BANKER THE ARIZONA OFFICIAL PUBLICATION OF THE ARIZONA BANKERS ASSOCIATION PUB. 12 ISSUE 4 Climate Change and Climate Risk Management for Banks Page 8
2 THE ARIZONA BANKER The community bank compliance partner. That’s ReviewAlliance. Explore how R/A can help - Talk with our team at info@bankersalliance.org or (833) 683-0701. Holding Company of Compliance Alliance and ReviewAlliance Which special projects does your team need to tackle to have all your 2023 submissions ready for exams? Scan the QR code for R/A’s capabilities. C M Y CM MY CY CMY K
aba.com/SummitSBA March 20–22, 2023 Washington DC & Virtual WASHINGTON SUMMIT Get ahead of what’s to come in the new Congress with ABA’s Washington Summit. Don’t miss this opportunity to make your voice heard about the major issues facing your bank, your customers, and your communities. Registration is FREE for bankers.
IN THIS ISSUE @ 2023 Arizona Banker Association (AzBA) |The newsLINK Group, LLC. All rights reserved. The Arizona Banker is published four times each year by The newsLINK Group, LLC for AzBA and is the official publication for the association. The information contained in this publication is intended to provide general information for review and consideration. The contents do not constitute legal advice and should not be relied on as such. If you need legal advice or assistance, it is strongly recommended that you contact an attorney as to your specific circumstances. The statements and opinions expressed in this publication are those of the individual authors and do not necessarily represent the views of the association, its board of directors, or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. The Arizona Banker is a collective work, and as such, some articles are submitted by authors who are independent of AzBA. While AzBA and the newsLINK Group encourages a first-print policy, in cases where this is not possible, every effort has been made to complywith any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact The newsLINK Group at 855-747-4003. 111 West Monroe, Suite 440 Phoenix, Arizona 85003 Phone: (602) 258-1200 2022 AZBA BOARD OF DIRECTORS AND STAFF 3 Washington Summit 6 UNDER THE COPPER DOME Banks Are Under Attack Advocacy and Education are More Important Than Ever By Steven Killian, Arizona Bankers Association & Jay Kaprosy, Veridus 8 Climate Change and Climate Risk Management for Banks By Julia A. Gutierrez 10 Banks Need a Game Plan for Today’s Interest Rate Environment By Rob Blackwell, Chief Content Officer, IntraFi 13 2022 AZBA Holiday Reception at Lon’s 14 Money Laundering Through Art and Antiquities By Terri Luttrell, Compliance & Engagement Director, Abrigo 18 Why Lenders Should Consider SBA Loans During a Recession By Lauren Kloock, B:SIDE Capital 20 WASHINGTON UPDATE Beating Back a Bad Idea How Bankers United to Play Defense Against Durbin Expansion By Rob Nichols, CEO & President, American Bankers Association 24 CFPB to Furnishers Know Your Role! By Prince Girn, Compliance Alliance Paul Hickman CEO & President Steven Killian Director of Government Relations Michal Plavecky Executive Administrator Kerensa Williams Chief Operating Officer William Ridenour General Counsel AZBA STAFF Jack Barry Enterprise Bank & Trust Bill Callahan Arizona Bank & Trust Neal Crapo Wells Fargo Bank Frank Coumides KS State Bank Wayne Gale 1st Bank Yuma Peter Hill Goldwater Bank Joel Johnson FirstBank Kyle Kennedy Bell Bank Dave Matthews First Western Trust Christine Nowaczyk BOK Financial Brad Parker PNC Bank Steve Richins Comerica Bank Tyson Rigby JPMorgan Chase Craig Robb City National Bank Dina Ryan Citigroup Patrick Strieck BMO Chris Webster Commerce Bank of Arizona Mark Young National Bank of Arizona DIRECTORS Brian Schwallie Immediate Past Chairman U.S. Bank Scott Vanderpool Chairman Bank of America Don Garner Chairman-Elect Alliance Bank of Arizona Bo Hughes Treasurer Canyon Community Bank Brian Riley Vice Chairman Foothills Bank Brian Ruisinger Secretary Republic Bank of Arizona EXECUTIVE COMMITTEE
equipls.com 480-443-8984 Structure: Your bank might be limited in what it can offer when it comes to unique financing terms. We get that. ELS has over 30 years of experience in providing customized funding options. Whether your customer needs a lease or a finance agreement, ELS has the ability to be flexible and competitive. Credit Quality: Does your customer lack the sophistication, time in business or struggle to meet your covenants? Because we have our own capital ELS can provide permanent financing putting your customer in the best possible situation for success. Collateral: As an independent lender/lessor, ELS is flexible enough to deliver our products to virtually any business. ELS can provide solutions for every industry from aircraft to IT. Size: Have you met your lending limit with one of your better customers? Or perhaps it’s a small request from a longtime prospect and it’s time to get your foot in the door. As a niche lender we can provide fast solutions for smaller requests or aggressive terms of any size for your creditworthy clients. Areas where ELS has expertise navigating obstacles Putting the financial pieces together for your bank’s customers. EQU I PMENT LEAS I NG s e rv i ce s . l . l . c .
