Compliance with New Reg GG Is Mandatory on December 1, 2009
Oklahoma’s Estate Tax Repealed Effective January 1, 2010
3% Interest Requirement for County Deposits Gone Effective July 1, 2009
Change to Unclaimed Property Statute Effective November 1, 2009
OK to Charge Fee to Cash On-Us Check for Non-Customers?
Compliance with New Reg GG Is Mandatory on 12/1/2009
Byron’s Quick Hit: Reg GG implements Congress’s legislative requirements to curb illegal internet gambling by shutting off the funding for it. Importantly, Reg GG applies only to commercial, not consumer accounts. Also, Reg GG focuses on stopping your customers’ deposits from illegal internet gambling, not outgoing payments. Reg GG requires that all banks write and implement policies and procedures for implementing its requirements. In addition, all banks must give written notice to its existing commercial customers. Banks will also have to have new procedures in place to verify that their commercial customers are not participating in illegal internet gambling.
If you are in need of quick access to sample written policies and procedures, as well as sample notice to existing commercial customers and other documents required under Reg GG, I would highly recommend to that you consider purchasing access to an online webinar that is available through the OBA at: http://www.bankersed.com/okbankers/catalog.asp?UGUID=&CategoryID=&ItemID=20090708-272095-163928. I have participated in this webinar myself. For an investment of 2 hours and $270, you will be a long way down the road to becoming Reg GG compliant, including obtaining access to sample written policies and procedures that you can modify to your specific needs.
In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act (“UIGEA”) in an effort to stem a growing tide of illegal internet gambling. Ironically, UIGEA does not make any gambling activities illegal that were not already so (and does not make any gambling legal either). Rather, UIGEA attempts to choke out illegal internet gambling by stopping the source of funds, ultimately involving U.S. banks.
Whether internet gambling is illegal is generally determined under state law. If gambling is illegal under state law, it is also a violation of federal law under 18 U.S.C. § 1955. Except where explicitly sanctioned by the State, gambling is illegal within Oklahoma. See 21 Okla. Stat. §§ 941-996.3.
Gambling websites have become quite successful at convincing gamblers that so long as their website is located in a site where it is legal to gamble (often off-shore), then the gamblers internet gambling is also legal. However, this is not the case. Legally speaking, it is a settled issue that that the place where the gambling takes place is where the gambler is located. Thus, a person accessing an internet gambling cite in Oklahoma is gambling in Oklahoma, even if the website operator and website equipment is physically located somewhere else where gambling may be legal.
UIGEA is designed to disrupt payments to gambling businesses from gamblers. Reg GG was adopted by the Federal Reserve pursuant to Section 802 of UIGEA on November 18, 2008. Reg GG took effect on January 19, 2009. Banks’ compliance with Reg GG becomes mandatory on December 1, 2009. There are no express penalties designated for failure to comply with Reg GG. However, that does not mean that banks are free to ignore the new regulation (Reg D and Reg DD are examples of other regulations without any express penalties). It simply means that a bank’s failure to abide by the regulation would be addressed by a bank’s regulator.
There are five basic requirements for banks under Reg GG, which are each addressed further below: (1) banks must draft and adopt a formal, written UIEGA Compliance Policy; (2) banks must provide notice to its existing commercial customers; (3) banks must implement due diligence procedures at account opening for commercial customers; (4) if relied upon by a bank, a bank must received notice of compliance from a designated payment system (credit or debit card system); and (5) banks must have procedures for responding when a bank detects a restricted transaction involving commercial customers. NOTE: Requirements under Reg GG and UIEGA are separate from banks’ existing responsibilities to report suspected illegal activity (SAR reporting).
Adoption and Implementation of Written Policies
Section 233.5(a) of Reg GG provides:
All non-exempt participants [including all banks] in designated payments systems shall establish and implement written policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions.
