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SEC accuses crypto companies of $37 million scheme
On September 30, the SEC filed a complaint in the U.S. District Court for the Southern District of Florida against two cryptocurrency companies and their principals (collectively, “defendants”) claiming that they falsely promised investors that their cryptocurrency was backed by a $10 billion gold bullion investment. According to the complaint, the SEC alleged that between May 2018 and January 2019, the defendants “made material misrepresentations and omissions to investors while they were offering and selling [a crypto asset that the companies owned and controlled] in a series of news and press releases issued to the public." The releases falsely claimed that one of the cryptocurrency companies had acquired and received title to $10 billion in gold bullion and intended to back each token that was owned and controlled by the companies issued and sold to investors with $1.00 worth of this gold. One of the companies claimed to have acquired the gold through a purchase transaction with one of the principles and his company. The defendants also misrepresented that independent accounting firms had performed an “audit” of the gold and verified its existence. In reality, the gold acquisition transaction was a sham. The SEC’s complaint alleged violations of anti-fraud and securities registration provisions of the federal securities laws. The SEC is seeking permanent injunctive relief, disgorgement plus prejudgment interest, civil penalties and officer-and-director bars against the individual defendants.
Hsu says regulators should coordinate efforts to mitigate crypto risks
On October 11, acting Comptroller of the Currency Michael J. Hsu delivered remarks before DC Fintech Week 2022, discussing the importance of identifying and monitoring cryptocurrency risks to protect consumers and the financial system. Among other things, Hsu noted that crypto “is an immature industry based on an immature technology.” He added that the industry still needs to deal with “the unabating volume of scams, hacks, and fraud.” Hsu voiced his concerns about integrating crypto into the traditional financial system without a more “accurate and complete” view of the risks. He noted that “[t]he largest crypto players today want to provide an increasingly broad range of services seamlessly under one roof for their customers.” Hsu pointed out that even though commingling crypto activities could “offer convenience for consumers and cost savings for crypto firms, conflicts abound and the riskiest activity threatens the whole bundle.” He warned that banks looking “to engage in crypto activities may want to carefully consider the scope of what they want to do, start with what can be most readily risk managed, and impose gates, through limits and other controls, to prevent uncontrolled expansion and growth into higher-risk activities.”
Hsu also delivered remarks before the Harvard Law School and Program on International Financial Systems Roundtable on Institutional Investors and Crypto Asset, discussing the need for clarifying supervisory expectations related to crypto activities and the role of regulators to ensure safety and soundness while promoting responsible innovation. Hsu said that regulators should coordinate efforts to write rules that help mitigate risks associated with digital assets. He emphasized that the term “don’t chase” for financial regulators means “not lowering our standards when dealing with crypto.” He further pointed out that “[s]haring information with peer agencies and seeking a common understanding of the risks and opportunities in the space can help ensure that regulatory standards remain high and the playing field stays level.” Hsu concluded by reiterating that he is a “crypto skeptic,” stating that his “skepticism of crypto stems from a frustration that the most promising innovations have been crowded out by hype and a fixation on trading,” and said that “[p]rogrammability, composability, and tokenization hold promise.”
Fed to roll out new bank application filing system at the end of October
On October 6, the Federal Reserve Board announced that the current bank application filing system will be replaced with a new, upgraded cloud-based system known as FedEZFile later this month. The Fed stated that while the substantive requirements of the applications will remain the same, the new system will make the filing process more intuitive. Paper applications and communications will also be minimized. Under the system, applicants will be provided real-time status tracking, two-way messaging, and the ability to digitally sign documents. A webinar on the new system is forthcoming.
FINRA alerts firms about rising ACATS fraud
On October 6, FINRA issued Regulatory Notice 22-21, alerting member firms to the rising trend of fraudulent account transfers of customer accounts using the Automated Customer Account Transfer Service (ACATS)—an automated system that facilitates the transfer of customer account assets from one member firm to another. FINRA explained that “ACATS fraud is related to the growing threat of new accounts being opened online or through mobile applications using stolen or synthetic identities,” and may occur when the identity of a legitimate customer of a carrying member is stolen by a bad actor to open a brokerage account online or through a mobile app at a receiving member. Bad actors, FINRA warned, may open a new account using stolen information only or through a combination of stolen and false information, and will try to move the ill-gotten assets to an external account at a different financial institution. FINRA reminded members of regulatory obligations that may apply to ACATS fraud, including know-your-customer rules, Bank Secrecy Act/AML requirements, and the Identity Theft Red Flags Rule.
Treasury requests feedback on cyberinsurance
On October 7, the U.S. Treasury Department published its Annual Report on the Insurance Industry, as required by the Dodd-Frank Act. The report discussed the U.S. insurance industry’s financial performance and its financial condition for the year ending December 31, 2021, and provided a domestic outlook for the industry for 2022. The report also summarized the Federal Insurance Office’s (FIO) activities and addressed certain matters affecting the domestic and international insurance industry.
Earlier, Treasury issued a request for input in the Federal Register on a potential federal insurance response to catastrophic cyber incidents. According to Treasury, “the comments will inform FIO’s work in responding to a recommendation by the U.S. Government Accountability Office that FIO and the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency jointly assess the extent to which the risks to U.S. critical infrastructure from catastrophic cyberattacks warrant a federal insurance response.” The request stated that cyber insurance is a significant risk transfer mechanism, and that the insurance industry has an important role to play in strengthening cyber hygiene and building resiliency. Comments are due November 14.
