Farewell to 2023, and welcome 2024. As we do every year, let’s look back.
We highlight 10 of our most-read blog posts from 2023, which address many of the key issues we’ve examined during the past year: criminal money laundering enforcement; compliance risks with third-party fintech relationships; the scope of authority of bank regulators; sanctions
The October 7, 2023 attacks on Israel by Hamas have re-focused U.S. government efforts to identify and counter funding streams for Hamas and terrorist activity in general – including, in particular, through the use of cryptocurrency. This heightened focus is exemplified by a recent report (“Report”) published by the Congressional Research Service (“CRS”), which examines the role of cryptocurrency donations in Hamas fundraising campaigns, which long predate the October 7 attacks. The Report references recent, related efforts by the Financial Crimes Enforcement Network (“FinCEN”), which we also discuss.
Continue Reading Hamas, Terrorist Financing, and Cryptocurrency
The new Director of FinCEN, Andrea Gacki, addressed several key topics on October 3, 2023 at the Association of Certified Anti-Money Laundering Specialists (“ACAMS”) conference in Las Vegas, Nevada. Specifically, Director Gacki addressed the issues of beneficial ownership under the Corporate Transparency Act (“CTA”); the real estate industry; investment advisers; fentanyl trafficking; and whistleblowers
In an unusual move, Laura Akahoshi, former Rabobank (the “Bank”) Chief Compliance Officer (“CCO”), filed on July 6, 2023 an opposition to the Office of the Comptroller of the Currency’s (“OCC”) dismissal of its own administrative enforcement proceeding against her. Akahoshi filed her petition in the U.S. Ninth Circuit Court of Appeals, arguing in part that the Administrative Procedures Act and 18 U.S.C. § 1818 provide the court with jurisdiction to review the OCC’s dismissal.
The OCC’s initial enforcement proceeding stemmed from allegations that Akahoshi participated in an effort to withhold information from an OCC examiner in connection with an examination of the Bank’s Bank Secrecy Act (“BSA”)/Anti-Money Laundering (“AML”) program. Specifically, the OCC alleged that Akahoshi had committed misconduct by failing to provide a report created by a third-party consulting firm regarding the adequacy of the Bank’s BSA/AML program.
The case against Akahoshi was one of several administrative enforcement actions that the OCC pursued after Rabobank NA agreed in February 2018 to pay more than $360 million in AML-related settlements reached with the U.S. Department of Justice (“DOJ”) and the OCC. As we previously blogged, the Bank’s former general counsel Daniel Weiss entered into a 2019 Consent Order in which he agreed to be barred from the banking industry and to pay a $50,000 fine. Many of the allegations contained within the Notice of Charges against Akahoshi mirrored those contained within the Notice of Charges against Weiss.
Akahoshi’s efforts face significant legal challenges, as exemplified by the fact that, as we discuss, an ALJ recently denied her application for the $4.2 million in attorney fees and costs that she expended defending herself against the OCC enforcement action. Nonetheless, the matter highlights several important and inter-related issues: the potential liability of individuals for alleged AML compliance failures, and the related powers of regulators; the potential tensions between the interests of individual AML compliance personnel and the financial institution; the role of whistleblowers; and how regulators and the government can use AML compliance audits and reviews by third-party consultants – which can vary greatly in quality, and sometimes can double as stealth business pitches by the consultants – as a sword against the institution.
On June 5, 2023, the SEC filed an extensive civil complaint against Binance Holdings Limited, its assorted affiliates and its beneficial owner and CEO, Changpeng Zhao, alleging multiple violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Binance suit, as all of SEC’s enforcement efforts in the crypto space, arises from the hotly contested and frequently litigated predicate categorically asserted by the SEC that at least some cryptocurrencies are “securities” under, and therefore subject to, the federal securities laws. The Binance case demonstrates how, from that premise, the SEC takes a utilitarian approach to the crypto industry, essentially overlaying the functions and participants in the traditional securities industry against their counterparts in crypto.
Although the Binance enforcement action obviously focuses on securities law, it is relevant to anti-money laundering concepts because the action focuses on Know-Your-Customer (“KYC”) requirements, as a predicate to discussing the securities laws. The Binance enforcement action is similar to the enforcement action against Bitmex and other entities, which rested on the allegation that the entity attempted to pretend that it did not have U.S. customers — even though it in fact had such customers, as it allegedly well knew and despite efforts to obfuscate such U.S. contacts. This post therefore will focus on the KYC and customer identification issues presented by the Binance complaint.
Continue Reading SEC’s Suit Against Binance Demonstrates Scope of Its Crypto Enforcement Efforts
The U.S. Attorney’s Office for the Southern District of New York recently unsealed an indictment of Charles McGonigal (“McGonigal”), a former high-ranking FBI official, who has been accused of helping Russian oligarch Oleg Deripaska (“Deripaska”) avoid U.S. sanctions. Last Thursday, Chairmen of the Senate and House Judiciary Committees wrote letters to U.S. Attorney General, Merrick Garland, and FBI Director, Christopher Wray demanding information.
We discuss here the letters, which are extremely pointed. But first, it’s worth examining the allegations in the indictment, which paint a dramatic tale of abuse of office, concealment through shell companies, and a former high-level law enforcement officer allegedly engaging in the same of behavior that, until very recently, he was sworn to detect, investigate and prevent.
Farewell to 2022, and welcome 2023. As we do every year, let’s look back.