In addition to this basic requirement, Reg GG provides some examples for inclusion in a bank’s required policy at Section 233.6. Unlike a procedure, a policy may be very general. Some things that should be addressed in such a policy include: (i) a statement that the policy is adopted to be in compliance with UIGEA and Reg GG; (ii) naming a person who is responsible for the bank’s compliance with the policy; (iii) addressing internal controls; and (iv) addressing training; and (v) addressing testing that will occur of the bank’s compliance with the policy and procedures thereunder.
One issue that is raised concerning adoption of a UIGEA policy is whether it is appropriate to combine the Reg GG policy with other policies that may already be in place, such as the bank’s existing account opening due diligence procedures and/or the bank’s BSA policy. This approach is specifically mentioned and sanctioned in the supplementary materials provided by the Federal Reserve to Reg GG. However, I would not recommend this practice for two reasons: (1) there has been much talk that implementation of Reg GG may be tabled or canceled altogether (although this seems unlikely at this late hour) – if this were to take place, it would made sense to have separate policies, so that Reg GG compliance could be dropped; and (2) if Reg GG is woven into, for example, your BSA policy, this makes it part of your BSA policy and thus, any failure to abide by Reg GG policies or procedures will arguably become a violation of BSA. I recommend having a separate UIGEA/Reg GG policy.
Notice to Existing Commercial Customers
One very important point of this article is that UIGEA and Reg GG apply only to commercial customers. However, the definition of a commercial customer may vary slightly from the traditional definition. Here, Reg GG defines a “commercial customer” as “a person that is not a consumer…” This may have the effect of including some entities that are not normally considered “commercial customers,” such as charities and government entities. It is clear, however, that Reg GG and your policies need not deal with or address consumer accounts.
The requirement of notice to existing commercial customers is not spelled out in the regulation itself. Rather, the supplementary information published by the Federal Reserve when Reg GG was finalized states:
[P]articipants will notify commercial customers that the participant’s facilities may not be used to process restricted transactions. Such notification could be accomplished through a term in the commercial customer agreements, through a notice sent to the customer, or through some other method.
As this “requirement” is not spelled out in the language of the regulation, it is not clear when such a notice has to be mailed. Since compliance with Reg GG is mandatory beginning December 1, it would make sense to mail this notice out as soon as possible. An excellent example of a sample notice to existing customers is contained in the written materials that accompany the webinar that is referenced in the introduction at the beginning of this article.
Due Diligence Procedures: Account Opening
UIGEA requires that banks establish and implement procedures reasonably designed to block or otherwise prevent or prohibit illegal gambling transactions. However, Reg GG, along with the supplementary materials that surround it, recognizes that it is not literally possible to block or prevent all such transactions. Thus, the regulation focuses on “due diligence by participants when opening accounts for commercial customers to reduce the risk that a commercial customer will introduce restricted transactions into the payment system in the first place.” Such “due diligence” focuses on account opening procedures.
Exceptions to Due Diligence Requirements:
1. Commercial Customers of Foreign Correspondent Accounts
2. Regulated Banks and Federal and State Government
A bank may verify that the customer qualifies is organized as provided in the following exceptions: (i) entities that are supervised by a federal function regulator (e.g., banks and credit unions); or (ii) an agency, department, or division of the Federal government or a State government. See Section 233.6(b)(4). Upon verification that the customer qualifies for one of these exceptions, a bank may open the account with no further actions required.
Procedures for All Other Commercial Customers
1. Determination of Minimal Risk of Illegal Internet Gambling
For all other commercial customers, a bank can make adopt due diligence procedures that will either enable it to make a determination that the customer presents a minimal risk of engaging in an illegal internet gambling business. Upon making this subjective determination, it may open the account. Banks procedures should directly address what documentation will be required to make this determination and should maintain sufficient records to support its determination.
In all cases, it is advisable to ask questions like: (i) how the entity/business is organized; (ii) in what state it is organized; (iii) the nature of the business; (iv) whether the commercial customer will provide financial services; (v) and whether the customer is engaged in gambling of any kind (whether legal or illegal). In the case of businesses that engage in gambling or which provide financial services, additional inquiries are probably necessary in order to determine the nature and legality of the business.