6 THE ARIZONA BANKER Banks Are Under Attack Advocacy and Education are More Important Than Ever By: Steven Killian, Arizona Bankers Association & Jay Kaprosy, Veridus he quickly changing political landscape has brought about great new risks to employers and the banking industry. Both political parties are pushing back against corporate entities, advancing legislation, and policy based on the day’s latest angry tweet storm or outlandish conspiracy theories. Bearing that in mind, it is critical that the banking industry doubles down on its efforts to be a leading advocate and proactive educator in this current political climate. Thankfully, the Arizona Bankers Association has a long history of serving as the chief advocate for Arizona’s banking industry. In fact, the first priority in the Association’s mission is to provide “premier government relations advocacy,” and we have been very successful. In recent years, we have advanced legislation to reform the state’s pooled collateral system, to address foreign money judgments, and to authorize the use of account registry services and many other banking priorities. We have also pushed back, and won, against many of the most egregious efforts to regulate who banks can and can’t do business with or to legislate new costly mandates. In other instances, the Association engages on behalf of the banking community by filing legal briefs in the many pending cases that would otherwise dramatically shift longstanding business practices or established understandings of the law. A key part of a meaningful advocacy effort is to be an educator, as proactively as possible. It is a daunting task to try to overcome and get in front of the misinformation that seems so prevalent today. In this new climate, much of the political debate happens in echo chambers of tweets, soundbites, and misinformation. The very basics of the essential role of banks in America’s free enterprise system seems to have gotten lost. Legislators’ lack of understanding of the risk management and fiduciary responsibilities that banks hold makes it very difficult for them to effectively evaluate and make an educated vote on the bills that come across their desks. Through direct feedback from you, the Association’s members, and our partnership with the American Bankers Association, we have equipped ourselves to capably educate policymakers both before and during the legislative process. We already knew many of the risks that the banking industry would face when the Arizona Legislature resumed in January. Our opponents spent the - - - UNDER THE COPPER DOME - - -
7 AZBANKERS.ORG summer preparing to advance “ESG” legislation in multiple states. ESG is a perfect example of where conspiracy and a minimal working knowledge of how banks work collide. We can expect to see more mandates on who banks can and can’t do business with. Ironically, the support or opposition to mandates to bank firearms or to not bank oil and gas will fall along party lines, yet neither recognizes the inconsistencies of their position. We should also expect the unexpected as, each year, new bills that would impact banking are introduced. With so many new faces that entered the Legislature in January, it is ever more crucial that new and incumbent legislators are educated on the nuances of the banking industry, increasing their understanding in a way that we get in front of misinformation coming down the pipe. We are prepared. Much of the Association’s success can be attributed to the active involvement of the Association’s membership. We maintain an active Government Relations Committee and we are thankful for the membership engagement in the Political Action Committee. Those messages have been and will continue to be carried to the capitol through dedicated Association staff and a decades-long standing relationship with the team at Veridus. w We have also pushed back, and won, against many of the most egregious efforts to regulate who banks can and can’t do business with or to legislate new costly mandates.
8 THE ARIZONA BANKER Banks must consider the various areas of risk, especially as they consider the safety and soundness of their institution. Climate Change and Climate Risk Management for Banks By Julia A. Gutierrez Climate change and risk management have become hot-button topics for financial institutions in recent years as a result of the rising concern by policymakers, international organizations, financial regulators, and so many others. There has been a big push in recent years for a more environmentally friendly world as we see changes in organizational resources and operations, investor expectations, environmental activists, and even the expectations of the current administration. With all the focus on environmental safety, considering the impacts and learning how to manage the risk is inevitable for financial institutions. What is Climate Change? Climate change is considered to be a change in global or regional climate patterns —more specifically, a change in global or regional climate patterns from the mid-20th century through today. It has been largely attributed to an increase in atmospheric carbon dioxide levels, which are produced by fossil fuel usage. It can be a controversial topic among various groups, but whatever side of the fence you stand on when it comes to climate change, banks face climate-related financial risks and managing that risk can be critical. What Type of Risks Should Financial Institutions Consider? According to the varying regulatory agencies, financial institutions and the overall financial system of the United States are faced with emerging risks, both physical and transition, from contributing factors such as climate change and the transition to a low-carbon economy. The harm to people and property which arises from acute, climate-related events (flooding, hurricanes, heatwaves, etc.) is considered a physical risk. Stresses to financial institutions as a result of the shifts in policy, the adjustments in consumer or business sentiments, or the changes in technology in order to limit the impact of climate change are considered transition risks. In other words, a transition risk is the risk of the transition to a more environmentally friendly process or way of conducting business and operations. Other risks that financial institutions should consider as it relates to climate change and the environment include credit risk, market risk, liquidity risk, operational risk, and reputational risk. Banks must consider the various areas of risk, especially as they consider the safety and soundness of their institution.
