Fed Report Provides Information on Debit Card Transactions in 2015

On November 30, the Fed announced the release of its annual report on debit card transactions in 2015. The report is the fourth in a series to be published every two years pursuant to Section 920 of the Electronic Fund Transfer Act (EFTA). As in prior years, the 2015 report reflected that issuers’ costs of authorizing, clearing, and settling debit card transactions (excluding issuer fraud losses) varied greatly across respondents. Data compiled in the report estimates that debit-card fraud losses to all parties (merchants, cardholders, and issuers) increased by 44 percent from 2013 to an estimated total of $2.41 billion in 2015. The median covered issuer had average fraud prevention and data security costs of 1.9 cents per transaction.

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Fed Extends Post-Employment Restrictions for Senior Examiners

In a press release on November 18, the Fed announced revised post-employment restrictions that more than double the number of senior staff examiners barred from leaving a Federal Reserve Bank and going right to work for a bank they had supervised. By law, senior bank examiners are prohibited for one year from accepting paid work from a financial institution that they had primary responsibility for examining in their last year of Reserve Bank employment. This post-employment restriction has previously applied only to central points of contacts (CPCs) at firms with more than $10 billion in assets. The revised policy expands this post-employment restriction to deputy CPCs, senior supervisory officers (SSOs), deputy SSOs, enterprise risk officers, and supervisory team leaders, which has the effect of more than doubling the number of senior examiners covered. The policy—which takes effect January 2, 2017—does not apply to senior examiners responsible for multiple unaffiliated banks.

In addition, another new Fed policy prohibits former Fed Bank officers from representing financial institutions and other third parties in matters before the Fed for one year after leaving their Federal Reserve position. This policy takes effect on December 5.

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GAO Report Recommends Additional Actions to Help Achieve Dodd-Frank Stress Test Goals

On November 15, the GAO released its report entitled Federal Reserve: Additional Actions Could Help Ensure the Achievement of Stress Test Goals. The report had been requested in September 2014 by House Financial Services Committee Chairman Jeb Hensarling in order to determine the costs, benefits, effectiveness and transparency of the Fed’s stress tests. Highlights of the Report can be found here.

The GAO was asked to review and assess the effectiveness of each of the Fed’s two stress test programs for certain banking institutions. Accordingly, the GAO analyzed Fed rules, guidance, and internal policies and procedures and assessed practices against federal internal control standards and other criteria. The GAO also interviewed Federal Reserve staff and officials at 19 banking institutions. The report sets forth 15 recommendations that the GAO believes will help improve the effectiveness of the Fed’s stress test programs. The recommendations include, among other things, improving disclosures and communications to firms, expanding model risk management, and reconsidering potential consequences of the Fed’s scenario design choices. The GAO has reported that the Fed “generally agreed with the recommendations and highlighted select ongoing and future efforts.”

In a November 15 press release, House Financial Services Committee Chairman Jeb Hensarling used the GAO report to critique the Fed’s lack of transparency with regard to certain activities under the Dodd-Frank Act. Among other things, Rep. Hensarling stated, “[t]he GAO report confirms the secrecy surrounding the stress tests makes it almost impossible to measure the effectiveness of the Fed’s regulatory oversight or the integrity of the tests’ findings. When it comes to the Fed’s stress tests, not only are they not transparent, they are often duplicative and impose unnecessary costs and burdens on financial institutions that are ultimately passed on to consumers.” Rep Hensarling cautioned further that “[t]he changes recently proposed by the Federal Reserve to its stress testing process are inadequate,” and the GAO report “demonstrates the absolute need for the new President to designate a Vice-Chairman for Supervision at the Federal Reserve who will have the power to ‘oversee the supervision and regulation’ of financial firms supervised by the Federal Reserve.”

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OCC Proposes Revisions to Stress Test Information Collection

On November 15, the OCC published a notice and request for comment on proposed changes to its rules requiring certain covered financial institutions, including national banks and federal savings associations with assets over $50 billion, to report certain financial information as part of stress testing. The proposed revisions to the OCC’s reporting requirements are “intended to promote consistency with” the Fed’s proposed changes to its form FR Y-14A, and consist generally of clarifying instructions, shifting the “as-of date”, adding data items, deleting data items, and redefining existing data items—including an expansion of the information collected in the scenario schedule. The proposed revisions also reflect the implementation of the final Basel III regulatory capital rule, which is set to revise and replace the OCC’s risk-based and leverage capital requirements to be consistent with agreements reached by the Basel Committee on Banking Supervision in ‘‘Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems’’ (Basel III). All comments must be received by January 19, 2017.

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Major Global Financial Company Pays $264 Million to Settle FCPA Investigation of its Referral Hiring Practices in China

A major global financial company (“Company”) and a Hong Kong subsidiary (“Subsidiary”) agreed on November 17, 2016, to pay approximately $264 million to the DOJ, SEC, and the Federal Reserve, putting an end to a nearly three year, multi-agency investigation of the Subsidiary’s “Sons and Daughters” referral program through which the children of influential Chinese officials and executive decisions makers were allegedly given prestigious and lucrative jobs as a quid pro quo to retain and obtain business in Asia. The conduct occurred over a seven year period, included the hiring of approximately 100 interns and full-time employees at the request and referral of Chinese government officials, and resulted in more than $100 million in revenues to the Company and approximately $35 million in profit to the Subsidiary.

The Subsidiary entered into a non-prosecution agreement and agreed to pay a $72 million criminal penalty, as well as to continue cooperating with the ongoing investigation and/or prosecution of individuals involved in the conduct. Additionally, the Subsidiary agreed to enhance its compliance programs and report to DOJ on the implementation of those programs. DOJ asserts in its press release that the Subsidiary admitted that, beginning in 2006, senior Hong Kong-based investment bankers set up the referral program as a means to influence the decisions of Chinese officials to award business to the Subsidiary, going so far as to link and prioritize potential hires to upcoming business opportunities, as well as to create positions for unqualified candidates where no appropriate position existed. The Subsidiary also admitted that its bankers and compliance personnel worked together to paper over these arrangements and hide the true purpose of the hire.

DOJ acknowledged that while the Subsidiary did not voluntarily or timely disclose its conduct, in determining an appropriate resolution DOJ considered a number of actions taken by the Company, including the commencement of a thorough internal investigation, the navigation of foreign data privacy law to produce documents from foreign countries, and the provision of access to foreign-based employees for interviews in the US. Additionally, DOJ considered the employment actions taken by the Subsidiary, which resulted in the departure of 6 employees and the discipline of 23 employees.

In connection with the same conduct, the Company also settled allegations with the SEC and the Federal Reserve. In a cease and desist order filed today, the SEC found that the Company violated the anti-bribery, books and records, and internal controls provisions of the Securities Exchange Act of 1934. The SEC considered the Company’s remedial actions and cooperation with the ongoing investigation, ordering the Company to pay over $105 million in disgorgement and $25 million in interest. Finally, in a consent cease and desist order filed today, the Federal Reserve Board imposed an approximately $62 million civil monetary penalty on the Company for operating an improper referral hiring program and failing to maintain adequate enterprise-wide controls to ensure candidates were vetted and hired appropriately and in accordance with anti-bribery laws and company policies. This order, among other things, requires the Company to enhance its oversight and controls of referral hiring practices and anti-bribery policies, as well as to continue cooperating with the ongoing investigation.

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