This Week in Compliance Vol. 7

What's been occupying our compliance attention lately? Here's a rundown of notable updates and regulatory happenings from the past weeks.

TD Bank Prepares for AML Penalties with $2.6 Billion Provision

In August 2024, TD Bank Group proactively addressed ongoing U.S. investigations into its anti-money laundering (AML) program by setting aside an additional $2.6 billion in provisions. This provision anticipates the monetary penalties expected as part of a global resolution with U.S. regulators, including FinCEN and the DOJ, which TD Bank expects to finalize by the end of the year. Additionally, TD Bank reduced its stake in The Charles Schwab Corporation by selling 40.5 million shares, which will positively impact the bank's Common Equity Tier 1 (CET1) ratio in the fourth quarter, offsetting some of the provision's negative effects.

As part of its efforts to strengthen its U.S. AML program, TD Bank has been investing in compliance enhancements, including hiring industry experts and upgrading technology and processes. The bank's CEO, Bharat Masrani, reaffirmed the organization's commitment to resolving these matters and emphasized the importance of building a stronger foundation for its U.S. business. TD Bank is working closely with regulators to achieve a resolution, aiming to provide further clarity to shareholders and stakeholders in the coming months.

European AI Act Comes into Force: Setting Global Standards for AI Regulation

On August 1, 2024, the European Union implemented the AI Act, the world's first comprehensive regulation on artificial intelligence. The Act introduces a risk-based framework, categorizing AI systems into minimal, specific transparency, high, and unacceptable risk levels. High-risk systems, such as those used in recruitment or loan decisions, face strict regulatory requirements, while AI applications deemed unacceptable, like certain manipulative technologies, are banned.

The AI Act also establishes rules for general-purpose AI models and sets up enforcement mechanisms, including significant fines for non-compliance. Member States have until August 2025 to appoint authorities to oversee compliance, with full implementation expected by August 2026. To ease the transition, the EU has launched the AI Pact, encouraging companies to voluntarily adopt key obligations ahead of time.

CFPB Comments on AI in Financial Services, Emphasizes Consumer Protection and Regulatory Consistency

On August 19, 2024, the Consumer Financial Protection Bureau (CFPB) released a statement addressing the use of artificial intelligence (AI) in the financial services sector. The CFPB emphasized that AI, while a key element of emerging technologies in finance, must comply with existing federal consumer protection laws. The agency highlighted its role in ensuring that new technologies do not bypass regulatory requirements, stressing that firms must adhere to legal mandates, even as they innovate. The CFPB also noted the importance of clear regulatory guidelines to foster innovation while protecting consumers.

The CFPB’s initiatives include ensuring no exemptions for AI or other technologies from consumer protection laws, requiring accurate reasons for credit denials regardless of AI use, and promoting fair competition. The Bureau is also focused on combating anticompetitive practices and ensuring companies are accountable for the AI algorithms they deploy in lending decisions. Through these efforts, the CFPB aims to balance innovation with rigorous enforcement of consumer rights.

ECB and EBA Report Uncovers EUR 4.3 Billion in Payment Fraud Across the EEA

A joint report by the European Central Bank (ECB) and the European Banking Authority (EBA) revealed that payment fraud in the European Economic Area (EEA) amounted to EUR 4.3 billion in 2022, with a reduction to EUR 2 billion in the first half of 2023. The majority of fraudulent activities were associated with credit transfers and card payments, particularly card fraud, which accounted for the highest volume of incidents. Fraud rates were notably lower for other payment methods like credit transfers.

The report highlighted the effectiveness of Strong Customer Authentication (SCA) regulations under the revised EU Payment Services Directive (PSD2). Transactions authenticated via SCA showed reduced fraud rates, particularly in card payments, compared to non-SCA transactions. However, fraud rates were higher in cross-border transactions, especially where SCA compliance is not mandatory, underscoring the uneven distribution of fraud losses across different payment methods and regions.

Singapore Passes New Law to Strengthen Anti-Money Laundering Efforts

On August 8, 2024, Singapore's Parliament approved the Anti-Money Laundering and Other Matters Bill, which strengthens regulations to combat money laundering. The Bill lowers the threshold for casino due diligence checks on transactions over USD 3,013 and allows courts to sell seized properties under specific conditions without all parties' consent. It also expands the definition of money laundering to include foreign environmental crimes and enhances data-sharing between government agencies to improve financial oversight. Despite concerns about data sharing and impacts on casinos, the Bill was widely supported.

At spektr, we understand that keeping up with regulatory changes and maintaining compliance can feel overwhelming. Let's have a chat about your compliance needs and how we can customize solutions to match your unique business requirements!