Wednesday, June 7, 2023

To access specific issuances, go to our Top Stories section, where you'll find links to all the relevant documents.
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Final agencies' guidance on 3rd-party risk management
The Federal Reserve Board, FDIC, and OCC yesterday issued final joint guidance designed to help banking organizations manage risks associated with third-party relationships, including relationships with financial technology companies.

Interagency Guidance on Third-Party Relationships: Risk Management describes principles and considerations for banking organizations' risk management of third-party relationships. It covers risk management practices for the stages in the life cycle of third-party relationships: planning, due diligence and third-party selection, contract negotiation, ongoing monitoring, and termination.

The guidance includes illustrative examples to help banking organizations, particularly community banks, align their risk management practices with the nature and risk profile of their third-party relationships. The agencies plan to engage with community banks immediately and develop additional resources in the near future to assist them in managing relevant third-party risks.

The final guidance reflects streamlined language and improved clarity based on the agencies' consideration of public comments on the proposed guidance released in July 2021.

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SEC charges Coinbase for failure to register
On Tuesday, the Securities and Exchange Commission announced charges against Coinbase, Inc., for operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.

According to the SEC's complaint, since at least 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law. Through these unregistered services, Coinbase allegedly:
  • Provides a marketplace and brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact;
  • Engages in the business of effecting securities transactions for the accounts of Coinbase customers; and
  • Provides facilities for comparison of data respecting the terms of settlement of crypto asset securities transactions, serves as an intermediary in settling transactions in crypto asset securities by Coinbase customers, and acts as a securities depository.
As alleged in the SEC's complaint, Coinbase's failure to register has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.

The SEC's complaint also alleges that Coinbase's holding company, Coinbase Global Inc. (CGI), is a control person of Coinbase and is thus also liable for certain of Coinbase's violations.

Finally, the complaint alleges that, since 2019, Coinbase has been engaging in an unregistered securities offering through its staking-as-a-service program, which allows customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase's efforts. Through this staking program, Coinbase allegedly pools each type of customers' stakeable crypto assets, stakes the pool to perform blockchain transaction validation services, and provides a portion of the rewards generated from this work to its customers whose assets were part of the pool. Coinbase failed to register its offers and sales of this staking program as required by law.

CFPB spotlight on AI chatbots in banking
The CFPB yesterday released a new issue spotlight on the expansive adoption and use of chatbots by financial institutions. Chatbots are intended to simulate human-like responses using computer programming and help institutions reduce the costs of customer service agents. These chatbots sometimes have human names and use popup features to encourage engagement. Some chatbots use more complex technologies marketed as “artificial intelligence,” to generate responses to customers.

The CFPB said it has received numerous complaints from frustrated customers trying to receive timely, straightforward answers from their financial institutions or raise a concern or dispute, and that working with customers to resolve a problem or answer a question is an essential function for financial institutions—and is the basis of relationship banking.

Financial institutions advertise that their chatbots offer a variety of features to consumers like retrieving account balances, looking up recent transactions, and paying bills. Much of the industry uses simple rule-based chatbots with either decision tree logic or databases of keywords or emojis that trigger preset, limited responses or route customers to Frequently Asked Questions (FAQs). Other institutions have built their own chatbots by training algorithms with real customer conversations and chat logs, like Capital One's Eno and Bank of America's Erica. More recently, the banking industry has begun adopting advanced technologies, such as generative chatbots, to support customer service needs.

The spotlight found the use of chatbots raised several risks, including:
  • Noncompliance with federal consumer financial protection laws
  • Diminished customer service and trust
  • Harm to consumers
Read more on this story.

OFAC sanctions supporters of Iran and drug cartel
On Tuesday, Treasury announced that OFAC has sanctioned a network of seven individuals and six entities in Iran, the People's Republic of China (PRC), and Hong Kong in connection with Iran's ballistic missile program.

Treasury also announced that OFAC designated two senior members of the Cartel de Jalisco Nueva Generacion (CJNG) engaged in trafficking high-caliber firearms from the United States and fuel theft in Mexico. Additionally, OFAC designated another individual and one Mexican entity that provide support to CJNG by laundering illicit narcotics proceeds. CJNG is a violent Mexico-based drug trafficking organization responsible for a significant proportion of fentanyl and other deadly drugs trafficked into the United States.

For the names and identification information of the parties designated in these OFAC actions, see the June 6, 2023, BankersOnline OFAC Update.

June designated as MDL Awareness Month
The National Credit Union Administration has designated June as Minority Depository Institution Awareness Month to enhance the public's understanding of the vital work minority depository institution credit unions perform in underserved communities nationwide.

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