FinCEN Director Discusses How FinCEN Uses BSA Data and the BSA Value Project
The Director of the Financial Crimes Enforcement Network (FinCEN), Kenneth A. Blanco, delivered prepared remarks at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference this week. Mr. Blanco spoke on five key topics: (1) how FinCEN uses Bank Secrecy Act (BSA) data, (2) the status of the BSA Value Project, (3) the importance of beneficial ownership information, (4) the federal banking agency working group efforts, and (5) the realignment of FinCEN’s organizational structure.
- Use of BSA Data. Blanco presented several statistics relating to FinCEN personnel, searches, and queries of BSA data and suspicious activity report (SAR) filings. He noted the drastic increase in SAR filings from convertible virtual currency (CVC) entities following FinCEN’s May 2019 Guidance besides commenting on the increase in filings from exchanges identifying potential unregistered, foreign-located money services businesses, specifically identifying Venezuela-based peer-to-peer exchangers. Mr. Blanco also noted that exchanges have increased their reporting of customers conducting transactions with CVC addresses linked to darknet marketplaces as well as CVC kiosk operators increasing their reporting on activity indicative of scam victims.
- BSA Value Project. FinCEN is reviewing the BSA data that it receives to make it more effective and the collection of it more efficient. It plans to develop metrics to track and measure the value of its use on an ongoing basis with regard to each type of stakeholder (e.g., FinCEN, law enforcement, regulators, financial institutions). Mr. Blanco stressed that FinCEN intends to be as transparent and public facing as possible about the results.
- Beneficial Ownership Information. Blanco stated that the importance of beneficial ownership information from a national security perspective “cannot be understated” and that the “secrecy behind shell companies … is a clear and present danger.” Rules pertaining to customer due diligence seek to address this, but Mr. Blanco believes that there is still work to be done.
- Interagency Working Group Efforts. Blanco highlighted several accomplishments of the working group that was established among FinCEN, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve, and the National Credit Union Administration (NCUA). A key highlight was the group’s joint statement on how banks can enter into collaborative arrangements to share resources to effectively manage their BSA and anti-money laundering obligations. Additionally, Mr. Blanco identified a joint statement where the agencies encourage the use of innovative approaches to better combat money laundering, terrorist financing and other illicit financial threats, even if such approaches do not succeed.
- Realignment at FinCEN. FinCEN’s Liaison Division has been realigned as the Strategic Operations Division (Strategic Ops) and is responsible for designing and implementing FinCEN’s strategic partnerships across the industry with government colleagues, both foreign and domestic. Additionally, FinCEN’s new Global Investigations Division (GID) has enabled FinCEN to more effectively use financial authorities to counteract actors involved in several criminal acts.
Shopin Founder Pleads Guilty to Charge of Securities Fraud
On December 11, 2019, the Securities and Exchange Commission (the “SEC”) filed a complaint against UnitedData, Inc., d/b/a Shopin, and its founder Eran Eyal in connection with a $42 millioninitial coin offering conducted from August 2017 to April 2018.
In its complaint, the SEC alleged that Eyal and Shopin conducted an unregistered securities offering in violation of the Securities Act of 1933 when it sold tokens to US persons through a two-stage financing process – which included a pre-sale conducted under “simple agreements for future tokens” and a direct sale of tokens to the general public.
Further, the SEC charged that Eyal and Shopin committed securities fraud under Rule 10(b)(5) of the Securities Exchange Act of 1934, in allegedly making material misrepresentations to investors in connection with the sale of tokens. The SEC’s complaint identified four allegedly false or misleading claims: (1) that Shopin had conducted two successful pilots with major retailers; (2) that Shopin had ongoing partnerships with retailers from which it claimed to receive revenue; (3) that Shopin had a “prominent Silicon Valley blockchain entrepreneur as an advisor”; and (4) that Shopin had a specific successful online company as an investor.
