AML/CTF, Sanctions and Insider Trading
EU Agrees Countering Money Laundering by Criminal Law Directive
On June 7, 2018, the Council of the European Union and the European Parliament announced their agreement on new EU criminal sanctions for money laundering. The proposed Countering Money Laundering by Criminal Law Directive will complement the Fifth Money Laundering Directive, which was adopted in May 2018.
The new Directive establishes minimum rules on the definition of criminal offences and sanctions in the area of money laundering. Member states will be required to implement national laws providing for money laundering offences by individuals to be punishable by a maximum term of imprisonment of at least four years. National laws will continue to provide for additional measures, such as fines, temporary or permanent exclusion from public tender procedures, grants and concessions, and national laws will also provide for national courts to take into account any aggravating factors for sentencing.
In addition, the new Directive establishes corporate liability for money laundering in certain circumstances and provides for corporates to face various sanctions, such as exclusion from entitlement to public benefits or aid, temporary or permanent exclusion from public tender procedures, grants and concessions, temporary or permanent disqualification from the practice of commercial activities, placing under judicial supervision, judicial winding-up and temporary or permanent closure of the establishments used for committing the offence.
The new Directive also includes rules for establishing jurisdiction and for cross-border cooperation between member states.
The U.K., Ireland and Denmark will not adopt the new Countering Money Laundering by Criminal Law Directive. In the U.K., this follows the approach in relation to EU criminal sanctions for market manipulation where the U.K. has implemented its own national regime instead.
The new Directive must now be formally adopted by the Council and Parliament. It will enter into force 20 days after it has been published in the Official Journal of the European Union and member states will have up to 24 months to transpose the new provisions into national law.
Parliament's press release is available at: http://www.europarl.europa.eu/news/en/press-room/20180605IPR05049/eu-wide-penalties-for-money-laundering-deal-with-council.
Council's press release is available at: http://www.consilium.europa.eu/en/press/press-releases/2018/06/07/eu-agrees-new-rules-to-make-sure-money-laundering-criminals-are-punished/pdf?_sm_au_=iVVTRnDvR5rsNrvq.
Details of the agreed Fifth Money Laundering Directive are available at: https://finreg.shearman.com/eu-fifth-money-laundering-directive-adopted.
Bank Prudential Regulation & Regulatory Capital
US Office of the Comptroller of the Currency Issues Clarifications Regarding CRA Evaluation
On June 15, 2018, the U.S. Office of the Comptroller of the Currency issued clarifying guidance with respect to the examination and evaluation of institutions under the Community Reinvestment Act. The bulletin issued by the OCC notes that clarifications with respect to CRA evaluation processes were previously communicated to examiners, and that effective June 1, 2018, the OCC rescinded its previous "Large Bank CRA Examiner Guidance," issued December 29, 2000 (OCC Bulletin 2000-35). The OCC bulletin provides clarification with respect to a number of aspects of the CRA evaluation process, including the frequency and timing of CRA performance evaluations, the applicable CRA performance evaluation period, full-scope and limited-scope reviews, the evaluation of various components of CRA evaluations and the timing for the finalization of CRA performance evaluations when there is an open investigation regarding potential discriminatory or other illegal credit practices. The OCC bulletin also outlines the guidance provided to examiners with respect to CRA evaluations, including the factors to consider in the evaluation process, communication with supervised institutions during the evaluation process and the presentation and analysis of performance data.
The full text of the OCC bulletin is available at: https://www.occ.treas.gov/news-issuances/bulletins/2018/bulletin-2018-17.html.
US Federal Reserve Board Approves Final Rule Regarding Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations
On June 14, 2018, the U.S. Board of Governors of the Federal Reserve System approved a final rule, which implements section 165(e) of the Dodd-Frank Act and establishes single-counterparty credit limits for bank holding companies and foreign banking organizations with $250 billion or more in total consolidated assets (including any U.S. intermediate holding company of these FBOs with $50 billion or more in total consolidated assets) and any other bank holding company classified by the Federal Reserve Board as a Global Systemically Important Bank.
Under the final rule, a U.S. GSIB cannot have aggregate net credit exposure to another single global systemically important banking organization or a nonbank financial company supervised by the Federal Reserve Board that exceeds 15% of its tier 1 capital, and cannot have aggregate net credit exposure that exceeds 25% of its tier 1 capital to any other counterparty (defined under the final rule to include a company (including any consolidated affiliates of the company); a natural person (including the person's immediate family collectively where the exposure to the natural person exceeds 5% of the institution's tier 1 capital); a U.S. state (including all of its agencies, instrumentalities, and political subdivisions); foreign sovereign entities that are not assigned a zero risk weighting under the risk-based capital rules (including their agencies and instrumentalities); and political subdivisions of foreign sovereign entities (including their agencies and instrumentalities)). Other financial institutions subject to the final rule (other than U.S. IHCs subject to the rule) cannot have aggregate net credit exposure to any other counterparty that exceeds 25% of an institution's tier 1 capital.
The combined U.S. operations of FBOs with $250 billion or more in total consolidated assets are also subject to these credit limits, but the FBO may comply by certifying that it is subject to consolidated credit limits established by its home country supervisor that are consistent with the Basel Committee's large exposure framework.
