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Recent Serious Violations Confirm Compliance Vigilance Is Continually Required

Steven Stachowicz, Managing Director Risk and Compliance

The September edition of Compliance Insights comments on two recent regulatory actions – one related to overtly discriminatory lending practices and one related to apparent violations of the Kingpin Act. Both demonstrate failings of the cited institutions’ compliance management systems to properly detect and prevent these issues, which have had significant monetary and reputational impacts.

This past June, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) announced a $10.6 million joint action against a mid-sized bank. The consent order required the bank to pay a $3 million penalty, establish a $4 million loan subsidy program, and pay $2.78 million in restitution to African-American consumers. Notably, the CFPB’s investigation involved, for the first time, “mystery shopping,” in which the CFPB sent individuals into the bank to confirm potentially discriminatory practices. In addition, the CFPB cited the bank for “redlining,” a practice by which lenders unreasonably limit financial services provided to minority neighborhoods. Finally, the CFPB also obtained policies and call recordings (some of which are outlined publically in the consent order) that are overtly – and shockingly – discriminatory in nature.

In the other regulatory action, the Office of Foreign Assets Control (OFAC) cited a U.S. bank for violations of the Foreign Narcotics Kingpin Designation Act, aka Kingpin Act. Issues with the bank’s sanctions screening system, as well as a failure to act timely on issues identified internally through a negative news search, led to a failure to identify certain inactive/dormant accounts. OFAC contends that the bank violated sanctions regulations through the failure to freeze the accounts and notify the U.S. Department of the Treasury.

These compliance issues, discussed in our latest briefing, are not new concepts. Compliance and BSA/AML functions has been stressed over the past several years with the implementation of many complex regulatory requirements, and banks are challenged to re-double their efforts around strengthening their programs, including boosting their monitoring and testing efforts, issue detection and resolution processes, and providing meaningful training to employees. The notion that overt discrimination in lending continues to happen today, many years after the passage of the Equal Credit Opportunity Act (ECOA), should make any compliance officer recoil in horror. It also shows that our work as compliance professionals is never done, and continued diligence and vigilance are critical to our effectiveness and financial institutions’ success.

Read our latest Compliance Insights edition here.

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