9 AZBANKERS.ORG Principles for Managing Climate-Related Risk While there currently isn’t specific regulatory guidance for achieving compliance and managing the risk related to climate, we are likely to see this in the near future. Regulatory agencies have addressed the issues, have requested feedback for managing the risk, and are looking at implanting regulatory requirements for large financial institutions. This would include banks with over $1 billion in assets. The OCC (Office of the Comptroller of Currency), along with other regulatory agencies, have released guidance, requests for information, and a set of principles by which financial institutions should consider in managing climate-related risks. The information released by the OCC includes a set of general principles as well as the specific areas of risk management. The general principles touch on governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis. The general principles provide guidance for developing an effective framework that is essential to the bank’s safe and sound operations. The principles outline expectations for the board and senior management oversight, guidance for developing a written program, and areas of consideration for planning which should take into account the bank’s overall business strategy, risk appetite, and financial, capital, and operational plans. It is also important that management is involved in the oversight of the development and implementation process for identifying, measuring, monitoring, and controlling climate-related financial risk exposure within the bank’s management framework. Sound climate-risk management is dependent upon the availability of relevant, accurate, and timely data; therefore, management should incorporate climate-related financial risk information into the bank’s internal reporting, monitoring, and escalation processes to facilitate timely and sound decision-making across the bank. An important approach for identifying, measuring, and managing climate-related risks is the development of climate-related scenario analysis. In order to ensure this framework is effective and successful, financial institutions should consider a risk assessment process as part of their sound risk-governance framework. This will ensure that the board and senior management are able to identify emerging risks in order to develop and implement the appropriate strategies to mitigate and manage them. The guidance issued by the OCC suggests that financial institutions should consider incorporating climate-related financial risks when identifying and mitigating all types of risk. While the agencies will eventually elaborate on risk assessment principles in subsequent guidance, it is suggested that financial institutions consider credit risk, liquidity risk, other financial risk, operational risk, legal/compliance risk, and other nonfinancial risk. Conclusion While there isn’t currently a specific set of guidance that financial institutions must abide by when it comes to climate risk, compliance, and management, this is an area which all banks should begin considering from a safe and sound banking standpoint. It looks like the future guidance related to climate risk will only apply — or be required by — large financial institutions; however, the guidance and risk considerations should be contemplated by institutions of all sizes. Risks can impact even smaller institutions; therefore, taking a proactive approach rather than a reactive response is always the best plan of action. It is important that financial institutions stay informed on the hot-button area of climate change and climate risk, from a compliance and risk management perspective, as the society in which we are living continues to set a higher standard for an environmentally friendly world. w
10 THE ARIZONA BANKER Banks Need a Game Plan for Today’s Interest Rate Environment By Rob Blackwell, Chief Content Officer, IntraFi s the Federal Reserve aggressively hikes interest rates to tamp down inflation, depositors are starting to demand more for their money. Results from IntraFi’s most recent quarterly survey of bank executives indicate the trend is likely to continue. Ninety-five percent of respondents expect funding costs to go up, and 71% said deposit competition would increase. But this doesn’t mean banks have to let macroeconomic forces or competitors dictate their strategies. Matt Pieniazek, President and CEO of Darling Consulting Group, recently joined me on Banking with Interest to discuss how banks should think about their balance sheets in the current interest-rate environment. He explains why all institutions need clearly documented game plans, how to extricate rate from the value proposition, why rising rates are a good thing, and much more. What follows is our conversation, edited for length and clarity: What are you seeing right now vis-a-vis banks and bank balance sheets? The majority of banks aren’t overly concerned about losing relationships. They’re facing deposit pressures in a few areas, but the funds they’ve lost have been mostly discretionary. However, things are about to get interesting. That sounds ominous. What do you mean? During the last rising-rate environment, the Fed took nearly two years to increase rates by 200-225 basis points, and deposit-rate changes were nearly three times as responsive to the second hundred basis points as they were to the first. Similarly, during the period leading up to the Great Recession, we had a 425-basis-point move. Things were pretty tame during the first 200 basis points, but by the third and fourth hundred, the proverbial gloves came off.
11 AZBANKERS.ORG Rates have now risen uncharacteristically aggressively in a short period – in fact, the delta between market rates and what banks are paying has never gotten this wide this fast. Even if depositors aren’t looking to move their money, it’s hard for them to ignore what’s happening. Additionally, during the pandemic, we made it easier to do things electronically and conditioned customers to avoid branches. Today, banking practices are very different than three or four years ago. So the dynamics are about to get really interesting, notwithstanding the excess liquidity still out there. What’s your advice to banks? Have a clearly documented game plan. (Many banks don’t.) Start by figuring out how much money you can, or are willing to, let leave; then determine which deposits are most valuable and prioritize those. Next, divide your deposit base into manageable pieces. Start by rank-ordering your largest-balance relationships (this will help with one-off conversations). Second, review your mass-market, traditional banking relationships. Third, review the “tweeners,” or those that aren’t quite whales but larger discretionary balances that could be at risk (mid-tier balances commingled with operating balances in those traditional accounts). Get your people in a room to assess the elasticity of deposits in each sector and your value proposition for those different consumer types, specifically, whether it’s driven by rate or other factors. Figure out your pricing strategy for each and how much outflow you will accept in each area and why. You recently wrote that all banks have what appear to be core deposits but are actually Trojan Horses. What did you mean? Monies that look like core deposits but have a high potential for disintermediation. Municipal deposits are one kind of Trojan Horse. Large commercial balances are another – many businesses have funds sitting in their banks that dwarf what they need for operations, but they’re also facing cost pressures, and it’s hard to ignore the opportunity to pick up the notably incremental yield on their excess cash. If they do need money, many will “borrow” from themselves. The third kind is CDs. CD balances have contracted notably through this cycle, but much of that is CD-mentality money sitting in savings accounts, now accounts, or money markets that will move back into CDs. What should banks be thinking about if rates keep rising? Everyone seems to get overly fixated on rising rates and how high they might go, but no matter what a bank’s interest rate risk profile is, the worst scenario for this industry would be for rates to do an about-face and head lower for three reasons: 1) Funding costs can only go so low, but assets will keep pounding down until eventually everybody’s margins get squeezed – it’s just a matter of how quickly and to what degree; 2) declining rate environments are highly correlated with declining economic environments, which are highly correlated with assetquality challenges, delinquencies, and elevated reserves; and 3) when economic activity slows, the outlook for loan growth darkens. Today, banking practices are very different than three or four years ago. So the dynamics are about to get really interesting, notwithstanding the excess liquidity still out there.
