Dive Brief:

• The Federal Deposit Insurance Corp., in conjunction with the Office of the Comptroller of the Currency and the National Credit Union Administration, issued a proposal Tuesday that would direct financial institutions to put more attention and resources toward higher-risk customers and activities, rather than those categorized as lower-risk.
• The overhaul of the anti-money laundering/countering the financing of terrorism framework would align each agency’s regulations with changes proposed Tuesday by the Financial Crimes Enforcement Network. That agency would get an enhanced role in the AML/CFT supervision and enforcement process under the inter-agency proposal. 
• Also Tuesday, the FDIC issued a proposed rule to implement provisions of the Genius Act, crafting a framework for FDIC-supervised payment stablecoin issuers featuring requirements related to reserve assets, redemptions of outstanding stablecoins, capital, permissible activities and risk management standards. 

Dive Insight:

With the 2020 passage of the Anti-Money Laundering Act, FinCEN and the banking agencies were directed to “modernize and strengthen” AML/CFT regulations “to encourage more effective outcomes” for banks, regulators, law enforcement and national security agencies, the FDIC said. AML regulations hadn’t been updated since the Bank Secrecy Act was enacted in the 1970s.

This week’s joint rules rewrite “seeks to avoid penalizing banks for ‘foot faults’ or approaching exams as ‘box checking’ exercises, and instead focuses on better aligning regulation with risk and avoiding having to wait until a massive failure to take action,” FDIC Chair Travis Hill said in a statement. 

Under the proposal, only “significant or systemic failures” to implement a program would prompt an enforcement action or a significant supervisory action related to AML/CFT, the FDIC said. 

“Banks currently devote enormous resources to complying with BSA requirements, while it is unclear to what extent much of that effort actually helps further law enforcement or national security efforts,” Hill said. “Meanwhile, the risk of large fines due to BSA violations incentivizes banks to ‘debank’ customers by denying or closing accounts.”

The proposal would also expand FinCEN’s role in the supervision and enforcement process by creating a new consultation framework for certain agency actions, the FDIC said. FinCEN would be able to review and provide feedback to the banking agencies before they issue certain AML/CFT-related enforcement and supervisory actions, which “will promote consistent approaches” to supervision, according to the notice in the Federal Register.  

Regulators would still have the necessary tools to take action “if, for example, a bank is accepting duffel bags full of cash from drug cartels or funding terrorists overseas,” Hill said.

Comments on the proposal are due 60 days after it’s published in the Federal Register.

The 191-page proposed rule implementing Genius Act standards – the FDIC’s second thus far – would also set requirements related to custodial and safekeeping services, and clarify that tokenized deposits remain deposits under the Federal Deposit Insurance Act. 

The proposal would also establish that deposits held as reserves backing a payment stablecoin would not be insured on a pass-through basis.

Hill said the agency genuinely welcomes “robust feedback” on key aspects of the proposal. 

“I recognize there will be many other questions related to tokenized deposits from market participants beyond the clarification in the proposal, and so I encourage comments on what types of additional clarity or guidance would be useful for the FDIC to consider providing,” Hill said in a statement. 

The proposed rule aligns largely with the OCC’s proposal related to stablecoin issuer regulation, put forth in February, he noted. The Genius Act labeled the OCC as the “primary Federal payment stablecoin regulator” for many potential issuers.

Comments on the FDIC proposal are due 60 days after publication in the Federal Register.