OCC and FDIC Issue Final Rule Prohibiting Use of Reputation Risk in Supervisory Frameworks

On April 7, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed a rule revising the Bank Secrecy Act’s anti-money laundering (AML) and countering the financing of terrorism (CFT) program requirements for financial institutions (including banks, broker dealers, mutual funds, and money services business businesses, among others) to implement changes mandated by the Anti-Money Laundering Act of 2020 and to make other changes. The proposed rule would replace FinCEN’s prior 2024 proposal and adopt a more risk-based, effectiveness-focused approach, requiring institutions to establish and maintain reasonably designed programs that include a US-based AML-CFT compliance officer, training, internal controls, and independent testing; prioritize higher-risk customers and activities; and align with FinCEN’s national priorities.

The proposed rule also would distinguish between program design and implementation failures and make two significant changes to AML-CFT supervision and enforcement policy with respect to banks. First, the proposed rule would raise the threshold for significant supervisory or enforcement actions against a bank based solely on program implementation deficiencies by specifying that, except with respect to a significant or systemic failure to implement its AML-CFT program, a bank that has a properly established AML-CFT program will not be subject to an AML-CFT enforcement or supervisory action by FinCEN or by a federal financial institution supervisory agency acting on authority delegated by FinCEN. Second, the proposed rule would introduce a notice-and-consultation framework for significant supervisory or enforcement actions that would require the Board of Governors of the Federal Reserve System (the Federal Reserve), the OCC, the FDIC and the National Credit Union Administration (NCUA) to provide notice to and consult with FinCEN before initiating a significant supervisory action pursuant to delegated authority by FinCEN.

The FDIC, the OCC, and the NCUA have concurrently issued a separate proposed rule to amend their regulations under the Bank Secrecy Act and other provisions of federal law to align with the changes proposed by FinCEN, including with respect to supervision and enforcement policy. The Federal Reserve has not yet released a similar proposal.

Comments on both proposals must be received by June 9.

On April 8, FinCEN and the Office of Foreign Assets Control (OFAC) issued a joint proposed rule to implement the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act) and treat permitted payment stablecoin issuers (PPSIs) as financial institutions under the Bank Secrecy Act, requiring PPSIs to comply with anti-money laundering, countering the financing of terrorism, and sanctions compliance obligations, including having a compliance officer; maintaining internal policies, procedures, controls, and an employee training program; meeting certain technical capabilities; filing suspicious activity reports; complying with record retention requirements; and submitting to FinCEN supervision with respect to the PPSI’s program. The proposal reflects a broader policy effort to mitigate illicit finance risks in digital assets while promoting innovation, including by leveraging emerging technologies (e.g., blockchain analytics and digital identity tools) and encouraging enhanced public-private collaboration. Comments must be received by June 9.

On April 8, the Federal Reserve invited public comment on a proposal to amend Regulation J so that FedNow participants (i.e., US banks and credit unions) could use intermediaries, other than Reserve Banks, to send funds transfers through the FedNow Service. Currently, a FedNow transfer can include only two US banks other than a Reserve Bank, which has effectively limited the service to domestic payments. Since FedNow launched, participants have expressed interest in using it for cross-border instant payments, and the proposal would allow an intermediary such as a correspondent bank to handle the international portion of a transaction, while FedNow handles the US domestic portion. The Federal Reserve states that the change would align FedNow with the Fedwire Funds Service, which has long permitted intermediaries, and would not change the payment flow between FedNow participants or which entities can connect to the service. Comments must be submitted by June 9.

On April 10, the FDIC rescinded its June 16, 2023 guidance regarding financial institutions assessing multiple non-sufficient funds (NSF) fees arising from re-presentment of the same unpaid transaction. The prior guidance advised FDIC-regulated financial institutions to engage in risk mitigation practices to avoid assessing multiple NSF fees on re-presentment of the same unpaid transaction by taking mitigating actions such as (1) eliminating NSF fees, (2) declining to charge multiple NSF fees on all transactions regardless of whether the transaction is re-presented, (3) reviewing policies and practices, (4) implementing clear and conspicuous disclosures around NSF fees, and (5) reviewing customer notification or alert practices around NSF fees. In rescinding this guidance, the FDIC noted that the guidance was overly broad in scope and raised uncertainty around when disclosures around re-presentments may result in unfairness under Section 5 of the Federal Trade Commission Act. The rescission of the guidance was effective immediately.