We highlight 12 of our most-read blog posts from 2022, which address many of the key issues we’ve examined during the past year: the Corporate Transparency Act (“CTA”) and beneficial ownership reporting; sanctions — particularly sanctions involving Russia; cryptocurrency and digital
The European Commission (“Commission”) recently released its 2022 Supranational Risk Assessment Report (“SNRA Report”) to the European Parliament and Counsel regarding the “risk of money laundering and terrorist financing affecting the internal market and relating to cross-border activities.” The SNRA Report analyzes, on a broad scale, money laundering and terrorism financing risks and proposes a plan of action to address them. The Report also examines more specifically “sectors or products where relevant changes have been detected.”
The SNRA Report flags the “Gambling Sector” as a “high risk” area of Anti-Money Laundering (“AML”) and Countering the Financing of Terrorism (“CFT”) concern, with a particular focus on online gambling. According to the Commission, online gambling presents a particularly high AML/CFT risk due to factors such as “the non-face-to face element, [and] huge and complex volumes of transactions and financial flows.” The potential use of e-money and virtual currencies, as well as the emergence of unlicensed online gambling sites, exacerbates this risk.
As the European Union (“EU”) considers how to tackle the potential risks of online gambling, the United States is simultaneously grappling with the rapid expansion of online gambling and online sports betting in particular. Before May 2018, when the Supreme Court struck down a 1992 federal law that effectively banned commercial sports betting in most states, Nevada was the only state with legalized sports betting in the United States. Although California ballot Proposition 27, which would have legalized online and mobile sports betting in California, failed to pass during last week’s national and state elections, more than 30 states still have legalized some form of sports betting, and there is politial pressure to continue to expand online gambling and other forms of gaming. As Americans jockey for the immense potential receipts that the expansion of online gambling can bring, it may be worth taking a page out of the EU’s book in order to consider the potential money laundering and terrorist financing risks that can accompany it.
Continue Reading European Commission Highlights Online Gambling’s Money Laundering Risks
On August 8, the Office of Foreign Assets Control (“OFAC”) sanctioned “notorious” virtual currency “mixer” Tornado Cash, which allegedly has been used to launder more than $7 billion worth of virtual currency since its creation in 2019. Tornado Cash is a virtual currency mixer that operates on the Ethereum blockchain. Tornado Cash receives a variety of transactions and mixes them together before transmitting them to their individual recipients. The stated purpose of such mixing is to increase privacy, but mixers are often used by illicit actors to launder funds because the process enhances anonymity and makes it very hard to track the flow of funds. According to the Treasury Department press release, “[d]espite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risk.” This statement seems to imply that Tornado Cash is run by actual people – an implication that is at the heart of the controversy over these sanctions, as we will discuss.
The sanctions against Tornado Cash have elicited enormous controversy in the crypto world because, some argue, (1) Tornado Cash is not an entity run by actual people, but is merely code; and (2) although OFAC has the legal authority to sanction people and entities, it lacks such authority to sanction code or a technology – or at the very least, such sanctions create many practical problems for innocent actors, including in ways which no one has foreseen fully. As we discuss, even a member of the U.S. House of Representatives has waded into the controversy this week, questioning the ability of OFAC to issue the sanctions and demanding answers. The controversy also reflects that, once again, whether one chooses to focus on the word “privacy” or on the word “anonymity” typically reflects an a priori value judgment predicting one’s conclusion as to whether something in the crypto world is good or bad.
Indisputably, the Tornado Cash sanctions are, to date, unique and unprecedented. Although they may turn out to be an outlier experiment by OFAC, public pronouncements by the U.S. Treasury Department strongly suggest that, to the contrary, they represent part of the future of crypto regulation, in which the enormous power of the U.S. government to issue broad sanctions obliterates legal and practical hurdles which could stymie other agencies, such as the Financial Crimes Enforcement Network (FinCEN). This may be because, ultimately, the government actually agrees that no person is in control of a powerful technology that has easy application for malicious uses, and that is precisely the problem.
Continue Reading OFAC Sanctions Virtual Currency “Mixer” Tornado Cash and Faces Crypto Backlash
On May 19, 2022, the Associate Director of the Enforcement and Compliance Division of the Financial Crimes Enforcement Network (“FinCEN”), Alessio Evangelista, spoke at the Chainalysis Links Conference in New York City on the topic of “The Intersection of Cryptocurrencies and National Security.” Associate Director Evangelista stressed “responsible innovation” by the cryptocurrency industry, in order to protect consumers and national security interests, as well as to combat cybercrime and other illicit financial activity. Associate Director Evangelista also denied that FinCEN’s enforcement efforts represent a “gotcha” enterprise.
Shortly after Associate Director Evangelista’s speech, Acting Comptroller of the Currency Michael J. Hsu discussed vulnerabilities in the cryptocurrency framework and recent volatility with stablecoins in pointed remarks at the DC Blockchain Summit 2022. Describing himself as a “crypto skeptic,” Acting Comptroller Hsu acknowledged the potential value of innovation presented by crypto, but repeatedly bemoaned a “hyped-based” crypto economy, and stressed that “hype is not harmless.”
Combined, these speeches leave no doubt that regulators are exceedingly focused on digital assets and cryptocurrencies, and in particular are increasingly focused on consumer protection concerns, beyond the usual illicit finance and terrorist financing concerns.
Continue Reading FinCEN and OCC Address Cryptocurrency: Responsible Innovation and Pervasive Hype