Regulatory Updates

Alabama Federal Judge Declares Corporate Transparency Act Unconstitutional

On March 1, 2024, the United States District Court for the Northern District of Alabama declared the Corporate Transparency Act (CTA) unconstitutional. In its memorandum opinion, the District Court rejected the Government’s position stating that the CTA exceeds Congress’ power to regulate these business entities. The Court also issued a Final Judgment, permanently enjoining enforcement of the CTA against the two plaintiffs.   

FINRA Publishes 2024 Annual Regulatory Oversight Report

U.S. Treasury Publishes 2024 National Risk Assessments for Money Laundering, Terrorist Financing, and Proliferation Financing

The annual risk assessment related to money laundering, terrorist financing, and proliferation financing was released and provides updates to the AML/CFT framework in place. Specific areas of the risk assessment include the fentanyl crisis, foreign and domestic terrorist attacks and financing, ransomware attacks, the growth of digital payments, and how threats to global peace have impacted financial crimes in the United States. The key findings related to money laundering include cybercrime, illegitimate businesses, lack of transparency in real estate transactions, vulnerabilities for sectors that do not have robust AML regulations, and weaknesses in U.S. financial institutions related to compliance. The risk of terrorist financing remains similar to 2022, as the biggest threat is the financial ties between entities or individuals in the U.S. and foreign terrorist groups.

FinCEN Proposes Rule to Combat Illicit Finance and National Security Threats in Investment Adviser Sector

FinCEN News Release | Federal Register Article

Under the Notice of Proposed Rulemaking (NPRM) submitted by FinCEN on February 13, an Investment Advisor Sector would be added to BSA, rules would apply to registered exempt fund advisors, and Investment Advisors would be included in definition of “financial institution” under the Bank Secrecy Act (BSA).

FinCEN Proposes Rule to Combat Money Laundering and Promote Transparency in Residential Real Estate

FinCEN News Release | Federal Register Article

The proposed rule would require certain professionals involved in the closing or settlement of residential real estate transfers to report information to FinCEN about certain non-financed sales and transfers and keep records.

EU Governments, Parliament Agree on Single AML Rulebook

The European Parliament and the European Union’s (EU) 27 national governments reached a provisional agreement in hopes of bringing together the application of anti-money laundering rules across the EU. Parliament and Council reached a provisional agreement on the sixth Anti-Money Laundering (AML) directive and the EU “single rulebook” regulation. 

The agreed provisions, part of the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) package, will have to be applied by banks and other obliged entities to protect the EU internal market from money laundering and terrorist financing. The single rulebook will newly subject professional soccer clubs, luxury car sellers, and private jet traders to AML rules, require financial institutions to conduct enhanced due diligence on wealthy customers engaged in large transactions, and introduce an EU-wide limit on cash payments of €10,000.

The new bills provide access to beneficial ownership information and give more powers to financial intelligence units (FIUs) to analyze and detect money laundering and terrorist financing cases as well as to suspend suspicious transactions.

UK Warns of Criminal Sanctions Evasion Through Artwork Storage Facilities

The National Crime Agency issued an alert to artwork storage facilities, warning of potential criminal exploitation of the sector by individuals subject to Russian sanctions. High-net-worth individuals, such as Russian oligarchs, hold art in specialist storage facilities for a range of reasons, including secure storage of art as an investment or as a store of value for tax benefits. It is known that criminals, including sanctioned individuals, are exploiting these services to evade sanctions and launder the proceeds of crime.

BIS Implements Final Rule of Additional Sanctions Against Russia and Belarus

The Department of Commerce is strengthening its existing sanctions under the Export Administration Regulations (EAR) against Russia and Belarus, including expanding the scope of the EAR’s Russian and Belarusian Industry Sector Sanctions and making changes to the licensing requirements that apply to the occupied Crimea region of Ukraine. This rule revises recent restrictions targeting Iran’s supply of unmanned aerial vehicles to Russia. This rule also refines certain existing export controls on Russia and Belarus. 

U.S. Senators Concerned With FinCEN’s Delay in Implementing AML and Sanctions Whistleblower Program

Several U.S. senators are questioning why FinCEN has delayed its whistleblower award program for financial crime-related activity. This program aimed to compensate individuals who submit tips that lead to instances of monetary sanctions that exceed $1,000,000. This was part of the 2021 annual defense bill, but no implementation for this program has occurred. Legislation allowed for whistleblowers to receive up to 30% of the monetary penalties but did not provide a minimum. FinCEN also failed to create a public website to receive tips and formalize rules surrounding the program. Part of this delay may be due to geopolitical events. FinCEN has until February 23, 2024, to explain why this program is not in effect.

