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FinCEN has announced it has joined the Securities and Exchange Commission (SEC) in jointly proposing a new rule that would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish, document, and maintain written customer identification programs (CIPs). The proposal is designed to prevent illicit finance activity involving the customers of investment advisers by strengthening the anti-money laundering and countering the financing of terrorism (AML/CFT) framework for the investment adviser sector.

This proposed rulemaking complements a separate FinCEN proposal in February 2024 to designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act (BSA) and subject them to AML/CFT program requirements and suspicious activity report (SAR) filing obligations, among other requirements. That proposal cites a Treasury risk assessment that identified that the investment adviser industry has served as an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, tax evasion, and other criminal activities. Together, these proposals aim to prevent illicit finance activity in the investment adviser sector and further safeguard the U.S. financial system.

The rule, if adopted, would require RIAs and ERAs to, among other things, implement a CIP that includes procedures for verifying the identity of each customer to the extent reasonable and practicable and maintaining records of the information used to verify a customer’s identity, among other requirements. The proposal is generally consistent with the CIP requirements for other financial institutions, such as brokers or dealers in securities and mutual funds. Comments on the proposal will be accepted for 60 days following publication in the Federal Register.

• Fact Sheet on proposal
• Publication and comment period update: Scheduled for publication in the 5/21/2024 Federal Register, with comments accepted through 7/22/2024.

The Federal Reserve Board has reported its release of a summary of the exploratory pilot Climate Scenario Analysis (CSA) exercise that it conducted with six of the nation's largest banks.

The summary describes how these banks are using climate scenario analysis to explore the resiliency of their business models to climate-related financial risks. Participating banks took a wide range of approaches in this exercise to consider the possible implications of different physical and transition risk scenarios. The exercise highlighted data gaps and modeling challenges that arise when estimating the financial impacts of highly complex and uncertain risks over various time horizons.

The banks that participated in the exercise were Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.

The exercise was exploratory in nature and does not have capital consequences. Drawing on lessons learned from the exercise, the Board will continue to engage with participating banks regarding their capacity to measure and manage climate-related financial risks.

OFAC has released and will publish on May 10 an interim final rule to amend the Reporting, Procedures and Penalties Regulations (the “Regulations”), to require electronic filing of certain submissions to OFAC and to describe and modify certain reporting requirements related to blocked property and rejected transactions. In particular, the rule would require use of the electronic OFAC Reporting System for submission of reports related to blocked property and rejected transactions, remove the mail option for certain other types of OFAC submissions, describe reports OFAC may require from financial institutions for transactions that meet specified criteria, and add a reporting requirement for any blocked property that is unblocked or transferred.

Additionally, OFAC is clarifying the scope of the reporting requirement for rejected transactions, in part to respond to comments received on the interim final rule OFAC published on June 21, 2019 to amend the Regulations. The interim final rule also modifies the procedures for requests relating to property that is blocked in error and updating the Regulations with respect to the availability of information under the Freedom of Information Act (FOIA) for certain categories of records.

The rule also clarifies that persons may submit a petition for administrative reconsideration to seek removal of a person or property from the List of Specially Designated Nationals and Blocked Persons or any other list of sanctioned persons maintained by OFAC. OFAC is also adding a description of reports OFAC may require financial institutions to provide about transactions that meet specified criteria to aid in the identification of blocked property. Finally, OFAC is making several technical and
conforming edits.

The rule will become effective 90 days after publication (August 8, 2024). Comments on the interim final rule will be accepted for 31 days after publication (through June 10, 2024).

Yesterday, FinCEN issued an Advisory to assist financial institutions in detecting potentially illicit transactions related to Islamic Republic of Iran-backed terrorist organizations. The Advisory highlights the means by which certain terrorist organizations receive support from Iran and describes several typologies these terrorist organizations use to illicitly access or circumvent the international financial system to raise, move, and spend funds. It also provides red flags that may assist financial institutions in identifying related suspicious activity.

Recent events have underscored Iran’s involvement in and financing of terrorist activity in the region. Iran seeks, among other goals, to project power by exporting terrorism throughout the Middle East and beyond by financing a range of regional armed groups, some of which are U.S.-designated Foreign Terrorist Organizations or Specially Designated Global Terrorist organizations. These terrorist organizations include Lebanese Hizballah, Hamas, the Palestinian Islamic Jihad, the Houthis, and several Iran-aligned militia groups in Iraq and Syria.

FinCEN requests that financial institutions reference this advisory in SAR field 2 and the narrative by including "IRANTF-2024-A001" and selecting SAR field 33(a) when filing SARs related to matters discussed in the Advisory.

