Bank Lawyer's Blog

Paying For The Great Wall: Let The Banks Do It

Customarily, you'd have to work harder than El Chapo's Narc-Anon sponsor to find common ground between me and the Golfer-in-Chief on any issue, but leave it to The Candidate with the Cockatoo Do to move that Sisyphean boulder up the slope and on to level ground. For all of you who've been wondering like me (and most other Americans, as well as many Mexicans) how The Orange Man plans to get Mexico to pay for The Great Wall along the Rio, he's made it clear: American financial institutions will carry his heavy water.

Under the proposal detailed on Trump’s campaign website, the Republican would rely on a section of the Patriot Act to effectively force banks and money transfer companies to determine whether a person trying to send money abroad is a legal resident of the U.S.

That section of the law was written to crack down on terrorist financing and requires banks and other financial institutions to verify the identities of people opening accounts and doing business with them.

Trump has vowed on his first day in office, he would expand that requirement to include wire transfers and require that no foreign person living in the U.S. can send money outside the country without first proving their legal status.

The businessman predicts that Mexico will agree to pay for a border wall within a matter of days to keep money flowing over the border. 

The Trump campaign has also floated increasing visa fees, cancelling visas, and establishing trade tariffs against Mexico as ways to pay for a border wall, but cutting off remittances is the centerpiece of his plan. 

Usually, the words "centerpiece" and "Trump" are used to refer to the living blonde-furred creature he wears on his cranium, the one that sometimes rears back on its hind legs and bays at the moon, Megan Kelly, or any other thing or person who displeases the the former lead singer for Devo. In this case, it refers to banks and other financial institutions, as well as other money transmitters like Western Union, doing what all federal government agencies otherwise responsible for keeping the word "legal" in "legal immigration" have failed to do since the 1930s: ferret out who's here legally and who is here on the down-low.

Naturally, banks are doing back-flips in anticipation of the expense and liability of that job, not to mention the back-breaking prospect of adding a ton or two to the already crushing compliance burden it will entail.

But banks and other financial companies say they do not want to get involved on the front lines in a contentious immigration battle, arguing there are questions about how effectively such a policy could be implemented.

“It should not be for the banking system to be the police or the immigration task force,” said one banking lobbyist. “I don’t think it should be left to banks to report that someone has come in to remit money to whatever country, and it may or may not be legal. That’s not our role.”

[...]

Banks contend that they do not have a method of establishing the legal status of a person in the U.S. A person can open an account or send money abroad simply by showing an Individual Taxpayer Identification Number, which is given out by the government to people lacking a Social Security number, including people who are in the U.S. illegally.

The banking lobbyist said Trump’s proposal is not yet being taken seriously by the industry because it is still several steps away from even beginning to look like a reality.

I assume that same lobbyist a year ago scoffed at the notion that a bloviating clown prince like The Donald could ever beat a well-funded, well-connected, "heavyweight" like The Jebster for the Republican Party's presidential nomination. Underestimating this carnival barker is a common blind spot this election season. He's like a nightmare from which you can't wake up no matter how loudly you scream. Let's take him seriously, no matter how many knots that ties in your nether regions, and make sure that he understands that any banker, even those who live in Colorado and consume mass quantities of EdiPure Raspberry Jellies, who was thinking of holding their nose and voting for him are going to vote for the Wicked Witch of the Chappaqua, or otherwise "Go Green," "Libertarian," or even "Liberace," unless he drops this harebrained scheme to build The Great wall on the backs of America's banks. In fact, bankers could get some assistance in making this point from their MSB brethren, as The Change We Were Waiting For recently noted.

“The notion that we are going to track every Western Union bit of money that is being sent to Mexico, good luck with that,” Obama told reporters. 

I amaze myself when I say this, but "Right On, Mr. President."

As the linked article points out, there are so many ways to circumvent the money transmission barrier that Trump proposes that banks, despite the money and labor it would cost them, would be about as effective in stopping money flowing from Mexican illegal immigrants in the U.S back home to Mexico as the US Border Patrol is at keeping out undocumented immigrants in the first place. In other words, it wouldn't work.

Not that reality ever stopped a megalomaniac.

Banking Blues On The Border

In a world filled with unintended consequences, a perfect storm of unintended consequences for the banking business is sweeping the US-Mexico border.

