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12 Month Review of Revised FATF Standards – Virtual Assets and VASPs

12 Month Review of Revised FATF Standards – Virtual Assets and VASPs

by | Sep 16, 2020 | Compliance Updates, iComply Insights

12 Month Review of Revised FATF Standards – Virtual Assets and VASPs

Jonathan C. Dunsmoor of Dunsmoor Law, P.C. discusses the impact of the 12-month review of the revised FAFT standards on the virtual asset industry

What happened​?

Overall, both the public and private sectors have made progress by implementing the newly revised FATF Standards, where 35 out of 54 jurisdictions are implementing FATF Standards. Even though there are still issues that need to be addressed, there has been no clear indication of a need to make amendments to the FATF Standards as of yet. This may change dramatically in the coming months, given the recent rise of Decentralized Exchanges (“DEX”) such as Uniswap.

What types of stakeholders will be impacted by this?

Anyone involved with the transmission of virtual currency needs to be aware of the FATF Standards and the applicability both locally and globally to their business operations. This is true regardless of whether the business is in the traditional money services business or in the virtual assets industry.

Why does this matter?

The reason for working diligently to maintain and improve upon these standards is simply to facilitate larger, more compliant business protocols globally. If the proliferation of terrorist financing and/or money laundering can be reduced, then the facilitation of greater access to investment opportunities can arise where transmission standards are respected and maintained.

Does this update/change create new opportunities? If so, what might they be?

Yes, the changes in the implementation and constant movement in technology regarding virtual assets will provide opportunities for further development of risk assessment departments in businesses, and the training and implementation of new technology tools will create a need for experts in these technologies and related industries. This is especially true for new asset classes and key threshold signature wallets.

Does this change create new risks for industry stakeholders? If so, what should they be looking out for?

No, these changes do not create new risks; however, changes in how virtual assets and VASPs are being used do create unknown risks that either have not been identified or lack the option for prevention due to the revised FATF Standards not being implemented within their jurisdiction. If a business engages with virtual assets and/or VASPs, it must be compliant with the law.

How does this impact compliance teams, and what can they do to stay ahead of the regulatory requirements?

There will be a wider need for deeper understanding in terms of the revised FATF Standards, as well as an understanding of the risks associated with virtual assets and VASPs. With the
changes in technology implemented by these avenues, it creates a demand for knowledge on tools and techniques to either prohibit or hinder the use of VASPs. The key will be staying abreast of new knowledge, sharing information, and implementing techniques that have been suggested by other members.

What can management teams or boards of directors do to stay ahead of these changes?

As mentioned, staying abreast of new knowledge presented in regards to the revised FATF Standards, sharing information among teams and the board, and making sure the Board of Directors is doing their due diligence in gaining information from other businesses that are using VASPs.

What can service providers do to help their clients stay ahead of these changes?

Service providers can start by implementing preventative measures under the FATF Standards. It’s important to have an idea of the client…that way, a service provider can perform their due diligence in reporting suspicious activity, screening for compliance issues, and keeping detailed records of their clients’ activities. It is highly recommended that internal protocols be developed and followed, especially for VASPs. This includes cross-border transactions as well as adherence to local laws regarding money transmission.

 

This information is for educational purposes only and does not constitute legal advice. Please seek competent legal counsel for specific questions or concerns regarding FATF or any topics discussed herein.

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Author — JONATHAN C. DUNSMOOR

Jonathan C. Dunsmoor, Esq. is a U.S. corporate attorney who focuses his practice on securities law and regulatory matters, including compliance protocols for blockchain-related offerings, asset management, and corporate governance. He represents private companies wishing to raise funds, including those exploring blockchain/cryptocurrency opportunities, as well as angel investors and investment funds. Jonathan is Senior Of Counsel for the New York-based Reid & Wise, LLC with offices in San Francisco and Shanghai.