On December 12, 2019, in a separate New York State criminal proceeding, Eyal pleaded guilty to felony securities fraud. According to New York Attorney General Letitia James, the plea required Eyal to step down as CEO of Shopin and to surrender $450,000 of cryptocurrency. Eyal also pleaded guilty to two separate counts of defrauding investors in his previous companies, to which he agreed to pay an additional aggregate sum of $600,000. Additionally, Eyal will be prohibited from raising capital or serving as an officer in a business in New York for three years.
The SEC Release can be viewed here.
The SEC Complaint can be viewed here.
TokenSoft Submits Registration for Transfer Agent
DTAC LLC, a solely owned subsidiary of TokenSoft Inc. (“TokenSoft”), has registered with the SEC to become a transfer agent. The SEC has accepted TokenSoft’s application but has not yet issued a notice of effectiveness.
Registered transfer agents act as an intermediary between the holders of publicly traded securities and the issuers. Their key function is to manage the issuance, cancelations, and transfer of certificates or ledgers that represent ownership of securities.
TokenSoft runs a platform that facilitates compliant issuances of blockchain-based securities and ongoing compliance administration. Through its service, TokenSoft “enables issuers, financial institutions, broker-dealers, real estate companies and funds to meet their compliance requirements at issuance, distribution and transfer.” TokenSoft is also the developer of the ERC-1404 “Simple Restricted Token Standard,” which allows for issuance of an ERC-20-like token, with smart contract-based restrictions on transfers.
In addition to the registration of DTAC LLC as a transfer agent, TokenSoft has also acquired interest in a registered broker-dealer – Token Soft Global Markets – which is registered with the Securities Investor Protection Corporation and the Financial Industry Regulatory Authority.
The public transfer agent filing can be viewed here.
CFTC Chairman Heath P. Tarbert Discusses Principles-based Regulation
In a lecture given at Harvard University’s Institute of Politics, the chairman of the Commodity Futures Trading Commission (“CFTC”), Heath P. Tarbert, spoke about the benefits and tradeoffs of using a rule-based approach to regulation verses a principle-based one. During this lecture he stated that the CFTC, when addressing “rapidly changing nascent industries” such as cryptocurrencies, relies primarily on the principal-based approach.
Chairman Tarbert stated that the principle-based approach focuses on outcomes and policy goals rather than specific rules. This allows for the regulator to implement his or her goals in a real-time responsive manner, rather than modifying rules in response to unwanted practices. He emphasized that this approach is flexible and can encourage innovation while discouraging “loophole behavior.” However, he noted that this approach does not provide for the same amount of clarity as a rule-based approach.
Full Speech can be found here.
Proposed Harsher Penalties in the Netherlands for Fraud Utilizing New Payment Methods
Proposed legislation from the Dutch Minister of Justice and Security, Ferdinand Grapperhaus, will increase the penalties for fraud utilizing newer payment systems, including cryptocurrency and payment applications. The increase in penalties reportedly will align the newer forms of financial fraud with the penalties for older forms of fraud, such as credit card fraud. The proposed legislation would increase the current maximum penalty of one to four years in jail (depending on the crime) to a maximum of six years.
Launch of Chinese Central Bank Currency and a New Chief Securities Regulator in China
On December 9, 2019, the Beijing-based business news publication Caijing reported that the People’s Bank of China, in partnership with other large Chinese financial and telecom institutions, has plans to launch a Chinese Central Bank Currency. This “digital Yuan” is reportedly being launched in one or two city-wide pilot programs before the end of 2019.
On December 12, 2019, Caijing reported that Yao Qian will serve as the director of a new bureau of the China Securities Regulatory Commission focused on technology regulation. Yao, who was the first director of the People’s Bank of China’s Digital Currency Institute, has previously made calls for the integration of blockchain technology in the development of a Chinese Central Bank Currency.
Danish Tax Authority Sends Information Request to Crypto Users
The Danish Tax Authority, Skattestyrelsen, has begun to send letters requesting cryptocurrency trading and holding information from taxpayers in Denmark who are known to have been trading in cryptocurrencies. This move parallels the heightened attention by various countries tax authorities in regulating cryptocurrency within the past year.