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OFAC sanctions Lebanese individuals
On October 28, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13441 against two Lebanese businessmen and a member of Parliament. According to OFAC, the sanctioned individuals contributed to the breakdown of good governance and the rule of law in Lebanon by profiting from the pervasive corruption and cronyism in Lebanon. As a result of the sanctions, all transactions by U.S. persons or in the U.S. that involve any property or interests in property of designated or otherwise blocked persons are generally prohibited. 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 generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons.
Biden Administration releases stablecoin recommendations
On November 1, the U.S. Treasury Department announced that the President’s Working Group on Financial Markets (PWG), with the FDIC and the OCC (collectively, “agencies”), released a report on stablecoins, which are a kind of digital asset intended to maintain a stable value relative to the U.S. dollar. The report noted that stablecoins may be more widely used in the future as a means of payment, which Secretary of the Treasury Janet L. Yellen said could increase “risks to users and the broader system.” Additionally, Secretary Yellen considers current stablecoin oversight to be “inconsistent and fragmented.” Among other things, the report discussed gaps in regulatory authority to reduce these risks. The report recommended that Congress promptly enact legislation to address the risks of payment stablecoins and ensure that payment stablecoins and payment stablecoin arrangements are subject to consistent and comprehensive federal oversight and to “increase transparency into key aspects of stablecoin arrangements and to ensure that stablecoins function in both normal times and in stressed market conditions.” According to the announcement, “[s]uch legislation would complement existing authorities with respect to market integrity, investor protection, and illicit finance, and would address key concerns,” including: (i) risks to stablecoin users and stablecoin runs; (ii) payment system risk; and (iii) systemic risk and concentration of economic power.
While Congress examines legislation on stablecoin, the report recommended that the Financial Stability Oversight Council consider steps for addressing risks, such as “the designation of certain activities conducted within stablecoin arrangements as, or as likely to become, systemically important payment, clearing, and settlement (PCS) activities,” which would be subject to an examination and enforcement framework. The report also recommended that stablecoin issuers “comply with activities restrictions that limit affiliation with commercial entities,” to maintain the separation of banking and commerce. Additionally, the report discussed that, in addition to existing AML/CFT regulations, stablecoin arrangements and activities may implicate the jurisdiction of the SEC and/or CFTC. Therefore, to prevent misuse of stablecoins and other digital assets, the announcement noted that Treasury “will continue leading efforts at the Financial Action Task Force (FATF) to encourage countries to implement international AML/CFT standards and pursue more resources to support supervision of domestic AML/CFT regulations.”
The same day, Treasury released a fact sheet on the PWG report, which clarified, among other things, the purpose of the report, risks posed by stablecoins, and the agencies’ recommendations. In a statement released by OCC acting Comptroller of the Currency Michael J. Hsu, he emphasized his support for the recommendations highlighted in the report pointing out that, “[s]tablecoins need federal prudential supervision to grow and evolve safely.” In a statement released by CFPB Director Rohit Chopra, he noted that though the CFPB was not a member of the PWG, the Bureau “will be taking several steps related to this market,” such as the CFPB’s orders to six large U.S. technology companies seeking information and data on their payment system business practices (covered by InfoBytes here), among other things.
FATF advances work on virtual assets, beneficial ownership transparency, and illicit finance risks
On October 22, the Financial Action Task Force (FATF) announced that it concluded its October plenary, which is the sixth session since the beginning of the Covid-19 pandemic. According to the announcement, utilizing a hybrid approach of both virtually and in-person participation, FATF “advanced its core work on virtual assets, beneficial ownership transparency, and illicit finance risks.” Among other things, the FATF: (i) approved an updated version of its Guidance on a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers for publication; (ii) proposed changes to beneficial ownership standards; (iii) approved the commencement of a study on Illicit Proceeds Generated from the Fentanyl and Related Synthetic Opioids Supply Chain; (iv) adopted an update to its 2016 confidential report on terrorist financing risk indicators; and (v) issued a statement regarding Afghanistan that reaffirmed the “United Nations Security Council Resolutions that Afghanistan should not be used to plan or finance terrorist acts, emphasiz[ing] the importance of supporting the work of non-governmental organizations in the country and maintaining the flow of humanitarian assistance to the Afghan people, and for governments to facilitate information sharing with their financial institutions on any emerging illicit finance risks related to Afghanistan.”