FSB reports on stablecoins and crypto-asset activities
Recently, Financial Stability Board (FSB) Chair Klaas Knot sent a letter to the G20 Finance Ministers and Central Bank Governors concerning global financial stability, followed by the release of two FSB reports. The letter stated that “turmoil in crypto-asset markets has validated many of the FSB’s concerns about crypto assets,” and noted that the “‘crypto winter’ has reinforced [its] assessment of existing structural vulnerabilities.” The letter expressed concerns that the risks crypto assets pose to financial stability are "likely to come back to the fore sooner rather than later.” Knot stated that the FSB’s report on stablecoins expanded recommendations for the regulation of stablecoins, which are digital tokens that aim to maintain a one-on-one value with less volatile assets such as the euro or dollar. In the stablecoin report, the FSB stated that most existing stablecoins would not meet its recommendations at present, and would require “significant improvements” to their governance, risk management, stabilization mechanisms and disclosures. Knot also discussed the FSB's report on crypto-asset activities and markets, which focuses on regulatory, supervisory, and oversight issues relating to crypto-assets to help ensure safe innovation. The report noted that “[c]orrelations between crypto-asset prices and mainstream equity indices have been steadily increasing since year-end 2021 and peaked in May 2022, when the market stress began.” The letter further described that in 2020, G20 Leaders endorsed the Roadmap for Enhancing Cross-border Payments to address the frictions that payments currently face, and thereby achieve faster, cheaper, more transparent and more inclusive cross-border payment services. As previously covered by InfoBytes, Knot stated that the recent FSB report on the roadmap presents “priorities for this new phase of the work, and proposes an intensified public-private sector collaboration to take this forward.” In regard to cyber risks, he stated that cyber-risk safeguards are important due to rapidly growing cyber incidents. He further stated that the FSB “is working to promote a resilient global financial system in the near term and over the longer run, supporting policymakers in the G20 to foster stronger, equitable and inclusive growth.”
FSB releases G20 roadmap for enhancing cross-border payments
On October 10, the Financial Stability Board (FSB) published its priorities for the next phase of work under the G20 Roadmap for Enhancing Cross-Border Payments. According to the FSB, the plan includes steps to strengthen external engagement during the next phase of the group’s work. The FSB noted three priorities for the payment program’s next phase, which include: (i) payment system interoperability and extension; (ii) legal, regulatory and supervisory frameworks; and (iii) cross-border data exchange and message standards. The FSB further noted that it will coordinate work to develop further details of the actions that will take place to follow through with the plan, including discussions with industry participants. The updated roadmap will be provided during the first G20 Finance Ministers and Central Bank Governors meeting in 2023.
FinCEN extends FBAR filing deadline for natural disaster victims
On October 6, the Financial Crimes Enforcement Network (FinCEN) issued a notice extending the deadline to February 23, 2023 for victims of certain recent natural disasters to file their reports of Foreign Bank and Financial Accounts (FBAR) for the 2021 calendar year (ordinarily due on or before October 15, 2022). The expanded relief is offered to victims impacted by Hurricane Fiona in Puerto Rico, Hurricane Ian in Florida, North Carolina, and South Carolina, and storms and floods in parts of Alaska. If FEMA later designates additional areas as eligible for individual assistance, FBAR filers in those locations will automatically receive the same filing relief. FinCEN also stated that it will work with FBAR filers who live outside the designated disaster areas but may have trouble meeting their filing obligations because their records are located in the affected areas.
OFAC sanctions Iranian leaders
On October 6, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions, pursuant to Executive Order 13553, against seven senior leaders within Iran’s government and security apparatus for the shutdown of Iran’s Internet access and the ongoing violence against peaceful protesters following the death of a 22-year old who died in the custody of Iran’s Morality Police. OFAC noted that the designations follow the September 22 sanctions against Iran’s Morality Police along with seven senior leaders who oversee Iran’s security organizations (covered by InfoBytes here). Collectively, and with the release of Iran General License D-2 (covered by InfoBytes here), which authorizes exports of additional tools to assist Iranians in accessing the Internet, these sanctions “show the United States’ commitment to free, peaceful assembly and open communication.” As a result of the sanctions, all property and interests in property belonging to the sanctioned persons subject to U.S. jurisdiction are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are also generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons. Persons that engage in certain transactions with the individuals or entities designated today may themselves be exposed to designation. Additionally, OFAC warned that “any foreign financial institution that knowingly facilitates a significant transaction or provides significant financial services for any of the individuals designated today could be subject to U.S. sanctions.”
OFAC sanctions wildlife trafficking organized crime group
On October 7, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13581 against a Malaysian national, a wildlife trafficking transnational criminal organization, and a Malaysian company for trafficking endangered wildlife and engaging in poaching. According to OFAC, the Malaysian individual specializes in transporting rhino horn, ivory, and pangolins from Africa, generally utilizing routes through Malaysia and Laos and onward to consumers in Vietnam and China. OFAC noted that the designations were made in collaboration with the U.S. Fish and Wildlife Service, the State Department, and the DOJ. As a result of the sanctions, all property and interests in property belonging to the sanctioned targets that are in the U.S. or in the possession or control of U.S. persons are blocked and must be reported to OFAC. Further, “any entities that are owned 50 percent or more by one or more designated persons” are blocked. U.S. persons are prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons.