Maxine Waters’ HR 2543 gives me the impression that Congress does not understand banking …

Jerome Powell, chairman of the Board of Governors of the Federal Reserve System (“Board” or “FRS”), today finished up his semi-annual tour of Capitol Hill when he presented to the U.S. House Committee on Financial Services the status of the Board’s monetary policy as it impacts the US economy.

I have watched hundreds of Congressional hearings over the past twelve years and quite frankly I never expect very much substance.  I would advise that if you can’t read Mr Powell’s entire report, then his written testimony should suffice.

The chairman of the committee, Maxine Waters, Democrat of California, announced early in the hearing that a bill she sponsored, the Federal Reserve Racial and Economic Equity Act (HR2543), had passed the House and is now sitting in the Senate.  The intent of the bill is to add additional demographic reporting requirements; to modify the goals of the Federal Reserve System, and for other purposes.”

Specifically, HR2543 would require the FRS to:

  1. Eliminate disparities across racial and ethnic groups regarding employment, income, wealth, access to credit;
  2. Conduct monetary policy and bank regulation in order to eliminate the aforementioned disparities;
  3. Conduct payment system operations in order to eliminate racial and ethnic disparities;
  4. Continue carrying out the Community Reinvestment Act of 1977; and
  5. Conduct comparisons across different demographic groups including race, ethnicity, gender, and educational attainment.

I have come to accept Congress’ authority to create a central bank system pursuant to Congress’ responsibility under the U.S. Constitution to regulate the value of money.  I can understand a constitutional argument that Congress used an implied or ancillary power to create the FRS.  Using the central bank as a social agency for diversity, equity, and inclusion I can’t fully embrace.

The Constitution does not provide for a central bank much less for a central bank that has as part of its mandate the mitigation of harm in the banking system to ethnic minorities. The boat has long left the harbor for any mitigation of banking harms to blacks.

Blacks were not a part of America’s capital and natural resources allocation plan dating back to the 1600s.  The exponential increase in capital holdings by whites are an expected result of human behavior and lineage maintenance.  Due to slavery and the Jim Crow era, Blacks were doomed to remain behind in the capital holdings race.  In order to participate in true banking activity, the entire population of blacks in America for its first 300 years would have to have owned land, waterways, access to minerals, and access to fair labor markets in order to trade for credit.

What Mrs Waters has proposed in her bill is about the best that the black political class can do in Washington.  Even if the measure passes in the Senate, the necessary reallocation of capital to blacks would not occur. 

HR 2543 serves no other purpose but to rile up Senate Republicans and make them the scape goat for failed policy.      

Alton Drew

23 June 2022

 Disclaimer: This blog post should not be construed as legal advice or an agreement to provide legal or political analysis.  To set up a consultation, contact us at altondrew@altondrew.com.

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Waller signals a “regulatory perimeter” for crypto-asset regulation

Yesterday, Christopher J Waller, a member of the Board of Governors of the Federal Reserve System, delivered remarks concerning regulation of the crypto-asset space.  Governor Waller described a “regulatory perimeter” within which traditional finance operates.  The “normal backstops and safety nets” that we see applied on traditional finance are not, at this moment, being applied to the market for crypto-assets.

Governor Waller shared data on the usage practices of crypto-asset holders.  Anywhere from 12% to as high as 20% of American adults held crypto-assets during the past year.  Approximately 90% of these adults held crypto-assets for investment purposes versus for use as a payments system.

Crypto-asset trade creates the opportunity for counter-party disputes and Governor Waller discussed briefly that in the aftermath of a market loss, disputes between intermediaries and traders over poor due diligence, poor financial advice, or poor management skills could arise. 

The irony Governor Waller points out is that it is usually the intermediary i.e., a bank, that seeks out protection.  This demand for protection on the part of the larger players in a financial market did not surprise me.  Think agency co-option for the sake of putting the negative externalities of a loss on society at large.  While Governor Waller did not cite the 2007-2008 Great Financial Crisis and the bank bailouts that ensued, I gathered from his remarks that the rest of American society wants regulations that both protect taxpayers from the socialization of losses while promoting confidence in the investment ecosystem’s safety.

I don’t see crypto-asset regulation as an issue that causes political realignment.  President Biden’s executive order on crypto-assets, notwithstanding, Governor Waller’s remarks at a minimum seemed designed to stay on topic at the SNB-CIF Conference on Cryptoassets and Financial Innovation, while tangential with the “let’s have a discussion” tone of Mr Biden’s executive order.

When we hear public discussions about expanding regulations, more than likely there is a very rough written draft laying around somewhere.  Anything at this point is speculation as to content, but traders should start their own discussions and analysis now.  Nothing wrong with exploring the legislative, political, and legal scenarios.    

Alton Drew

4 June 2022

Disclaimer: This blog post should not be construed as legal advice or an agreement to provide legal or political analysis.  To set up a consultation, contact us at altondrew@altondrew.com.