OCCRP Reports Global Financial Crime Generated Over $3 Trillion in 2023

The Organized Crime and Corruption Reporting Project reported that Nasdaq released its annual Global Financial Crime Report on January 30, estimating that transnational illicit activities generated over $3 trillion in 2023. The report estimated that $782.9 billion came from drug trafficking activity, $346.7 billion came from human trafficking, and over $11 billion came from terrorist financing activities. Additionally, the report estimates that fraud scams and bank fraud schemes totaled $485.6 billion in losses globally.

People Are Using AI to Bypass KYC 

The company OnlyFake is leveraging networks to create fake IDs that appear to be legitimate for only $15. The developed software can generate hundreds of fake profiles using an Excel dataset. These IDs are realistic to the point that they pass KYC for OKX, a cryptocurrency exchange that uses the service Jumio to verify documents. OnlyFake uses AI, specifically general adversarial networks, to design a neural network that improves and becomes more accurate in creating and detecting fake IDs. This practice has already been seen in the U.S., Italy, China, Russia, Argentina, Czechia, and Canada, making this an international issue.

Enforcement Updates

Whistleblowers Allege Inadequate Customer Due Diligence by Cash App

Federal financial regulators are exploring allegations by two whistleblowers that Cash App, the popular mobile payment platform, and entities providing transaction services to its users performed inadequate due diligence on customers, potentially opening the door to money laundering, terrorism financing, and other illegal activities. The whistleblowers allege the Cash App program “had no effective procedure to establish the identity of its customers.” In their complaints, the whistleblowers detail an array of questionable Cash App transactions with entities under sanction by the Treasury Department’s Office of Foreign Assets Control, operations known to sell personal information and credit card data for illegal purposes, and offshore gambling sites barred to U.S. citizens.

NYSDFS Orders Gemini Trust Company LLC to Pay $37 Million for Regulatory Breaches

State regulators in New York fined Gemini Trust Company $37 million in response to multiple failures in fiduciary oversight, customer- and lending-related due diligence, transaction monitoring, and suspicious activity reporting. New York’s Department of Financial Services, or DFS, disclosed in a 29-page consent order Wednesday that in the months and years prior to November 2022, the exchange’s manifold weaknesses against illicit finance “threatened the safety and soundness of the company.” 

Green Dot estimates up to $50M in liabilities over proposed Fed order, sets aside $20M after draft AML order from Fed

Fintech Green Dot stated in its 8-K that it has received a proposed consent order from the Federal Reserve tied to its compliance with anti-money-laundering regulations and other risk management matters that could cost it tens of millions of dollars. Green Dot has set aside $20 million related to the proposed order, Chief Financial Officer Jess Unruh said on its quarterly earnings call. The enforcement action, which includes civil money penalties, could end up costing as much as $50 million.

Genesis Global Trading fined $8M by NYDFS over AML, cyber lapses

Virtual currency brokerage firm Genesis Global Trading agreed to pay an $8 million penalty levied by the New York State Department of Financial Services (NYDFS) for alleged compliance failures that left it vulnerable to illicit activity and cybersecurity threats.

NYDFS Fines ICBC Bank $30 Million For Multiple Compliance Failures

NYDFS’ investigation into ICBC’s compliance failures included multiple deficiencies in the New York branch’s BSA/AML compliance program from 2018 through 2022. The investigation concluded that a former New York branch employee backdated several compliance documents at the direction of a then-current branch employee and that ICBC failed to report this misconduct to the Department in a timely fashion. The investigation also concluded that ICBC unlawfully disclosed confidential supervisory information to an overseas regulator.

OCC Assesses $65 Million Penalty Against City National Bank Related to Systemic Deficiencies in the Bank’s Risk Management and Internal Controls

The OCC found that the bank engaged in unsafe or unsound practices, including its failure to establish effective risk management and internal controls. The bank also violated the Bank Secrecy Act (BSA) and 12 CFR Part 9 – Fiduciary Activities of National Banks. The agency also issued a cease-and-desist order requiring the bank to take broad and comprehensive corrective actions to improve its strategic plan, operational risk management, including internal controls; compliance risk management, including BSA/anti-money laundering and fair lending; strategic risk management; and investment management practices.

Supervisory Board Member of New York State Employee Federal Credit Union Pleads Guilty in $1 Billion Scheme to Dodge Money Laundering Rules in New York

FINCEN News Release | Department of Justice Article

Gyanendra Asre, 56, of New York, pleaded guilty to failure to maintain an anti-money laundering program in violation of the Bank Secrecy Act as part of a scheme to bring lucrative and high-risk international financial business to a small, unsophisticated credit union.

According to court documents, from 2014 to 2016, he was a member of the supervisory board of the New York State Employees Federal Credit Union (NYSEFCU), a financial institution that was required to have an anti-money laundering program. Through the NYSEFCU and other entities, Asre participated in a scheme that brought over $1 billion in high-risk transactions, including millions of dollars of bulk cash transactions from a foreign bank, to the NYSEFCU.