2. Obtaining Customer Certification
Alternatively, if the bank is unable to make a determination that a commercial customer represents only a minimal risk, it may obtain a certification from its new customer that it does not engage in any internet gambling business. NOTE: This certification should not be limited to illegal internet gambling business, but should include ANY internet gambling business. If the customer will not so certify, further due diligence is required. This is made clear in the additional materials accompanying Reg GG, which state:
If the commercial customer engages in an Internet gambling business, the participant should obtain further documentation to show that the Internet gambling business is lawful.
It may be a good idea to request a customer certification from new customers in any case, even if the customer would otherwise present a minimal risk of illegal internet gambling, as such a certification will also put the new customer on notice that illegal internet gambling is prohibited by the bank.
Due Diligence Procedures: Discovery of Illegal Internet Gambling or of Deposit of Illegal Internet Gambling Proceeds
Reg GG specifies four different types of payments systems. They are (i) ACH, (ii) checks; (iii) wire transfers; and (iv) card systems (debit and credit cards). Generally, a bank is required to have a procedure for each payment system. The sample procedures given at Section 233.6 are fairly uniform for each of ACH, checks and wire transfers, with slightly more variation for card systems. Also, the supplementary materials published with Reg GG state:
The Agencies anticipate that a depository institution that qualifies as a small entity and participates in ACH, check and wire-transfer systems would be able to establish and implement the same due diligence policies and procedures for commercial customers across all three of those systems for purposes of [Reg GG]. The institution will not need to establish and implement separate policies and procedures for each of these designated payment systems.
Of note, neither the regulation nor the additional materials define a “small entity” for purposes of the above language. At any rate, at least for the first three types of payments systems, policies generally will be pretty similar.
As to policies for card systems, most banks will be able to rely on a written statement or notice from the operator of the card system in which it participates. The notice must state that the operator has designed or structured its policies and procedure to comply with UIGEA and Reg GG. Upon receiving such a statement, a bank need not have a policy to deal with card systems.
Oklahoma’s Estate Tax Repealed Effective January 1, 2010 (along with 68 Okla. Stat. § 812)
Several years ago, the U.S. Congress began to phase out the federal estate tax, culminating in its total phase out at the end of 2009. In 2006, the Oklahoma legislature saw fit to follow suit, and repealed the Oklahoma Estate Tax, effective January 1, 2010. As a result, Sections 801 through 825 of Title 68 will be repealed.
Most importantly for Oklahoma banks, the repeal of the Oklahoma Estate Tax includes the repeal of 68 Okla. Stat. § 812. Section 812 requires that Oklahoma banks (i) give notice to the Oklahoma Tax Commission before proceeds of a deceased account holder’s account will be distributed, and (ii) allows the provisional release of certain amounts from such accounts until the Oklahoma Tax Commission has been given an opportunity to object to release of funds.
This will ease one of the many burdens on Oklahoma banks: Beginning with deaths occurring on or after January 1, 2010, Oklahoma banks will no longer be required to place a hold on decedent’s accounts or to give a notice to the Oklahoma Tax Commission of a customer’s death.
Not a License to Distribute Funds
Banks should note that the repeal of the Estate Tax and requirement to give notice to the OTC is not a license to distribute funds. When appropriate, banks should still freeze an account following a customer’s death and wait for proper instructions from an Oklahoma court as to distribution of the estate and/or appointment of a personal representative for a decedent’s estate. This remains subject to the exceptions that are sometimes available to banks through 6 Okla. Stat. § 906 (where decedent dies without a will and the bank holds $5,000 or less) or 58 Okla. Stat. § 393 (where decedent dies with a total probate estate valued at $20,000 or less).
However, where a decedent’s account is held in joint tenancy or with a POD designation, a bank will be able to proceed to fully distribute the account proceeds as required to the surviving joint tenant or under the POD designation.
