Federal Reserve Orders Compliance Overhaul at Customers Bancorp

The Federal Reserve has mandated a comprehensive overhaul of compliance and risk management practices at Customers Bancorp, Inc., the parent company of Customers Bank, following the identification of significant deficiencies in the Bank’s anti-money laundering (AML) and Bank Secrecy Act (BSA) compliance. The move comes as the Bank aggressively pursues a digital asset strategy, raising concerns among federal regulators about its preparedness to manage associated risks.

The Federal Reserve Bank of Philadelphia conducted recent examinations of Customers Bank, a state-chartered institution and member of the Federal Reserve System. These examinations uncovered critical gaps in the Bank’s risk management framework and its adherence to the BSA/AML requirements, prompting federal regulators to step in. The deficiencies were particularly concerning in the context of the Bank’s digital asset activities and its instant payments platform, which allows commercial clients to make tokenized payments over a distributed ledger technology system.

In a written agreement with the Federal Reserve, Customers Bancorp and Customers Bank have committed to a series of corrective actions aimed at bolstering their compliance infrastructure. Among the key requirements, the boards of both Bancorp and the Bank must submit detailed plans within 60 days to enhance oversight of their operations, particularly focusing on the digital asset strategy and related risk exposures.

Digital Asset Strategy Under Scrutiny

The Federal Reserve’s action shines a spotlight on Customers Bank’s ambitious foray into digital assets, a sector that has drawn increased regulatory scrutiny. The Bank’s strategy involves offering a suite of banking services tailored to digital asset customers, alongside the operation of an instant payments platform using distributed ledger technology. These activities, while potentially lucrative, pose heightened risks, including exposure to illicit financial activities, which the Bank’s current compliance framework was found to inadequately address.

Under the terms of the agreement, the Bank is required to improve its risk management practices, including enhancing policies, procedures, and staffing levels to ensure that it can effectively monitor and manage the unique risks associated with digital assets. The Bank must also ensure that its compliance officers possess the appropriate expertise to oversee these complex activities.

BSA/AML Compliance Overhaul

Central to the Federal Reserve’s directive is a comprehensive overhaul of the Bank’s BSA/AML compliance program. Customers Bank must revise its internal controls, conduct a thorough risk assessment, and enhance its customer due diligence processes to better detect and prevent money laundering and other financial crimes. This includes implementing a robust system for monitoring suspicious activities and ensuring that all potential violations are promptly reported to law enforcement and regulatory authorities.

The agreement also mandates an independent review of the Bank’s transaction monitoring systems, particularly focusing on transactions conducted between March and August 2023. This review, to be conducted by a third-party consultant, will assess whether the Bank appropriately identified and reported suspicious activities, especially those involving high-risk customers.

Ongoing Oversight and Potential Consequences

The Federal Reserve has made it clear that it will maintain close oversight of Customers Bancorp and Customers Bank as they implement these changes. The boards of both entities are required to submit quarterly progress reports detailing their efforts to comply with the agreement. Failure to meet the terms could lead to further regulatory actions, including financial penalties and restrictions on the Bank’s operations.

While the agreement does not specify immediate financial penalties, the cost of compliance—both in terms of resources and potential reputational damage—could be significant. Additionally, the Federal Reserve reserves the right to take further action if the Bank fails to address the identified deficiencies, which could include more severe sanctions.

This regulatory intervention underscores the heightened scrutiny facing financial institutions that engage in digital asset activities. As the landscape of financial services continues to evolve, banks like Customers Bank must navigate the complexities of innovation while ensuring they remain in full compliance with stringent regulatory standards.

The GRC Report is your premier destination for the latest in governance, risk, and compliance news. As your reliable source for comprehensive coverage, we ensure you stay informed and ready to navigate the dynamic landscape of GRC. Beyond being a news source, the GRC Report represents a thriving community of professionals who, like you, are dedicated to GRC excellence. Explore our insightful articles and breaking news, and actively participate in the conversation to enhance your GRC journey.