The final rule also establishes three tiers of credit limits for U.S. IHCs whose parent FBOs have $250 billion or more in total consolidated assets. U.S. IHCs with at least $50 billion but less than $250 billion in total consolidated assets cannot have aggregate net credit exposure to any other counterparty that exceeds 25% of the IHC's total regulatory capital plus the balance of its allowance for loan and leases losses not included in tier 2 capital under the capital adequacy guidelines. U.S. IHCs with $250 billion or more but less than $500 billion in total consolidated assets cannot have aggregate net credit exposure to any other counterparty that exceeds 25% of the IHC's tier 1 capital. Similar to the limits imposed on U.S. GSIBs, U.S. IHCs with $500 billion or more in total consolidated assets, cannot have aggregate net credit exposure to another single GSIB or a nonbank financial company supervised by the Federal Reserve Board that exceeds 15% of its tier 1 capital, and cannot have aggregate net credit exposure to any other counterparty that exceeds 25% of its tier 1 capital.
The final rule will take effect 60 days from its publication in the Federal Register. The compliance deadline for GSIBs will be January 1, 2020. For all other institutions, the compliance deadline will be July 1, 2020.
In connection with the final rule, the Federal Reserve Board issued a notice and request for comments with respect to a proposed reporting template (proposed reporting form FR 2590) to monitor compliance by the institutions covered under the final rule. The proposed form includes nine schedules that broadly cover the gross exposure of the respondent institutions to various counterparties, eligible collateral and risk mitigating factors and disclosure of certain counterparties whose risk must be aggregated under the final rule. The notice requests comments with respect to various aspects of the proposed form including whether the form is necessary and whether it can be improved, the accuracy of the estimated burdens imposed by the proposed reporting requirement and the estimated compliance costs in connection with the proposed reporting requirement. Comments to the proposal will be due 60 days from its publication in the Federal Register.
The full text of the final rule is available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180614a1.pdf.
The full text of the reporting template proposal is available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180614a2.pdf.
US Comptroller of the Currency Discusses Agency Priorities before House and Senate Committees
On June 13 and 14, 2018, U.S. Comptroller of the Currency Joseph M. Otting discussed the priorities of the OCC before the U.S. House Financial Services Committee and U.S. Senate Committee on Banking, Housing, and Urban Affairs. Comptroller Otting identified the following as his key priorities: modernizing the OCC's approach to the Community Reinvestment Act, encouraging institutions to meet the short-term, small-dollar credit needs of their customers, enhancing Bank Secrecy Act and anti-money laundering compliance, simplifying regulatory capital requirements, simplifying the Volcker Rule and promoting efficacy and efficiency in the supervisory activities of the OCC.
The full text of Comptroller Otting's prepared testimony before the two committees is available at: https://www.occ.treas.gov/news-issuances/congressional-testimony/2018/pub-test-2018-60-written.pdf, https://www.occ.treas.gov/news-issuances/congressional-testimony/2018/pub-test-2018-61-written.pdf and https://www.occ.treas.gov/news-issuances/congressional-testimony/2018/pub-test-2018-61-oral.pdf.
Bank of England Confirms its Approach to Setting Internal MREL in Groups
On June 13, 2018, the Bank of England published a Policy Statement setting out its feedback to the responses it received to its October 2017 consultation on its approach to setting a minimum requirement for own funds and eligible liabilities. MREL is a minimum requirement for firms to maintain equity and eligible debt liabilities that can bear losses before and in resolution and results in a top-up to standard regulatory capital requirements, similar in concept to the old Tier 3 requirements under Basel II. The requirement will apply to U.K. authorized banks, building societies and PRA-designated investment firms, parent undertakings of those firms that are financial holding companies and to U.K. authorized subsidiaries of such firms. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.
The BoE's October 2017 consultation set out proposals for changes to the BoE's 2016 Statement of Policy on its approach to setting "external" MREL for resolution entities, to include the BoE's approach to "internal" MREL, i.e. instruments that are issued to a resolution entity from other legal entities in a group. Internal MREL is intended to cover U.K.-headquartered banking groups as well as U.K. subsidiaries of overseas banking groups.
The BoE is implementing its proposals largely as consulted on. However, it has made some small revisions to clarify internal MREL instrument eligibility, external MREL instrument eligibility and clean holding company requirements. Having considered consultation responses, the BoE will not be proceeding with its original proposal in the October 2017 consultation that critical service providers supporting the delivery of the group's critical functions must maintain financial resources equivalent to at least 25% of the annual operating costs of providing services. The BOE has also decided not to set requirements around the location and the form of surplus MREL at this stage.
The BoE will set MREL on a firm-by-firm basis. It will communicate in the second half of 2018 the interim internal MREL which it expects to apply from January 1, 2019 for relevant subsidiaries of G-SIBs, subject to an EU joint decision for relevant subsidiaries on the basis of the revised Statement of Policy. The BoE plans to communicate in early 2019 the interim internal MREL it expects to apply from January 1, 2020 for relevant subsidiaries of non-G-SIBs, subject to an EU joint decision process for relevant subsidiaries on the basis of the revised Statement of Policy.
Given that external and internal MREL must be set on an annual basis, the Bank will engage with institutions at this time, as well as on an ongoing basis, to consider whether the transitional arrangements for meeting the interim or end-state MRELs remains appropriate.
The Policy Statement is available at: https://www.bankofengland.co.uk/-/media/boe/files/paper/2018/policy-statement-boes-approach-to-setting-mrel-2018.pdf.
The updated Statement of Policy is available at: https://www.bankofengland.co.uk/-/media/boe/files/paper/2018/statement-of-policy-boes-approach-to-setting-mrel-2018.pdf?la=en&hash=BC4499AF9CF063A3D8024BE5C050CB1F39E2EBC1.
Details of the October 2017 consultation are available at: https://finreg.shearman.com/bank-of-england-launches-consultation-on-setting-.
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