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On November 15, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco delivered remarks at the Chainalysis Blockchain Symposium to discuss, among other things, the agency’s focus on convertible virtual currency (CVC) and remind attendees—particularly financial institutions—of their compliance obligations. Specifically, Blanco emphasized that FinCEN applies a “technology-neutral regulatory framework to any activity that provides the same functionality at the same level of risk, regardless of its label.” As such, money transmissions denominated in CVC, Blanco stated, are money transmissions. Blanco discussed guidance issued by FinCEN in May (previously covered by InfoBytes here) that reminded persons subject to the Bank Secrecy Act (BSA) how FinCEN regulations relating to money services businesses apply to certain business models involving money transmissions denominated in CVC. Blanco also highlighted the agency’s recent collaboration with the CFTC and the SEC to issue joint guidance on digital asset compliance obligations. (Previous InfoBytes coverage here.) Highlights of Blanco’s remarks include (i) suspicious activity reporting related to CVC has increased, including “filings from exchanges identifying potential unregistered, foreign-located money services businesses”; (ii) compliance with the “Funds Travel Rule” is mandatory and applies to CVC; (iii) for anti-money laundering/combating the funding of terrorism purposes, accepting and transmitting activity denominated in stablecoins falls within FinCEN's definition of “money transmission services” under the BSA; and (iv) administrators of stablecoins must register as money services businesses with FinCEN.
On October 18, the U.S. Treasury Department released a public statement issued by the Financial Action Task Force (FATF) following the conclusion of its plenary meeting held October 16-18. Topics discussed by attendees included Iranian terrorist financial risks, guidance related to “stablecoins” and virtual assets, and reports related to anti-money laundering/countering the financing of terrorism (AML/CFT). Specifically, the FATF discussed the re-imposition of countermeasures on Iran as well as enhanced due diligence strategies due to the country’s AML/CFT deficiencies. As previously covered by InfoBytes, the FATF issued a public statement last June that called upon members and urged all jurisdictions to require increased supervisory examination for branches and subsidiaries of financial institutions based in Iran. Assistant Secretary for Terrorist Financing and Financial Crimes Marshall Billingslea issued a statement in Treasury’s press release that “countries will be called upon to impose further financial restrictions to protect the international financial system if Iran hasn’t ratified and fully implemented the key treaties related to fighting money laundering and terrorist financing.”
The FATF also issued a public statement to clarify that standards adopted last June (InfoBytes coverage here) apply to “stablecoins” and their service providers. Additionally, the FATF adopted changes to its methodology on how it will assess whether countries are complying with the relevant requirements. Specifically, the FATF noted in the plenary meeting outcomes that “assessments will specifically look at how well countries have implemented these measures. Countries that have already undergone their mutual evaluation must report back during their follow-up process on the actions they have taken in this area.”
Additionally, the FATF (i) provided an updated report on measures for combating ISIL and Al-Qaeda financing; (ii) called upon all countries to apply countermeasures on North Korea due to ongoing AML/CFT and weapons of mass destruction proliferation financing risks to the international financial system; and (iii) noted it will publish reports by year end related to AML/CFT and counter-proliferation financing legal frameworks for both Russia and Turkey, along with a review of implementation measures undertaken by the countries.
On October 11, the SEC announced it obtained a temporary restraining order through an emergency action filed against two offshore entities that allegedly raised more than $1.7 billion of investor funds. According to the complaint, the entities sold approximately 2.9 million digital tokens worldwide, including more than 1 billion tokens to 39 U.S. purchasers. The entities promised that the tokens would be delivered upon the launch of its own blockchain by the end of October 2019. The SEC alleges the entities violated Sections 5(a) and 5(c) of the Securities Act by failing to register its offers and sales of securities with the SEC. In addition to the emergency relief, the SEC is seeking a permanent injunction, disgorgement, and civil penalties against the offshore entities.
On October 11, the SEC, Commodity Futures Trading Commission (CFTC), and Financial Crimes Enforcement Network (FinCEN) issued a joint statement to remind persons who engage in digital asset activities or handle cryptocurrency transactions of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA). According to the agencies, AML/CFT obligations apply to entities defined as “financial institutions” under the Bank Secrecy Act, which include “futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSB) as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the SEC.” The obligations include, among other things, (i) establishing and implementing an effective AML program; and (ii) complying with recordkeeping and reporting requirements such as suspicious activity reporting (SARs).
