We are pleased to offer the latest episode in Ballard Spahr’s Business Better podcast series, The Business of Cryptocurrency.  In this episode, we discuss the basics of money transmitter and Bank Secrecy Act registration and compliance program requirements. The episode also covers more complex regulatory issues confronting cryptocurrency exchanges, financial institutions, and other businesses

We are pleased to offer the latest episode in Ballard Spahr’s Consumer Financial Monitor Podcast series — a weekly podcast focusing on the consumer finance issues that matter most, from new product development and emerging technologies to regulatory compliance and enforcement and the ramifications of private litigation.

In this episode, we discuss the historic changes

The U.S. Government Accountability Office (“GAO”) recently issued a public version of a more detailed and confidential report previously sent to Congress summarizing the GAO’s review of the use of virtual currencies to facilitate human and drug trafficking.  The GAO’s report, Additional Information Could Improve Federal Agency Efforts to Counter Human and Drug Trafficking, (“the Report”) is lengthy.  The GAO examined two issues:  (1) U.S. agencies’ collection of data on the use of virtual currencies for human and drug trafficking; and (2) the steps taken and challenges faced by U.S. agencies to counter human and drug trafficking facilitated by virtual currencies.  In this post, we will describe the Report at a high level, but will focus on the emerging trends identified in the Report and the GAO’s recommendations to counter the use of virtual currency in facilitating human and drug trafficking by amending BSA/AML regulation of virtual currency kiosks, otherwise known as virtual currency ATMs, so as to identify specific locations.
Continue Reading  GAO Publishes Report on Nexus Between Virtual Currencies and Human and Drug Trafficking Financing

Strategy Reflects Coordinated Focus on Transparency and “Gatekeeper” Responsibilities

Last week, the Biden Administration unveiled a sweeping “whole-of-government approach” to combating corruption.  Identifying corruption as a “cancer within the body of societies—a disease that eats at the public trust and the ability of governments to deliver for their citizens”—the United States Strategy on Countering Corruption (the “Plan”) articulates a global vision for rooting out this national security threat.  The first-of-its-kind approach focuses on responding to corruption’s transnational dimensions, with a specific emphasis on reducing “the ability of corrupt actors to use the U.S. and international financial systems to hide assets and launder proceeds of corrupt acts.”  Although the Plan is grounded in “five-mutually reinforcing pillars,” pillars two and three merit a closer look from this blog’s readers.  They serve as an important recap of the various steps the Administration has taken to combat illicit finance and its strategy for increased enforcement using both the new and existing tools at its disposal.  Further, the Plan implicates many pressing Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) issues on which we repeatedly blog, as we will discuss.
Continue Reading  White House Releases Sweeping U.S. Strategy on Countering Corruption

Agencies Issue “Crypto Asset Roadmap” for 2022 Guidance, and OCC Confirms Prior Interpretive Letters on Crypto – So Long as Supervisory Regulators Do Not Object

The Board of Governors of the Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) (collectively, the “Agencies”) issued on November 23 a short Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (“Joint Statement”), which announced – without further concrete detail – that they had assembled a “crypto asset roadmap” in order to provide greater clarity in 2022 to banks on the permissibility of certain crypto-asset activities.  Only the week before, the Chief Counsel for the OCC issued Interpretive Letter #1179, which confirmed that a bank could engage in certain cryptocurrency, distributed ledger and stablecoin activities – consistent with prior OCC letters – so long as a bank shows that it has sufficient controls in place, and first obtains written notice of “non objection” by its supervisory office.  This post will discuss both publications.

There is great overlap between the bank activities referenced in the Joint Statement and Interpretive Letter #1179.  The 2022 clarity promised by the “roadmap” presumably will supersede, once issued, Interpretive Letter #1179, which appears to function as a general stop-gap until the 2022 publications hopefully provide more detail regarding exactly how banks can attain compliance.

