The messaging app company agreed to pay a civil penalty and return US$1.2 billion to investors 

What Happened?

June 26, 2020: In Q1 2018, Telegram conducted a digital assets offering, selling US$2.7 billion-worth of GRAM tokens to investors worldwide. This June, the SEC finally reached a settlement with the project to resolve charges that stated Telegram’s unregistered token offering violated federal securities laws.

Prior to the SEC getting involved, anti-money laundering agencies were forced to intervene when they discovered that over US$1 billion of what Telegram had raised was known to come from sanctioned entities, including those affiliated with human trafficking, money laundering, and terrorism. The company paid back the identified individuals but neglected to implement any procedures or tools to ensure AML and securities regulations compliance of entities from which they accepted investments.

While the remaining funds totaling $1.7 billion were hoped to come from reputable sources, many accredited investors who invested in Telegram’s offering were actually investing on behalf of non-accredited investors. Tools such as blockchain forensics could have accurately identified legal syndication and investment pools; however, because Telegram didn’t have the controls for AML in place, the project is now officially defunct.

Source: https://www.sec.gov/news/press-release/2020-146

Who Is Impacted?

Companies that plan to sell or have sold digital assets in order to raise capital for their business operations.

Telegram, who had already spent a considerable amount of the raised capital, is now forced to repay its investors as well as millions in fines and legal fees.

Why This Matters?

Prior to the SEC settlement, many blockchain and security token experts held the opinion that raising a total of US$2.7B is more than enough to pay for legal fees to ‘buy your outcome’, essentially advising their own clients to ‘shoot first and ask questions later’. This precedent will make it more difficult for smaller issuers in the future to follow Telegram’s lead in markets around the world.

What’s Next?

It’s highly unlikely that Telegram’s investors will receive a full refund of the amount they invested. Retail investors who invested through illegal syndicates and token pools will also face additional challenges, ensuring that their percentage is paid back to them out of a wallet they have no control over.

As part of their settlement, Telegram will be required to provide the SEC with clear procedures of how they will support investors who want to reclaim their funds. Previous orders have shown that the SEC will need to approve how Telegram executes this; it’s quite likely that Telegram’s legal strategy will make it very cumbersome and manual for investors to submit a claim, with the objective being to reduce the total number of properly completed submissions that they receive.

Important to note is that the issue had nothing to do with Telegram’s use of blockchain technology, but rather the fact that they ignored the regulation and missed the crucial opportunity to program their offering in such a way that would allow them to fulfill regulatory obligations and successfully launch the TON network.

With such a high-profile win under their belt, the SEC will now use this precedent in future strategies to target other token offerings who have taken or plan to take an approach similar to Telegram’s ICO.

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The UK regulator fined a major German bank over £37 million

What Happened?

June 17, 2020: The Financial Conduct Authority has fined Commerzbank AG London over £37 million for failing to conduct timely, periodic due diligence of its clients. As a result, nearly 2,000 Commerzbank clients had transacted without passing proper Know-Your-Customer checks between October 2012 and September 2017.

Source: https://www.fca.org.uk/news/press-releases/fca-fines-commerzbank-london-37805400-over-anti-money-laundering-failures

Who Is Impacted?

Financial firms in the UK, including any overseas branches of UK firms, and the customers of these firms.

Why This Matters?

Despite the FCA publishing the guidance on steps firms could take to mitigate financial crime risk, the bank was reportedly aware of the weaknesses in the system yet didn’t take any measures to fix them. Moreover, the FCA raised specific concerns directly to Commerzbank in 2012, 2015, and 2017 with no response from the bank.

FCA’s investigation highlighted the bank’s failings in several key areas:

• Failure to conduct timely and periodic due diligence on its clients, resulting in an ‘out of control’ situation of outdated due diligence checks at the close of 2016;
• Failure to properly address and mitigate long-standing flaws in the automated monitoring tools for money laundering risk on transactions for clients; and 
• Failure to implement and practice all required customer due diligence policies and procedures.

On top of that, the bank’s transaction monitoring tool was missing 40 high-risk countries and 1,110 high-risk clients, which is a violation of Principle 3 of the FCA Principles for Businesses.

What’s Next?

Since the FCA’s ruling, Commerzbank London has enacted a remediation strategy to ensure its AML and KYC procedures follow adequate compliance requirements. It has also conducted a robust deep-dive investigative exercise internally to review and identify any suspicious transactions that occurred during the time period in question.

This exercise involved pausing all onboarding of any new, high-risk clients, as well as suspending all trade finance activity until the exercise is complete. Commerzbank committed to resolving the flaws in their systems, and ended up qualifying for a 30% discount on their original penalty amount, reducing the amount owing from £54 million to £37 million. 

Speedy mitigation measures notwithstanding, Commerzbank and other UK firms would be well-advised to heed the words of the FCA:

“Commerzbank London’s failings over several years created a significant risk that financial and other crime might be undetected. Firms should recognise that AML controls are vitally important to the integrity of the UK financial system.”

– Mark Steward, Executive Director of FCA

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