12 THE ARIZONA BANKER Public banks with valuations that reflect a highly inelastic core deposit base through prior cycles don’t want to change the Street’s perception with beta moves that have nothing to do with their true base of core deposits. How is social media adding to deposit pressures? It’s definitely having an effect. But banks need to remember there’s always somebody paying more than them. If rate was the most important variable, every other bank would go out of business, and you’d have one big bank paying the highest rates. The point I’m making is if banks fuel conversations about rate to where it becomes the main topic of discussion, then they’re communicating that their value proposition is mainly tied to rate instead of the other things they bring to the table. Conversely, depository institutions that believe in their value propositions will do well during this cycle because they’ll know where they can be proactive. They’ll experiment more, try more things. What are your thoughts on strategies for banks not dealing with excess liquidity? I’ll start by saying there are many banks with concentrations of large balances that don’t want pricing on these to upset the apple cart. They don’t want a handful of accounts messing up their core deposit strategies, so they’ve been paying higher rates than usual. Then they’ve been selling the money into a deposit network, such as IntraFi’s, through its One-Way Sell program. This enables them to effectively lower their deposit costs and keep the money out of their deposit expenses by moving it off the balance sheet, knowing they can bring it back on if necessary. Public banks with valuations that reflect a highly inelastic core deposit base through prior cycles don’t want to change the street’s perception with beta moves that have nothing to do with their true base of core deposits. They’d prefer to move all their discretionary monies into repos, so they become a borrowing cost, or just sweep them off so they can actually generate some fee income and, in effect, slow the rise in their deposit costs. They’re also starting to worry about reputation risk, which is a first for me (and I’ve been doing this for a long time). Regarding your question, banks borrowing money are actually pushing local market pricing up. They don’t match wholesale, but they’ve got a long runway, given the delta between market rates and what other banks are paying. They’ll pay a lot more than other institutions, but they’ll also save a lot. Right now, borrowing banks are facing high opportunity costs, so if they’re dealing with a larger account, they’re more apt to pay up or negotiate. Otherwise, they’ll just have to replace them with something substantially more expensive. Loan growth was good in the second quarter, but there were signs of it faltering in the third quarter. What have you been hearing? There’s a clear consensus that pipelines have peaked. When we talk to banks about forecasts, many anticipate making half as many loans next year as they will make this year. Hurdle rates are up because of interest rates, there’s lots of uncertainty surrounding any kind of real estate, and businesses aren’t as comfortable making investments right now. Banks themselves are pulling back on some concentrations, asking tougher questions. We’ve seen a lot of disruption in the past two years from COVID-19 and other factors. How should banks be thinking about ALCOs right now? Way too many ALCOs tend to be more of a reporting function that spends too much time creating detailed decks that do little more than give people headaches. Then, toward the end of meetings, they’ll shoehorn in conversations on what to do. Those institutions have it backward. ALCO should feed strategy. It should be a profit center, not the cost center it tends to be. What are the biggest mistakes banks are making today? One is that they’re not changing loan pricing to levels that represent fair, risk-adjusted returns. They’re letting the liquidity overhang get in the way. The majority of banks – not all – are knowingly doing deals at perhaps the tightest spreads ever. But their business models don’t support FHLB plus 150 to 200. They don’t support SOFR plus 150 to 175. They don’t support prime minus 100 or more. Banks have to get away from all that. They can’t let irrational/desperate competition dictate their ongoing lending strategies. They need to improve their balancing act. Another is that many banks don’t socialize the logic underpinning their value propositions. They don’t explain how to deflect objections to those who work on the front lines. They don’t institute formal feedback loops, either. Banks should never underestimate the importance of communication, coaching, and guidance. w
13 AZBANKERS.ORG 2022 AzBA Holiday Reception at Lon’s
14 THE ARIZONA BANKER Money Laundering Through Art and Antiquities By Terri Luttrell Compliance & Engagement Director, Abrigo Andy Warhol’s portrait of Marilyn Monroe, “Shot Sage Blue Marilyn,” Photo 215104290 / Marilyn Monroe © Gustavo Rosa | Dreamstime.com
15 AZBANKERS.ORG • Fluctuating valuation: Another aspect of the art and antiquities trade making it prone to money laundering is that it is difficult to place a value on these high-end items as the worth is based on the eye of the collector – the purchaser. The pricing of art and antiquities is a highly subjective practice allowing criminals to launder vast sums of money, mainly through art auctions. • Absence of requirements to report large cash transactions: Art dealers can keep the names of buyers and sellers anonymous. And unlike U.S. businesses that deal in large sums of money and must file currency transaction reports (CTRs) and suspicious activity reports (SARs), art dealers do not have to file reports with FinCEN. Examples of exorbitant amounts paid under anonymity for these items through legitimate auction houses are: • Sotheby’s $120 million sale of Edvard Munch’s “The Scream” set a 2012 record for the most expensive work sold at auction. The identity of the buyer was allowed to be kept unknown for some time. Speculation on the purchaser before he was identified had included Russian oligarchs. • In 