Safe Deposit Boxes
There are two statutes in the Oklahoma Banking Code that make specific reference to the requirements of 68 Okla. Stat. § 812: 6 Okla. Stat. §§ 1301.2 and 1308, both dealing with the handling of safe deposit boxes after the lessor’s death. An inspection on these provisions reveals that they merely recognized the requirements of Section 812 and stated within the sections that in addition to other requirements, banks were required to give notice to the Oklahoma Tax Commission regarding a safe deposit box lessor’s death. As a result, banks need not worry giving a notice to the OTC regarding the death a safe deposit box lessor for deaths occurring on or after January 1, 2010.
Happiness Short Lived?
Although bankers can be happy that they will not have to worry about giving notice to the OTC for deaths occurring on or after January 1, 2010, there remains the question of whether this victory may be short-lived. Why, you may ask? Well, it appears that the repeal of the Oklahoma Estate Tax was enacted based upon the repeal of the Federal Estate Tax.
There is one additional wrinkle in this equation: the phase-out of the Federal Estate Tax is complete in tax year 2010; however, there is a “sunset” provision to the phase-out of the Federal Estate Tax, and unless the U.S. Congress acts again, the Federal Estate Tax will be back in full force effective January 1, 2011. Thus, if an Oklahoma resident dies in 2010, there will no federal or state estate tax upon his death. However, if he dies on January 1, 2011, as of right now, Federal Estate Tax may be levied, but not any Oklahoma Estate Tax. For reasons that I won’t go fully into here, it is unlikely that the Oklahoma legislature would allow this result to stand. At the least, it is likely that the Oklahoma legislature will act to take advantage of any allowance for a state estate tax credit that may apply to the federal estate tax after January 1, 2011. Stay tuned!
However, for the time being, we can all be happy about the repeal of 68 Okla. Stat. § 812.
3% Interest Requirement for County Deposits Gone Effective July 1, 2009
Avid readers of the Legal Update may recall a discussion in the June 2008 Legal Update authored by Charles Cheatham regarding the statutory requirement contained at 19 Okla. Stat. § 682. According to this provision, it was a required that every county earn 3% on its bank deposits. The relevant statutory language provided:
All monies … received by the county treasurer … shall be deposited in interest-bearing accounts in financial institutions designated and qualified as county depositories as now provided by law and shall draw interest, subject to deduction of financial institution charges for maintaining, processing and collateralizing the account, at a rate of not less than three percent (3%) per annum on average daily balances, which interest shall be paid monthly…
As discussed in the June 2008 Legal Update, this provision raised several interesting issues, including fees that could be charged by banks under the provision. It also begs the question of whether this was a requirement on the BANK at all, as by its terms the provision was a requirement on the counties, not on the bank.
The good news is that these issues ARE NOW LARGELY MOOT, as19 Okla. Stat. § 682 was amended effective July 1, 2009. The amended provision now states:
All monies … received by the county treasurer … shall be deposited in interest-bearing accounts in financial institutions designated and qualified as county depositories as now provided by law and shall draw interest, subject to deduction of financial institution charges for maintaining, processing and collateralizing the account,
at a rate of not less than three percent (3%) per annum on average daily balances, which interest shall be paid monthly…
[Deleted language previous version shown as stricken above]. Thus, although much of the discussion regarding what fees are properly chargeable on county deposits from the June 2008 Legal Update still applies, it becomes much less important, because IT is no longer necessary to reflect that interest is being paid at a gross minimum rate of 3%. Although deposit accounts are still required to be interest-bearing accounts, there is no minimum amount of interest. This should make dealing with county deposits much easier and more straightforward.
Change to Unclaimed Property Statute Effective November 1, 2009
By the time this article is published the October 31 deadline to file a report for any unclaimed property will have come and gone. Did you file a report for unclaimed property? If you did not, you should file your bank’s report as soon as possible. Information for filing, including waiting periods for reporting and tendering unclaimed property are available through the Oklahoma State Treasurer’s website, at: http://www.ok.gov/treasurer/Unclaimed_Property/Holder_Information/index.html.
