Regulatory Compliance & Financial Crimes December 2023 Update

Regulatory Compliance & Financial Crimes December 2023 Update

In this edition of our monthly update, we will be looking at relevant regulatory updates, including enforcement actions, guidance, rulemakings, and other public statements made by federal and state financial services regulatory agencies as of November 30, 2023. Our goal is to provide our clients and network with highlights of relevant and useful updates within the compliance and financial crimes industry.

December 19, 2023

Regulatory Updates

FinCEN and the Bureau of Industry and Security (BIS) Issue Joint Notice and New Key Term for Reporting Evasion of U.S. Export Controls Globally

The Department of Commerce’s Bureau of Industry and Security (BIS) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a joint notice highlighting a new Suspicious Activity Report (SAR) key term (“FIN-2023-GLOBALEXPORT”) for financial institutions to reference when reporting potential efforts by individuals or entities seeking to evade U.S. export controls unrelated to Russia’s invasion of Ukraine. The notice highlights that institutions should take a risk-based approach to trade transactions and includes red flags to watch for.

FinCEN Finalizes Rule on Use of FinCEN Identifiers in Beneficial Ownership Information Reporting

FinCEN issued a final rule that details when a reporting company may report an entity’s FinCEN identifier and full legal name instead of information about an individual beneficial owner. This can only occur if three conditions are met: the entity has obtained a FinCEN identifier and provided that FinCEN identifier to the reporting company, an individual is or may be a beneficial owner of the reporting company by virtue of an interest in the reporting company that the individual holds through the entity, and the beneficial owners of the entity and of the reporting company are the same individuals.

CFPB Proposes New Rule for Digital Consumer Payment Applications

The Consumer Financial Protection Bureau (CFPB) proposed a rule to define a market for general-use digital consumer payment applications. The proposed market would cover providers of funds transfer and wallet functionalities through digital applications for consumers’ general use in making payments to other persons for personal, family, or household purposes. Larger participants of this market would be subject to the CFPB’s supervisory authority under the Consumer Financial Protection Act (CFPA).

Morgan Stanley Wealth Management Arm Being Probed by Fed Reserve Regarding AML Controls for Wealthy Foreign Customers

The Federal Reserve is scrutinizing Morgan Stanley’s controls for foreign customers during onboarding, the report said. The agency has previously found the bank’s due diligence and anti-money laundering (AML) controls to be lacking, according to the report, and has privately reprimanded the bank for not making the required changes.

FinCEN and the Internal Revenue Service Issue Alert on COVID-19 Employee Retention Credit Fraud

The IRS Criminal Investigation (CI) has identified ongoing scams related to the ERC involving more than $2.8 billion of potentially fraudulent ERC claims between 2020 and 2023. In response, the IRS has issued a moratorium on processing new ERC claims through the end of 2023 to protect small business owners from scams. Scammers are known to file fraudulent ERC claims using shell companies or dormant entities, existing but ineligible businesses.

The FinCEN notice highlights the importance of vigilance for red flags related to ERC schemes and requests that financial institutions reference the key term “FIN-23-ERC” on any relevant Suspicious Activity Reports (SARs). 

Enforcement Updates

FinCEN Announces Largest Settlement in U.S. Treasury Department History with Virtual Asset Exchange Binance for Violations of U.S. Anti-Money Laundering Laws

Binance settled with FinCEN and OFAC for $4.3 billion due to Bank Secrecy Act (BSA) and sanctions violations, including the failure to have sufficient programs in place to prevent and report suspicious activity. FinCEN’s settlement agreement assesses a civil money penalty of $3.4 billion, imposes a five-year monitorship, and requires significant compliance undertakings, including to ensure Binance’s complete exit from the United States. OFAC’s settlement agreement assesses a penalty of $968 million and requires Binance to abide by a series of robust sanctions compliance obligations, including full cooperation with the monitorship overseen by FinCEN. 

Regulators Say Wells Fargo Isn’t Doing Enough to Police Customer Crimes

Wells Fargo is facing a lawsuit for allowing an alleged $490 million Ponzi scheme led by Matthew Beasley to operate. Following the 2016 scandal of holding illegitimate accounts and the Office of the Comptroller of the Currency consent order related to failing BSA/AML laws, this Ponzi scheme continues to show that Wells Fargo has not considered their risk. A court-appointed receiver looking to recover funds of Beasley’s victims sued Wells Fargo, claiming that the bank aided Beasley’s scheme by maintaining the account. The account was opened to be a lawyer’s trust account, in which attorneys hold funds on their clients’ behalf. Deposits intended to be for investment purposes went to fund Beasley’s extravagant lifestyle. According to filings, both parties are in settlement talks.