2022, Christie’s sold Andy Warhol’s portrait of Marilyn Monroe, “Shot Sage Blue Marilyn,” for $195 million, setting a new record. The purchaser was an art dealer, but the eventual owner is unknown. • Picasso’s “Green Leaves, Nude and Bust,” which for two years was the world’s top-priced work at auction after Christie’s sold it for $106.5 million, is currently on display at London’s Tate Modern, where its owner is still not identified. The anonymity afforded to purchasers and sellers of highend collectibles, along with the large sums for which art and antiquities can change hands, have proven to be enticing to money launderers and kleptocrats. ealers in art and antiquities have long been part of money laundering typologies on a global scale, given the illegal movement of funds flowing through these channels. Recent efforts to provide greater scrutiny to detect and prevent laundering money through art and antiquities are bringing newfound attention that financial institutions should consider as they run their Anti-Money Laundering/Combating the Financing of Terrorism Programs (AML/CFT Programs). The Problem of Money Laundering Using Art and Antiquities The world of art and antiquities trading is widely portrayed as a glamorous hobby reserved for the rich and famous. The fact that this market has been loosely regulated in the United States leaves the industry open to illegal actors in the dark market and open trade, such as auction houses and the internet. It is an attractive method for layering illicit funds into the financial system by buying and selling high-end items. Money laundering through art and antiquities is a known method of hiding illicit funds. According to estimates from The United Nations Office on Drugs and Crime (UNODC), billions of dollars are laundered through the global art market annually, with further billions estimated to pass through the underground art market each year. Methods of illegal transactions include theft, fakes, illegal imports, and organized looting. Furthermore, terrorist groups have generated revenue via trafficking antiquities. Why Money Laundering Through Art and Antiquities is a Risk Several factors contribute to the ease and attraction of money laundering using art and antiquities: • Anonymity: Sales and purchases can easily be accomplished anonymously, even with reputable auction houses like Christie’s and Sotheby’s. There are various reasons why legitimate transactions are made anonymously, such as privacy expectations and not wanting to draw public attention to the transactions. In addition, a more strategic fact is that there is power in anonymity. The world of art and antiquities trading is widely portrayed as a glamorous hobby reserved for the rich and famous.
16 THE ARIZONA BANKER Edvard Munch “The Scream” | Photo stock.adobe.com Recent Study Outlines HowArt is Used for Money Laundering Congress attempted to address loopholes that might promote antiquities and art money laundering by passing the Anti-Money Laundering Act of 2020 (AMLA). In a proposed rule issued by FinCEN in September 2021, antiquities dealers would be brought under the same AML regulatory framework previously applied to U.S. financial institutions under the Bank Secrecy Act (BSA). Industry leaders expect the final rule to be published in the near future. AMLA also mandated that the Treasury Department study the high-end art industry to determine the degree of money laundering and terror financing risk associated with art dealers. This study determined that money laundering does occur through the sale and purchase of high-end art. It noted the following three ways criminals are using art to launder money: 1. Accepting art as payment to integrate illicitly generated or acquired funds into the financial system; 2. Hiding or parking the proceeds of illegal activities via art purchases; and 3. Using art purchased with illicit proceeds as collateral for other transactions to disguise the source of funds.
17 AZBANKERS.ORG Terri Luttrell, Compliance & Engagement Director with Abrigo (formerly Banker’s Toolbox), is CAMS-Audit certified and has over 20 years in the banking industry, working both in medium and large community banks in the areas of compliance/fraud, commercial lending, and deposit operations. As an AML consultant, she has helped institutions develop BSA/OFAC programs to ensure all regulatory requirements are met, and managed a team of AML investigators for a large/ cross-border institution, among other roles. Despite these findings, Treasury concluded that the risk of money laundering via art was not significant enough for art dealers to be brought under the definition of the BSA at this time. Greater priorities for closing loopholes were mentioned, such as: • The beneficial ownership registry mandated by the Corporate Transparency Act, and • Deterring money laundering and public corruption occurring via high-end real estate. Scott Rembrandt, Deputy Assistant Secretary for Strategic Policy in the Office of Terrorist Financing and Financial Crimes, said that further regulations for art dealers are not required until “we’ve tackled more systemic issues, like creating a beneficial ownership registry to crack down on shell companies.” Efforts to Combat Money Laundering Through Art and Antiquities It’s important to note that much of the requirements of AMLA are to be created and implemented by FinCEN, a small division of the U.S. Treasury already struggling with a lack of funding and other resources. The Biden administration officials are asking Congress to send $210 million to FinCEN under the U.S. government’s proposed 2023 budget, which marks a roughly 30% increase from its current funding. While this indicates that FinCEN is underfunded, the budget is not expected to have bipartisan support. FinCEN Issued an Advisory on Kleptocracy and Foreign Public Corruption in April of 2022, urging financial institutions to focus efforts on detecting the proceeds of public corruption. The advisory emphasizes that corrupt public officials launder their illicit profits through various means, including shell companies or by purchasing high-end assets, such as real estate, yachts, private