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In October, the Office of Foreign Assets Control (OFAC) published more targeted guidance for digital asset companies related to compliance with sanctions and best practices for mitigating risks. OFAC's virtual currency guidance is directed at the entire industry, "including technology companies, exchangers, administrators, miners, wallet providers, and users." It aims to "help the virtual currency industry prevent exploitation by sanctioned persons and other illicit actors," according to the press release issued with the guidance. Essentially, the guidance emphasizes that anyone subject to U.S. sanctions laws and regulations must continue to abide by them when engaging with virtual currencies.
The guidance provides several best practices that entities involved in virtual currency activities should follow to remain in compliance and to mitigate penalties in instances of compliance failures. These practices will be familiar to anyone with experience in sanctions compliance best practices applicable to other industries. This said, the document notes, compliance solutions should reflect a risk-based approach and should be tailored to the type of product or business involved, its size and level of sophistication, its clients and counterparties, and the locations it serves. OFAC also expects companies to implement these practices sooner rather than later in the company's existence, before any products and services are released. While there is no single compliance program to suit all scenarios, implementing OFAC's best practices, as follows, can prevent sanctions violations and serve as a mitigating factor should any violations occur: Management Commitment Management should commit to enforcing a culture of compliance throughout the organization from the company's earliest days. OFAC recommends specific actions that management can take to set an appropriate tone from the top, including reviewing and endorsing compliance procedures, allocating adequate resources to compliance, delegating autonomy and authority to the compliance department, and appointing an experienced sanctions compliance officer. Risk Assessment Regular and ongoing risk assessments should be conducted to identify risks associated with sanctions compliance. Activities and relationships associated with foreign jurisdictions or foreign persons should be assessed for their potential to expose a company to sanctioned persons or places. A virtual currency company’s risk assessment process should be tailored to the types of products and services offered and the locations in which such products and services are offered. Appropriately customized risk assessments should reflect a company’s customer or client base, products, services, supply chain, counterparties, transactions, and geographic locations, and may also include evaluating whether counterparties and partners have adequate compliance procedures. Internal Controls Internal controls should be able to "identify, interdict, escalate, report (as appropriate), and maintain records for" prohibited activities. Useful internal controls include sanctions screening, geolocation tools, know your customer ("KYC") procedures, and transaction monitoring and investigation to identify virtual currency addresses and other data associated with sanctioned individuals, entities, or jurisdictions. OFAC includes virtual currency addresses as identifying information for designated persons, so these should be used in screening as well. While OFAC does not require the virtual currency industry to use any particular in-house or third-party software, OFACT states that such software can be a helpful tool for an effective sanctions compliance program. Testing and Auditing Testing and auditing procedures can include ensuring that screening and IP blocking are working effectively. Companies that incorporate a comprehensive, independent, and objective testing or audit function within their sanctions compliance program are equipped to ensure that they are aware of how their programs are performing and what aspects need to be updated, enhanced, or recalibrated to account for a changing risk assessment or sanctions environment. The size and sophistication of a company may determine whether it conducts internal and external audits of its sanctions compliance program. Some best practices for testing and audit procedures in sanctions compliance programs for the virtual currency industry include: sanctions list screening, keyword screening, IP blocking, and investigation an reporting. Training Companies should conduct trainings for relevant employees at least annually. The best practices for the virtual currency industry are not new, nor are they unique to the industry. However, the recent guidance from OFAC indicates that the industry will be a particular focus for enforcement, and companies in the industry should implement these measures as soon as possible to the extent they have not already done so. The scope of a company’s training will be informed by the size, sophistication, and risk profile of the company. OFAC training should be provided to all appropriate employees, including compliance, management, and customer service personnel, and should be conducted on a periodic basis, and, at a minimum, annually. A well-developed OFAC training program will provide job-specific knowledge based on need, communicate the sanctions compliance responsibilities for each employee, and hold employees accountable for meeting training requirements through the use of assessments Remedial measures Where a sanctions violation has occurred, OFAC can consider the remedial measures a company has taken as a mitigating factor in a penalty determination. Remedial measures can include adding and/or strengthening the tools listed above to fill gaps and repair weaknesses in the compliance program. Conclusion OFAC is placing much greater scrutiny on the virtual currency industry. Industry members should be mindful of implementing and maintaining robust compliance measures early and often.  By Neal Reynolds, President, BankMarketingCenter.com, a Synergy Endorsed Business Partner and OBA Associate Member  Robots have been demonized for a long time. And understandably. Hard to believe but it’s been 50 years since HAL, the spaceship’s computerized brain, threatened to kill the Discovery One astronauts in the film, “2001: A Space Odyssey.” It’s one of the earliest films that I can remember that warned us about how Artificial Intelligence could very well be “an experiment gone horribly wrong.”