We appreciate your readership and support.  Feel free to donate to us via PayPal or support our advertisers. We are also seeking sponsors for our blog.  Contact us at altondrew@altondrew.com.

Financial Action Task Force Identifies Jurisdictions with Anti-Money Laundering and Combating the Financing of Terrorism and Counter-Proliferation Deficiencies

Source: Financial Crimes Enforcement Network

Immediate Release

March 10, 2022

WASHINGTON—The Financial Crimes Enforcement Network (FinCEN) is informing U.S. financial institutions that the Financial Action Task Force (FATF), an intergovernmental body that establishes international standards to combat money laundering, counter the financing of terrorism, and combat weapons of mass destruction proliferation financing (AML/CFT/CPF), has issued public statements updating its lists of jurisdictions with strategic AML/CFT/CPF deficiencies following its plenary meeting this month.[1]  U.S. financial institutions should consider the FATF’s stance toward these jurisdictions when reviewing their obligations and risk-based policies, procedures, and practices.

On March 4, 2022, the FATF removed Zimbabwe from its list of Jurisdictions under Increased Monitoring and added the United Arab Emirates (UAE), noting the UAE’s significant progress in strengthening its AML/CFT regime as well as its February 2022 high-level political commitment to completing its FATF action plan.  

The FATF’s list of High-Risk Jurisdictions Subject to a Call for Action remains the same with Iran and the Democratic People’s Republic of Korea still subject to the FATF’s countermeasures.

As part of the FATF’s listing and monitoring process to ensure compliance with its international standards, the FATF issued two statements: (1) Jurisdictions under Increased Monitoring, which publicly identifies jurisdictions with strategic deficiencies in their AML/CFT/CPF regimes that have committed to, or are actively working with, the FATF to address those deficiencies in accordance with an agreed upon timeline and; (2) High-Risk Jurisdictions Subject to a Call for Action, which publicly identifies jurisdictions with significant strategic deficiencies in their AML/CFT/CPF regimes and calls on all FATF members to apply enhanced due diligence, and, in the most serious cases, apply counter-measures to protect the international financial system from the money laundering, terrorist financing, and proliferation financing risks emanating from the identified countries.

Jurisdictions Under Increased Monitoring

With respect to the FATF-identified Jurisdictions under Increased Monitoring, U.S. covered financial institutions are reminded of their obligations to comply with the due diligence obligations for foreign financial institutions (FFI) under 31 CFR § 1010.610(a) in addition to their general obligations under 31 U.S.C. § 5318(h) and its implementing regulations.  As required under 31 CFR § 1010.610(a), covered financial institutions should ensure that their due diligence programs, which address correspondent accounts maintained for FFIs, include appropriate, specific, risk-based, and, where necessary, enhanced policies, procedures, and controls that are reasonably designed to detect and report known or suspected money laundering activity conducted through or involving any correspondent account established, maintained, administered, or managed in the United States.  Furthermore, money services businesses (MSBs) have parallel requirements with respect to foreign agents or foreign counterparties, as described in FinCEN Interpretive Release 2004-1, which clarifies that the AML program regulation requires MSBs to establish adequate and appropriate policies, procedures, and controls commensurate with the risk of money laundering and the financing of terrorism posed by their relationship with foreign agents or foreign counterparties.  Additional information on these parallel requirements (covering both domestic and foreign agents and foreign counterparts) may be found in FinCEN’s Guidance on Existing AML Program Rule Compliance Obligations for MSB Principals with Respect to Agent Monitoring.  Such reasonable steps should not, however, put into question a financial institution’s ability to maintain or otherwise continue appropriate relationships with customers or other financial institutions, and should not be used as the basis to engage in wholesale or indiscriminate de-risking of any class of customers or financial institutions.  Financial institutions should also refer to previous interagency guidance on providing services to foreign embassies, consulates, and missions.

The United Nations (UN) adopted several resolutions implementing economic and financial sanctions.  Member States are bound by the provisions of these UN Security Council Resolutions (UNSCRs), and certain provisions of these resolutions are especially relevant to financial institutions.  Financial institutions should be familiar with the requirements and prohibitions contained in relevant UNSCRs.  In addition to UN sanctions, the U.S. Government maintains a robust sanctions program.  For a description of current Office of Foreign Assets Control (OFAC) sanctions programs, please consult OFAC’s Sanctions Programs and Country Information.

High-Risk Jurisdictions Subject to a Call for Action

With respect to the FATF-identified High-Risk Jurisdictions Subject to a Call for Action, specifically, counter-measures, financial institutions must comply with the extensive U.S. restrictions and prohibitions against opening or maintaining any correspondent accounts, directly or indirectly, for North Korean or Iranian financial institutions.  In the case of the Democratic People’s Republic of Korea (DPRK) and Iran, existing U.S. sanctions and FinCEN regulations already prohibit any such correspondent account relationships.