Nearly half the bank branches in San Ysidro have closed in the last two years, mirroring a trend along the entire Mexican border that’s creating headaches for small businesses and forcing some residents to go without bank accounts.

Bank officials say branch closures along the border are the result of a recent federal crackdown on drug-related money-laundering and an inevitable reduction in brick-and-mortar locations as more banking gets conducted online.

No one disputes that those are factors, but some question whether the banks are using such things as excuses for closing less lucrative branches in relatively low-income border areas.

Whatever the cause, politicians and community leaders say the closures are stifling business along the border, where cash remains crucial to commerce, and threatening long-term prosperity by leaving a trail of empty storefronts and making loans harder to secure.

Another factor cited is the paucity of new bank charters since the collapse of 2008. No new community banks are being formed by local business leaders to meet the needs of the border communities not being met by big banks.

"Most communities along borders like San Ysidro don’t have community banks — we’re at the mercy of the national chains," [San Ysidro Chamber of Commerce CEO Jason] Wells said.

The national chains are closing, not opening, branches, not only in San Ysidro, but all along the Mexican border.

As of Oct. 1, 80 percent of bank branches had closed in Calexico, 29 percent had closed in Nogales, Ariz., and in Texas 13 percent had closed in El Paso and 17 percent in Laredo.

In San Ysidro, six of the community’s 13 branches have closed.

"Derisking" a bank can be bad for business, obviously.

Among the proposed solutions being urged by business leaders are a softening of money-laundering penalties. The $1.9 billion hit that HSBC took not long ago is cited in the article as a prime motivator for the acceleration of border branch closings. Don't hold your breath on that happening. The US Justice Department and federal regulators are too busy pursuing "hate speech," payday lenders, and online dating services to seriously consider lifting its jackboot off the neck of banks in the area of BSA/AML compliance, unless your a bank that services a state-legal, federally-illegal recreational pot business, in which case, as long as you file a Cheech-and-Chong SAR, you'll likely get a wink-wink/nudge-nudge from General Lynch.

Frankly, I don't see any short-term reversal of the trend. Perhaps, if and when de novo bank charter approvals become more common, a few local banks eventually might be created to serve some of these areas. Or, Princess Fauxcohontas may eventually exhale her pipe dream of a US Post Office "Bank of the People's Republic" and morph border post office branches into border bank branches that specialize in turning cash deposits into money orders. Otherwise, I don't see an end to the trend.

No Mystery Why CUs Not Filing More SARs

A recent post on the allegations by FinCEN director Jennifer Shasky Calvery that credit unions are lackadaisical about filing suspicious activity reports led not only to noisy "un-subscriptions" to this blog by some apparently offended credit union readers (usually, only a post bashing Elizabeth Warren causes that reaction), but an actual thoughtful and civil response from long-time credit union attorney Hal Scoggins. Mr. Scoggins failure to adopt the usual "shoot-the-messenger" approach to blog reading marks him as a man of taste and discrimination, as does, obviously, his interest in reading the deep thoughts of Jack Handy this blog's author, a man who a once received an email from a New York-based think tank that advised him that he could be a "thought leader" if only he weren't so flippant. Dream on!

Hal gave me permission to post his response here, so here it is (edited to remove an favorable comments about me, since I am currently positioning myself as the "Anti-Trump" foretold in the Book of Revelations):

A quick comment on your 9/17 post about Jennifer Shasky Calvery’s comments on CUs that haven’t filed SARs or CTRs.  I read her comments and initially thought, “Wow, that’s scary." A “statistically significant” number of credit unions have not filed any SARs or CTRs.”  But it’s a little less scary when one considers a couple of points about credit unions: 

* The NCUA’s call report data for June 2013 shows that there are 6284 credit unions in the United States.

* The same call report data shows that 1892 of those credit unions have total assets under $10 million.   (30% - that’s statistically significant.)

* Average asset size of those 1892 credit unions is just over $4 million.

* Average number of members:  826

* Average number of employees:  1.4 FT and 1.2 PT

I could not pull pure cash data from the NCUA data, but I looked at a couple of random CU’s call reports; one $2.5 million and one $1.5 million.  They had cash on hand of $26,000 (yes, thousand) and $15,000, respectively.  I would guess that a statistically significant number of those credit unions do not offer checking accounts.  Only 287 offer credit cards, and I was shocked the number was that high. 

When the CU has only $4 million in total assets, 800 members with an average account balance of about $5000, and there is probably only $40,000 in cash in the entire CU, there are probably not going to be any times where someone is bringing in or taking out $10,000 in cash (no CTRs).  Plus, you don’t offer enough services to be that useful for criminal activity, and there are probably not many times where the member is doing a transaction that the credit union doesn’t have enough knowledge about to take it out of the realm of suspicious activity (no SARs).  If 30 percent of CUs in the country fit that profile (and it appears they do), it is a lot easier to see how a “statistically significant” number haven’t filed any SARs or CTRs for a couple of years.

Valid points, and they ought to be considered by all fair minded folks without an axe to grind, which, I think, leaves out 99% of commercial bankers and at least one bank law blogger who is more interested in eliciting a drive-by guffaw than being a "thought leader" (whatever the hell that is).

In a later email, Hal made the following additional point, which is also telling.

My reaction now (after doing that tiny bit of research) is – you’re the director of FinCEN, and you can’t have one of your flunkies do 10 minutes of research to provide some context before you make a speech like that? Or better yet, require the flunkie to do 10 minutes of research to provide some context at the time they actually provide you with the info for your little sound bite?

Research? We don't need no stinkin' research! We're the federal "guhment" and we've just been making it up as we go along since 1789.

Besides, Calvery needs food for FinCEN's pet goat and she wants all financial institutions, taxable and tax-free, to get on the stick and start winnowing the forests. SARs: it's what for dinner!

No SARs? No Worries!

Banks and credit unions have been gnawing on one another like Donald Trump on Carly Fiorina's face since before The Donald's dad gifted him with his first blow dryer (which, I believe, was some time before Cro-Magnon Man out-bred Donald's Neanderthal ancestors). Credit unions want to make business loans like banks and banks want to be tax exempt, too. Or, something like that.

Amidst all the "Am Not-Are Too" finger-pointing engaged in by both segments of the financial industry, there is clearly one area of business where banks are beating credit unions to the punch, time after time: SAR-filing (paid subscription required).

Speaking Tuesday to the National Association of Federal Credit Unions, Financial Crimes Enforcement Network Director Jennifer Shasky Calvery said that an unusually large number of credit unions have not filed suspicious activity reports or currency transaction reports for nearly two years.

"Some early research we are looking at suggests that we have a surprisingly larger … statistically relevant and unusual number of credit unions that over a seven-quarter period — so almost a two-year period — filed neither a SAR or CTR," she told the trade group's congressional conference.

She acknowledged that "there could be problems with the data," but added that "the number is surprising, so we are trying to understand that."

Now, this is the same Jennifer Shasky Calvery who last year declared that the battle to pry open the banking business for state-legal recreational marijuana businesses had been won, so a healthy dose of skepticism might be warranted as to the reliability of these statistics. Still, no SARs or CTRs at all?

I guess its safe to say that many credit unions are not overspending on their anti-money laundering compliance staff. Which, I suppose, is just fine until, you know, it isn't.

Don't Ask, Don't Tell

You may recall last year's pronouncement by the head of FinCEN, Jennifer Shasky Calvery, that 105 financial institutions were, thanks to the amazing guidance provided in February 2014 by FinCEN, servicing state-legal, federal-illegal marijuana businesses. Apparently, less than 10% of those are in Colorado, land of the free and home of the dazed, because according Colorado Rep. Jared Polis, only eight commercial banks and two credit unions in that state are banking the pot biz, and none of them want to be publicly named.

I assume that they don't want to happen to them what happened to publicity-challenged MBank out of Oregon. As recently related in published reports, that Oregon bank announced in January that it was open for (marijuana) business not only in Oregon, but in Colorado, and that it had the "tacit approval" of the FDIC to bank the unbankable. Within less than a week, because it was supposedly "overwhelmed" by the response from Colorado marijuana businesses, it pulled entirely out Colorful Colorado. Now, it's announced that it has pulled out of the entire marijuana business nationally, even in its home state of Oregon, apparently haven satisfied the munchies and gotten a good night's sleep. Like the Colorado exit, the industry-wide exit is supposedly due to the unexpected response of unbanked pot sellers and the bank's determination that "the bank is not big enough to provide and support all of the compliance components required."