SEC Charges Founder of $1.7 Billion HyperFund Crypto Pyramid Scheme and Top Promoter with Fraud

On January 29, the Securities and Exchange Commission charged Xue Lee (a.k.a. Sam Lee) and Brenda Chunga (a.k.a. Bitcoin Beautee) for their involvement in a fraudulent crypto asset pyramid scheme known as HyperFund that raised more than $1.7 billion from investors worldwide.

According to the SEC’s complaint, from June 2020 through early 2022, Lee and Chunga promoted HyperFund “membership” packages, which they claimed guaranteed investors high returns, including from HyperFund’s supposed crypto asset mining operations and associations with a Fortune 500 company.

As the complaint alleges, however, Lee and Chunga knew or were reckless in not knowing that HyperFund was a pyramid scheme and had no real source of revenue other than funds received from investors. In 2022, the HyperFund scheme collapsed, and investors were no longer able to make withdrawals.

SEC Charges TradeStation Crypto for Unregistered Offer and Sale of Crypto Asset Lending Product, fined $1.5 Million

On February, the Securities and Exchange Commission announced charges against TradeStation Crypto, Inc., based in Plantation, Florida, for failing to register the offer and sale of a crypto lending product that allowed U.S. investors to deposit or purchase crypto assets in a TradeStation account in exchange for the company’s promise to pay interest. To settle the SEC’s charges, TradeStation agreed to pay a $1.5 million penalty.

According to the SEC’s order, TradeStation began to offer and sell the crypto lending product with the interest feature around August 2020. TradeStation marketed the interest feature as a way for investors to earn interest and “Put your crypto assets to work for you,” and TradeStation had complete discretion over how to deploy the assets to generate revenue to pay interest to investors. The order finds TradeStation offered and sold the crypto lending product with the interest feature as a security, and, since it did not qualify for a registration exemption, TradeStation was required to register its offer and sale but failed to do so.

Former Banking Executive Pleads Guilty to Evading Anti-Money Laundering Regulations

The former vice president of a bank located in Missouri pleaded guilty to assisting high-risk bank customers in evading the bank’s anti-money laundering controls. According to court documents, between April 2014 and July 2022, McVey assisted high-risk bank customers engaged in deceptive sweepstakes and short-term online loan activities in evading the bank’s anti-money laundering controls.

Former Law Firm Partner Sentenced To 10 Years in Prison for Laundering $400 Million Of OneCoin Fraud Proceeds

A former international law firm partner was sentenced to 10 years in prison by U.S. District Judge Edgardo Ramos for laundering approximately $400 million of proceeds from the massive international fraud scheme known as “OneCoin.” In addition to the prison term, he was sentenced to three years of supervised release and ordered to forfeit a money judgment of $392,940,000, several bank accounts, a yacht, two Porsche automobiles, and four real-estate properties.

2 Las Vegas casinos to pay $7.45M after former exec’s guilty plea in money laundering probe

MGM Grand and The Cosmopolitan of Las Vegas will pay a combined $7.45 million after a former executive pleaded guilty to one count of failure to file reports of suspicious transactions required to be made by casinos. According to the investigation, the COO of casino knew a customer was gambling the proceeds of their illegal bookmaking operation but failed to report or stop the activity.

Canada’s TD Bank faces penalty for faulty anti-money laundering controls

Reports state that the penalties imposed on TD Bank by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is expected to exceed C$10 million ($7.44 million), which could be the biggest ever penalty slapped on a Canadian financial institution by the country's anti-money laundering agency. 

FINTRAC, which is preparing to impose the penalty, completed an assessment of the lender in late 2023 and deemed its anti-money laundering compliance to be unsatisfactory. TD Bank said it was improving its anti-money laundering (AML) program and had appointed new executives and advisers to head those efforts.

U.S., UK Impose Joint Sanctions on Houthi Military Officials

The United States and United Kingdom announced joint sanctions against four Houthi military officials in Yemen amid an escalating armed conflict with a militant group that has targeted international commercial shipping in the Red Sea with attacks. The sanctions target senior military leaders of the Iranian-backed group that has controlled northern Yemen amid a nearly decade-long civil war in the country.

U.S. Sanctions Iran Central Bank Subsidiary for U.S. Tech Procurement and Violating Export Rules

The U.S., on February 14, imposed sanctions on three people and four firms — across Iran, the United Arab Emirates, and Turkey — for allegedly helping to export goods and technology purchased from U.S. companies to Iran and the nation’s central bank. Treasury’s Office of Foreign Assets Control said the procurement network transferred U.S. technology for use by Iran’s Central Bank in violation of U.S. export restrictions and sanctions.

This market update was prepared with assistance from Alexandra Barkoske and Clayton Gingrich.