Federal banking regulators have been busy in this space.  These pronouncements come closely on the heels of a Report on Stablecoins issued earlier in November by the Agencies and the U.S. President’s Working Group on Financial Markets, which delineated perceived risks associated with the increased use of stablecoins and highlighted three concerns: risks to rules governing anti-money laundering (“AML”) compliance, risks to market integrity, and general prudential risks.
Continue Reading  Federal Bank Regulators Focus on Crypto Assets and Blockchain Activities

Travel Rule and Beneficiary Information Continues to Challenge Virtual Asset Service Providers

In late October, the Financial Action Task Force issued its long-awaited updated guidance on Virtual Assets and Virtual Asset Service Providers (“FATF Guidance”), an extremely lengthy and detailed document setting forth how virtual asset service providers (“VASPs”) and related virtual asset activities fall within the scope of FATF standards for anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”).  The FATF Guidance is important to VASPs worldwide, as well as the more traditional financial institutions (“FIs”) doing business with them.  Because of its great breadth, we focus here only on its comments regarding implementation of the so-called “Travel Rule” for virtual assets.  This portion of the FATF Guidance is particularly relevant to the U.S. because, as we have blogged, the Financial Crimes Enforcement Network (“FinCEN”) proposed regulations in 2020 – still pending – which would change the Travel Rule by lowering the monetary threshold for FIs from $3,000 to $250 for collecting, retaining, and transmitting information related to international funds transfers, and explicitly would make the Travel Rule apply to transfers involving convertible virtual currencies.

The FATF Guidance has additional relevance to U.S. VASPs and FIs because, this month, the U.S. President’s Working Group on Financial Markets (“PWG”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller (“OCC”) (together, “the U.S. Agencies”) issued a Report on Stablecoins (the “Report”).  Stablecoins are digital assets designed to maintain stable value as related to other reference assets, such as the U.S. Dollar.  In the Report, the U.S. Agencies delineate perceived risks associated with the increased use of stablecoins and highlight three types of concerns: risks to rules governing AML compliance, risks to market integrity, and general prudential risks.  We of course will focus here on the Report’s discussion of AML risks, particularly because it repeatedly invokes the FATF Guidance, thereby illustrating the increasing efforts by governments to seek a global and relatively coordinated approach to addressing AML/CFT concerns regarding virtual assets.
Continue Reading  Global Developments in AML and Virtual Assets:  FATF Guidance and the Travel Rule, and U.S. Pronouncements on Stablecoins

On October 15, 2021, the Financial Crimes Enforcement Network (“FinCEN”) issued a financial trend analysis on ransomware relating to Suspicious Activity Reports (“SARs”) filed in the first half of this year (“Analysis”).  According to the Analysis, U.S. banks and financial institutions reported $590 million in suspected ransomware payments in SARs filed between January and June 2021, more than the total for all of 2020.  FinCEN found that ransomware payments are often made using virtual currency, such as Bitcoin (“BTC”).  The Office of Foreign Assets Control (“OFAC”) also released guidance in tandem with the FinCEN Analysis, addressing how the virtual currency industry can address sanctions-related risks.

Ransomware appears to be top-of-mind at the U.S. Treasury, as we have blogged.  FinCEN’s Analysis and OFAC’s guidance came quickly on the heels of OFAC issuing on September 21 a six-page Updated Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments, which states that OFAC will consider self-reporting, cooperation with the government and strong cybersecurity measures to be mitigating factors in any contemplated enforcement action against a ransomware victim that halts an attack by making the demanded payment to attackers who were sanctioned or otherwise had a sanctions nexus.  Also on September 21, 2021, OFAC issued its first sanctions designation against a virtual currency exchange by designating the virtual currency exchange “for its part in facilitating financial transactions for ransomware variants.”
Continue Reading  FinCEN Reports Spiraling SARs Relating to Ransomware

On October 6, the Department of Justice (“DOJ”) announced the creation of a National Cryptocurrency Enforcement Team (“NCET”).  The DOJ press release is set forth in part below, without further commentary, other than to observe that the NCET’s stated goals are to address issues on which we repeatedly have blogged:  crypto exchangers and their AML

Global AML Compliance Faces Challenges Relating to Regulator Expertise, the Travel Rule, Decentralized Finance, and “Regulator Shopping”