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SEC Charges App Developer for Unregistered Security-Based Swap Transactions

SEC Charges App Developer for Unregistered Security-Based Swap Transactions

by | Aug 25, 2020 | Compliance Updates, iComply Insights

SEC Charges App Developer for Unregistered Security-Based Swap Transactions

Kayvan B. Sadeghi of Schiff Hardin LLP reviews recent actions from both the SEC and CFTC against app developer Abra

What happened​?

On July 13, 2020, the SEC and CFTC each filed settled enforcement actions against Abra and its related company, Plutus Technologies Philippines Corporation.

Abra is a cryptocurrency app developer that offered synthetic exposure to dozens of fiat currencies, digital currencies, and blue-chip stocks and ETFs. They were penalized for structuring and effecting swaps without complying with U.S. securities and commodities laws.

Abra unsuccessfully sought to avoid U.S. laws by excluding U.S. purchasers and moving certain operations out of the U.S. The SEC announcement emphasizes that one “may not evade the federal securities laws merely by transacting primarily with non-U.S. retail investors and setting up a foreign entity to act as a counterparty, while conducting crucial parts of their business in the United States.”

What types of stakeholders will be impacted by this?

This announcement should serve as a caution to anyone seeking to structure their business conduct or offerings to stay outside the reach of U.S. securities and commodities laws.

Why does this matter?

U.S. regulators view the reach of U.S. laws far more broadly than businesses might expect. This action also demonstrates the clear intent of the SEC and CFTC to work together where their jurisdictions may overlap, including in the blockchain space.

Does this change create new risks for industry stakeholders? If so, what should they be looking out for?

This action highlights and increases the regulatory risks for anyone who has sought to stay outside the reach of U.S. laws by excluding U.S. purchasers. The SEC and CFTC likely will now view the market as on notice that the efforts taken by Abra were insufficient.

Does this change create new opportunities for industry stakeholders? If so, what might they be?

Any company that has concerns about compliance with U.S. securities and commodities laws should consider this announcement an opportunity to evaluate with counsel whether to approach the SEC and/or CFTC proactively.

How does this impact compliance teams, and what can they do to stay ahead of the regulatory requirements?

Compliance teams must remain vigilant with KYC and AML requirements, but they must also realize that a well-intentioned and implemented plan to exclude U.S. purchasers is only part of the puzzle, not a complete solution.

What can management teams or boards of directors do to stay ahead of these changes?

Management teams and boards can evaluate with outside counsel both their existing compliance programs and whether to proactively engage regulators through channels such as LabCFTC and SEC’s FinHub.

What can service providers do to help their clients stay ahead of these changes?

Service providers will do well to stay in their lane, understand what risks they can help control, and also where their best efforts alone may fall short of reaching their client’s end goal.

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Author — KAYVAN B. SADEGHI

Kayvan B. Sadeghi is a trial and appellate lawyer at Schiff Hardin LLP with more than 15 years of experience in complex commercial and securities litigation, investigations, and enforcement proceedings. He regularly defends clients before the U.S. Department of Justice, Securities and Exchange Commission, state attorneys general, and other government agencies. His clients have included leading global companies, and their directors and officers, across a range of industries including financial services, media, technology, and energy.

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Banker and Insurance Agent Banned From Providing Financial Advisory Services in Singapore

Banker and Insurance Agent Banned From Providing Financial Advisory Services in Singapore

by | Aug 21, 2020 | Compliance Updates, iComply Insights

Banker and Insurance Agent Banned From Providing Financial Advisory Services in Singapore

MAS issued prohibition orders to two individuals for fraud and dishonest conduct

What Happened?

August 19, 2020: The Monetary Authority of Singapore has issued prohibition orders against Mr. Aw Yong Seng, a former representative of Prudential Assurance Company Singapore Pte Ltd, and Mr. Chew Swee Sun, a former representative of Bank of Singapore Limited.

Both individuals were previously charged with false orders for securities, unauthorized trading, and other violations, and convicted to a sentence of 8 weeks – 4 months imprisonment.

The prohibition order restricts Mr. Aw and Mr. Chew from providing any financial advisory services and taking part in the management of any financial advisory firm.