jets, and high-value art. Was this an afterthought after the study postponed what might have been another loophole closed to money launderers as other countries have done? The lack of U.S. legislation and oversight has promoted the U.S. to the number one money laundering country globally, with shell companies used to purchase high-end collectibles and cultural properties. As criticism continues from global watchdog organizations such as the Financial Action Task Force (FATF), concerns have increased since the Russian invasion of Ukraine. With Russian sanctions implemented worldwide, oligarchs and other kleptocrats have seized loopholes and are hiding assets into high-end purchases, including art and antiquities. A lack of regulatory oversight could lead to serious national security issues. Financial Institution Action to Detect and Prevent Money Laundering Art and Antiquities In the meantime, what should financial institutions do to ensure that money laundering through art and antiquities is not occurring through their bank? It is never too early to bump up your knowledge in these areas and prepare for regulations surrounding antiquities dealers. Although antiquities is positioned to be included under the BSA with all of the monitoring and reporting requirement that entails, it would be prudent for financial institutions to apply the exact same requirements to art dealers, including: • Both art and antiquities dealers in your enterprise-wide risk assessment • Recognizing that art and antiquities dealers, and customers who use them, are at higher risk for money laundering, terrorist financing, and political corruption . . . what should financial institutions do to ensure that money laundering through art and antiquities is not occurring through their bank? It is never too early to bump up your knowledge in these areas and prepare for regulations surrounding antiquities dealers. • Creating processes and procedures for enhanced due diligence for art and antiquities trading • Applying beneficial ownership requirements to any shell corporations, including those dealing in high-end art • Submitting suspicious activity reports for any large cash purchases with unknown sources of funds FinCEN issued a notice in March 2021 informing financial institutions of efforts related to trade in antiquities and art. The notice includes clear expectations for SAR filing if suspicious activity is detected in these areas. Having proactive procedures in place to detect money laundering in art and antiquities will prepare you for what is sure to be further regulations around art dealers. It will also show your banking regulators that you understand your risk related to both antiquities and the art communities. w
18 THE ARIZONA BANKER Why Lenders Should Consider SBA Loans During a Recession By Lauren Kloock, B:SIDE Capital
19 AZBANKERS.ORG Our partner lenders may also be wondering if there’s anything they can do in preparation for a recession for their small business clients. Luckily, we have good news in light of the doom and gloom lurking among us. In general, the SBA 504 and SBA 7(a) loan programs are well situated for challenging economic times. As 2022 has come to a close, we keep hearing the tune of a particular chorus on repeat across news stations, podcasts and pretty much every media outlet: Will There be an Economic Recession in 2023? Many analysts, economists, and other experts are largely backing this prediction with mounds of data saying how people might prepare or what we can expect in the face of the looming recession. Our partner lenders may also be wondering if there’s anything they can do in preparation for a recession for their small business clients. Luckily, we have good news in light of the doom and gloom lurking among us. In general, the SBA 504 and SBA 7(a) loan programs are well situated for challenging economic times. SBA financing provides enhancements to banks that are unable to lend conventionally on certain projects. Some of the more obvious reasons why lenders may want to consider SBA financing options: • It lessens the credit risk for lending institutions through the unique equity structure under the SBA 504 program, with the bank at 50% Loan to Value • Under the 7(a) loan program, SBA guarantees up to 85% of the total loan, making it an incredible opportunity for banks to confidently expand their portfolio as we enter 2023. However, looking back on previous recessions, there are several other reasons why SBA financing may be more attractive during a downturn over lending conventionally. Nine reasons lenders can think outside of the box regarding lending during an economic recession include: 1. SBA loans still lessen bank risk during hard economic times. 2. During tougher economies, SBA lending historically increased as commercial credit boxes shrunk. 3. Lenders still serve higher-risk industries during economic hardship by relying on the SBA guarantee on 7(a) loans. 4. Equity injection requirements are typically lower on SBA projects, allowing the borrower to retain cash for business working capital needs. 5. Refinancing is an attractive option for lenders to offer borrowers variable-rate loans tied to prime. In some instances, 504 loans may be used to refinance 7(a) loans. 6. Ability to lend to under-collateralized service businesses for business acquisitions or businesses experiencing a decline in property values 7. SBA 7(a) loans offer both fixed and variable rate options, while SBA 504 loans offer long-term fixed rates of up to 25 years. 8. This federal fiscal year, SBA 7(a) loans offer fee reductions on loans under $500,000 for both bank and borrower. 9. Selling on the secondary market is available if lenders wish to sell 7(a) loans for a premium (not available for SBA 504 loans). It’s hard to say what this year will bring, but B:Side is here to let you know we’re in this together. Our team of lending experts is happy to set up training to walk you through the nitty gritty of SBA financing based on your bank’s needs. Just shoot us a line or give us a call to let us know how we can support you. w Lauren Kloock of B:Side can be reached at 303.657.0010 or loanproduction@bside.org.
