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On October 1, the CFTC filed charges against five entities and three individuals for allegedly owning and operating an unregistered cryptocurrency derivatives platform and failing to implement required anti-money laundering procedures. The complaint alleges that the platform “illegally offer[ed] leveraged retail commodity transactions, futures, options, and swaps” on cryptocurrencies without implementing key safeguards required by the Commodity Exchange Act and several CFTC regulations compliance measures, such as know-your-customer procedures or actions designed to detect and prevent illicit activities. The CFTC also claims that the exchange operated as an unregistered futures commission merchant and did not have CFTC approval to operate as a designated contract market or swap execution facility. The complaint requests civil monetary penalties and remedial ancillary relief in the form of (i) permanent trading and registration bans; (ii) disgorgement; (iii) restitution; (iv); pre- and post-judgment interest; and (v) a permanent injunction from future violations.
In a parallel action, the U.S. Attorney for the District of New York indicted the three individuals along with a fourth individual on federal charges of violating, and conspiring to violate, the Bank Secrecy Act “by willfully failing to establish, implement, and maintain an adequate anti-money laundering  program” at the exchange.
On September 29, a global bank and several of its subsidiaries agreed to resolve investigations into allegations that their traders engaged in manipulative trading of metals futures and U.S. Treasury securities using a practice known as spoofing. The CFTC’s order settled charges that numerous bank traders violated federal commodities laws over a period of at least eight years by allegedly placing hundreds of thousands of spoof orders in precious metals and Treasury futures contracts. According to the CFTC announcement, a broker-dealer subsidiary of the bank—a registered futures commission merchant—also allegedly failed to identify, investigate, and stop the misconduct, despite numerous red flags. While neither admitting nor denying any wrongdoing in connection with the CFTC’s allegations, “except to the extent that Respondents admit those findings in any related action against Respondents by, or any agreement with, the [DOJ] or any other governmental agency or office,” the bank and its subsidiaries have agreed to pay a $920 million penalty.
In a parallel matter, the SEC announced the same day that it had reached a settlement with the broker-dealer subsidiary for fraudulently engaging in manipulative trading of Treasury securities. The SEC alleged that the subsidiary traders place non-bona fide orders to buy or sell a particular Treasury security in order “to create a false appearance of buy or sell interest” to “induce other market participants to trade against the bona fide orders at prices that were more favorable to [the broker-dealer subsidiary] than [the broker-dealer subsidiary] otherwise would have been able to obtain.” The broker-dealer subsidiary agreed to the entry of the SEC’s cease-and-desist order, in which it admitted to the SEC’s factual findings and agreed to pay disgorgement of $10 million and a civil penalty of $25 million, which will be offset by amounts paid by the bank and its subsidiaries in parallel DOJ and CFTC actions.
Additionally, the DOJ announced it had entered into a three-year deferred prosecution agreement with the bank to resolve criminal charges of two counts of wire fraud related to the aforementioned allegations. The agreement imposes a payment of more than $920 million, which consists of a criminal monetary penalty, criminal disgorgement, and victim compensation, with the criminal penalty credited towards the equal amount in penalties imposed by the CFTC. The bank and its subsidiaries must also continue to cooperate with any ongoing or future investigations and prosecutions, and it must report evidence or allegations of misconduct that could further violate federal anti-fraud, securities, or commodities statutes. Furthermore, the bank and its subsidiaries are required to enhance internal compliance programs as appropriate.
On September 28, the CFTC announced a $4.5 million settlement with a national bank and two affiliated entities to resolve allegations that they failed to preserve audio files, including trader recordings that were subpoenaed in 2017. According to the CFTC, in early 2018 the bank stated that it had directed staff to preserve the recordings and asked for an extension to turn over the requested audio files. The Commission granted the request. In late 2018, the bank, however, said the audio files had been deleted due to a design flaw in its audio preservation system. The CFTC claimed that the bank was aware of the audio-preservation issue as early as 2014. As such, according to the CFTC, the bank “did not maintain adequate internal controls with respect to its preservation of audio and thus failed to diligently supervise matters related to its business as a CFTC registrant.” The entities did not admit or deny the CFTC’s findings, but have agreed to pay the $4.5 million civil penalty plus post-judgment interest.
