BPInsights: January 10, 2020

BPInsights: January 10, 2020

Top of the Agenda

How the Pentagon Was Duped by Contractors Using Shell Companies

Anonymous shell companies pose a severe threat to national security, according to a January 4 Bloomberg article about a recent Government Accountability Office (“GAO”) report. The GAO report determined that foreign nationals and other illicit actors establish shell companies in the United States to evade US sanctions and gain access to the Pentagon’s $350 billion in high-security defense contracts. Bloomberg cited one finding from the GAO report, where a Turkish national was successfully awarded 346 military contracts for torpedoes and other defense technology, resulting in $7 million in losses and the illegal export of military-technical drawings to Turkey.

In October, the House passed a bill to end anonymous shell companies, and a bipartisan group of senators has also introduced legislation. BPI supports meaningful legislation to end the abuse of anonymous shell companies and reform the anti-money laundering regulatory framework, and BPI recently launched an online resource to further demonstrate the urgency of passing this reform.

5 Stories Driving the Week

1. Federal Reserve’s Lael Brainard Outlines CRA Proposal 
In a January 8 speech at the Urban Institute, Federal Reserve Governor Lael Brainard outlined an alternative approach for modernizing the Community Reinvestment Act. Like the OCC/FDIC proposal, her approach would use objective metrics-based criteria to evaluate retail lending and community development lending and investment, but the ratings thresholds for these metrics would vary across banks, assessment areas and business cycles. Unlike the OCC/FDIC proposal, her approach would continue to evaluate retail services and community development services using qualitative criteria. Although she did not explicitly criticize the OCC/FDIC proposal, she noted throughout her remarks that her approach was grounded in empirical analysis and designed to “avoid unintended consequences” of using a “uniform comprehensive ratio that adds together all of a bank’s CRA-eligible activities in an area.” In response to Governor Brainard’s remarks, BPI CEO Greg Baer stated, “CRA reform is an incredibly complex topic that involves measuring the community impact of a wide range of activities that are difficult to quantify on an absolute or relative basis, so it is no surprise that well-meaning policymakers could reach different conclusions on the same set of facts.”


2. Can Regulators Catch Up to Tech Changes?
On January 8, American Banker published an article on the growth of technology compared to the gradual pace of policymaking by regulators and lawmakers in this area. “Given the goals of the tech firms like Google, Amazon, Apple and Facebook to get deeper into financial services, the tension between those who want to innovate banking faster and a regulatory system designed in many ways to slow change will only intensify,” the Banker wrote.


3. Banks Considering Environmental and Social Risks in Lending Decisions 
A new Fitch Ratings study found that about half of banks surveyed are incorporating environmental, social and governance (“ESG”) policies into their underwriting process. The Fitch study found that banks with $100 billion in assets were more likely to screen for ESG risks. The study noted, “[b]anks’ monitoring of ESG risk generally results in greater due diligence rather than outright deal rejection.” The study surveyed 182 banks in 49 countries.


4. Discussion of Final Basel III Global Capital Rules Proves Contentious in EU
As the European Commission closes its consultation on how to apply the final Basel III global capital rules to European banks, Politico Pro reports signs are emerging that the process to agree upon final rules will not be easy and will come up against opposition from both industry and individual EU Member States. Industry and some authorities are concerned that the finalized rules could significantly increase capital requirements, with the European Banking Authority estimating that the rules could require an additional €125 billion in capital across the system. Most recently, the proposals have received pushback from the French National Assembly, which voted 91-16 to adopt a resolution to protect the competitiveness of the financial sector when applying the revised Basel III global framework. It is unclear at this point how such national measures will impact any final rules from the Commission.

5. A Cautionary Tale of Open Banking
A January 6 American Banker BankThink op-ed outlined the potential risks and opportunities of banks partnering with a technology company. According to the op-ed, traditional banks switching to open banking may face “unique risks to [their] operations, technology infrastructure, third-party partnerships and financial crimes.” At the same time, it also presents opportunities to leverage more resources in fraud prevention.