20 THE ARIZONA BANKER here’s a saying that “everything old is new again,” and that’s certainly an adage you can bank on in Washington, D.C. – especially when it comes to poor public policy proposals. A textbook example of this unfolded during the 117th Congress, when our industry found itself once again facing a bad idea that we thought had been soundly defeated: placing restrictive routing mandates on credit cards, like those imposed on debit cards by the Durbin Amendment over a decade ago. The idea came in the form of a bipartisan bill – the so-called Credit Card Competition Act – introduced in the Senate by Sens. Dick Durbin (D-IL) and Roger Marshall (R-KS) and in the House by Reps. Peter Welch (D-VT) and Lance Gooden (R-TX). Bankers know all too well that the 2010 Durbin Amendment had disastrous consequences for banks and their customers: it increased the costs of checking accounts and debit cards and ultimately led to the elimination of popular debit card rewards programs. The Durbin Amendment’s most damaging provisions apply to banks of all sizes, causing a nearly 25% cut in the per-transaction debit card revenue earned by banks with under $10 billion in assets. At the same time, it helped line the pockets of large retailers who talked a big game about passing savings on to consumers – but 10 years’ worth of data tells us that simply isn’t what happened. In fact, the Federal Reserve published a study finding that only 1% of merchants lowered prices for consumers since the Durbin price controls took effect. What’s more, the Credit Card Competition Act also goes several steps further than the Durbin amendment – not only would it require banks to add a second network to their customers’ cards, but it would limit them to options set by the Fed, unlike the Durbin Amendment, which allowed banks to choose between any two unaffiliated networks. The Credit Card Competition Act also requires banks to accept virtually any kind of transaction – functionally requiring them to onboard potentially many more than two networks, even networks that don’t meet basic data security standards. Given the potentially catastrophic effect the bill could have on community banks and bank customers – while providing no tangible cost savings or benefits for consumers – the industry sprang into action to set the record straight. Immediately following the bill’s introduction, ABA led a coalition of eight national financial services trade groups in issuing a statement of strong opposition to the bill. We followed this up with numerous letters, op-eds, grassroots calls to action and cobranded ads with the Texas and Kansas bankers associations that ran in their respective districts. The efforts were amplified by an op-ed from the Florida Bankers Association and a creative “Don’t Let Congress Steal Your Credit Card Rewards!” social media campaign from the Missouri Bankers Association. In early December, we then expanded that effort into an all-out media blitz to stave off any last-minute efforts to attach the bill to a must-pass piece of year-end legislation. Every step of the way, our efforts at the national level were complemented by robust advocacy efforts by our partners at the state bankers’ associations, who stepped up to make calls, attend Washington fly-ins, pen letters and columns, and even appear on national TV to address our concerns about the Beating Back a Bad Idea: How Bankers United to Play Defense Against Durbin Expansion By Rob Nichols CEO & President, American Bankers Association WASHINGTON UPDATE
21 AZBANKERS.ORG bill. Together, we blanketed Capitol Hill with a succinct, united message: the Credit Card Competition Act is terrible public policy that should not be enacted. Our combined efforts proved the hollowness of this bill – it failed to attract a single cosponsor beyond the initial two in both the House and Senate or gain enough support to advance as a standalone measure and was successfully blocked from any other bills moving through Congress as the lame-duck session came to a close. This win underscores the tremendous value of our state association alliance and demonstrates the power that our industry can have when we unite behind one message. It’s also an important reminder about vigilance. We can’t say for certain whether and how these bad ideas will rear their heads again in Congresses to come. But what we can say is that if they do, our industry will be ready to respond. w Email Rob at nichols@aba.com. Bankers know all too well that the 2010 Durbin Amendment had disastrous consequences for banks and their customers: it increased the costs of checking accounts and debit cards and ultimately led to the elimination of popular debit card rewards programs.
801.676.9722 | 855.747.4003 sales@thenewslinkgroup.com ARE YOUREADY FORGROWTH? ADVERTISE IN THIS MAGAZINE TO ROCKET YOUR BUSINESS FORWARD.
23 AZBANKERS.ORG ARIZONA & COLORADO BANKER SUMMIT Join 100+ of your bank colleagues from Arizona and Colorado along with associate member sponsors at the Jewel of the Sonoran Desert for 4 days of learning and connecting at the Ritz Carlton at Dove Mountain in Marana, AZ. Marana, Arizona azbankers.org/register email: events@azbankers.org MAY 31 JUNE 3 2023 We collaborate with attorneys, CPAs, investment professionals, and other advisors to accomplish the goals of a client’s estate plan. PLACE YOUR TRUST IN US Ben Jarman, CFP®, CTFA. Arizona Manager & Senior Trust Officer Rachel Zaslow, J.D. Senior Trust Officer Hannah Malinski, J.D. Trust Officer The Advisors’ Trust Company® Zia Trust, Inc. Rebecca Isler Trust Associate fIndependent Corporate Fiduciary fTr u s t A d m i n i s t r at i o n fEstate Settlement & Probate 602.633.7999 11811 N. Tatum Blvd Suite 2900, Phoenix, AZ 85028 www.ziatrust.com We work alongside your clients’ investment advisor 2023
24 THE ARIZONA BANKER