Today we are very pleased to welcome guest blogger Federico Paesano from the Basel Institute on Governance (“Basel Institute”). The Basel Institute recently issued its Basel AML Index for 2021 (“Basel AML Index”). This data-rich and fascinating annual publication, one of several online tools developed by the Basel Institute to help both public- and private-sector practitioners tackle financial crime, is a research-based ranking that assesses countries’ risk exposure to money laundering and terrorist financing. This year, we will focus on the section of the Basel AML Index which analyzes data from the Financial Action Task Force (“FATF”) on how jurisdictions are responding to money laundering and terrorist financing threats related to virtual assets.  The Basel AML Index concludes: “not well at all.”

Federico Paesano is a Senior Financial Investigation Specialist at the Basel Institute’s International Centre for Asset Recovery, and leads its Cryptocurrencies and Anti-Money Laundering Compliance Training.  For 14 years, Federico worked for the Italian Financial Police, ending his career as Chief Investigator, leading and conducting judicial and financial investigations, focusing in particular on economic crimes such as corruption and money laundering.  In July 2009, he was seconded by the Italian Government to the European Union Police Mission in Afghanistan (“EUPOL”) as Mentor to the Minister of Interior on Anticorruption.  Along with Europol and Interpol, Federico and the Basel Institute are co-organizing on December 7–8, 2021 the 5th Global Conference on Criminal Finances and Cryptocurrencies, which focuses on the emerging threat posed by criminals using new payment methods to conceal the proceeds of their crimes. His Quick Guide to Cryptocurrencies and Money Laundering Investigations may be found here.

The Basel Institute is a not-for-profit Swiss foundation dedicated to working with public and private partners around the world to prevent and combat corruption, and is an Associated Institute of the University of Basel. The Basel Institute’s work involves action, advice, and research on issues including anti-corruption collective action, asset recovery, corporate governance and compliance, and green corruption.  Money Laundering Watch was pleased to have Gretta Fenner and Dr. Kateryna Boguslavska of the Basel Institute guest blog on the Basel AML Indices for 2020 and 2019.

This blog post again takes the form of a Q & A session, in which Federico responds to questions posed by Money Laundering Watch about the Basel AML Index 2021 and wider debates on the topic. We hope you enjoy this discussion of money laundering risks and virtual assets — which addresses regulators’ frequent lack of expertise, tracing of cryptocurrency transactions, the Travel Rule, the challenges posed by decentralized finance, “regulator shopping,” and more.  —Peter Hardy and Andrew D’Aversa
Continue Reading  The Basel AML Index 2021: Virtual Assets and Money Laundering. A Guest Blog.

OFAC Updates Advisory on Enforcement Risks Relating to Agreeing to Pay Ransomware

First Post in a Two-Part Series on Recent OFAC Designations

On September 21, 2021 OFAC issued its first sanctions designation against a virtual currency exchange by designating the virtual currency exchange, SUEX OTC, S.R.O. (SUEX) “for its part in facilitating financial transactions for ransomware variants.”  Although this is a unique development, the broader and more important issue for any financial institution or company facing a ransomware attack is the continuing problem encapsulated in OFAC’s six-page Updated Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments, which OFAC released in conjunction with the announcement of the SUEX designation.  The Updated Advisory illustrates a “Catch 22” scenario, in which a victim that halts a ransomware attack by making the demanded payment then may find itself under scrutiny from OFAC on a strict-liability basis if it turns out that the attackers were sanctioned or otherwise had a sanctions nexus.  The Updated Advisory states that OFAC will consider self-reporting, cooperation with the government and strong cybersecurity measures to be mitigating factors in any contemplated enforcement action.

OFAC has been busy.  Tomorrow, we will blog on a more traditional action announced by OFAC right before the SUEX designation:  OFAC’s designation of members of a network of financial conduits funding Hizballah and Iran’s Islamic Revolutionary Guard Corps-Qods Force.  This designation is notable for the targets’ alleged use of gold as a vehicle to launder illicit funds through front companies.
Continue Reading  OFAC Targets Virtual Currency Exchange For Ransomware Attack