The agencies note that persons who engage in digital asset-related activities may have AML/CFT obligations regardless of the “label or terminology used to describe a digital asset or a person engaging in or providing financial activities or services involving a digital asset.” According to the agencies, the facts and circumstances underlying the asset or service, “including its economic reality and use,” is what determines how the asset is categorized, the applicable regulatory treatment, and whether the persons involved are financial institution under the BSA.
Additionally, FinCEN reminded financial institutions of its supervisory and enforcement authority to “ensure the effectiveness of the AML/CFT regime,” emphasizing that persons who provide money transmission services are MSBs subject to FinCEN regulation. FinCEN also referred to its May 2019 interpretive guidance, which consolidated and clarified current FinCEN regulations, guidance, and administrative rulings related to money transmissions involving virtual currency. (Previous InfoBytes coverage here.)
On September 30, the SEC announced a settlement with a blockchain technology company resolving allegations that the company conducted an unregistered initial coin offering (ICO). According to the order, the company raised several billion dollars from the general public after an ICO, in which it publicly offered and sold 900 million digital assets in exchange for virtual currency, to raise capital to develop software. The SEC alleges that the company violated Section 5(a) and 5(c) of the Securities Act because the digital assets it sold were securities under federal securities laws, and the company did not have the required registration statement filed or in effect, nor did it qualify for an exemption to the registration requirements. The order, which the company consented to without admitting nor denying the findings, imposes a $24 million civil money penalty.
On September 18, the SEC announced it filed a lawsuit in the U.S. District Court for the Central District of California against a digital platform and its owner (collectively, “defendants”) for raising over $14 million in an unregistered initial coin offering (ICO) in violation of Section 5 of the Securities Act of 1933 and for acting as unregistered brokers for other digital asset offerings in violation of Section 15 of the Securities Exchange Act of 1934. The SEC contends the defendants claimed to investors that their tokens would increase in value upon trading and that ICO token holders would be able to swap them for other tokens on the platform, at an average of a 75 percent discount. The SEC notes that the tokens had experienced “a precipitous loss in value” since issuance, averaging roughly 1/20th of the average purchase price during the offering. Moreover, the SEC alleges the defendants acted as a broker for other ICOs, raising over $650 million for their clients. The SEC’s suit seeks a permanent injunction, disgorgement of profits plus interest, and civil penalties.
On August 13, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco delivered remarks at the 12th Annual Las Vegas Anti-Money Laundering Conference stressing the need for compliance within the gaming industry, particularly as new technologies emerge such as mobile gaming and the use of convertible virtual currencies (CVC) increases. With the U.S. Supreme Court issuing a decision in May holding that states can legalize sports gambling (previously covered by InfoBytes here), Blanco stated that casinos need to consider ways to integrate their sports betting programs—including mobile sports betting apps—into their existing anti-money laundering programs. These measures must include establishing and implementing procedures for detecting and reporting suspicious activities, Blanco noted, reminding the audience of FinCEN’s FAQs designed to assist financial institutions when reporting cyber indicators and cyber-enabled financial crime.
Blanco also discussed FinCEN’s work with respect to cybersecurity and virtual payments, noting, among other things, that both online and physical casinos that accept CVC need to consider how they review transactions to determine the source of the currency and recognize indicators of suspicious activity. Blanco referred casinos to consolidated guidance issued by FinCEN in May (previously covered by InfoBytes here), and expressed a concern that “CVC-related SAR filings by casinos have not been as robust as expected since the May CVC guidance and advisory were published.” He further stressed the importance of information-sharing between casinos, and highlighted that sharing SARs can contribute to the identification of suspicious transactions as well as Bank Secrecy Act compliance responsibilities.