It may be pure coincidence, but it appears that any time a bank is publicly "outed" as a banker to the stoned, the bank pulls out of the business. None of the 105 institutions cited by Ms. Calvery or the ten cited by Mr. Polis was named. Had they been, how many of them would have "pulled an MBank"? Most, if not all, is my guess.

Unlike banking payday lending, a perfectly legal business that the regulators are trying to eradicate, banking marijuana selling, a blatantly illegal business (under federal criminal laws), is just fine with the federal banking regulators as long as the bank flies under the radar screen. It's OK to service an illegal drug business as long as you (A) file the right kind of Cheech & Chong SAR or SARs, and (B) don't ever, ever, let anyone but the illegal business owners and bank officials know about it. Do you think that this state of affairs breeds cynicism and contempt for the rule of law? Me, too.

"Don't Ask, Don't Tell." It was bad policy for the US military and it's no better for the US banking business.

The Fed's Cold Comfort To Colorado MJ Businesses

I'm traveling this week on business, but I didn't want to leave town without a comment on the visit of Esther George. head of the Federal Reserve Bank of Kansas City, to Denver last week. She was invited to meet with Colorado Representatives Polis and Perlmutter, who've been trying to find a way around the inconvenient fact that what might be legal in Colorado in the way of raising, refining, and selling marijuana for recreational use is still a violation of Colorado criminal laws, as is the handling of funds derived from such illegal activities by banks. According to Rep. Polis, George gave them the Mount Rushmore Response: impassive staring with no audible sound.

George was "circumspect" in her comments about banking for marijuana businesses, Perlmutter said.

"She wouldn't give us a 'yes, no or maybe,'" he said.

But George "expressed great interest in learning about the challenges" marijuana businesses are facing, said Perlmutter, D-Golden.

In other words, like Bill Clinton, she felt their pain in a rhetorical sense only.

The application of Colorado's Fourth Corner Credit Union, formed top bank the unbankable state-legal Mary Jane businesses in Colorado, for a FRB master account has been hung up for months at the Fed. It is likely in Washington, D.C., where it may be sucked into a black hole, eaten by a goat, or consigned to Elizabeth Warren's S&M dungeon.

What actually caught my attention was the assertion by Polis that eight banks and two credit unions were secretly banking marijuana businesses. In other words, eight banks, with the "tacit" collusion of bank regulators, are engaged in illegal drug money laundering.

I understand. The banking regulators are too busy trying to drive legitimate payday lending businesses out of business through Operation Choke Point to bother with federal criminal laws. This is perfectly understandable in the Humpty-Dumpty, Alice-Through-The-Looking-Glass world in which we live today.

US Justice Department to Banks: SARs May Not Be Sufficient

Most bankers I know always love to receive a helping hand from federal law enforcement officials in making their daily lives just a little bit better. That's why I'm sure that most bankers smiled wide when an Assistant US Attorney General recently told a gathering of bankers that when it comes to reporting suspicious activity, a SAR is often not nearly enough.

“The vast majority of financial institutions file suspicious activity reports when they suspect that an account is connected to nefarious activity,” said assistant attorney general Leslie Caldwell in a Monday speech, according to prepared remarks. “But, in appropriate cases, we encourage those institutions to consider whether to take more action: specifically, to alert law enforcement authorities about the problem.”

[...]

A tip-off from a bank about a suspicious customer could lead law enforcement to seize funds or start an investigation, Ms. Caldwell said.

Sure, that makes sense. Bankers have nothing better to do than to do your job for you, right Leslie? The difference between filing a SAR and picking up the phone and reporting your suspicions to a cop is that the SAR is confidential (the subject of the report should never know one was filed) and applicable law provides for banks that file them a "safe harbor" from a lawsuit by the subject of the SAR (in all but in cases of the most egregiously bad faith filings). Those specific protections do not apply to a phone call or an email to a cop.

