FINANCIAL INSTITUTIONS

Banking

and the Pandemic

The impact of COVID-19 on compliance monitoring for banking institutions

By James Jarrett, CPA

From remote work to surging first-time online banking users, the COVID-19 pandemic has had a widespread impact on customer behavior and compelled financial institutions to adopt new business-as-usual processes and compliance monitoring procedures. However, these changes have also amplified the challenges for financial crime management and compliance monitoring programs at institutions of all asset sizes. Throughout 2020 and into 2021, financial institutions have struggled to manage and maintain processes with limited resources. COVID-19 has placed limitations on in-person customer interaction, including temporary closing of branch lobbies and permanent closing of some branches. Financial institutions are forced to work with skeleton staffing due to employees testing positive for the coronavirus or required quarantines due to exposure, and the limited staffing has forced management to adopt new processes and procedures. In addition, it has forced management to temporary halt or limit compliance monitoring procedures in lieu of completing daily business processing.

Many financial institutions moved their back-office departments to remote working environments in an attempt to lessen the spread of COVID-19 within their institutions. One of the major hurdles that institutions faced was the lack of technology to adapt to remote working environments and an absence of secure means to perform required business and compliance-related functions. Information technology (IT) departments led the way through this transition process, and depending on the size of the institution and their IT department size, this could have taken weeks to months to transition all applicable employees to remote working environments. Also, during the transition process, management should have been managing and monitoring all manual processes to ensure that these procedures were being completed. This may have required rewriting, updating or enhancing processes and procedures along the way. For example, antimoney laundering (AML) software filtering criteria should have been reviewed and necessary changes made with respect to the change in operations and customer banking abilities during the pandemic.

Business continuity planning

During the start of the pandemic, did your financial institution struggle to implement its business continuity plan? Did it struggle to transition to off-site or remote working environments? If so, now is the time to revisit your business continuity plan and make necessary updates. The Federal Financial Institutions Examination Council (FFIEC) agencies released an “Interagency Statement on Pandemic Planning,” which states that business continuity plans should address the threat of a pandemic influenza outbreak and its potential impact on the delivery of critical financial services. With respect to business continuity, regulators will want to know how COVID-19 is affecting your institution. Information that financial institutions should know and have readily available include the following: • the number of COVID-19 cases • any local outbreaks • staffing issues that impacted the financial institution and what product and/or service areas were impacted, including compliance You company’s Compliance Department should also be documenting any changes to compliance-related policies and procedures due to COVID-19. If compliance monitoring frequency or processes have changed, this should be documented by the Compliance Department with explanations for why they changed and discussion of the compensating monitoring controls that are in place.

Bank Secrecy Act (BSA) compliance

Your company’s BSA Department is one of the high-risk areas that regulators will focus on. Your BSA Department should be documenting any Office of Foreign Assets Control (OFAC) filtering and transaction monitoring and any review backlogs that have been developed. If BSA/AML transaction monitoring alert or case backlogs develop, there should be an escalation process to devote additional resources to “cap” the backlog and bring about reduction. This should be documented within the BSA department, including an explanation as to why this occurred and how it was remediated. Additionally, business continuity planning within this department should take precedence, and plans should be in place to manage EDD reviews if self-quarantine of the BSA officer is required. If the BSA Department is large enough, it should be split into teams with an alternating on-site (if necessary) schedule. A recent Financial Crimes Enforcement Network (FinCEN) update declared that it “expects financial institutions to continue following a risk-based approach, and to diligently adhere to their BSA obligations.” However, FinCEN also states that it “appreciates that financial institutions are taking actions to protect employees, their families, and others in response to the COVID-19 pandemic, which has created challenges in meeting certain BSA obligations, including the timing

requirements for certain BSA report filings.” FinCEN also encourages financial institutions to contact their functional regulator(s) or other BSA examining authority as soon as practicable if a financial institution has BSA compliance concerns because of the COVID-19 pandemic.

Fair lending

Fair lending is considered another high-risk area that regulators will place great focus and scrutiny on during examinations. Since March 2020, financial institutions have been flooded with consumer loan requests, and the pandemic resulted in a sharp inflow of consumer requests for forbearance or modifications that could result in increased fair lending issues. To ensure fair lending compliance, financial institutions should review and update policies and procedures to reflect temporary changes to the process. Additionally, any changes to policies and procedures should be properly communicated and documented with staff. This will ensure that lenders are offering customers a consistent product vs. one lender deciding to defer a payment while another is suggesting a partial payment. Another fair lending concern that should be reviewed is the denial process during the pandemic. A second review process should be implemented to verify that the reasons for denial are supported by information in the credit file. Additionally, the review should also ensure that adverseaction notices were delivered in a timely manner. Also, financial institutions should be monitoring and tracking complaints, with analysis of the complaints received helping to identify areas of risk that will need to be reviewed in greater detail. Additionally, compliant trends should be reported to senior management. Lastly, the Compliance Department or the fair lending officer should be completing internal compliance monitoring with respect to fair lending laws. With the influx of loans due to the pandemic, the bank’s assessment area should be reviewed to ensure it is still accurate. A detailed review should be completed and documented to identify potential redlining. This review should include Paycheck Protection Program (PPP) loans. In addition, the bank should ensure preferential treatment is not being given to PPP loan applicants who are bank customers vs. applicants who are not bank customers.

Conclusion

Financial institutions should be aware that regulators may be delaying examinations due to the pandemic; however, they will always come back to fair lending laws. An example is the JPMorgan $53 million disparate treatment settlement with the Department of Justice (DOJ) in 2017. The DOJ alleged that the bank was recklessly disregarding the rights of at least 53,000 African-American and Hispanic borrowers and that JPMorgan failed to catch a disparate impact affecting a group of their customers due to lack of monitoring and loan file reviews. The time frame that was reviewed was between 2006 and 2009, which was during the 2008 financial crisis.