On September 11, the CFTC filed a complaint in the U.S. District Court for the Southern District of Texas against four individuals accused of operating a purported multi-level marketing scheme involving the solicitation of nearly $100,000 in customer funds that were to be used to speculate in cryptocurrency. The CFTC alleged that the defendants violated the Commodity Exchange Act by, among other things, creating the false illusion that their business employed “master traders” with years of cryptocurrency trading experience, that customers’ earnings would increase based on the amount of their deposits, and that customers who made referrals would receive bonuses. Additionally, the defendants posted misleading trade statements online that failed to “accurately reflect the Bitcoin trading purportedly undertaken by [the d]efendants and led certain customers to believe they were earning significant amounts of money from [the d]efendants’ trading of Bitcoin on their behalf.” The CFTC further claimed that when customers tried to unsuccessfully withdraw their funds, the defendants would first claim their website or smartphone app were experiencing technical problems, but then eventually stopped responding to the customer requests. The CFTC seeks to enjoin the defendants’ allegedly unlawful acts and practices, to compel compliance with the Commodity Exchange Act and CFTC regulations, and to further enjoin the defendants from engaging in any commodity interest-related activity. In addition, the CFTC seeks civil monetary penalties, restitution, trading and registration bans, and other statutory, injunctive, or equitable relief as the court may deem necessary and appropriate.
On August 10, the Financial Industry Regulatory Authority (FINRA), SEC, and the CFTC announced separate settlements with a broker-dealer following investigations into its anti-money laundering (AML) programs. The broker-dealer did not admit or deny any of the charges, and the agencies all considered remedial actions undertaken by the broker-dealer. FINRA fined the broker-dealer $15 million for allegedly failing to establish and implement AML processes reasonably designed to detect and report suspicious transactions as required by the Bank Secrecy Act, including foreign currency wire transfers to and from countries known to be at high risk for money laundering. Additionally, the broker-dealer “lacked sufficient personnel and a reasonably designed case management system.” The broker-dealer consented to the terms of the Letter of Acceptance, Waiver and Consent and agreed to retain a third-party consultant to take steps to remediate its AML program.
In a separate investigation conducted by the SEC, the broker-dealer reached a settlement to resolve allegations that it repeatedly failed to file suspicious activity reports (SARs) as required by the Exchange Act for U.S. microcap securities trades executed on behalf of its customers. According to the SEC, because the broker-dealer’s “AML policies and procedures were not reasonably tailored to the risks of [its] U.S. microcap securities business,” over a one-year period, it failed to (i) recognize red flags; (ii) properly investigate suspicious activity; and (iii) file more than 150 SARs in a timely fashion even after compliance personnel flagged the suspicious transactions. Under the terms of the order, the broker-dealer has agreed to be censured, will cease and desist from committing future violations, and will pay an $11.5 million civil penalty.
The CFTC also announced a settlement to resolve allegations that the broker-dealer failed to (i) diligently supervise the handling of several commodity trading accounts; (ii) sufficiently oversee its employees’ handling of these accounts, leading to its “failure to maintain an adequate [AML] program and to conduct appropriate customer monitoring”; and (iii) identify or conduct adequate investigations necessary to detect and report suspicious transactions. Under the order, the broker-dealer is required to pay an $11.5 million civil penalty and disgorge $706,214 it earned as the futures commission merchant for certain accounts that were the subject of a 2018 CFTC enforcement action.
On July 27, the CFTC announced an approximately $9 million whistleblower award to a claimant who reported “specific, credible and timely” information that led to a successful Commodity Exchange Act (CEA) enforcement action. The associated order notes that the claimant voluntarily provided original information leading to the opening of an investigation and the enforcement action, and was under no “legal obligation” to provide the information. The order does not provide any other significant details about the information provided or the related enforcement action. The CFTC has awarded approximately $120 million to whistleblowers since the enactment of its Whistleblower Program under the Dodd-Frank Act, and whistleblower information has led to nearly $950 million in monetary relief.