As a commenter to the linked article observed, "[i]f the Feds would actually do something about the millions of SARs we (financial institutions) have filed, some of these criminals would be in jail." To "do something," the Feds would have to rip those SARs from the gravitational pull of the black hole into which they're apparently dumped and read them, something that bankers have believed for years rarely happens. On the other hand, as FinCEN's head boasted last year regarding all the Cheech & Chong SARs that banks in Colorado have been filing on "legal" marijuana-related businesses, FinCEN actually read 62% of them. That left 38% to be eventually transformed into goat pellets after being consumed by FinCEN's pet goat.

My guess is that many banks will continue to believe that filing a SAR is a more than sufficient "tip off" for any law enforcement agency that actually is interested in uncovering crime.

Ponzi Not Gone(zi)

Nearly five years ago, we discussed the risk that Ponzi schemes posed to banks and the need for the BSA/AML personnel of the bank to be skilled on detecting the warning signs. The recent judgment against PNC in St. Louis ought to hammer home that point.

A jury in federal court here on Monday awarded $491 million in damages in a civil lawsuit sparked about seven years ago by the collapse of a Clayton-based company selling prepaid funerals.

[...]

After a five-week trial, the jury awarded $355.5 million of compensatory damages and $35.5 million in punitive damages against PNC Bank and $100 million more against Forever Enterprises, the latter being a defunct family-owned holding company.

The suit is based upon the "bad conduct" of officers of a company (NPS) that sold prepaid funeral contracts. PNC's predecessor bank acted as the trustee of the contracts.

NPS promised customers across the country that money from prearranged funeral contracts would be held in trust. Claims were supposed to be funded by life insurance policies payable to the trust. But federal authorities found that company officers and others spent some of the money on lavish lifestyles instead.

Beginning in the early 1990s, liabilities exceeded trust assets, the plaintiffs said, and NPS could pay for funerals only by using cash from new contracts.

More than 97,000 victims — customers, funeral homes, insurers and financial institutions — lost money, federal officials have said.

The officers went to prison. PNC has now taken it in the shorts, financially speaking, although the bank has vowed to appeal. I expect any right-minded financial institution would rather pay lawyers millions to fight a nearly half-billion-dollar verdict than to meekly pay it. After all, you need to send a message to potential plaintiffs' lawyers that you need to come strapped (again, financially speaking) if you're gonna' mess with PNC. In addition, the bank might actually be sincere in its "respectful" position that the jury screwed the pooch (judicially speaking) and that it can win on appeal (even if "win" means paring the size of the verdict down to an amount that won't choke a Clydesdale).

Regardless of the outcome on appeal, the verdict demonstrates why banks need to be locked and loaded when it comes to spotting potential Ponzi schemes. That might be a harder task in a state like Colorado or Oregon, where recreational marijuana use is legal and all of this stuff gets lost in a cloud of smoke, man, and then....ummm...ahhhh... What was I saying?

Oh, yeah: "Beware the Ponzi" or "Man, that rug really tied the room together."

Changing of the Guard at DOJ

The recent confirmation of Loretta Lynch as the none-too-soon successor to the current Commissar Attorney General of the United States, engendered a lot of speculation about whether or not the exit of "Fast and Furious" Holder will also spell the end of Operation Choke Point. In a Senate hearing, Ms. Lynch was less than enlightening on this point.

In response to questions by Senator Mark Lee, a Chock Point critic, she sounded positively tepid.

Lynch told the senator that should she be confirmed, she would work with him to ensure that law-abiding Americans aren’t targeted by the initiative.

“I look forward to hearing your concerns and working with you on them,” she said.

Let's hope that when she uses the term "working with you" she doesn't really mean "working you over." Time will tell.

On another issue, however, she differs markedly from her boss, the Department of Justice, and FinCEN, which have been falling all over themselves to aid the heirs to Cheech and Chong to light up their bongs. Unlike Barack, Loretta loathes the demon weed.

A federal prosecutor in New York, Ms. Lynch told the Senate Committee on the Judiciary she disagreed with the president’s no-big-deal take on pot, saying, “I certainly don’t hold that view and don’t agree with that view of marijuana as a substance.”

“I think the president was speaking from his personal experience and personal opinion, neither of which I’m able to share,” Ms. Lynch said. “But I can tell you that not only do I not support the legalization of marijuana, it is not the position of the Department of Justice currently to support the legalization. Nor would it be the position should I become confirmed as attorney general.”

