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On March 8, the Financial Crimes Enforcement Network (FinCEN) issued an advisory reminding financial institutions that on February 22, the Financial Action Task Force (FATF) updated two documents that list jurisdictions identified as having “strategic deficiencies” in their anti-money laundering and combating the financing of terrorism (AML/CFT) regimes. The first document, the FATF Public Statement, identifies two jurisdictions, the Democratic People’s Republic of Korea and Iran, that are subject to countermeasures and/or enhanced due diligence due to their strategic AML/CFT deficiencies. The second document, Improving Global AML/CFT Compliance: On-going Process, identifies the following jurisdictions with strategic AML/CFT deficiencies that have developed an action plan with the FATF to address those deficiencies: the Bahamas, Botswana, Cambodia, Ethiopia, Ghana, Pakistan, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, and Yemen. Notably, Cambodia has been added to the list due to the lack of effective implementation of its AML/CFT framework. FATF further notes that several jurisdictions have not yet been reviewed, and that it “continues to identify additional jurisdictions, on an ongoing basis, that pose a risk to the international financial system.” Generally, financial institutions should consider both the FATF Public Statement and the Improving Global AML/CFT Compliance: On-going Process documents when reviewing due diligence obligations and risk-based policies, procedures, and practices.
CFTC, SEC settle with foreign trading platform conducting Bitcoin transactions without proper registration
On March 4, the CFTC resolved an action taken against a foreign trading platform and its CEO (defendants) for allegedly offering and selling security-based swaps to U.S. customers without registering as a futures commission merchant or designated contract market with the CFTC. The CFTC alleged that the platform permitted customers to transact in “contracts for difference,” which were transactions to exchange the difference in value of an underlying asset between the time at which the trading position was established and the time at which it was terminated. The transactions were initiated through, and settled in, Bitcoin. The CFTC alleged that these transactions constituted “retail commodity transactions,” which would have required the platform to receive the proper registration.
According to the CFTC, the defendants, among other things, (i) neglected to register as a futures commission merchant with the CFTC; and (ii) failed to comply with required anti-money laundering procedures, including implementing an adequate know-your-customer/customer identification program. The consent order entered by the U.S. District Court for the District of Columbia imposes a civil monetary penalty of $175,000 and requires the disgorgement of $246,000 of gains. The consent order also requires the defendants to certify to the CFTC the liquidation of all U.S. customer accounts and the repayment of approximately $570,000 worth of Bitcoins to U.S. customers.
In a parallel action, the SEC entered into a final judgment the same day to resolve claims that, among other things, the defendants failed to properly register as a security-based swaps dealer. The defendants are permanently restrained and enjoined from future violations of the Securities Act of 1933 and are required to pay disgorgement of approximately $53,393. This action demonstrates the potential application of CFTC and SEC registration requirements to non-U.S. companies engaging in covered transactions with U.S. customers.
On March 11, FDIC Chairman Jelena McWilliams spoke at the Institute of International Bankers Annual Washington Conference about Volcker Rule reform, emphasizing that federal agencies need to provide greater clarity about the types of prohibited trading and the types of funds that fall within the scope of the rule. McWilliams noted that compliance with the Volcker Rule (Section 13 of the Bank Holding Company Act), which restricts a bank’s ability to engage in proprietary trading and own certain funds, has been challenging for institutions and that many of the rule’s requirements are “extremely complex and overly subjective.” Emphasizing that there appears to be a broad consensus for reform, McWilliams stated that—after considering a Notice of Proposed Rulemaking proposing significant changes to the Volcker Rule’s trading and compliance elements issued last May (covered by InfoBytes here), along with comment letters, and stakeholder input—it remains clear that certain elements of the rule and proposal still require work. Concerning the Volcker Rule’s effect on banks engaged in international activity, McWilliams noted that “[w]e need to right size the rule’s extraterritorial scope while also minimizing competitive inequities between the U.S. banking entities and their foreign counterparts,” adding that the Volcker Rule should not prohibit activities clearly not governed by U.S. rules, and that the FDIC will consider options for simplifying the current rule’s scope and requirements for foreign funds.
On March 6, the CFTC issued an enforcement advisory announcing that it would add violations of the Commodity Exchange Act involving foreign corrupt practices to its cooperation and self-reporting program. The CFTC will recommend no civil monetary penalty where companies and individuals which are not registered (or required to be registered) with the CFTC timely and voluntarily disclose such violations. Full cooperation and appropriate remediation would also be required. In announcing the enforcement advisory, the CFTC’s Director of Enforcement stated at the ABA’s National Institute on White Collar Crime that the change “reflects the enhanced cooperation between the CFTC and our law enforcement partners like the Department of Justice.” He also stated that the agency currently has open investigations into various foreign corrupt practices that violate the Commodity Exchange Act, including bribes that “secure business in connection with regulated activities,” manipulation of benchmarks, “prices that are the product of corruption [being] falsely reported to benchmarks,” and corrupt practices altering the commodity markets.