FSOC directs regulators to take measures to mitigate climate-related financial risks
On October 21, the Financial Stability Oversight Council (FSOC) released a new report in response to President Biden’s May executive order, which directed financial regulators to take steps to mitigate climate-related risk related to the financial system. The Report on Climate-Related Financial Risk (see also FSOC’s fact sheet) identified more than 30 specific recommendations for member agencies, including that members should: (i) expand capacity and efforts “to define, identify, measure, monitor, assess, and report on climate-related financial risks and their effects on financial stability,” including through “investments in staffing, training, expertise, data, analytic and modeling methodologies, and monitoring”; (ii) promptly conduct an internal inventory of currently available data and develop plans for acquiring necessary additional data to fill climate-related data and methodological gaps; (iii) review existing public disclosure requirements and consider updating public reporting requirements in a way that would build on the work of the Task Force on Climate-Related Financial Disclosures; and (iv) continue to assess and mitigate climate-related risks to financial stability, including through scenario analysis, and evaluate whether revised or new regulations or guidance is necessary to clarify expectations for regulated or supervised institutions. The report also called for enhanced coordination across member agencies, and said a Climate-related Financial Risk Committee will be formed to “identify priority areas for assessing and mitigating climate-related risks to the financial system and serve as a coordinating body to share information, facilitate the development of common approaches and standards, and foster communication across FSOC members.” A Climate-related Financial Risk Advisory Committee will also be formed to help gather information and analysis from stakeholders on climate-related financial risks. Treasury Secretary Janet Yellen warned that FSOC has a responsibility under the Dodd-Frank Act “to respond to emerging threats to the stability of the United States financial system” and to “ensure the resilience of the financial system to the future impacts of climate change.”
Treasury highlights strategy to advance racial equity
On October 25, the U.S. Treasury Department released a blog post that highlights how the Department is focusing on advancing racial equity. Among other things, the blog noted that this focus has informed the Treasury’s decision to establish “a dedicated Office of Recovery Programs and has flowed through the policy and operational decisions [it has] made to implement the historic American Rescue Plan.” According to the blog, the Office of Recovery Programs addresses urgent needs and makes lasting investments to mitigate long-term disparities by making equity a foundational priority in the delivery of the program, which has improved the circumstances of vulnerable households and created opportunities for small businesses, cities, and states. In addition, Treasury announced the appointment of Janis Bowdler to be the Department’s first Counselor for Racial Equity. The blog also noted that Treasury’s “efforts go beyond [Treasury’s] diverse, dedicated political appointees,” because Treasury is “also deeply committed to improving diversity and inclusion among the broader career Treasury workforce, where we acknowledge much more work remains to be done.”
FinCEN grants limited relief to casinos
On October 19, the Financial Crimes Enforcement Network (FinCEN) issued a notice that grants limited exceptive relief to casinos from some customer identity verification requirements regarding online gaming. Casinos are not subject to Customer Identification Program (CIP) regulations, which results in casinos not having the ability to rely upon non-documentary verification of a customer’s identity. As previously covered by InfoBytes, in 2020, FinCEN issued an interagency order granting an exemption from the requirements of the CIP rules for insurance premium finance loans extended by banks to all customers. According to the recent notice, a casino can use suitable non-documentary methods to verify online customers’ identification and “[t]he suitability or non-suitability of any particular method should be evaluated based on risk.” The notice also notes that a casino’s anti-money laundering program requires describing when the casino will verify identity by documentary methods, non-documentary methods, or a combination of both. This exceptive relief is effective October 19.
Treasury makes recommendations to enhance effectiveness of sanctions
On October 18, the U.S. Treasury Department released the results from a comprehensive economic and financial sanctions review and issued recommendations on preserving and enhancing sanctions’ effectiveness in supporting national security and U.S. interests going forward. The 2021 sanctions review involved the participation of hundreds of sanctions stakeholders, including former Treasury officials, the Departments of State and Justice, USAID, Congress, small and large commercial businesses and financial institutions, and foreign governments, among others. The review found that while sanctions are “an essential and effective policy tool,” there are new challenges, “including rising risks from new payments systems, the growing use of digital assets, and cybercriminals,” as well as the “impact of sanctions on the flow of legitimate humanitarian aid to those in need.” The review noted that “American adversaries—and some allies—are already reducing their use of the U.S. dollar and their exposure to the U.S. financial system more broadly in cross-border transactions,” and that Treasury is “mindful of the risk that, if left unchecked, these digital assets and payments systems could harm the efficacy of our sanctions.” The review further found that in the past 20 years, there has been a 933 percent increase in the number of sanctions designations, and stressed that in order to ensure sanctions continue to support U.S. national security objectives, there must be changes made to adapt and modernize the underlying system by which sanctions are deployed.
The review made the following recommendations to mitigate these challenges and bolster the effectiveness of sanctions programs: (i) adopt a structured policy framework linking sanctions to a clear policy objective; (ii) engage in multilateral coordination when possible; (iii) calibrate sanctions to prevent unintended economic, political, and humanitarian impact; (iv) expand existing outreach to ensure sanctions are easily understood, enforceable, and, where possible, reversible; and (v) invest in modernizing Treasury’s sanctions technology, workforce, and infrastructure, especially with respect to digital assets and services.
