The recent unannounced failure of a prominent international bank has left many of its customers, especially non-resident and international clients, in a state of panic and uncertainty. The fear of losing their hard-earned money and the lack of knowledge about the legal framework governing bank failure, resolution, and liquidation has only added to the anxiety of affected customers.

FinCEN Notice of Finding – A Brief Overview

The Financial Crimes Enforcement Network (FinCEN) is a bureau within the United States Department of the Treasury that aims to safeguard the financial system from illicit use, money laundering, and the financing of terrorism. A FinCEN Notice of Finding is a formal announcement issued by the bureau when it identifies a financial institution as being of “primary money laundering concern” under Section 311 of the USA PATRIOT Act. This notice serves as a warning to the bank in question and its customers, including retail, small businesses, and corporate clients.

The impact of a FinCEN Notice of Finding is significant, as it publicly identifies an international bank as being of “primary money laundering concern,” which can lead to a loss of confidence among customers, counterparties, and regulators. In response, international banks typically take immediate steps to address the concerns raised in the Notice, which may include implementing stricter anti-money laundering (AML) and combating the financing of terrorism (CFT) controls, enhancing transaction monitoring, and cooperating with regulatory authorities to remediate any deficiencies. Additionally, banks may face penalties, fines, or the imposition of special measures by FinCEN, further incentivizing them to proactively resolve the issues and restore their reputation in the financial industry. When a Notice of Finding is issued, various stakeholders, including bank regulators, account holders, and correspondent banks, respond in different ways:

Bank Regulators: Regulators in the jurisdiction where the bank operates, as well as those in other jurisdictions where the bank has a presence, will closely scrutinize the bank’s activities and regulatory compliance. They may require the bank to submit detailed action plans and regular progress reports to address the concerns raised in the Notice. Regulators may also impose penalties, fines, or additional measures to ensure that the bank complies with AML/CFT regulations.

Account Holders: Upon learning of a Notice of Finding, account holders may become concerned about the safety of their deposits and the bank’s overall stability. To mitigate these concerns, they may seek more information from the bank regarding the steps being taken to address the issues identified in the Notice. Some account holders may decide to transfer their funds to other financial institutions, especially if they perceive the risks associated with their current bank to be too high.

Correspondent Banks: Correspondent banks, which facilitate transactions between banks across borders, are particularly sensitive to the risks associated with money laundering and terrorist financing. As a result, they may re-evaluate their relationship with a bank that has received a Notice of Finding, potentially leading to the termination of correspondent banking relationships. This can significantly impact the affected bank’s ability to process international transactions, further straining its financial position and reputation in the industry.

Overall, a FinCEN Notice of Finding triggers a range of responses from various stakeholders, emphasizing the need for the affected bank to promptly address the issues identified and restore confidence in its operations and compliance. Statutory administration is often instantly imposed to preserve the critical functions of the bank.

The Legal Framework for Bank Failure, Resolution & Liquidation

In the event of a bank failure, various regulatory authorities and agencies come into play to manage the resolution and liquidation process. The specific procedure depends on the jurisdiction in which the bank operates, as well as the nature of the bank’s operations and clientele. However, there are some common principles and guidelines that apply across jurisdictions.

Resolution and Liquidation Authorities: When a bank is declared to be in a state of failure or insolvency, it falls under the supervision of a resolution or liquidation authority. In the United States, for example, the Federal Deposit Insurance Corporation (FDIC) is the primary resolution authority for failed banks. Similarly, the European Banking Authority (EBA) and national resolution authorities deal with bank failures in the European Union.

Deposit Insurance: To protect customers’ deposits in the event of a bank failure, most countries have a deposit insurance system in place. In the United States, the FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category. In the European Union, depositors are protected under the Deposit Guarantee Schemes Directive (DGSD), which guarantees deposits up to €100,000 per depositor, per bank.

Ranking of Claims and Distribution of Assets: During the resolution and liquidation process, the failed bank’s assets are distributed among its creditors in a specific order of priority, known as the ranking of claims. Typically, secured creditors, such as those holding collateral for their loans, are given priority over unsecured creditors. Depositors, including retail, small businesses, and corporate clients, are considered unsecured creditors and are ranked accordingly. In most jurisdictions, depositors are granted a preferred status, meaning their claims are prioritized over those of other unsecured creditors.

Cross-border Cooperation: Bank failures involving international banks with operations in multiple jurisdictions require close cooperation between the resolution authorities of the countries involved. Frameworks such as the EU Bank Recovery and Resolution Directive (BRRD) and the Financial Stability Board’s (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions help facilitate this cooperation and ensure that the interests of all affected parties, including non-resident customers, are taken into account during the resolution process.