In years since, robots have continued to be characterized as malevolent, destructive, emotionless job-stealers. Manufacturing jobs would disappear as robots could work much more efficiently, safely, accurately, and less expensively than human beings. In the meantime, their view of the world -- one of course where robots ruled -- would supplant that of their creators, they’d revolt against the human race and take over the world. My, how times have changed. The kind of thinking (aka Artificial Intelligence) that made HAL a monster is exactly the kind of thinking that today’s community banks are utilizing to supplement their service to customers. Until now, customer service was largely built on human interaction. Whether a mega financial institution or a community bank, the standard for quality customer service is extraordinarily high. Customer service representatives must be patient, efficient, knowledgeable, and quick to solve customer complaints without a hitch. Maintaining this high standard is labor intensive, and certainly not cheap. And during these pandemic days, finding and keeping individuals who can deliver this type of service has become almost impossible. So, say hello to CHATBOT! Okay, what exactly is a chatbot? The latest tactic in “conversational marketing,” a chatbot is a “software robot” that chats with customers on your various customer experience touchpoints such as websites, messaging apps, and devices. A chatbot mimics conversation through text (e.g., 1800flowers.com) or voice (e.g., Alexa). If you’ve just spoken to your Google Assistant, well, you’ve just chatted with, in effect, a chatbot. So, are people really using chatbots? Absolutely, and there’s plenty of consumer research to prove it. Recent research from Survey Monkey and Drift show that “only 38% of consumers actually want to talk with a human when engaging a brand. This isn’t to say they always prefer chatbots, but it highlights just how many ways there are to get answers today that don’t involve live human conversation — text messaging and self-service portals, just to name a few.” Chatbots can learn and evolve, as well. IBM’s Waston, for instance, “uses machine learning algorithms and asks follow-up questions to better understand customers and pass them off to a human agent when needed.” Pretty clever, isn’t it? According to an August 13, 2021 article by tech consulting firm, CapTech, “back in 2019 40% of consumers in the U.S. were using chatbots to shop with retailers. In addition, 77% of customers said chatbots will transform their expectations of companies over a five-year span.” The article goes on to say that “aside from meeting consumers’ needs… there are other advantages to chatbots… Businesses spend over $1.3 trillion per year to address customer requests, and chatbots could help reduce that cost by 30%. In fact, virtual customer assistants help organizations reduce call, chat, and email inquiries by 70%, while 90% of businesses report recording large improvements in the speed of complaint resolution.” In closing, a chatbot might seem like a small contribution to your ability to service customers, but there are certainly big benefits to be realized for the banks that use them. Just be careful if it starts asking for a salary increase and better benefits…
And now for something completely different. Except it’s not; it just hasn’t been around for a number of years. But it most assuredly has an impact on your community bank’s bond portfolio and on the securities you’ll be thinking about purchasing the next time you’re in the market.
I’m speaking once again about the ever-popular slope of the yield curve. For our purposes, these are the yields on the various on-the-run Treasury issues, specifically the ones at the two-year and 10-year maturity terms. Those are the most popular benchmarks for bond market analysts to use when the slope of the yield curve is discussed. What is different so far this year is that the slope, or difference in yield at the benchmarks, has both grown and shrunk in a few short months. This surely doesn’t look like a secular trend vis-à-vis 2017 through 2019, when the slope gradually, grindingly, flattened by more than 100 basis points (1.0%). So, now that we’ve established that bond yields of differing tenors seem to have minds of their own, what does that mean to your community bank? More is better, usually Most community bankers have been wishing for higher rates since late 2019, when the economy started to lose oil pressure. Loan demand (but not credit quality, thankfully) had already begun to deteriorate by the time “COVID-19” became part of our vocabulary. In short order, the Federal Reserve pushed short-term yields to near zero, began buying billions of bonds each month and launched a series of programs to back-stop the economy. The yield curve and—not surprisingly—net interest margins flattened. What we experienced in the first quarter of 2021 is known as a “bear steepener.” This occurs when monetary policy is on hold at the same time bond investors get the shakes about inflation. With all the fiscal stimulus coursing through the economy’s veins, long-term buyers demanded more protection against purchasing power erosion, and the slope of the curve jumped nearly 80 basis points by March 31. Alas, this trend proved to be short-lived. In the second quarter, especially after the Fed’s June meeting, the bond market gave back a large portion of the 2021 yield improvement. By the halfway point in the year, the curve’s slope was back down by about 35 basis points. This was not welcome news for portfolio managers, who are still hustling to invest idle cash, which is probably leaving margins exposed to falling rates. What shape indicates This is probably a good time to recount what the slope of the curve telegraphs about investor sentiment. If long and short rates have very little difference, it indicates investors are relatively satisfied that inflation is not a threat. Two-year buyers will almost always take their cue from the Fed, while 10-year buyers, who are quick to retreat if they sense prices are about to rise, have gradually required less risk premium over the past 30 years since inflation has stayed under wraps. (Investors of a certain age will recall the term “bond vigilantes.” Those institutional buyers would demand higher yields if the combination of monetary and fiscal policies weren’t to their liking. In the two decades, the bond vigilantes have gone the way of Wyatt Earp.) What took place in June of this year would qualify as a “bull flattener.” Longer rates retreated when the Fed, and in particular chairman Jay Powell, put the bond market more at ease regarding incipient inflation fears. The flatter curve means that longer-term investors aren’t rewarded as much for their additional price risk. That is relevant to community banks in 2021, since bond portfolios are as long as they’ve ever been, using duration as an indicator. Where to go from here What’s the next move for the shape of the yield curve? I’m not going to hazard a guess, but I will point out several tidbits of interest. For one, the current slope of about 120 basis points is almost exactly the past 10 years’ average. For another, the recent yield rise for the two-year Treasury note also restored its 10-year average spread over Fed Funds. And finally, the Fed’s June dot plot may have shown that more members are projecting the first hike earlier than in the recent past, but the consensus is still in 2023, which is a long way from here. Stay tuned for more reporting on our mountain of debt, as depicted by the thrilling slopes of the U.S. Treasury yield curve.