25 AZBANKERS.ORG CFPB to Furnishers: Know Your Role! By Prince Girn, Compliance Alliance “CFPB seeks to do away with the potential loophole that furnishers may try to take advantage of to evade their obligation to investigate disputes and merely write them off as frivolous at their own discretion.” On September 13, the Consumer Financial Protection Bureau (CFPB) filed an amicus brief in regard to a district court case that was decided between a consumer plaintiff and a credit reporting agency defendant. For those with a limited legal background, an amicus brief is simply a brief submitted to a court by a person or organization who is not a party to a case but has an interest in the action that is essentially trying to convince or have the court consider deciding a matter a particular way in order preserve their interest. In a nutshell, the case was about a consumer who discovered an error on their credit report, which stated that the consumer had a delinquent account with a service provider. The consumer claims that the account was never theirs and was fraudulently opened, so the consumer filed a dispute with the service provider. In response to the dispute, the service provider requested additional documentation, including an affidavit and a police report, which the consumer never provided before or after the request by the service provider. As a result of the consumer’s failure to respond to the service provider’s request, the service provider concluded that the account was not fraudulently opened and then referred the delinquent account to a collection agency. The consumer then filed their first dispute with the consumer reporting company, which the consumer reporting company passed down to the collection agency. Because the account was never noted to be in dispute, the collection agency took no action on the account and did not note the account in dispute even after it was handed the dispute. The consumer then filed a second dispute with the consumer reporting company, which was, again, handed down to the collection agency. This time, however, the consumer stated that the account was subject to litigation and obtained a police report. As a result, the collection agency removed the delinquent account from the credit report and ceased collections. In the litigated matter, the court held for the defendant by stating that furnishers are only obligated to investigate bona fide disputes. The CFPB recognizes that errors on a credit report can have lifealtering consequences as those errors can cause an individual to get denied for loans, housing and even employment. Due to the significant impacts an error on a credit report can have, the CFPB realizes the need for consumers to have meaningful procedures in place for companies to investigate and resolve these errors. Indirect and Direct Disputes The Fair Credit Reporting Act (FCRA) gives consumers multiple avenues to dispute errors on their credit report. Since consumers receive their credit information from consumer reporting companies, they often initiate their dispute with the consumer reporting company. This is typically passed down to the furnisher, who is usually the business that reported the information to the reporting company in the first place. This is called an indirect dispute. Consumers also have the option to file their dispute directly with the furnisher, which is called a direct dispute. Any time a furnisher gets handed down a dispute, it is required to investigate the dispute and report its findings of the investigation back to the consumer reporting company. However, disputes get lost in this process because furnishers have adopted the notion that they are free to dismiss these disputes based on whether they believe they are legitimate or not. Due to this discretion, one can probably see why consumers would feel powerless and hopeless when trying to resolve errors on their credit reports. w
Member FDIC 35742 Reg. O loans | Holding company loans & lines of credit | Equipment financing | Participation loans Whether your loan is large or small, get faster turnaround from our experienced correspondent team. 35742 AD Arizona Bankers Association May 2022_Tracy.indd 1 5/4/22 3:43 PM
GET THE SHIELDCANNABISBANKINGPLAYBOOK: ShieldBanking.com/cannabis-banking-playbook To ensure the processes, procedures, technology, and trained staff are in place to serve this industry, bankers need to start with a plan. Having a clear understanding of what is required to serve cannabis businesses and minimize risk to the financial institution will help bankers prepare for the upfront costs associated with cannabis banking and develop the policies and procedures needed to hit the ground running. With regulations varying from state to state, it’s a complex industry with high costs, requiring a considerable investment of time and energy. Compliant banking operations require continuous enhanced due diligence to help guard against risks such as: A Robust Illegal Market. According to New Frontier Data, the legal cannabis market in the U.S. is expected to reach $41 billion by 2025. Unfortunately, the illicit market, valued at $65 billion by some estimates, is shrinking at a slower pace. Financial institutions must ensure that funds coming through their doors are from legal channels. Bad Actors. To ensure bad actors are not attaching themselves to good businesses, enhanced due diligence conducted around underlining beneficial owners will continue to be at a heightened level for the foreseeable future. Legacy Cash. Because the cannabis market existed as a cash business long before legalization and because the industry continues to operate largely as a cash business, a strong BSA/AML programwill help ensure that funds coming into the financial institution are from legal cannabis operations. While the added burden and cost associated with serving this industry may limit the total number of participants in the short term, we expect competition from financial institutions to steadily increase as more states launch legal programs and we get closer to federal recognition. Financial institutions that invest in technology to improve efficiencies and lower costs today will be able to scale as the industry grows and have a competitive advantage when the economics of the industry change over time and new banks and credit unions enter the market. Informed by the experiences of pioneering bankers across a growing number of states with legal medical and adult-use programs, the Shield cannabis banking playbook defines a path forward for financial institutions to serve cannabis-related businesses compliantly while benefiting from the financial rewards of this market. The emerging legal cannabis industry brings significant growth potential, alongwith challenging operational demands and complex regulations. But cannabis banking does not have tomean high-risk banking. Build aWinning Cannabis BankingProgram Cannabis banking, simplified. Shield Compliance transforms how financial institutions manage risk, comply with regulations, and address the operational demands of the legal cannabis industry. Compliance management for financial institution daily operations, including case management and automated reporting. Informed account application process for underwriting and onboarding cannabis business accounts. Compliant mobile payment and payroll solutions to reduce cash transaction dependency. See how Shield Compliance is helping financial institutions earn the benefits of a compliant cannabis banking program. info@shieldbanking.com (425) 276-8235 GET IT TODAY GET THE GUIDE TO COMPLIANT CANNABIS BANKING
www.thenewslinkgroup.orgRkJQdWJsaXNoZXIy ODQxMjUw