Financial Services Alert - June 3, 2014

The U.S. District Court for the Eastern District of Missouri (the “District Court”) issued a memorandum and order (the “Order”) in which the District Court upheld a decision of the FDIC that contract damages sought by the former chairman, president and chief executive officer (the “CEO”) of an FDIC-insured bank (the “Bank”) would constitute a “golden parachute payment” under 12 U.S.C. § 1828(k) and 12 C.F.R. § 359 of the FDIC’s regulations and, accordingly, could not be paid without the prior written consent of the FDIC.  The District Court concluded that the FDIC had not abused its discretion in reaching its decision in the matter.

In the case, Von Rohr v. Reliance Bank and FDIC, the CEO had an employment agreement (the “Employment Agreement” or the “Agreement”) with the Bank’s holding company, which was subsequently assigned to the Bank.  Under the terms of the then most recent extension (which was for three years) of the Employment Agreement, the Agreement would expire on September 1, 2012.  Prior to June 16, 2011, the FDIC notified the Bank that it was deemed to be in troubled condition and on June 16, 2011 the Bank notified the CEO that it would not renew the Employment Agreement and that the Agreement would terminate as of September 1, 2011.  In the case, the CEO asserted that despite the Bank’s notice of termination to him as of September 1, 2011, he was entitled to salary, contributions to his retirement plan and additional benefits (in the aggregate, the “Proposed Payment”) through September 1, 2012 (the end of the three-year term) because the Bank had prematurely terminated the Employment Agreement and, in the CEO’s view, the Proposed Payment was not a “golden parachute payment.”

In response to the Bank’s request that the FDIC determine whether the Proposed Payment was a prohibited golden parachute payment (which request was not accompanied by an application certifying that the CEO was not responsible for the Bank’s troubled condition), the FDIC issued a written determination that the Proposed Payment was a golden parachute payment that could not be paid without prior written FDIC consent.

The FDIC concluded that the Proposed Payment was a prohibited golden parachute payment because: (1) it would be compensation to the CEO under a binding agreement; (2) it would be contingent upon, and paid after, the CEO’s termination; (3) it would be received after the Bank was in a troubled condition; and (4) the CEO was terminated while the Bank was in a troubled condition.  In the Order, the District Court also took note of the fact that the CEO had not provided services to the Bank during the one-year period for which he sought damages.

FinCEN issued an advisory (the “Advisory”) to update financial institutions on the increased use of “funnel accounts” as part of trade-based money laundering (“TBML”) by criminals in the aftermath of the 2010 through 2012 restrictions on U.S. currency transactions in Mexico.  FinCEN defined a funnel account as:

“An individual or business account in one geographic area that receives multiple cash deposits, often in amounts below the cash reporting threshold, and from which the funds are withdrawn in a different geographic area with little time elapsing between the deposits and withdrawals.”

In June 2010, Mexico issued regulations limiting deposits of U.S. cash in Mexican banks, and in 2011 and 2012 Mexico expanded those restrictions to cover deposits made at exchange houses (casas de cambio) and at brokerage firms (casas de bolsa).  FinCEN states in the Advisory that law enforcement information and suspicious activity reports lead to the conclusion that, at this time, Mexico-related criminals: (1) continue to use funnel accounts to move the proceeds of criminal activities; and (2) are using funnel accounts to finance the purchase of goods as part of TBML activity.

The Advisory next describes four typical steps in criminal use of funnel accounts in conjunction with TBML:

• A U.S. or foreign business or individual, colluding with criminal actors, opens an account at a bank whose accounts can receive cash deposits at branches in multiple states.
• Multiple individuals (acting for a criminal organization) deposit the cash proceeds of, e.g., narcotics sales, into the account at different branches of the bank.  The deposit at each branch is less than $10,000.
• After a number of deposits have been credited to the account, an intermediary initiates wire transfers (or issues checks) from the funnel account to a U.S. business for the purchase of goods that are then shipped overseas for sale.
• After the sale of these goods overseas, the sale proceeds are transferred to the criminal organization and are funds that have been laundered through TBML.

The Advisory next provides a description of various red flags for use for a funnel account in conjunction with TBML.  FinCEN does not offer any bright line tests for compliance in the Advisory and cautions financial institutions that some red flags for funnel accounts and TBML “are, in appropriate circumstances, legitimate financial activities…” and, accordingly, when evaluating whether activities are suspicious, financial institutions need to consider all of the available facts and circumstances and review applicable FinCEN guidance.  Moreover, FinCEN requests that financial institutions include the term “MX Restriction” in both the Narrative and Suspicious Activity Information sections of suspicious activity reports (“SARs”) when there is a possible connection between the suspicious activity being reported and the U.S. currency restrictions on Mexican financial institutions.  Financial institutions should also include the terms “Funnel Account” and/or “TBML” in SARs where the suspicious activity involves such an account or scheme.  

Finally, the Advisory provides a graph that illustrates the manner in which illicit proceeds, through funnel accounts may fuel the purchase of goods as part of a TBML scheme.

The SEC’s Division of Investment Management issued an Information Update that describes the procedure for providing a version of an exemptive application marked to show changes from relevant precedent (in the case of an initial submission) or from a prior version of the same application (in the case of an amendment).  The Information Update notes that marked versions considerably increase the efficiency of staff review.  “[T]o ensure that [the Division’s staff] may confidently continue [its reliance on marked copies provided by applicants],” the Information Update instructs an applicant providing a marked copy to send the staff reviewer an email with the appropriate certification as follows:

Confirmation for initial filings:  “I confirm that the marked version of the application attached to this email is a complete and accurate comparison of the application filed on Edgar on [DATE] (file no. 812-____) to the application of [NAME] filed on Edgar on [DATE] (file no. 812-____).”

Confirmation for amendments:  “I confirm that the marked version of the application filed on Edgar is a complete and accurate comparison of the application filed on Edgar on [DATE] (file no. 812-____) to the immediately prior version of the application filed on Edgar.”