The op-ed suggested that banks focus on third-party risk management, including requiring third-parties such as fintech aggregators, to use compliance APIs and security access tokens, which offer greater data protection than screen scraping methods used by some consumer products. This practice is already being adopted by many banks, including JPMorgan, which the Financial Times recently reported is now requiring third-parties to use secure tokens in an ongoing effort to protect customer data.

In Case You Missed It

BPI, IIB Submit Letter Supporting Fed Proposal to Extend FBO Compliance Deadlines for Single Counterparty Credit Limit Rule
On December 20, BPI and the Institute of International Bankers (”IIB”) filed a comment letter supporting the Federal Reserve’s proposal to extend the compliance dates for its final single counterparty credit limit (“SCCL”) rule by 18 months (until 2021) for the U.S. consolidated operations of FBOs. The SCCL rule allows a covered FBO to satisfy its SCCL requirements through compliance with standards established by its home country supervisor to the extent that they are consistent with the Basel Committee’s Large Exposures Framework. As BPI and IIB note, the proposed 18-month extension would provide necessary time for the home countries of covered FBOs to fully implement the Framework before the SCCL rule’s effective date, preventing a temporary “implementation gap” that would require covered FBOs to build a compliance framework for the U.S. SCCL rule solely for use during that period. The SCCL applies to the U.S. consolidated operations of FBOs that have total global consolidated assets of at least $250 billion.

Banking Agencies Provide Relief to Banks and Asset Managers Regarding Unintended Consequences of the Rise of Passive Fund Investing
On December 27, the federal banking agencies jointly released a policy statement providing conditional and temporary relief for banks and asset managers from provisions of the Federal Reserve’s Regulation O (“Reg O”) applicable to bank transactions with companies in an asset manager’s portfolio. Reg O imposes size limits as well as other compliance responsibilities on bank credit extensions to bank “insiders,” including 10% shareholders. The policy statement notes that passive asset managers have increasingly crossed the 10% threshold for coverage under Reg O by virtue of their investment vehicles’ ownership stakes in banking organizations. The relief is conditioned on the asset manager’s agreement not to seek to influence any credit decisions by the bank and certain other requirements intended to deter any risks of insider self-dealing. It will be in place until January 2021. The policy statement notes that the agencies will consider formally amending Reg O to permanently address issues raised by the rise of passive investing by large asset managers.

OCC Appeals Court Decision Striking Down Fintech Charter
On December 19, the Office of the Comptroller of the Currency appealed a decision in a case brought before the New York State Department of Financial Services (“DFS”) that would prevent the OCC from issuing national bank charters to non-depository fintech institutions. The OCC began the practice of chartering fintech companies in 2015 before the New York DFS filed suit in September 2018, arguing that the practice exceeded the OCC’s authority under the Administrative Procedure Act and was in violation of the Tenth Amendment. The appeal will be heard in the U.S. Court of Appeals 2nd Circuit.

Agencies Extend Comment Deadline for Inter-Affiliate Margin Proposal
On December 20, the five federal banking agencies announced that they would reopen and extend the deadline until January 23 for the agencies’ inter-affiliate swap margin proposal. Comments were originally due by December 9. In response to the request for comment, BPI signed and submitted a joint comment letter with the American Bankers Association, the Securities Industry and Financial Markets Association, and other trade associations.

BPI, Trades Support Loan Application Revisions in Letter to HUD
On December 20, together with the Housing Policy Council, the Mortgage Bankers Association, and the American Bankers Association, BPI submitted a letter to HUD responding to its request for approval of a revised Addendum to the Federal Housing Administration’s (“FHA”) Uniform Residential Loan Application (“URLA”), used to determine the eligibility of a borrower and mortgage for FHA underwriting. The letter supports the revisions, outlining several helpful aspects of the changes, including aligning aspects of the Addendum with existing regulatory requirements and accounting for the severity of any loan-level defects and inaccuracies in evaluating certification statements.


01/14/2020 — House Financial Services Affordable Housing Hearing

01/14/2020 — House Financial Services Subcommittee Hearing on CRA Proposal

01/16/2020 – 01/18/2020 — American Bar Association Hosts 2020 Banking Law Committee Meeting including panel participation with members of the BPI team

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