On March 6, National Security Advisor Ambassador John Bolton issued a statement warning foreign financial institutions that they will face sanctions if it is determined they have been involved in facilitating illegitimate transactions benefiting former President Maduro’s regime.
See here for continuing InfoBytes coverage of actions related to Venezuela.
On March 4, proposed legislation, H.R. 1491, was introduced by its co-sponsors in the U.S. House of Representatives to provide federal financial regulatory clarity for fintech startups. According to a press release issued by Congressman David Scott (D-GA), the FINTECH Act of 2019 would: (i) mandate U.S. federal financial regulators harmonize and coordinate conflicting regulations that would cover fintech operations; and (ii) establish a Fintech Council to serve as a “single point of entry” for approving fintech charters before assigning approved fintechs to one or more designated U.S. regulators. The bill's co-sponsors are members of the House of Representatives' Financial Services Committee and co-chair the Fintech and Payments Caucus.
Federal Reserve to phase out Comprehensive Capital Analysis and Review (CCAR) “qualitative objection”
On March 6, the Federal Reserve Board (Fed) announced plans to limit the use of the “qualitative objection” in its Comprehensive Capital Analysis and Review (CCAR) exercise. Effective for the 2019 cycle, large U.S. bank holding companies and U.S. intermediate holding companies of foreign banking organizations that participate in four CCAR exercises and successfully pass the qualitative evaluation in the fourth year will no longer be subject to the evaluation under the final rule, which measures firms’ ability on a forward-looking basis to determine capital needs. Firms that fail to pass in the fourth year, the Fed noted, will continue to be subject to a possible qualitative objection until they pass. Moreover, all firms’ capital planning processes will still be evaluated, and firms will be required to pass the quantitative evaluation, which evaluates their ability to maintain minimum levels of capital under hypothetical stress scenarios. Furthermore, the Fed stated that it plans to no longer issue qualitative objections to any firms effective January 1, 2021, with the exception of firms who receive a qualitative objection the preceding year. Along with the final rule, the Fed released instructions for this year’s CCAR exercise, confirming that five of the 18 firms subject to this year’s CCAR exercises will possibly be subject to a qualitative objection.
On February 26, the Federal Reserve Board (Fed) issued clarifying guidance on the new rating system for the supervision of large financial institutions (LFIs). According to SR 19-3, the new LFI rating system replaces the current bank holding company (BHC) rating system and will evaluate and communicate the supervisory condition of: BHCs with total consolidated assets of $100 billion or more; all non-insurance, non-commercial savings and loan holding companies (SLHC) with total consolidated assets of $100 billion or greater; and the U.S. operations of foreign banking organizations with combined U.S. assets of $50 billion or more. The new rating system supports the Board’s supervisory program for all LFIs, including firms posing the greatest risk to U.S. financial stability. The Fed will assign initial LFI ratings to firms supervised by the Large Institution Supervision Coordinating Committee starting early 2019, and all other firms subject to the LFI rating system will be assigned initial ratings in early 2020. SR 19-4, issued the same day, provides guidance on which rating systems apply to BHCs and SLHCs with assets of less than $100 billion, following the adoption of the new LFI rating system.
In an indictment unsealed on February 26, the DOJ charged a former sales representative and the president of a U.S.-based company with conspiracy to commit bribery, wire fraud, and money laundering, and substantive wire fraud, for their alleged roles in “a scheme to corruptly secure business advantages, including contracts and payment on past due invoices, from Venezuela’s state-owned and state-controlled energy company.” The indictment alleges that from approximately 2009 to 2013, the sales representative and the president of the company conspired to bribe three of the energy company officials in exchange for providing advantages to the unnamed company, including through the creation of fictitious invoices from Panamanian shell companies.
According to the indictment, in exchange for the bribes the energy company officials allegedly assisted the company in obtaining additional energy company contracts, inside information, and payment on past due invoices. The defendants are also alleged to have received kickbacks in connection with the scheme. In total, the sales representative is alleged to have received over $985,000 and the president of the company over $258,000 in kickback payments. Two of the three officials that the defendants are accused of bribing have pleaded guilty in connection with the case and are pending sentencing.
U.K. oil and gas services company sets aside $280 million for bribery settlements with multiple countries
On February 20, a London-based oil and gas services company, reported in a filing with the SEC that it has set aside $280 million as an estimate for the settlement of investigations by U.S., Brazilian, and French law enforcement authorities regarding potential violations of anticorruption laws in several countries. The company’s predecessor previously paid $338 million to settle FCPA charges brought by the DOJ and the SEC in 2010.
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