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CLEARY FINTECH UPDATE

The Latest Insights Into Innovation in Financial Services


OFAC UPDATES RANSOMWARE ADVISORY AND SANCTIONS VIRTUAL CURRENCY EXCHANGE

By Chase D. Kaniecki, Samuel H. Chang & Megan Lindgren on September 27, 2021
Posted in Cryptocurrency, Cybersecurity

On September 21, 2021, the U.S. Department of the Treasury, Office of Foreign
Assets Control (OFAC): (i) issued an updated advisory on potential sanctions
risks for facilitating ransomware payments; and (ii) designated SUEX OTC, S.R.O.
(SUEX), a virtual currency exchange, on the list of Specially Designated
Nationals and Blocked Persons (SDN List) for its role in facilitating financial
transactions for ransomware actors.[1]  These actions demonstrate the U.S.
government’s increasing focus on virtual currencies as a key means of
facilitating ransomware payments and related money laundering, as well as OFAC’s
commitment to combating ransomware attacks and other malicious cyber activities.
Continue Reading OFAC Updates Ransomware Advisory and Sanctions Virtual Currency
Exchange

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SEC ENFORCEMENT ACTION AGAINST POLONIEX SIGNALS HEIGHTENED SCRUTINY FOR CRYPTO
EXCHANGES

By Lisa Vicens, Jonathan S. Kolodner, Rahul Mukhi & Megan Lindgren on August 16,
2021
Posted in Blockchain, Cryptocurrency, Cybersecurity, Enforcement, SEC Guidance

On August 9, 2021, the SEC issued a cease-and-desist order against digital asset
exchange Poloniex, Inc. for allegedly operating an unregistered exchange in
violation of Section 5 of the Exchange Act in connection with its operation of a
trading platform that facilitated the buying and selling of digital asset
securities.[1]

In the cease-and-desist order, the SEC alleged that Poloniex met the definition
of an “exchange” because it “provided the non-discretionary means for trade
orders to interact and execute through the combined use of the Poloniex website,
an order book, and the Poloniex trading engine.”  The SEC also found, based on
internal communications, that Poloniex decided to be “aggressive,” ultimately
listing token(s) it had internally determined carried a “medium” risk of being
considered securities under the Securities Act of 1933 pursuant to the test set
forth by the U.S. Supreme Court in SEC v. W.J. Howey.[2]  However, the SEC did
not identify what digital asset(s) it determined were securities nor why, simply
stating that Poloniex facilitated trading of “digital assets that were
investment contracts and therefore securities.”

Without admitting or denying the SEC’s findings, Poloniex agreed to the entry of
the order and a payment of $10,388,309 in disgorgement, prejudgment interest,
and a civil penalty. Continue Reading SEC Enforcement Action Against Poloniex
Signals Heightened Scrutiny for Crypto Exchanges

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CRYPTOCURRENCY AND OTHER NEW FORMS OF FINANCIAL TECHNOLOGY: POTENTIAL TERRORIST
FINANCING CONCERNS AND LIABILITY

By Alexis Collins, Chase D. Kaniecki, Samuel H. Chang, Michael G. Sanders &
Rathna Ramamurthi on June 28, 2021
Posted in Cryptocurrency, Cybersecurity, Financial Institutions

While large financial institutions have traditionally been hesitant to enter new
areas of financial products, particularly virtual assets, many more banks and
companies have expressed interest in virtual currencies as cryptocurrency has
become increasingly mainstream.  Given the use of such services by terrorist
groups, it is important for banks and other financial institutions to consider
evolving dynamics in this area.  On the one hand, one of the widely described
benefits of virtual currency is the transparency and public nature of
transactions since they are typically recorded in a publicly accessible
blockchain, which could facilitate policing and enforcement against illicit
activity.  At the same time, the relevant legal framework for combating
terrorist funding creates potential areas of liability, including, in particular
under the Anti-Terrorism Act (“ATA”) and the Justice Against Sponsors of
Terrorism Act (“JASTA”).  These considerations are important for companies and
banks that provide services related to virtual currency, but also are relevant
to any company that could be the target of ransomware attacks since attackers
may be sanctioned entities or have ties to terrorism and as a matter of practice
demand that the ransom payment be made in virtual currency.

Please click here to read the full alert memorandum.