Financial institutions should be aware that regulators may be delaying examinations due to the pandemic; however, they will always come back to fair lending laws.

James Jarrett, CPA, is firm director of Baker Tilly US LLP in Allentown, Pennsylvania. Contact him at 267-670-2376 or james.jarrett@bakertilly.com.

Thomas Bugel, CPA (1937 – 2020) Thomas Bugel, CPA, passed away at age 83 Tuesday, Dec. 15, 2020. Bugel graduated from the University of Wisconsin–Madison in 1961 with a degree in accounting. He joined Hooper Corp. after becoming a CPA in 1964 and progressed to CFO, ultimately serving as secretary-treasurer on Hooper’s board. He retired from Hooper in 1999 and continued working as a tax practitioner for H&R Block in Hayward. Bugel is survived by his wife, Donna; four children; eight grandchildren and one great-grandson; two sisters and several nieces and nephews. Steven Kaminski, CPA (1970 – 2021) Steven Kaminski, CPA, passed away on Friday, Jan. 22, at the age of 50. He attended UW–Whitewater, earning his bachelor’s degree and a master’s in accountancy and later becoming a CPA. Kaminski worked at Alliant Energy in the Finance Department for most of his career and most recently in the Treasury Department. He volunteered as a youth soccer coach for many years and was an organ and tissue donor. Kaminski is survived by his wife, Lynn; two children; his parents; one sister; and many other relatives and friends. Jon Robert Lindwall, CPA (1939 – 2020) Jon Lindwall, CPA, a lifetime member of the WICPA, passed away Tuesday, Dec. 29, 2020, at the age of 81. He was a graduate of Lincoln High School, Manitowoc, and the University of Wisconsin, earning his accounting degree in 1961 and going on to become a CPA. Most of his career was spent working for Smith & Gesteland LLP in Madison, and he retired from the firm in 2004. Lindwall is survived by his wife of 59 years, Barb; two brothers; a son and a daughter; six grandchildren and one great-grandchild; as well as other relatives and friends.

Frank S. Macek Jr., CPA (1927 – 2021) Frank S. Macek Jr., CPA, passed away Thursday, Feb. 4, at the age of 93. Macek served the U.S. Army during the Korean conflict and attended Marquette University on the G.I. Bill, earning his BBA and later becoming a CPA. He worked in finance for Harnischfeger Corp. (now P&H) for 30 years and then for Scribner, Cohen & Co. in Milwaukee. He volunteered for St. Joseph’s Parish in Cudahy and the Milwaukee Local Machinists Union and was a member of the Knights of Columbus and the Czech Catholic Union. Macek is survived by his wife, RoseMary; two children; a sister; many nieces and nephews; and former coworkers and colleagues. Steven M. Plotz, CPA (1952 – 2020) Steven Meehan Plotz, CPA, age 68, passed away Monday, Dec. 14, 2020. He attended UW–Madison and graduated with an accounting degree in 1974. Plotz began his career as a CPA with PricewaterhouseCoopers in Milwaukee. After moving back to Madison, he worked as a CPA and tax practitioner and ultimately became a partner at Ragsdale, Spitz, Reuschlein & Assoc. In 1983, Plotz and his wife moved to North Carolina, where Plotz continued his career in tax. He is survived by his wife, Joan; a stepson and two grandchildren; a sister; two nieces and a nephew; and other relatives and friends.

Thomas H. Schmitt, CPA (1960 – 2021) Thomas (Tom) Schmitt, CPA, age 60, passed away on Thursday, Jan. 14. He was an active member of the WICPA who served for many years on the Public Policy and Tax Conference Planning committees. Schmitt was a partner with The VanderBloemen Group in Mayville and served as a past president of Rotary International of Mayville, a director and treasurer of the Business Improvement District 10 in Milwaukee and the boards of South Side Guadalupe Inc., Smoke Free Inc., Dodge County United Way and USA Rugby Inc. He is survived by his wife, Linda Niemela; three children; three grandchildren; two siblings; and other relatives and friends.

Gregory A. Stein, CPA (1954 – 2021) Gregory A. Stein, CPA, age 66, passed away on Saturday, Feb. 6. As a CPA, he worked as a consultant for Reinhart, Boerner Van Deuren s.c. in Waukesha. Stein was active for many years in the WICPA as a member of the Wisconsin Taxation Committee and in 1999 served as a speaker at the Public Utilities Conference. He was a member of Bethlehem Lutheran Church, where he served in various leadership capacities, including church president and treasurer. After his retirement, Stein volunteered at German Fest and enjoyed playing golf and spending time with his children and grandchildren. He is survived by his wife, Bonnie; four children; 14 grandchildren; his father and sister; and other relatives and friends.

Linda Welch, CPA (1963 – 2020) Linda Welch, CPA, passed away Tuesday, Dec. 15, 2020, at age 57. She earned her accounting degree from UW–Whitewater in 1985 and was subsequently licensed as a CPA. Welch worked in finance at Case IH and TDS Telecom until she left the corporate world to raise her sons. She was an active volunteer for Agrace Hospice; the PTO and other parent groups at Thoreau Elementary, Cherokee Middle and West High Schools; the Nakoma League neighborhood association; and the Circle of Love group, which provides support for children from the Chernobyl region of Ukraine. She is survived by her husband, Jim; two sons; her mother; a sister and brother; many nieces and nephews; and numerous other relatives and friends.

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