A stated opposition to "legalizing" marijuana could be read as merely opposing legalization at the federal level. In addition, personally opposing legalization, even at the state level, does not necessarily translate into abandoning the current position of the DOJ as embodied in the "Cole Memorandum" and its spawn at the DOJ and FinCEN. That position appears to be that as long as a state legal marijuana business doesn't run afoul of eight listed activities which the DOJ thinks are "really, really bad" (as opposed to being merely "really bad"), then federal law enforcement will look away. In the case of banks that service such "legal/illegal" businesses, as long as they file special super secret SARs and perform initial and ongoing due diligence with a level of detail that would confound the NSA, the Feds will cut them a break, as well.

 

Pot's proponents claim that we should not take Ms. Lynch seriously. They note that she was testifying before a committee chaired by the marijuana-repulsed Chuck Grassley. I guess their point might be that she was "spinning" (i.e., committing perjury).

 

Assuming, however, that she was actually delivering her honest opinion to Senator Grassley, I think that Ms. Lynch's arrival on the scene may bode ill for the "three monkeys approach" to the future enforcement of federal drug laws against businesses that are engaged in state-legal-federal-illegal marijuana businesses. "Looking the other way" might prove to be a thing of the past for the DOJ, even before a Republican AG takes office in 2017 (should a Republican win the White House in 2016).

 

Moreover, the rogue banks in Colorado, Oregon, and elsewhere, who, in banking marijuana businesses, have been operating under the "don't-ask-don't-tell" benevolence of the FDIC and other federal banking regulators who take their cues from the head of the Executive branch (although they would deny that allegation until the end of time), may find that the examiners who have been giving them "tacit approval" to bank marijuana businesses as long as they don't make that fact public, are suddenly attacked by fits of rectitude and begin to take federal drug trafficking laws seriously again. If that happens, good luck with holding the agencies to their "tacit" approval.

Another Step Back?

Ballard Spahr has one of the best initial analyses of last week's Financial Institution Letter in which the FDIC "encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk." In other words, the FDIC took another step back down from its participation in the Department of Justice's Operation Choke Point. The first step was taken last summer, when the FDIC obliterated its list of "risky businesses" by category. The FDIC claims that banks under its supervision should evaluate the risk of a business on a customer-by-customer, not industry-by-industry, basis.

The firm also discusses an internal FDIC memorandum to its examiners. Apparently, the FDIC is attempting to head off any rogue examiners who, like the former head of supervision in Atlanta, tried to put all payday lenders out of the banking system because he didn't favor that line of business as a matter of personal moral preferences.

The internal memorandum states that FDIC examiners: 

• Should not use “informal suggestions” to make recommendations or requirements for terminating deposit accounts or for criticizing a bank’s management or risk mitigation associated with deposit accounts that does not rise to the level of a recommendation or requirement to terminate accounts
• Must put in writing in the report of examination (ROE) their criticisms of a bank’s management or risk mitigation associated with deposit accounts
• Cannot base recommendations for terminating deposit account relationships solely on reputational risk to the bank

The memorandum further mandates that before recommendations or requirements for terminating deposit accounts are provided to and discussed with a bank’s management and directors, they must be made in writing and an FDIC Regional Director must approve them in writing. It also requires such findings to be “thoroughly vetted with regional office and legal staff” before they are included in the ROE or supervisory actions are pursued.

I suppose that this means that from now on, when a payday lender is blackballed by an FDIC-regulated institution, you'll know it's either the result of the institution's own analysis of the risk posed by that specific lender, or, at least, that the persecution has been authorized at high levels of the FDIC, not merely by a lone-wolf, piss-ant field examiner. That ought to give everyone comfort.

As the firm concludes, this latest guidance, while welcome, is not a "Get-Out-Of-Jail-Free" card for payday lenders, porno kings and queens, gun dealers, online dating services, and other "undesirables." As a practical matter, banks that want to do business with them will still be subject to heightened due diligence requirements. Although Ballard Spahr does not put it this way, I will: such businesses will still, for practical purposes, be considered "guilty until proven innocent." The customer will have to be able to demonstrate that it is one of the "good payday lenders" before the risk will likely be judged to be acceptable to the bank.

We'll have to see how this shakes out. While these signs are favorable, until there is a change in the White House, I'm from Missouri on whether we've actually turned a corner.