On July 15, the Rhode Island governor signed HB 5847, which adds virtual currency to the existing electronic money transmission and sale of check license law and adds additional provisions clarifying the licensing process. Specifically, the bill renames Chapter 19-14.3 of Rhode Island’s General Laws titled, “Sale of Checks and Electronic Money Transfers” to “Currency Transmission” and includes within the definition of currency transmission, virtual currency. The bill defines virtual currency as a, “digital representation of value that: (A) [i]s used as a medium of exchange, unit of account, or store of value; and (B) [i]s not legal tender, whether or not denominated in legal tender.” Among other things, the bill excludes from the definition of virtual currency a “[n]ative digital token used in a proprietary blockchain service platform.” Subject to certain exceptions, the bill requires a person engaging in currency transmission business activity to be licensed with the state. Additionally, the bill, among other things, (i) requires virtual currency licensees to provide resident users of their services specified disclosures; (ii) subjects applicants and licensees to mandatory compliance programs and monitoring; and (iii) prohibits licensees from engaging in unfair, deceptive, or fraudulent practices. The act is effective January 1, 2020.
On June 21, the Secretary of the U.S. Department of the Treasury issued a statement confirming that FATF members agreed to regulate and supervise virtual asset financial activities and related service providers. On the same day, FATF issued a statement noting that it “adopted and issued an Interpretive Note to Recommendation 15 on New Technologies (INR. 15) that further clarifies the FATF’s previous amendments to the international Standards relating to virtual assets and describes how countries and obliged entities must comply with the relevant FATF Recommendations to prevent the misuse of virtual assets for money laundering and terrorist financing and the financing of proliferation.” As previously covered by InfoBytes, in October 2018, FATF urged all countries to take measures to prevent virtual assets and cryptocurrencies from being used to finance crime and terrorism and updated The FATF Recommendations to add new definitions for “virtual assets” and “virtual asset service providers” and to clarify how the recommendations apply to financial activities involving virtual assets and cryptocurrencies.
According to FATF announcement, INR. 15 establishes “binding measures,” which require countries to, among other things, (i) assess and mitigate risks associated with virtual asset activities and service providers; (ii) license or register service providers and subject them to supervision; (iii) implement sanctions and other enforcement measures when service providers fail to comply with an anti-money laundering/combating the financing of terrorism (AML/CFT) obligation; and (iv) ensure that service providers implement the full range of AML/CFT preventive measures under the FATF Recommendations, including customer due diligence, record-keeping, suspicious transaction reporting, and screening all transactions for compliance with targeted financial sanctions.
On June 18, the CFTC announced it filed a complaint in the U.S. District Court for the Southern District of New York against a United Kingdom-based bitcoin trading and investment company and its principal (collectively, “defendants”) for allegedly fraudulently obtaining and misappropriating almost 23,000 bitcoin from more than 1,000 customers. The CFTC alleges the defendants violated the Commodity Exchange Act by fraudulently soliciting customers to purchase bitcoin with cash and then deposit the bitcoin in accounts controlled by the defendants. The CFTC alleges that the defendants misrepresented that they “employed expert virtual currency traders who earned guaranteed daily trading profits on customers’ Bitcoin deposits.” Additionally, the CFTC alleges the defendants also fabricated weekly trade reports and “manufactured an aura of profitability” by depositing new customer bitcoin purchases to other customer accounts. The scheme, according to the CFTC, obtained almost 23,000 bitcoins “from more than 1,000 members of the public,” “which reached valuation of at least $147 million.” The CFTC is seeking civil monetary penalties, restitution, rescission, disgorgement, trading and registration bans, and injunctive relief against further violations of the federal commodity laws.
- Daniel P. Stipano to discuss “Beneficial Ownership: You have questions – We have quick answers” at the ABA/ABA Financial Crimes Enforcement Conference
- Moorari K. Shah to discuss "Legal & regulatory issues – Next wave of regulatory policy" at the Marketplace Lending & Alternative Financing Summit
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at an American Bar Association webinar
- Kari K. Hall and Christopher M. Walczyszyn to speak on the "Understanding updates to Regulation CC to ensure effective check processing" at a National Association of Federal Credit Unions webinar
- Daniel P. Stipano to discuss "ACAMS Moneylaundering.com Year-End Compliance Review and 2020 Outlook" at an ACAMS webinar
- APPROVED Webcast: Periodic reporting made easier
- Daniel P. Stipano to discuss "A 20/20 view on 2020’s legislative and regulatory outlook" at the ACAMS Anti-Financial Crime and Public Policy Conference