The Agencies (OCC, FRB, FDIC, FCA and NCUA) have recently proposed revisions to the Interagency Questions and Answers Regarding Flood Insurance. The purpose of this proposal is to supplement the July 2020 proposed Q&As which only contained two proposed questions on private flood insurance. These new proposed Q&As are formulated based off questions received by the Agencies regarding private flood insurance rules that went into effect July 1, 2019 and include 24 proposed Q&As on private flood insurance.
In attempts to provide additional clarify on requirements, the proposed Q&As use the term “Act” in reference to the National Flood Insurance Act of 1968 (NFIA) and the Flood Disaster Protection Act of 1973 (FDPA), as well as “Regulation,” to refer to each Agency’s current flood insurance rule. The new proposed Q&As are divided into three main categories regarding private flood insurance:
Mandatory Acceptance Key Takeaways Anytime renewals, or when a borrower presents a new private flood insurance policy regardless of whether a MIRE event occurred (making, increasing, renewing, or extending of a loan), the lender is required to review the policy to determine if it meets the mandatory purchase criteria. If it does not, the lender may still accept the policy if it meets the discretionary acceptance criteria. If a lender has a policy to not originate mortgage loans in nonparticipating communities or coastal barrier regions where NFIP is not available, private flood insurance requirements are not going to require the lender to change its policy. Lenders are not required to accept private flood insurance policies solely because the policy contains the compliance aid assurance clause when the lender reviews it and determines the policy actually does not meet the mandatory acceptance requirements. But that does not alleviate the lender from reviewing a policy that does not contain the compliance aid assurance clause to determine whether it meets the requirements for private flood insurance before rejecting the policy. The policy must contains the compliance aid assurance clause language in the policy or an addendum before the bank accepts without conducting a review. Even if that is true, the lender must still ensure that the coverage is at least equal to the lesser of the outstanding principal balance of the loan or the maximum amount of the coverage available under the Act for the type of property and that other key aspects of the policy are accurate, like the borrower’s name and address. Lastly, if a policy lacks the compliance aid assurance clause, the lender is still free to review the policy to determine if it meets the criteria under discretionary acceptance from the Regulation. But it must still determine, even if the policy does not meet the requirement for discretionary acceptance, whether they are still required to accept under mandatory acceptance. Discretionary Acceptance Key Takeaways Under the discretionary acceptance test, lenders must evaluate the sufficiency of the insurer’s solvency, strength, and ability to satisfy claims under general safety and soundness principles. They may obtain information from a State insurance regulator for the State in which the property is located and rely on licensing and other processes used by the State insurance regulator for such an evaluation. Additionally, if a lender has previously accepted a private flood insurance policy under the discretionary acceptance requirements and that policy is renewed, the lender still must review the policy to ensure it continues to meet the discretionary acceptance requirements. A conclusion to this fact must be documented in writing. General Compliance Key Takeaways There are additional requirements when it comes to mandatory acceptance or discretionary acceptance and deductibles when it comes to coverage amounts exceeding or not exceeding the amount available under the NFIP. Additionally, lenders are not prohibited when using a third party to review private flood insurance policies from charging a fee to the borrower. Disclosure requirements regarding the fee do come into play, however. If a declarations page provides enough information for the lender to make a determine on mandatory or discretionary acceptance, or if the declarations page contains the compliance aid assurance clause, lenders are free to rely on the declarations page to determine if the policy complies with the Regulation but should request additional information about the policy if not able to make that determination. Lastly, servicers must comply with the Regulation as well when determining whether private flood insurance may be accepted under the mandatory or discretionary acceptance provisions if the lender is supervised by the Agencies. Comments for these new proposals are due May 17, 2021. |
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