Source: https://www.mas.gov.sg/regulation/enforcement/enforcement-actions/2020/mas-bans-two-individuals-for-fraud-and-dishonest-conduct

Who Is Impacted?

Bankers, insurance agents, asset managers, and other financial services professionals.

Why This Matters?

Financial services providers must comply with strong client authentication procedures to capture the client’s consent and authorization prior to executing trade orders.

What’s Next?

To better protect themselves, financial services providers should review their user experience and customer journies through onboarding, KYC review, enhanced due diligence, order management, re-authentication, and transaction processing. Compliance teams should review and assess the risk for each channel of client engagement such as face-to-face, video call, phone, email, messaging, web portal, and mobile application.

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SEC Charges Former Hertz CEO with Filing of Inaccurate Financial Statements

SEC Charges Former Hertz CEO with Filing of Inaccurate Financial Statements

by | Aug 20, 2020 | Compliance Updates, iComply Insights

SEC Charges Former Hertz CEO with Filing of Inaccurate Financial Statements

Mark Frissora allegedly pressured his employees to “find money”

What Happened?

August 18, 2020: The Securities and Exchange Commission of the U.S. charged former Hertz CEO Mark Frissora with aiding and abetting the car rental company in filing inaccurate financial statements. According to the SEC, Frissora pressed employees to make changes to the company’s financial reports in 2013.

Frissora is also accused of failing to disclose to investors that the company was keeping cars for longer periods of time to cut down on depreciation costs.

Source: https://www.forbes.com/sites/rachelsandler/2020/08/13/former-hertz-ceo-charged-in-accounting-scandal/#3aa81d1f333c

Who Is Impacted?

Frissora has agreed to pay a $200,000 fine to settle the charges with the SEC, and also to repay his former employer $2 million in incentive-based compensation.

Why This Matters?

For all companies, it is important to understand the importance of accuracy in your statements to investors and the public. This SEC enforcement highlights how the regulator is working to maintain checkpoints of accountability within their capital markets.

What’s Next?

Aside from fines, Frissora will be subject to increased scrutiny during Know-Your-Customer (KYC) reviews, as his name will appear in risk-screening results.

Compliance teams can use recent cases like this to test the effectiveness of their compliance systems. Does this name search produce a result in your U.S. screening procedures? If so, how quickly can your compliance workflows identify and present this new risk to your risk management team?

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Request a demo today.

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SEC Charges Wind Turbine Company and Individuals With Defrauding Investors

SEC Charges Wind Turbine Company and Individuals With Defrauding Investors

by | Aug 19, 2020 | Compliance Updates, iComply Insights

SEC Charges Wind Turbine Company and Individuals With Defrauding Investors

Kristina Subbotina of Ross Law Group reviews the SEC’s recent action against the wind turbine company and individuals

What happened​?

The SEC filed a complaint against Thunderbird Power Corp., a wind turbine company (the “Company”) and its three affiliated individuals (together with the Company, the “Defendants”), Thunderbird’s CEO Richard Hinds, former Thunderbird president Anthony Goldstein, and consultant John Alexander “Lex” van Arem. The SEC alleged that the Defendants defrauded investors in a US $1.9 million unregistered offer and sale of the Company’s stock.

Specifically, the SEC stated that the Defendants made false and misleading statements through the Company’s press releases, marketing materials, offering materials, and a YouTube video. For example, the press releases and the YouTube video mislead investors by stating that Siemens had tested the Company’s wind turbine product and confirmed its efficiency and production ability. The SEC alleged that the Company’s offering memorandum contained material misrepresentations and omissions about the Company’s operations, including how the Company would use investor proceeds.

Additionally, all the Defendants allegedly misappropriated 40% of the investor funds to enrich themselves and to compensate sales agents.

What types of stakeholders will be impacted by this?

Private companies raising funds in private offerings, and its officers and even consultants. Investors should also be aware of the continued existence of fraudulent investment schemes.

Why does this matter?

This enforcement action brings attention to the continued existence of fraudulent investment schemes, and the very real risk of illegal offerings being conducted at present. It should heighten both regulatory and investor awareness of the prevalence of this issue.