In the case of Iran, the Government of Iran and Iranian financial institutions remain persons whose property and interests in property are blocked under E.O. 13599 and section 560.211 of the Iranian Transactions and Sanctions Regulations (ITSR).  U.S. financial institutions and other U.S. persons continue to be broadly prohibited under the ITSR from engaging in transactions or dealings with Iran, the Government of Iran, and Iranian financial institutions, including opening or maintaining correspondent accounts for Iranian financial institutions.  These sanctions impose obligations on U.S. persons that go beyond the relevant FATF recommendations.  In addition to OFAC-administered sanctions, on October 25, 2019, FinCEN found Iran to be a Jurisdiction of Primary Money Laundering Concern and issued a final rule, pursuant to Section 311 of the USA PATRIOT Act, imposing the fifth special measure available under Section 311.  This rule prohibits U.S. financial institutions from opening or maintaining correspondent accounts for, or on behalf of, an Iranian financial institution, and the use of foreign financial institutions’ correspondent accounts at covered United States financial institutions to process transactions involving Iranian financial institutions (31 C.F.R. § 1010.661).

Countries Removed

For jurisdictions removed from the FATF listing and monitoring process, U.S. financial institutions should take the FATF’s decisions and the reasons behind the delisting into consideration when assessing risk, consistent with financial institutions’ obligations under 31 C.F.R. § 1010.610(a) and 31 C.F.R. § 1010.210.

If a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution must file a Suspicious Activity Report.

Questions or comments regarding the contents of this release should be addressed to the FinCEN Regulatory Support Section at frc@fincen.gov.

[1] See also FATF Public Statement on the Situation in Ukraine (2022), (i) calling on “competent authorities to provide advice and facilitate information sharing with their private sectors on assessing and mitigating any emerging money laundering/terrorist financing/proliferation financing risks identified, including with respect to virtual assets, as well as other threats to international safety and security from the region”, (ii) noting that “malicious cyber activity targeting financial institutions and systems could jeopardize the ability of the private sector and competent authorities to implement and monitor core AML/CFT controls”, and “could prevent access to financial services for legitimate users needing to access vital services”, and (iii) reiterating the “importance of ensuring that non-profit organisations and all other humanitarian actors can provide the vital humanitarian assistance needed in the region and elsewhere, without delay, disruption or discouragement.”

Financial Institution

Casinos

Depository Institutions

Insurance Industry

Money Services Businesses

Mortgage Co/Broker

Precious Metals/Jewelry Industry

Securities and Futures

Balkanizing internet regulation is out of step with the uniformity needs of financial technology

Analysis

The eye-catcher ….

In two weeks, state utility regulators will convene in San Antonio, Texas for the National Association of Regulatory Utility Commissioners annual meeting to discuss how they can leverage a recent decision by the United States Court of Appeals-DC Circuit that the Federal Communications Commission cannot preempt state regulation of concerns over consumer access to and privacy on the internet via broadband.

Some states such as California have moved ahead with their own net neutrality laws, hoping to enforce consumer protections by prohibiting internet access providers from lowering traffic speed from certain websites or preventing internet service providers from favoring their own content by blocking a consumer’s access to content that the consumer prefers.

The state-by-state approach problem

The problem with a state-by-state approach for a financial technology firm is the uncertainty that data and capital face when they traverse state borders. Will a content delivery firm tasked with storing and transmitting financial data on behalf of a financial technology firm have to enter into different interconnection agreements per state because of the differing consumer privacy laws encountered in each state?  Will differing requirements on paid prioritization result in financial data traffic slowing down depending on which state border it crosses?

There is an irony that on a global basis, the United States is a staunch proponent of freer cross-border data flows, but would run the risk of subjecting those same data flows to a hodge-podge of regulations that create digital toll roads for financial data traffic.

The changing consumer taste in banking

What federal and state policy makers should be focusing on is ensuring the amount of bandwidth necessary for digital transmission of financial data and capital is available.  Our use of digital banking services will not be shrinking anytime soon.  MediaCom Business cited data in a blog post that 92% of millennials make their choices as to where to bank based on the digital services a bank offers.  Legacy banks hoping to compete with digital upstarts are accepting this type of demand an, as found by consulting firm Accenture, are exploring how best to integrate and deploy technology necessary for meeting this demand.

Recommendation: Seamless versus Balkanization

The supply of digital banking and payment systems services combined with increasing demand for these services means more bandwidth is needed in order to optimize the consumer experience.  State and federal policy makers can facilitate this need for increased bandwidth by focusing policy on ensuring the delivery of this infrastructure.  Coming up with 50 different rules on net neutrality is more distraction than help.

What should be spawned in next month’s NARUC meeting is a recommendation for national legislation on consumer privacy.  Consumer privacy concerns should no longer be leveraged to create 50-plus fiefdoms for net neutrality.  Transmission of information, data, and knowledge should be a seamless experience for consumer and firms that use financial technology to transmit value and capital.