions must review their SAR-related policies and update them as necessary to address the issues referenced in this FinCen notice.

CFPB urges Supreme Court to review 5th Circuit’s finding that CFPB’s funding structure is unconstitutional

The Consumer Financial Protection Bureau (“CFPB”) recently filed a reply brief related to the petition for certiorari seeking review of the Fifth Circuit’s decision in Community Financial Services Association of America, Ltd. v. CFPB. In that decision, the Fifth Circuit Court of Appeals held that the CFPB’s funding structure violates the Appropriations Clause of the United States Constitution and struck down the CFPB’s payday lending rule.

In the response letter, the CFPB challenged the Community Financial Services Association of America, Ltd.’s claim that the CFPB’s funding was “unprecedented,” noting that respondents “cannot meaningfully separate the CFPB’s funding from Congress’s long-standing and admittedly valid practice of funding agencies from standing sources outside of annual spending bills.” CPFB also argued that the defendants failed to rehabilitate the appellate court’s disruptive remedy and could not justify the district court’s failure to conduct a separation analysis.

Currently, it is unclear whether the US Supreme Court will consider the Fifth Circuit’s ruling during the current Supreme Court term or during the next term.

OCC revises guidance on branch closures and changes of control

On February 7, 2023, OCC Bulletin 2023-6 announced an updated version of the “Branch Closings” booklet in the Comptroller’s Licensing Manual. According to OCC Bulletin 2023-6, the revised booklet, which outlines policies and procedures for filings and customer notices related to the closing of all national banks, federal savings associations, and federal branches and agencies of foreign banking organizations, provides current guidance. references, and make other minor changes and corrections to the previous booklet.

Similarly, on February 16, 2023, OCC Bulletin 2023-7 announced an updated version of the “Change in Bank Control” booklet in the Comptroller’s Licensing Manual. The revised booklet replaced the same title issued in September 2017, makes corrections where necessary and contains updated guidance for changes in control of national banks, federal savings associations, and federal branches and agencies of foreign banking organizations.

Financial institutions should be aware of the updated guidance in these bulletins and confirm compliance with the branch closure booklet and the Change in Bank Control booklet where applicable.

Regulators are reinforcing the need to act now in preparation for the end of LIBOR

USD LIBOR is expected to end on June 30, 2023. In late January, the Alternative Reference Rates Committee of the Federal Reserve Board (“ARCC”) published its Summary of Key ARCC Recommendations (“ARRC Key Recommendations”) advising:

Take action now to rectify old contracts before 30 June 2023;

Communicate planned price changes and use the Depository Trust and Clearing Corporation’s enhanced legal notification system as soon as available to effectively disseminate information about securities price changes; and

Use the Secured Overnight Financing Rate (“SOFR”) as a replacement rate for USD LIBOR and as the basis for the transaction in cash and derivatives markets.

The ARCC key recommendations echoed advice from the late June 2022 FSB progress report which warned that a large number of contracts requiring back-up implementation and/or contract renegotiation would pose operational or market disruption risks. Financial institutions with legacy contracts including LIBOR without reserve provisions should contact counsel now to determine how best to resolve LIBOR-related issues.

In Fintech & Crypto: (1) Recent crypto settlements point to enforcement trends related to stakes and earned products; and (2) SEC Alerts Celebrities Regarding Crypto Endorsements.

Recent crypto settlements point to enforcement trends related to stakes and earned products

The North American Securities Administrators Association (“NASAA”) is an organization of securities regulators consisting of 67 state, provincial and territorial securities administrators. NASAA recently found that a Cayman Islands digital asset firm, Nexo, breached securities registration regulations through the sale of the Nexo Earned Interest Product. According to NASAA, Nexo provides virtual currency-related financial services to retail and institutional borrowers in the United States, including trading, borrowing and lending services. NASAA alleged that Nexo failed to register as a securities and commodities broker, but told investors that it was in full compliance with various securities registration requirements. In late January, NASAA announced that as part of a settlement, Nexo will pay $22.5 million to settle charges from the Securities Exchange Commission (“SEC”) and $22.5 million in fines to settle similar charges from state regulatory authorities, including regulatory agencies in California, Washington, Kentucky, New York, Oklahoma, Indiana, Maryland, South Carolina, Vermont, and Wisconsin.

On February 9, 2023, the SEC filed a complaint against Payward Ventures, Inc. and Payward Trading, Ltd., both known as Kraken, for failure to register the offering and sale of their cryptoasset staking-as-a-service program, where investors transfer cryptoassets to Kraken for efforts in exchange for advertised annual investment returns as much as 21 percent. To settle the SEC’s charges, Kraken agreed to immediately stop offering or selling securities through crypto-asset staking services or staking programs and to pay $30 million in disgorgement, prejudgment interest and civil penalties.

These settlements show that the SEC and similar regulatory agencies are targeting stake and earned products offered by a number of cryptocurrency exchanges. Although there are currently no formal rules for crypto lending, cryptocurrency exchanges must examine securities regulations and consider whether their products require registration. This is particularly true with regard to interest-bearing products which appear to be under intense regulatory scrutiny.

SEC Alerts Celebrities Regarding Crypto Endorsements

On February 17, 2023, the SEC announced charges against former NBA player Paul Pierce for touting the EMAX token, a cryptoasset security offered and sold by EthereumMax, on social media without disclosing the payment he received for the promotion and for making false and misleading claims promotional statements about EthereumMax products. Mr. Pierce agreed to settle the charges and pay $1.409 million in penalties, disgorgement and interest to the SEC.

This case is a reminder to advocates: Federal securities laws require anyone promoting a cryptoasset security to disclose the nature, source and amount of compensation received in exchange for the promotion. Advocates should consult with attorneys to confirm that any endorsements in the cryptoasset space comply with SEC regulations. This is especially important given that creators of cryptoassets and the SEC often disagree about whether a given cryptoasset qualifies as a security.

The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.