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OFAC SETTLES WITH DIGITAL CURRENCY PAYMENT PROCESSOR FOR SANCTIONS VIOLATIONS

By Derek M. Bush, Paul Marquardt, Alexis Collins, Chase D. Kaniecki, Patrick
Fuller, Michael G. Sanders & Megan Lindgren on March 9, 2021
Posted in Cybersecurity, Enforcement, Regulatory, Sanctions, Virtual Currency

On February 18, 2021, the U.S. Department of the Treasury, Office of Foreign
Assets Control (OFAC) announced a $507,375 settlement with BitPay, Inc.
(BitPay), a payment processor for merchants accepting digital currency as
payment for goods and services, for 2,102 apparent violations of multiple
sanctions programs between 2013 and 2018.[1] The settlement highlights that
financial service providers facilitating digital currency transactions must not
only establish sanctions compliance programs to screen their own customers but
also must monitor third-party non-customer transaction information. Continue
Reading OFAC Settles with Digital Currency Payment Processor for Sanctions
Violations

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TURNING THE PAGE: HIGHLIGHTS OF THE SEC’S DIVISION OF EXAMINATION’S 2021
PRIORITIES

By Robin M. Bergen, Zachary Baum & Veronica Joubert on March 8, 2021
Posted in Cybersecurity, Enforcement, Financial Institutions, SEC Guidance

On March 3, 2021, the U.S. Securities and Exchange Commission (“SEC”) Division
of Examinations (the “Division”)—formerly the Office of Compliance Inspections
and Examinations—released its 2021 Examination Priorities (“2021 Priorities”). 
The 2021 Priorities generally retain perennial risk areas as the Division’s core
focus, but do include several new and emerging risk areas reflecting broader
policy shifts under new SEC leadership.

The 2021 Priorities include:  retail investors; information security and
operational resilience; financial technology (“Fintech”), including digital
assets; anti-money laundering; transition from the London Inter‑Bank Offered
Rate (“LIBOR”); several areas covering registered investment advisers and
investment companies; market infrastructure; and oversight of the Financial
Industry Regulatory Authority and Municipal Securities Rulemaking Board programs
and policies.  Although not formal priorities, the Division will also focus on
climate-related risks and environmental, social and governance (“ESG”) matters
in light of recent market developments and broader attention in these areas.
Continue Reading Turning the Page: Highlights of the SEC’s Division of
Examination’s 2021 Priorities

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FDIC OVERHAULS BROKERED DEPOSIT REGULATION

By Cleary Gottlieb on January 27, 2021
Posted in Financial Institutions, Regulatory

In December 2020, the FDIC approved a Final Rule to reframe the definition and
exceptions for “brokered deposits”. Historically, the FDIC has broadly defined
virtually any third party connecting a depositor with a bank as a “deposit
broker” and the resulting deposits as “brokered deposits”. The Final Rule
responds to long-standing industry criticisms seeking to narrow these terms. The
Final Rule aims to permit substantially more deposits to be excluded from
treatment as “brokered deposits” by narrowing the definition of “deposit broker”
and by establishing a number of specific designated business exceptions that
would automatically meet the “primary purpose” exception from the “deposit
broker” definition. It is anticipated that the Final Rule will provide more
flexibility for banks to enter into bank-fintech partnerships and other
arrangements.

The Final Rule is effective April 1, 2021. However, entities may continue to
rely on existing staff advisory opinions or other interpretations that predated
the Final rule until January 1, 2022, at which point those opinions and
interpretations will be moved to inactive status.

This alert memorandum discusses our key takeaways and summarizes the notable
points from the Final Rule, including key modifications from the proposed rule.

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OCC AFFIRMS AUTHORITY OF NATIONAL BANKS TO ENGAGE IN ADDITIONAL
CRYPTOCURRENCY-RELATED ACTIVITIES, INCLUDING ISSUING STABLECOINS

By Derek M. Bush, Katherine Mooney Carroll, Graham Bannon, Michael G. Sanders &
Hugh C. Conroy, Jr. on January 15, 2021
Posted in Blockchain, Cryptocurrency

On January 4, 2020, the Office of the Comptroller of the Currency (“OCC”)
published an interpretive letter (the “Letter”) clarifying that national banks
and federal savings associations (“banks”) may engage in and facilitate payment
activities through new technological means, including serving as a node in a
distributed ledger system such as those utilized by some stablecoins,
facilitating customer conversion of fiat currency to or from digital currencies,
and issuing stablecoins.