Also, the SEC continues its efforts to discourage issuers from defrauding investors and demonstrates that even relatively small offerings (under $2 million) are under its purview.

Does this change create new risks for industry stakeholders? If so, what should they be looking out for?

In general, the SEC’s complaint serves as a reminder to private companies to comply with the U.S. securities laws and regulations when offering and selling securities, specifically:

  • Provide correct and complete information in the company’s offering materials, including offering memorandum and subscription agreement;
  • Ensure the information provided in marketing materials (i.e., presentations, business plans, posts, and videos on social media platforms) should be consistent with the information in the offering materials; and
  • Register the offer and sale of the securities under the U.S. Securities Act of 1933, as amended, unless the company qualifies for an exemption from the registration requirements.

How does this impact compliance teams, and what can they do to stay ahead of the regulatory requirements?

Compliance teams should make sure that their company’s employees and consultants, including sales representatives, communicate to investors only information consistent with the offering materials. A compliance team, for example, may want to review emails and phone communications between the sales representatives and investors to ensure the former do not mislead the latter.

What can management teams or boards of directors do to stay ahead of these changes?

Management teams or boards of directors can be reminded to continue directing strong efforts to ensure compliance with the U.S. federal and states securities laws and regulations:

  • Sales representatives receiving compensation in the form of a percentage of the investor funds raised must be registered broker-dealers. You can verify a person’s broker-dealer registration on the FINRA’s website: https://brokercheck.finra.org/.
  • For a compliant unregistered offering of securities, Form D must be filed within 10 days from the sale of those securities, and blue sky filings must be made in each state where the investors reside.
  • If the issuer conducts general solicitation, all of its investors must be accredited, and the accredited investor status must be verified internally or through a third-party provider

What can service providers do to help their clients stay ahead of these changes?

Service providers should remind their clients (i) to provide the complete and correct information in the offering and marketing materials, and (ii) to properly qualify for an exemption from the registration requirements.

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Author — KRISTINA SUBBOTINA

Kristina Subbotina is a corporate and securities attorney with Ross Law Group PLLC representing investment funds and emerging growth companies throughout their lifecycle, including formation, financing rounds, and exit strategies. 

learn more

Is your AML compliance too expensive, time-consuming, or ineffective?

iComply enables financial services providers to reduce costs, risk, and complexity and improve staff capacity, effectiveness, and customer experience.

Request a demo today.

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FBI Concerned About Money Laundering Risks in Private Equity Transactions

by | Jul 17, 2020 | Compliance Updates, iComply Insights

FBI Concerned About Money Laundering Risks in Private Equity Transactions

Leaked report highlights FBI’s growing attention towards private sector AML risks with advice for corporations to ensure proper due diligence

What Happened?

July 14, 2020: The $10-trillion private equity market in the U.S. is facing additional scrutiny as a vehicle for money laundering, according to the intelligence bulletin reported having been leaked from the FBI.

The document suggests that private investment funds lack adequate anti-money laundering programs and calls on regulators to enhance their screening efforts of the industry.

Source: https://www.reuters.com/article/bc-finreg-fbi-laundering-private-equity/fbi-concerned-over-laundering-risks-in-private-equity-hedge-funds-leaked-document-idUSKCN24F1TP

 

Who Is Impacted?

Private capital markets firms, investment funds, and equity firms, as well as their law firms and due diligence providers.

 

Why This Matters?

As the power and size of private capital markets increased, experts are expecting regulators to pay closer attention to corporate mergers and acquisitions transactions, angel investments, and private equity markets.

 

What’s Next?

While no public action has been taken by regulators, private capital markets continue to operate with little-to-no KYC friction. The leaked FBI document demonstrates the growing trend among law enforcement agencies and financial regulators to set new standards of AML compliance for all verticals of private capital markets.

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Is your AML compliance too expensive, time-consuming, or ineffective?

iComply enables financial services providers to reduce costs, risk, and complexity and improve staff capacity, effectiveness, and customer experience.

Request a demo today.

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