On July 17, the U.S. Treasury Department issued a joint statement on the EU - U.S. Financial Regulatory Forum, which met virtually on July 14 and 15 and included participants from Treasury, the Federal Reserve Board, CFTC, FDIC, SEC, and OCC. Forum participants discussed six key themes: (i) potential financial stability implications and economic responses to the Covid-19 pandemic; (ii) capital market supervisory and regulatory cooperation, including cross-border supervision; (iii) “multilateral and bilateral engagement in banking and insurance,” including “cross-border resolution of systemic banks” and Volcker Rule implementation; (iv) approaches to anti-money laundering/countering the financing of terrorism financing and remittances; (v) the regulation and supervision of digital finance and financial innovation, such as “digital operational resilience and developments in crypto-assets, so-called stablecoins, and central bank digital currencies”; and (vi) sustainable finance developments. EU and U.S. participants recognized the importance of communicating mutual supervisory and regulatory concerns to “support financial stability, investor protection, market integrity, and a level playing field.”
On June 25, the Federal Reserve Board, CFTC, FDIC, OCC, and SEC (agencies) finalized the rule, which will amend the Volcker Rule to modify and clarify the regulations implementing Section 13 of the Bank Holding Company Act with respect to covered funds. As covered by InfoBytes in February, the agencies issued the proposed rule, and, after the notice and comment period, finalized the proposal with certain modifications based on the public comments. Among other things, the final rule (i) exempts qualifying foreign excluded funds from certain restrictions, but modifies the anti-evasion provision and compliance program requirements from the proposal; (ii) revises the exclusions from the covered fund provisions for foreign public funds, loan securitizations, and small business investment companies; (iii) adopts several new exclusions from the covered fund provisions, including an exclusion for venture capital funds, family wealth management, and customer facilitation vehicles; (iv) permits established, codified categories of limited low-risk transactions between a banking entity and a related fund; (v) provides an express safe harbor for senior loans and senior debt, and redefines “ownership interest”; and (vi) provides clarity regarding permissible investments in the same investments as a covered fund organized or offered by the same banking entity. The final rule is effective October 1.
The FDIC also released a Fact Sheet on the final rule.
On June 9, the Commodity Futures Trading Commission (CFTC) announced a more than $6 million whistleblower award to a claimant who reported “specific, credible and timely” information that led to a successful Commodity Exchange Act (CEA) enforcement action. The associated order notes that the claimant voluntarily provided original information leading to the opening of an investigation and the enforcement action, and was under no “legal obligation” to provide the information. The CFTC notes that while five claimants submitted whistleblower award applications to the CFTC in response to the covered action, the CFTC provided the award only to claimant one, as three of the other claimants failed to contest a preliminary determination in favor of the award to the successful whistleblower, constituting a failure to exhaust administrative remedies. The order provides limited details on the fifth claimant’s objections to the denial, but notes the CFTC determined that the claimant’s “arguments are baseless.” The order does not provide any other significant details about the information provided or the related enforcement action. The CFTC has awarded over $110 million to whistleblowers since the enactment of the Whistleblower Program under the Dodd-Frank Act, and their information has led to nearly $900 million in monetary relief.
On June 10, the Commodity Futures Trading Commission announced that it has extended through September 30, 2020, certain aspects of its no-action relief issued in response to Covid-19. The CFTC’s staff letter extends previously issued no-action guidance regarding certain regulatory requirements for persons who are registered with the CFTC as futures commission merchants, introducing brokers, swap dealers, retail foreign exchange dealers, and floor brokers. Certain relief for members of designated contract markets or swap execution facilities that are not registered with the CFTC is also extended. Those relying on relief are expected to establish and maintain a supervisory system to oversee activities of personnel who are working from remote locations during Covid-19.
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