cryptocurrency

FinCEN Urges Financial Institutions to Focus on Detecting Proceeds of Foreign Public Corruption

 

The Financial Crimes Enforcement Network (“FinCEN”) recently issued an advisory urging financial institutions (including certain cryptocurrency businesses) to implement controls to help detect proceeds of foreign public corruption. The Advisory describes the types of corrupt payments and arrangements that financial institutions should be looking for and identifies red flags to help those institutions detect and report suspicious transactions that may involve kleptocracy and foreign public corruption.

Targeting Corruption. FinCEN reemphasizes that fighting corruption is a priority for the Biden Administration (as Orrick discussed here) and focuses on the “crucial role” financial institutions play in “identifying corrupt activity and associated money laundering on the part of foreign public officials” and kleptocrats, which it describes as those who wield political power or influence to enrich themselves at the expense of their nation.1 “Foreign public corruption erodes public trust and disproportionately harms the most vulnerable in societies[,]” said FinCEN Acting Director Himamauli Das in the press release accompanying the Advisory. Das urged financial institutions to “remain vigilant and promptly report suspicious financial activity.”2

While the Advisory’s cautions relate to public corruption globally, FinCEN singles out Russia as a “particular concern,” describing “widespread” corruption in, and linked to, the country, and the role that Russian kleptocrats and oligarchs play in supporting Russian President, Vladimir Putin’s regime, including Russia’s invasion of Ukraine. The Advisory builds on FinCEN guidance issued in recent weeks concerning the use of digital assets (crypto) and ransomware and the purchase of luxury goods and high-value assets to evade Russia sanctions.

Types of Corruption. The Advisory provides an overview of kleptocracy and foreign public corruption under the umbrellas of (1) wealth extraction and (2) laundering illicit proceeds.

FinCEN describes two methods of wealth extraction. The first, bribery and extortion, includes payments to foreign officials to obtain or retain business or other benefits, and may include coercion by corrupt officials. These improper arrangements may involve third-party facilitators or shell companies to conceal the purpose and flow of payments. The second, misappropriation or embezzlement of public assets, includes the theft, diversion, or misuse of public assets or resources for personal benefit. This type of corruption may involve officials exploiting or deceiving parties that seek to do business with the government.

Under the category of laundering illicit proceeds, the Advisory highlights the use of shell companies and offshore financial accounts to obscure the ownership and origin of illicit funds or facilitate the payment of bribes or misuse of assets, and the purchase of real estate, luxury goods and other high-value assets to launder proceeds of corruption. The Advisory also highlights U.S. government efforts against Russian elites, including pursuing their real estate, private aircrafts, and yachts.

Red Flags. The Advisory offers a list of red flags (available here) to help financial institutions detect transactions associated with kleptocracy and public corruption. The flags concern opacity in awarding government contracts; transactions involving services to state-owned companies; foreign business conducted through personal accounts; foreign jurisdictions that appear unrelated to the work of, or high-value assets not commensurate with, a government official’s role; charges at above-market rates that lack supporting detail or that do not match the documentation; and the use of third parties, fictitious emails, or fraudulent documents to conceal the origin of funds or ownership.

Suspicious Activity Reporting. The Advisory concludes with a “reminder” of Bank Secrecy Act (“BSA”) obligations for financial institutions, including scenarios in which financial institutions must file a suspicious activity report (“SAR”). The Advisory also asks institutions to specifically cite this document (“CORRUPTION FIN-2022-A001”) to indicate a connection between the suspicious activities being reported and the activities described in the Advisory. It also notes existing guidance on BSA reporting requirements and due diligence.

Takeaways. Although the Advisory and its guidance are framed in general terms, the explicit links to Russia and the types of corruption highlighted both serve as yet another indication of the Administration’s focus on such ties. Third-party analysis of SAR filings suggests that certain financial institutions, such as cryptocurrency exchanges and other “money services businesses,” may not be meeting their obligations to file corruption-related SARs.3 This Advisory suggests that such SAR filing failures will likely receive additional scrutiny from FinCEN.

The Advisory confirms that financial institutions need to take care to identify possible links to Russia. While the “red flags” listed are likely familiar to those who work in the anti-corruption field, they serve as a reminder and warning. Financial institutions should continue to prioritize the establishment of risk-based controls and procedures that include reasonable steps that can help them understand their customers and meet regulators’ due diligence expectations.

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1 FinCEN Press Release, FinCEN Issues Advisory on Kleptocracy and Foreign Public Corruption, (April 14, 2022).

2 Id.

3 Alison Jimenez, Kleptocracy Suspicious Activity Reports, Dynamic Securities Analytics, Inc. (April 15, 2022).

FCA Sets Out New Proposals to Restrict High-Risk Financial Promotions

 

On 19 January, 2022, the FCA published its consultation on strengthening its financial promotion rules for high-risk investments, including cryptoassets (CP22/2). The consultation proposes some fairly onerous requirements and we expect that many of our clients will want to respond to this paper. We’ve summarised some of the key changes being proposed below.