• Advisory FIN-2024-A001

On Tuesday, the United States designated Dmitry Yuryevich Khoroshev, a Russian national and a leader of the Russia-based LockBit group, for his role in developing and distributing LockBit ransomware. This designation is the result of a collaborative effort with the U.S. Department of Justice, Federal Bureau of Investigation, the United Kingdom’s National Crime Agency, the Australian Federal Police, and other international partners.

Concurrently, the Department of Justice is unsealing an indictment and the Department of State is announcing a reward offer for information leading to the arrest and/or conviction of Khoroshev. The United Kingdom and Australia are also announcing the designation of Khoroshev.

For identification information on Khoroshev, see BankersOnline’s May 7, 2024, OFAC Update.

Federal Reserve Financial Services yesterday released the results of studies indicating that U.S. businesses and consumers are rapidly adopting digital, faster and instant payment services, according to studies released today by Federal Reserve Financial Services. Digital wallet use saw especially strong growth in 2023 — efficiency-focused businesses increased their use by 31% over the prior year, and convenience-minded consumers experienced a 32% increase.

These changes, particularly consumers’ use of digital wallets and online banking, are leading to increases in instant and faster payment use cases such as bill payment, mobile wallet funding and defunding, account-to-account transfers, and immediate payroll for employees.

Overall, 86% of businesses and 74% of consumers said they used faster or instant payments in 2023, and most (74% of businesses and 79% of consumers) reported looking to their financial institution to provide these services. Other key findings:

• Younger consumers are leading the move to digital, faster and instant payments. More than half of Generation Z (ages 18-25) and millennials (26-41) now use digital wallets, and 80% of these younger consumers say it is important to be able to make payments by mobile device.
• One in four (25%) consumers are challenged by the slow speed of payments and prefer to have better options for instant money movement to help manage personal finances.
• Businesses are using faster/instant payments because it helps them reduce cost (48%) and provides flexibility to pay and be paid as customers prefer (39%). Additionally, 35% appreciate the 24/7 nature of instant payment services.
• Businesses say key use cases that benefit from instant payments include business-to-business (92%), business-to-person (71%) and account-to-account (40%). Many businesses also believe instant payments will be useful for digital wallet funding/defunding (50%) and earned wage access (25%).

Full reports:

• Business Research Brief
• Consumer Research Brief
  

OFAC has announced the formal launch of its new OFAC Sanctions List Service (SLS) application. SLS is now the primary application OFAC will use to deliver sanctions list files and data to the public.

SLS includes support for all OFAC legacy and modern sanctions list data files. While certain sanctions list data are now hosted within the SLS cloud, existing links to OFAC list files remain functional through URL redirects.

The Sanctions List Service application incorporates the traditional OFAC Sanctions List Search tool which will continue to be available at https://sanctionssearch.ofac.treas.gov/.

The May 3, 2024, issue of FDIC Consumer News has been posted, with an article on "Your Business, Your Deposits." The article includes sections on:

• Things to know about small business accounts
• Payments from customers
• Deciding on whether the separate consumer and business deposit accounts
• Varying protections for consumer versus commercial accounts
• Watching out for scams targeting businesses

The FDIC, OCC and Federal Reserve Board have jointly announced their issuance of a guide to support community banks in managing risks presented by third-party relationships.

Third-party relationships present varied risks that community banks are expected to appropriately identify, assess, monitor, and control to ensure that their activities are performed in a safe and sound manner and in compliance with applicable laws and regulations. These laws and regulations include, but are not limited to, those designed to protect consumers and those addressing financial crimes.

The guide offers potential considerations, resources, and examples through each stage of the third-party relationship and may be a helpful resource for community banks. While the guide illustrates the principles discussed in the third-party risk management guidance issued by the agencies in June 2023, it is not a substitute for that guidance.

• Third-Party Risk Managment: A Guide for Community Banks
• OCC Bulletin 2024-11
• FIL-20-2024

Yesterday, the Department of the Treasury reported that OFAC has designated five individuals for helping U.S.-designated Hizballah money exchanger Hassan Moukalled (Moukalled) and his company, CTEX Exchange, evade sanctions and facilitate illicit activities in support of Hizballah. These individuals, including two co-founders of CTEX Exchange and two of Moukalled’s sons, operate two companies in Lebanon and the United Arab Emirates (UAE) that were concurrently designated. Individuals and entities targeted yesterday were designated pursuant to Executive Order (E.O.) 13224, as amended, which targets terrorist groups, their supporters, and those who aid acts of terrorism.

For the names and identification information of the designated parties, see the May 2, 2024, BankersOnline OFAC Update.