There were several amendments to the Oklahoma Unclaimed Property Act in 2009, effective for reporting on or after November 1, 2009. Thus for 2009 reporting, these changes did not apply. One of these changes affects Oklahoma banks. Up until now, annual reports that were due on or before October 31 would include in such reports “property reportable as of the preceding September 1…” Effective November 1, 2009, this provision [60 Okla. Stat. § 661(D)] has substituted “July” for “September.” Thus, beginning for reporting for 2010, banks should include property using the appropriate holding period for property that is reportable as of July 1.
OK to Charge Fee to Cash On-Us Check for Non-Customers?
Byron’s Quick Hit: Given the current state of the law and case-law it is probably allowable for a bank to charge a fee to a non-customer for cashing an on-us check over the counter. However, in order to do so, a bank should make sure that their account agreement with their customer clearly discloses that a fee will be charged.
I was asked recently whether it was permissible to charge a fee for cashing an on-us check for a non-customer. After a little digging, it became apparent that this would be an excellent subject for an article. This is a practice that has been around from some time, but has had its fair share of legal controversy. In fact, some banks take this practice to another level, outright refusing to cash an on-us check over the counter for a non-customer. Aside from the customer service issues surrounding these practices, it presents a unique set of legal issues.
The legal controversy over this practice stems from whether this practice represents a wrongful dishonor of the bank’s customer’s order to pay the named payee. Thy typical scenario is a payroll check that is presented to the payor bank over the counter by the employee of the bank’s customer, who is not a customer of the payor bank.
Discussion of UCC Provisions
Several provisions of the Uniform Commercial Code come into play in addressing the legality of this practice, beginning with Section 3-502(b)(2), which provides, “If a draft is payable on demand … the draft is dishonored if presentment for payment is duly made to the drawee and the draft is not paid on the day of presentment.”
If a dishonor is “wrongful” under the UCC, a bank can be held liable for all damages caused by the wrongful dishonor. UCC § 4-402(b) provides:
A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include damages for an arrest or prosecution of the customer or other consequential damages. Whether any consequential damages are proximately caused by the wrongful dishonor is a question of fact to be determined in each case.
For purposes of this discussion, probably the most important UCC provision is § 4-401(a), which provides:
A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank. [Emphasis added].
History of the Caselaw
Over the years, there has been a fair amount of litigation over the practice of charging to cash on-us checks for non-customers. Importantly, there is nothing directly on point from an Oklahoma court (although, there is one Oklahoma decision that does touch on the issue, discussed below).
Historically, the most important decision covering this practice has been Your Style Publications, Inc. v. Mid Town Bank and Trust Co., 501 N.E. 2d 805 (Ill Ct. App. 1986). In this case, an Illinois court considered the legality of the practice of charging a 2% fee to non-customers to cash an on-us check over the counter. This was a typical scenario where the bank’s customer (the plaintiff) maintained a checking account at the bank and one of its employees presented a payroll check for payment.
The Your Style court held that the bank’s refusal to pay the full amount of the check, as ordered by its customer, was a dishonor of the check. Importantly, the court recognized that the relationship between the customer and the bank was based in a contract. The fee schedule provided by the bank designated that a fee would be charged “for non-customer check cashing.” However, the court determined that the term “non-customer check cashing” was ambiguous, and construing the contract against the drafter of the contract (the bank), determined that the fee was not authorized under the circumstances.
Although Your Style was a defeat for the bank in question, it more or less pointed the way for banks who wish to charge such a fee. The Your Style court expressly recognized that the bank and customer could agree to charge the fee in question, but held that the language of the account agreement was not sufficiently clear. As a result, most of the post-Your Style decisions have favored banks.
Post Your Style, another important legal provision has been added to the discussion of this topic, that is 12 C.F.R. § 7.4002, which in part provides:
(a) Authority to impose charges and fees. A national bank may charge its customers non-interest charges and fees, including deposit account service charges.
(1) All charges and fees should be arrived at by each bank on a competitive basis and not on the basis of any agreement, arrangement, undertaking, understanding, or discussion with other banks or their officers.