Agencies announce new measures to combat ransomware
On October 15, the U.S. Treasury Department announced additional steps to help the virtual currency industry combat ransomware and prevent exploitation by illicit actors. The guidance builds upon recent “whole-of-government” actions focused on confronting “criminal networks and virtual currency exchanges responsible for laundering ransoms, encouraging improved cyber security across the private sector, and increasing incident and ransomware payment reporting to U.S. government agencies, including both Treasury and law enforcement.” (Covered by InfoBytes here.) The newest industry-specific guidance—part of the Biden administration’s efforts to counter ransomware threats—outlines sanctions compliance best practices tailored to the unique risks associated with this space. According to Treasury, there is a “need for a collaborative approach to counter ransomware attacks, including public-private partnerships and close relationships with international partners.”
The same day, the Financial Crimes Enforcement Network (FinCEN) released new data analyzing ransomware trends in Bank Secrecy Act reporting filed between January 2021 and June 2021. The report follows FinCEN’s government-wide priorities for anti-money laundering and countering the financing of terrorism priorities released in July (covered by InfoBytes here). Issued pursuant to the Anti-Money Laundering Act of 2020, the report flags “ransomware as a particularly acute cybercrime concern,” and states that in the first half of 2021, FinCEN identified $590 million in ransomware-related suspicious activity reports (SARs)—an amount exceeding the entirety of the value report in 2020 ($416 million). If this trends continues, FinCEN warns that ransomware-related SARs submitted in 2021 will have a higher transaction value than similar SARs filed in the previous 10 years combined. FinCEN attributes this uptick in activity to several factors, including an increasing overall prevalence of ransomware-related incidents, improved detection and incident reporting, and an increased awareness of reporting obligations and willingness to report by financial institutions.
In conjunction with the “growing prevalence of virtual currency as a payment method,” Treasury’s Office of Foreign Assets Control (OFAC) issued sanctions compliance guidance for companies in the virtual currency industry, including technology companies, exchangers, administrators, miners, wallet providers, and financial institutions. OFAC warned that “sanctions compliance obligations apply equally to transactions involving virtual currencies and those involving traditional fiat currencies,” and that participants “are responsible for ensuring that they do not engage, directly or indirectly, in transactions prohibited by OFAC sanctions, such as dealings with blocked persons or property, or engaging in prohibited trade- or investment-related transactions.” Among other things, the guidance will assist participants on ways to evaluate risks and build a risk-based sanctions compliance program. OFAC also updated related FAQs 559 and 646.
Fed and Treasury address climate change risks
On October 7, Federal Reserve Governor Lael Brainard spoke at the Federal Reserve Stress Testing Research Conference discussing the impacts of climate change on economic activity. Brainard revealed that the Fed is considering the potential implications of climate-related risks for financial institutions and the financial system and emphasized that scenario analysis is emerging as a possible key analytical tool. Regarding the climate scenario analysis, Brainard noted that climate change’s future financial and economic consequences depends on the physical effects and the nature and speed of the transition to a sustainable economy. She highlighted the importance of “model[ing] the transition risks arising from changes in policies, technology, and consumer and investor behavior and the physical risks of damages caused by an increase in the frequency and severity of climate-related events as well as chronic changes, such as rising temperatures and sea levels.” Brainard also discussed opportunities to learn from other countries' use of climate scenario analysis and overcoming the challenges in implementing climate scenario analysis, noting that “climate scenario analysis may need to consider interdependencies across the financial system,” among other things. Brainard added that she anticipates that it will be useful “to provide supervisory guidance for large banking institutions in their efforts to appropriately measure, monitor, and manage material climate-related risks, following the lead of a number of other countries.”
The same day, the U.S. Treasury Department announced the Treasury Climate Action Plan, which is directed by Executive Order 14008 and Treasury’s efforts to support adaptation and increase resilience of its facilities and operations to the impacts of climate change. Among other things, the plan establishes five priority action areas, including: (i) rebuilding stagnated programs and capabilities; (ii) addressing climate change vulnerabilities across Treasury operations; (iii) ensuring a climate-focused approach to managing Treasury’s real property portfolio footprint; (iv) enabling management to fully consider climate change realities; and (v) accounting for a financial investment approach appropriate to Treasury’s climate objectives. In addition to the priority areas, Treasury will utilize the data and science of climate change to adjust policies, programs, and activities in improving its resilience to climate risks and impacts, according to the announcement.
OFAC sanctions Mexican nationals
On October 6, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to the Foreign Narcotics Kingpin Designation Act against four individuals who are allegedly senior members of a Mexican-based drug cartel, which is said to be responsible for trafficking deadly drugs into the U.S. As a result of the sanctions, all property and interests in property subject to U.S. jurisdiction that belong to the sanctioned persons must be blocked and reported to OFAC. U.S. persons are also generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons. OFAC further notes that the designations against the individuals were made in collaboration with the Drug Enforcement Administration and Mexico’s Financial Intelligence Unit.