Globalization brings unique compliance challenges under Regulation W. One scenario illustrates this well: If a foreign government controls both a bank and another company, is that company an affiliate of the bank?
The answer is yes. Under 12 CFR 223.2, common control by any entity, including a foreign government, creates an affiliate relationship. The affiliate definition does not distinguish between domestic and foreign controlling entities, nor does it exempt sovereign or governmental controllers.
This means that if a foreign sovereign wealth fund or government ministry controls a bank and also controls another company, those entities are affiliates for Regulation W purposes. All covered transactions between the bank and that commonly controlled company are subject to the 10 percent individual limit, the 20 percent aggregate limit, collateral requirements, the low-quality asset prohibition, and the market-terms requirement of Section 23B.
The twin purposes of Sections 23A and 23B, as articulated by the Federal Reserve, are to protect against losses from affiliate transactions and to limit transfers of the federal safety net subsidy to affiliates. These purposes apply regardless of whether the controlling entity is a domestic holding company or a foreign government.
DM Tip: If your bank has any foreign government ownership or control, map out all entities controlled by that same government. Treat all commonly controlled entities as affiliates and ensure all transactions are monitored under your Regulation W compliance program.