  1. Classification of high-risk investments.

Following feedback that the COBS 4 rules were challenging to navigate and understand, the FCA proposes to rationalise the COBS 4 rules as follows:

New category Investments included Mass marketing rules
“restricted mass market investments” (RMMIs) · non-readily realisable securities (e.g., shares or bonds not listed on an exchange);

· qualifying cryptoassets; and

· P2P agreements

Mass marketing will be allowed to retail investors subject to certain restrictions
“non-mass market investments” (NMMIs) · non-mainstream pooled investments (e.g., pooled investments in an unauthorised fund – such as an unregulated collective investment scheme); and

· speculative illiquid securities (e.g., speculative mini-bonds)

Mass marketing will be banned to retail investors

 

  1. Consumer journey into high-risk investments.

The FCA explain in the consultation that it is concerned that too many consumers are just “clicking through” and accessing high-risk investments without understanding the risks involved. The FCA’s existing marketing restrictions are intended to ensure consumers only access high-risk investments knowingly, however, the FCA state that consumer research shows this approach is not working as well as it could.

The FCA proposals include:

    • a ban on financial promotions for high-risk investments from containing any monetary and non-monetary benefits that incentivise investment activity (which include cryptoasset incentives);
    • for RMMIs (see definition above):
      • a new risk warning will be required, and a link must be provided for the customer to obtain further prescribed information regarding the risks of investing. The proposed risk warning is: “Don’t invest unless you’re prepared to lose all your money invested. This is a high-risk investment. You could lose all the money you invest and are unlikely to be protected if something goes wrong. Take 2min to learn more.”;
      • a personalised risk warning pop-up must be displayed for first time investors with a firm before receiving a direct offer financial promotion;
      • a 24-hour cooling off period for first time investors with a firm before the customer can receive the direct offer financial promotion;
      • consumers will be required to state why they meet the relevant criteria for an exemption (e.g., restricted investor, HNW investor, self-certified sophisticated investor (this exemption will not apply to cryptoasset products), or certified sophisticated investor). For example, this may require the customer to state their income to demonstrate they are high net worth; and
      • RMMI specific requirements on the appropriateness assessment must be complied with. The FCA proposes introducing stronger appropriateness tests (including restricting the number of retakes that a potential customer can have and restricting the guidance firms can provide to the customer during the assessment).

Cryptoasset firms should note that these new rules will also apply to promotions of qualifying cryptoassets.

  1. Strengthening the role of firms approving and communicating financial promotions.

Last year, the Treasury confirmed that it intends to amend the financial promotion approval regime by establishing a regulatory gateway for the approval of financial promotions made by unauthorised persons. The current financial promotion regime will be amended so that financial promotions made by unauthorised persons can only be approved by certain regulated firms that have been given permission by the FCA to approve financial promotions of unauthorised firms.

In addition to the new regulatory gateway, the FCA wants to strengthen the role of a section 21 approver (a regulated firm that approves financial promotions for others) as it believes that they play an important role in enabling unauthorised issuers of high-risk investments to reach consumers. The regulator states that it wants to develop a robust regime to complement the proposed section 21 gateway which, when implemented, will hold section 21 approvers to high standards. The proposals include:

    • a rule that will require firms to self-assess whether they have the necessary competence and expertise in an investment product or service before approving or communicating a relevant financial promotion;
    • a rule to require section 21 approvers to have a continuing relationship, with those for whom they approve promotions, for the life of the promotion and to actively monitor it after approval for any changes that might mean the promotion no longer complies;
    • extending the conflict-of-interest rules to cover the approval of financial promotions;
    • a rule that requires section 21 approvers to collect attestations of ‘no material change’ from clients with approved promotions every three months, and for the lifetime of the approved promotion; and
    • requiring firms when approving promotions subject to an appropriateness test, to check the compliance of appropriateness tests periodically, throughout the lifetime of a promotion.
  1. Applying financial promotion rules to qualifying cryptoassets.

Following the government confirming that it intends to extend the scope of the financial promotion perimeter to include qualifying cryptoassets, the FCA is consulting on how it will categorise these cryptoassets once they are brought into the financial promotion regime.

The FCA intends to generally apply the same rules to cryptoassets as currently applied to non-readily realisable securities and P2P agreements. However, it is important to note that the proposals state that it should not be possible for ‘direct offer’ financial promotions of qualifying cryptoassets to be made to self-certified sophisticated investors. Financial promotions relating to cryptoassets will need to comply with COBS 4.

The consultation closes for comments on 23 March, 2022 and the FCA intends to confirm its final rules this summer 2022.

Firms will have three months from the FCA publishing the final rules to comply with the new requirements for the consumer journey and for section 21 approvers. The cryptoasset promotion changes will apply from the date that qualifying cryptoassets are brought within the financial promotion regime.

SEC Obtains Emergency Order Halting Alleged Diamond-Related ICO Scheme Targeting Hundreds of Investors

 

On May 21, the Securities and Exchange Commission (SEC) announced that it obtained a court order halting an ongoing $30 million Ponzi Scheme. The SEC complaint charged a cryptocurrency business and its principal with using investor funds to run a Ponzi Scheme. Release.

Regulatory Risks Facing Cryptocurrency Trading Platforms

What does it mean for a cryptocurrency trading platform to be compliant with U.S. laws? The answer is not as clear as some may expect and hinges on such questions as how tokens on the platform are legally categorized and how trading is conducted. Orrick’s Jason Somensatto, Of Counsel to our White Collar, Investigations, Securities Law and Compliance Practice, recently explored this issue in Bloomberg Law’s Securities and Regulation Report™.

What is clear from recent developments is that multiple U.S. regulators are scrutinizing whether trading platforms are complying with various regulatory schemes. Most notably, token trading platforms risk enforcement for not following law applicable to money transmission and to securities and commodities trading. Although enforcement against cryptocurrency businesses in these areas has thus far been minimal, trading platforms should expect that to change in light of the increasing attention being paid by regulators to these issues.

To view the full article, please visit Bloomberg’s website.