Compliance Corner

The IBA Law Department

QUESTION

We are a small bank, and several of our employees have been diagnosed with COVID-19. We have two employees on site who are maintaining daily operations and addressing customer needs, but they may have been exposed to the disease. We have been in contact with the FDIC and IDFPR regarding the circumstances, and the IDFPR has advised us of the necessary steps to make an emergency proclamation request and temporarily close our bank. We would be able to process our daily cash letter, as our correspondent bank handles those operational duties. Are there any other requirements or regulations we should be aware of in the event of a closure, such as any Uniform Commercial Code (UCC) considerations?

ANSWER

If your bank must close due to a large portion of your employees being diagnosed with COVID-19, we believe you would be excused from meeting the time limits imposed by the UCC, provided your bank exercises diligence in taking the necessary action as soon as it is able.

Delays by collecting banks and paying banks beyond the UCC’s time limits may be excused if the delay is caused by emergency conditions or other circumstances beyond the bank’s control — provided “the bank exercises such diligence as the circumstances require.” The commentary to the UCC notes that this exception also applies to time limits “imposed by special instructions, by agreement or by Federal regulations or operating circulars, clearinghouse rules or the like.” We believe a closure due to a large portion of your employees being infected with COVID-19 would constitute an emergency condition beyond your bank’s control, as courts have stated that situations that may excuse delay include “abnormal operating conditions such as . . . substantial shortage of personnel during . . . emergency situations.”

Similarly, Regulation CC provides that if “a bank is delayed in acting beyond the time limits” set forth in the regulation due to emergency conditions or other circumstances beyond its control, “its time for acting is extended for the time necessary to complete the action, if it exercises such diligence as the circumstances require.” Regarding other considerations related to closures, we recommend reviewing the FDIC’s FAQs for Financial Institutions Affected by COVID-19. The FAQs provide that financial institutions should contact their regional FDIC office (which your bank has done already) if they are unable to comply with regulatory reporting requirements. The FAQs also provide that financial institutions affected by COVID-19 should contact FinCEN and their regulators as soon as practicable about any potential delays in their ability to file required Bank Secrecy Act reports.

QUESTION

After filing a suspicious activity report (SAR) on FinCEN’s website, we were contacted by someone asking for supporting documentation related to the SAR. This person has an email address indicating they work for the Department of Homeland Security, and they appear to be knowledgeable about the facts in the SAR, but they asked for the requested information to be sent to their email address rather than through a secure platform. Is this proper procedure for submitting supporting documentation related to a SAR?

ANSWER

We recommend reviewing your Bank Secrecy Act (BSA) compliance and anti-money laundering program for procedures related to verifying the identity of requestors of supporting documentation before deciding whether and how to submit the requested documentation. While we are not aware of any laws or guidance outlining any specific procedures required for submitting supporting documentation, FinCEN has issued guidance stating that financial institutions should “take special care to verify that a requestor of information is, in fact, a representative of FinCEN or an appropriate law enforcement or supervisory agency” and incorporate procedures related to such verification into its BSA compliance or anti-money laundering program.

FinCEN goes on to explain in its guidance that such procedures could include independent employment verification with the requestor’s field office or face-to-face review of the requestor’s credentials. We believe that requesting independent verification of the requestor’s identity, as well as a secure delivery method that ensures that the verified requestor is the one actually receiving the supporting documentation, would be a reasonable procedure under these circumstances.

Additionally, we have received feedback from members of our Compliance Division Advisory Committee regarding their experiences submitting supporting documentation related to a SAR. None of them had ever been requested to send supporting documentation by email. One member stated that their institution had received a request to send supporting documentation by mail, which they accomplished by creating a password protected CD with images of the requested documents. Another member stated that their institution would require written notification of receipt via USPS before sending any supporting documentation, and another member stated that they would call their primary federal regulator for guidance.

QUESTION

A customer with two accounts held in individual ownership recently died. We received a copy of the customer’s will, which has been filed with the court. The will names an executor and states that the executor is responsible for paying the estate expenses out of the remainder of the customer’s estate. The will also states that the remainder of the estate will pour over to the customer’s revocable trust. The trustee of the trust wants to close the accounts, and we have not had any communication with the executor. Who has the authority to close the accounts?

ANSWER

It does not appear that you have sufficient information to determine who may close the accounts or to determine whether the accounts are held in the trust or the customer’s estate. As a result, we do not recommend closing the accounts based on the trustee’s request alone. Instead, we recommend waiting until a party authorized by the probate court to administer the customer’s estate or presenting a small estate affidavit comes forward to close the accounts.

The Illinois Probate Code authorizes pour-over wills in which the testator bequeaths their property to a trustee of a trust, and “unless the testator’s will provides otherwise,” the testator’s property is governed by the terms of the trust instrument. However, the Illinois Trust Code requires that certain expenses must be paid (such as the costs of administration of the settlor’s estate and funeral expenses) before the proceeds of a pour-over trust may be distributed. If your customer’s estate does not have sufficient funds to pay these expenses, the estate (as represented by the executor) may have the right to collect those funds from the trust.

Because the trustee’s right to the customer’s funds is subject to the payment of certain estate expenses, we believe that there is a possibility that the executor may have a conflicting claim to the funds held in the deposit accounts that the trustee is attempting to close. In other words, if your bank closes the accounts without the knowledge or permission of the executor, your bank may be exposed to conflicting claims over the account funds between the trustee and executor.

If the value of the customer’s entire estate does not exceed $100,000 and does not contain real estate held in the customer’s name alone, an individual who presents a small estate affidavit would be authorized to close the accounts — and your bank is protected from liability when relying on a small estate affidavit to the same extent as if dealing with a duly appointed estate representative. However, a small estate affidavit may be used only in cases where no letters of office have been issued or requested from a probate court and there are no disputes regarding the will or heirship of the customer.

About the IBA Law Department

Our IBA Law Department provides many resources to help our bank members meet their compliance challenges, including a toll-free Compliance Hotline (1-800-GO-TO-IBA) and a dedicated compliance website (www.GoToIBA.com). We also publish a free weekly e-newsletter highlighting the latest regulatory developments, select recent Q&As, and other useful information – let us know if you want to subscribe!

Note: This information does not constitute legal advice. You should consult bank counsel for legal advice, even if the facts are similar to those discussed above.