The Letter reasons that payment services are a core banking function, and that
independent node verification networks (“INVNs”) and stablecoins are merely new
means of effecting pre-existing permissible bank activities.

The letter follows other recent actions by former Acting Comptroller of the
Currency Brian Brooks to clarify the authority of national banks to engage in
certain digital asset activities, including the issuance of two other
interpretive letters last year clarifying permissible cryptocurrency-related
activities for banks (custodying digital assets and holding certain stablecoin
reserves).  The Acting Comptroller, whose resignation became effective today,
also spearheaded an initiative to grant national bank and national trust bank
charters to fintech companies.

The Letter notes that banks “should consult with OCC supervisors, as
appropriate, prior to engaging in these activities.”  This guidance, OCC
precedents in expanding permissible bank activities, and the controversy
surrounding recent crypto-related charter applications may lead to a
deliberative approach by the OCC to banks expanding into these activities.
Continue Reading OCC Affirms Authority of National Banks to Engage in Additional
Cryptocurrency-Related Activities, Including Issuing Stablecoins

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SEC ISSUES ENFORCEMENT ACTION AGAINST UNIKRN, INC. FOR ITS ICO, PROMPTING RARE
PUBLIC DISSENT FROM COMMISSIONER HESTER PEIRCE

By Alexis Collins, Colin D. Lloyd, Matthew C. Solomon, Zachary Baum & Jim
Wintering on September 24, 2020
Posted in Cryptocurrency, Enforcement, ICOs, SEC Guidance, Virtual Currency

On September 15, 2020, the Securities and Exchange Commission issued a
cease‑and‑desist order against Unikrn, Inc. concerning its 2017 initial coin
offering  of UnikoinGold .  The SEC found that the Unikrn ICO violated the
prohibition in Section 5 of the Securities Act of 1933 against the unregistered
public offer or sale of securities.  The SEC imposed several remedies, including
requiring Unikrn to permanently disable the UnikoinGold token and a civil money
penalty of $6.1 million. Continue Reading SEC Issues Enforcement Action Against
Unikrn, Inc. for its ICO, Prompting Rare Public Dissent from Commissioner Hester
Peirce

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AML REGULATORS CLARIFY DILIGENCE REQUIREMENTS FOR POLITICALLY EXPOSED PERSONS

By Katherine Mooney Carroll, Paul Marquardt, Patrick Fuller & Graham Bannon on
August 31, 2020
Posted in Enforcement, Financial Institutions, Sanctions

On August 21, the Financial Crimes Enforcement Network, together with the
federal banking agencies, released a statement to clarify banks’ customer due
diligence obligations for politically exposed persons. The Statement affirms
that (i) there is no regulatory requirement, and no supervisory expectation, for
banks’ Bank Secrecy Act / anti-money laundering programs to include “unique,
additional due diligence steps” for customers who are PEPs and (ii) there is no
regulatory requirement for banks to screen customers and their beneficial owners
for PEPs.  Instead, the Statement confirms that PEP customers should be subject
to the same risk-based approach to CDD that applies to any other customer, but
that PEP status (and screening for PEPs) may be a factor in developing a
customer risk profile and assessing money laundering risk.  It also reminds
banks of the continued U.S. national security and law enforcement interest in
detecting and combatting public corruption and other criminality involving PEPs.

Please click here to read the full alert memorandum.

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OCC IMPOSES $80 MILLION PENALTY IN CONNECTION WITH BANK DATA BREACH

By Katherine Mooney Carroll, Alexis Collins, Rahul Mukhi, Jonathan S. Kolodner &
Hyatt Mustefa on August 18, 2020
Posted in Cybersecurity, Enforcement

In a landmark enforcement action related to a bank data breach, the Office of
the Comptroller of the Currency (“OCC”) assessed an $80 million civil monetary
penalty and entered into a cease and desist order with the bank subsidiaries of
Capital One on August 6, 2020.  The actions follow a 2019 cyber-attack against
Capital One.  The Federal Reserve Board also entered into a cease and desist
order with the banks’ parent holding company.  The OCC actions represent the
first imposition of a significant penalty against a bank in connection with a
data breach or an alleged failure to comply with the OCC’s guidelines relating
to information security. Continue Reading OCC Imposes $80 Million Penalty in
Connection with Bank Data Breach

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