SEC Charges Crypto Company SafeMoon and Its Executive Team for Fraud and Unregistered Offering of Crypto Securities

The SEC charged SafeMoon LLC, SafeMoon US LLC, its creator, and the companies’ CEO and Chief Technology Officer for perpetrating a massive fraudulent scheme through the unregistered sale of the crypto asset security SafeMoon. According to the SEC’s complaint, the defendants promised to take the price of the token “safely to the moon,” but instead of delivering profits, they wiped out billions in market capitalization, withdrew crypto assets worth more than $200 million from the project, and misappropriated investor funds for personal use.

NYDFS Fines Payoneer $1.25 Million for Sanctions Program Issues

Payoneer faces a $1.25 million penalty and consent order issued by the New York State Department of Financial Services related to issues with their sanctions program. The order pertains to transactions that occurred between 2011-2016, citing that Payoneer’s OFAC system had weak matching algorithms, did not screen the appropriate data, and allowed pending payments to be released.

SEC Charges Kraken for Operating as an Unregistered Securities Exchange, Broker, Dealer, and Clearing Agency

SEC charged Payward Inc. and Payward Ventures Inc., together known as Kraken, with operating Kraken’s crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency. According to the complaint, since at least September 2018, Kraken has made hundreds of millions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Kraken intertwines the traditional services of an exchange, broker, dealer, and clearing agency without having registered any of those functions with the Commission as required by law.

SEC Announces Enforcement Results for Fiscal Year 2023

The SEC filed 784 enforcement actions in FY 2023 (a 3% increase from FY 2022), obtained orders for nearly $5 billion in financial remedies (second highest in SEC history), and distributed nearly $1 billion to harmed investors.

CFTC Releases FY 2023 Enforcement Results November 07, 2023

The Commodity Futures Trading Commission (CFTC) published its enforcement results for fiscal year 2023, highlighting a total of 96 enforcement actions that resulted in over $4.3 billion in penalties, restitution, and disgorgement. The enforcement actions included fraud, manipulation, and other significant violations in diverse markets, including digital assets and swaps markets.

FTX Sues Bybit to Claw Back $953 Million in “Misappropriated Funds”

FTX’s bankruptcy advisers sued the crypto exchange ByBit Fintech Ltd to recover $953 million transferred to its investment partner, Mirana, and other individuals. The gross value of the initial transfer was $838 million. An additional $115 million in digital and fiat assets were transferred to various entities and individuals involved with Bybit and Mirana. 

Bybit was given VIP status, which by association, led Mirana to be able to leverage VIP status. VIP status allowed customers to fulfill withdrawal requests as soon as assets became available, which impacted the ability of non-VIP customers to withdraw funds. The suit seeks to recover and return the assets that were “fraudulently” transferred to Bybit, Mirana, and other affiliates that are being “held hostage” by aforementioned affiliates.

OFAC Settles With daVinci Payments for Violations of Sanctions Programs

On November 6, 2023, Swift Prepaid Solutions, DBA daVinci Payments, settled its civil liability with the Office of Foreign Assets Control (OFAC) for $206,213 for numerous violations of OFAC sanctions on Crimea, Iran, Syria, and Cuba occurring between November 2017 and July 2022. daVinci manages prepaid reward card programs, which it allowed persons apparently residing in the sanctioned jurisdictions to redeem. Users would redeem tokens received from daVinci online by providing their name, address, and email addresses.

While users could not enter addresses in sanctioned jurisdictions, a compliance investigation identified 12,378 occasions in which daVinci had redeemed prepaid cards for users with IP addresses associated with Crimea, Iran, Syria, and Cuba, and 13 occasions in which recipients had used email addresses with top-level domains associated with these jurisdictions. Due to the shortcomings in daVinci’s geolocation controls and sole reliance on customer-provided location data, these IP addresses and email addresses were not flagged, and online financial services were provided to these individuals.

This market update was prepared with assistance from Alexandra Bartkoske (Associate – Chicago) and Clayton Gingrich (Associate – Philadelphia).