Federal Reserve Enters Into Written Agreements with Discover Financial Services and State Street Corporation

SUMMARY

Over the past week, the Board of Governors of the Federal Reserve (the “Federal Reserve”) announced two enforcement actions addressing Bank Secrecy Act (“BSA”)/anti-money laundering (“AML”) compliance program deficiencies. Contemporaneous with those announcements, the Vice Chairman of the Federal Reserve noted in a speech the “massive fines being imposed on banks” but the absence of personal accountability. Consistent with our observations earlier this year, U.S. regulators continue to focus their enforcement efforts on BSA/AML compliance and continue to stress the importance of personal accountability.

BACKGROUND

On May 28, 2015, the Federal Reserve announced an enforcement action against Discover Financial Services (“Discover”), a bank holding company. The Federal Reserve action follows a Consent Order entered into by the Federal Deposit Insurance Corporation (the “FDIC”) on June 13, 2014 with Discover Bank, Discover’s subsidiary state non-member bank, also addressing BSA/AML program weaknesses. On June 1, 2015, the Federal Reserve announced a similar enforcement action against State Street Corporation, a bank holding company, and its subsidiary state member bank, State Street Bank and Trust Company (collectively, “State Street”).1

Both actions took the form of Written Agreements, which are typically viewed as a “less severe” enforcement measure than other measures available to the Federal banking agencies, such as Cease and Desist Orders. Although both actions lack detail concerning the deficiencies identified by the Federal Reserve, each impose significant remedial obligations on the party institutions. The obligations are more substantial for State Street than Discover, which is consistent with the Federal Reserve’s jurisdiction over both the bank holding company and its subsidiary state member bank. Notably, State Street is required to conduct a transaction review—frequently referred to as a “look-back”—covering a three-month period in 2013.

In a speech delivered on the same day as the State Street announcement, Stanley Fischer, Vice Chairman of the Federal Reserve, highlighted several “major lessons learned” from the economic crises of the last 20 years. In his remarks, he stated that the principle that the private sector would manage risk efficiently and effectively “did not work out as predicted” and suggested as “a possible reason that incentives are misaligned”. According to Vice Chairman Fischer, “[o]ne sees massive fines being imposed on banks. One does not see the individuals who were responsible for some of the worst aspects of bank behavior, for example in the Libor and foreign exchange scandals, being punished severely. Individuals should be punished for any misconduct they personally engaged in.”2 While Vice Chairman Fischer did not call out BSA/AML compliance specifically, his sentiments echo those conveyed by others in respect of deficiencies in BSA/AML programs. 3

IMPLICATIONS

Thus far in 2015, the Federal Reserve has announced a total of nine public enforcement actions against financial institutions.4 Of those nine actions, six were announced simultaneously on May 20, 2015 for unsafe and unsound practices in the foreign exchange markets. The other three are the Discover action, the State Street action, and the Federal Reserve’s March 12, 2015 action against Commerzbank AG to address, among other things, BSA/AML compliance deficiencies. Accordingly, a significant portion of the total public enforcement actions issued by the Federal Reserve since the beginning of the year address BSA/AML compliance deficiencies. In addition to the Federal Reserve’s actions this year, other agencies have combined to initiate enforcement actions against more than 20 financial institutions for BSA/AML compliance deficiencies through the first five months of the year.5

Consistent with our observations in January, the actions against Discover and State Street strongly suggest that government agencies continue to focus their enforcement efforts on BSA/AML compliance. Although it has recently been reported that regulators believe there is no actual increased focus on BSA/AML compliance and that the perception of such increased focus may be because other concerns are “easing up”,6 the number of enforcement actions taken thus far this year and other indicia of increased emphasis are powerful indicators.7

The sharp focus on BSA/AML and calls for personal accountability do not appear to be abating. BSA/AML compliance and risk management should continue to be a focus of boards of directors and senior management of financial institutions.