(2) The establishment of non-interest charges and fees, their amounts, and the method of calculating them are business decisions to be made by each bank, in its discretion, according to sound banking judgment and safe and sound banking principles. A national bank establishes non-interest charges and fees in accordance with safe and sound banking principles if the bank employs a decision-making process through which it considers the following factors, among others:
(i) The cost incurred by the bank in providing the service;
(ii) The deterrence of misuse by customers of banking services;
(iii) The enhancement of the competitive position of the bank in accordance with the bank’s business plan and marketing strategy; and
(iv) The maintenance of the safety and soundness of the institution.
The Office of the Comptroller has interpreted this language as authorizing a national bank to charge check-cashing fess to non-account holding payees.
In 2001, the Texas legislature passed a measure requiring that a bank pay a check drawn on it against an account with a sufficient balance at par, without regard to whether the payee was an account holder at the bank. Prior to the effectiveness of this statute, it was challenged. In that case, the court held that the Texas statute was preempted by the National Banking Act, which provides preemption for national banks over conflicting state provisions. Where federal law had been interpreted by the OCC has authorizing such charges for a national bank, the statute was held to be preempted. On separate grounds, the Texas court held that the statute was also preempted for state-chartered banks, where the Texas Constitution provided that a state-chartered bank has the same rights and privileges that are afforded to national banks domiciled in the state.
Subsequent to the Texas decision discussed above, this rationale has even been adopted by the Illinois Court of Appeals, the same court that decided Your Style. See Johnson v. First Banks, Inc., 889 N.E.2d 233 (Ill. Ct. App. 2008). In Johnson v. First Banks, the Illinois Court of Appeals, the court held that a non-customer payee of an on-us check was not a “customer” within the meaning of the UCC and lacked standing to bring a claim for wrongful dishonor. Further, the Johnson court held that a payee’s state law claim for charging a fee was preempted under the National Bank Act, even where the bank in question was a state-chartered bank. Like Texas, Illinois law provided that state banks enjoyed the same privileges afforded to national banks.
There is no Oklahoma case directly addressing the same issues as presented in any of the out-of-state decisions discussed above. However, there is one Oklahoma decision interpreting wrongful dishonor that should be considered. In Shaw v. Union Bank & Trust Co., 640 P.2d 953 (Okla. 1981), the Supreme Court of Oklahoma held that a bank’s refusal to honor a savings withdrawal order from a customer who was entitled to withdraw funds, was a wrongful dishonor under the UCC. In so holding the Shaw court determined that a savings withdrawal order was an “item” under the UCC and this subject to the UCC’s wrongful dishonor claim.
Although the facts in Shaw are divergent than the issue presented here, the holding has one other troubling point for banks wishing to charge a fee to non-customers. The Shaw court stated that:
The cases appellee cites to argue for the restriction of the action in contract are not convincing. These cases stand for the general rule that the relationship between a bank and depositor is contractual. That general rule does not apply to the special situation of wrongful dishonor. [Emphasis added].
As discussed above, in order for a bank to correctly charge a fee for cashing on-us checks, it is probably necessary to clearly state that it will do in its agreement with its customer. The above quote arguably casts doubt on using this approach. However, given that the Shaw decision is based on very different facts and was given well before the more current decisions on federal preemption (indeed, the decision predates adoption of 12 C.F.R. § 7.4002, upon which the preemption cases are based), I believe it is highly unlikely that an Oklahoma court would reach a decision that such fees are prohibited where they are clearly disclosed to the bank’s customer.
There are many factors that affect a bank’s decision of whether to seek to charge a fee to non-customers for cashing an on-us check, including customer service to the bank’s customer. However, one thing is clear: a bank that wishes to charge such a check (or is considering the more extreme measure of refusing to cash on-us checks for non-customers) must have a very clear account agreement informing their customer that a fee will be charged.
Banks that wish to make a change in this area must also consider the account disclosure requirements of Reg DD. If you are already charging a fee to non-customers, you should go back and make sure that your account agreements clearly allow you to do so. If you are considering adopting such a charge going forward, you must make a change to your existing account agreements and send a notice out to your affected customers before you begin charging the fee.