Enforcement Actions

Leaders of CFTC, FinCEN, and SEC Issue Joint Statement on Activities Involving Digital Assets

October 11, 2019

Washington, DC – The leaders of the U.S. Commodity Futures Trading Commission, the Financial Crimes Enforcement Network, and the U.S. Securities and Exchange Commission (the “Agencies”) today issued the following joint statement to remind persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA).

AML/CFT obligations apply to entities that the BSA defines as “financial institutions,” such as futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the SEC. Among those AML/CFT obligations are the requirement to establish and implement an effective anti-money laundering program (AML Program) and recordkeeping and reporting requirements, including suspicious activity reporting (SAR) requirements.

For the purpose of this joint statement, “digital assets” include instruments that may qualify under applicable U.S. laws as securities, commodities, and security-or commodity-based instruments such as futures or swaps. We are aware that market participants refer to digital assets using many different labels. The label or terminology used to describe a digital asset or a person engaging in or providing financial activities or services involving a digital asset, however, may not necessarily align with how that asset, activity or service is defined under the BSA, or under the laws and rules administered by the CFTC and the SEC. For example, something referred to as an “exchange” in a market for digital assets may or may not also qualify as an “exchange” as that term is used under the federal securities laws. As such, regardless of the label or terminology that market participants may use, or the level or type of technology employed, it is the facts and circumstances underlying an asset, activity or service, including its economic reality and use (whether intended or organically developed or repurposed), that determines the general categorization of an asset, the specific regulatory treatment of the activity involving the asset, and whether the persons involved are “financial institutions” for purposes of the BSA.

The nature of the digital asset-related activities a person engages in is a key factor in determining whether and how that person must register with the CFTC, FinCEN, or the SEC. For example, certain “commodity”-related activities may trigger registration and other obligations under the Commodity Exchange Act (CEA), while certain activities involving a “security” may trigger registration and other obligations under the federal securities laws. If a person falls under the definition of a “financial institution,” its AML/CFT activities will be overseen for BSA purposes by one or more of the Agencies (and potentially others). For example, the AML/CFT activities of a futures commission merchant will be overseen by the CFTC, FinCEN, and the National Futures Association (NFA); those of an MSB will be overseen by FinCEN; and those of a broker-dealer in securities will be overseen by the SEC, FinCEN and a self-regulatory organization, primarily the Financial Industry Regulatory Authority (FINRA).

Certain BSA obligations that apply to a broker-dealer in securities, mutual fund, futures commission merchant, or introducing broker, such as developing an AML Program or reporting suspicious activity, apply very broadly and without regard to whether the particular transaction at issue involves a “security” or a “commodity” as those terms are defined under the federal securities laws or the CEA.

Additional Comments by the U.S. Commodity Futures Trading Commission Chairman

The mission of the CFTC is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation. In advancing that mission, the CFTC regulates key participants in the derivatives markets, including boards of trade, futures commission merchants, introducing brokers, swaps dealers, major swap participants, retail foreign exchange dealers, commodity pool operators, and commodity trading advisors pursuant to the CEA. An “introducing broker” or “futures commission merchant” is defined in BSA regulations as a person that is registered or required to register as an introducing broker or futures commission merchant under the CEA. Introducing brokers and futures commission merchants are required to report suspicious activity and implement reasonably-designed AML Programs. These requirements are not limited in their application to activities in which digital assets qualify as commodities or are used as derivatives. The rules would also apply to activities that are not subject to regulation under the CEA.

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Additional Comments by the Financial Crimes Enforcement Network Director

As a bureau of the Department of the Treasury, FinCEN is the administrator of and lead regulator under the BSA — the nation’s first and most comprehensive AML/ CFT statute. FinCEN’s mission is to protect our financial system from illicit use, ensure our national security, and protect our people from harm. FinCEN has supervisory and enforcement authority over U.S. financial institutions to ensure the effectiveness of the AML/CFT regime. As such FinCEN mandates certain controls, reporting, and recordkeeping obligations for U.S. financial institutions. The BSA and its implementing regulations set forth the regulatory obligations that generally apply to financial institutions, including AML Program, recordkeeping, and reporting requirements.

FinCEN regulates, among other persons, money transmitters and other MSBs. FinCEN’s BSA regulations define a “money transmitter” as a person engaged in the business of providing money transmission services or any other person engaged as a business in the transfer of funds. The term “money transmission services” means “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.”

In May 2019, FinCEN issued interpretive guidance (2019 CVC Guidance) to remind persons subject to the BSA how FinCEN regulations relating to MSBs apply to certain business models involving money transmission denominated in value that substitutes for currency, specifically, convertible virtual currencies. The 2019 CVC Guidance consolidated current FinCEN regulations, and related administrative rulings and guidance issued since 2011, and applied these rules and interpretations to other common business models involving CVC engaging in the same underlying patterns of activity. Covered persons and institutions are strongly encouraged to review the 2019 CVC Guidance.

As set forth in the 2019 CVC Guidance, a number of digital asset-related activities qualify a person as an MSB that would be regulated by FinCEN. FinCEN’s BSA regulations also provide that any person “registered with, and functionally regulated or examined by, the SEC or the CFTC,” would not be subject to the BSA obligations applicable to MSBs, but instead would be subject to the BSA obligations of such a type of regulated entity. Accordingly, even if an introducing broker, futures commission merchant, broker-dealer or mutual fund acts as an exchanger of digital assets and provides money transmission services for the purposes of the BSA, it would not qualify as a money transmitter or any other category of MSB and would not be subject to BSA requirements that are applicable only to MSBs. Instead, these persons would be subject to FinCEN’s regulations applicable to introducing brokers, futures commission merchants, broker-dealers and mutual funds, respectively. These obligations include the development of an AML program and suspicious activity reporting requirements, as well as requirements under applicable CFTC or SEC rules. Furthermore, regardless of federal functional regulator, all financial institutions dealing in digital assets meeting the definition of “securities” under federal law must comply with federal securities law.

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Additional Comments by the U.S. Securities and Exchange Commission Chairman

The statutory mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. In general, the SEC has jurisdiction over securities and securities-related conduct. Persons engaged in activities involving digital assets that are securities have registration or other statutory or regulatory obligations under the federal securities laws.

The SEC oversees the key participants in the securities markets, some of which may engage in digital asset activities. Key participants in the securities markets include but are not limited to national securities exchanges, securities brokers and dealers, investment advisers, and investment companies. Market participants receiving payments or engaging in other transactions in digital assets should consider such transactions to present similar or additional risks, including AML/ CFT risks, as are presented by transactions in cash and cash equivalents. With regard to SEC regulated entities, broker-dealers and mutual funds are defined as “financial institutions” in rules implementing the BSA. A “broker-dealer” is defined in rules implementing the BSA as a person that is registered or required to register as a broker or dealer under the Securities Exchange Act, while a “mutual fund” is defined as an investment company that is an “open-end company” and that is registered or required to register under the Investment Company Act of 1940.

Broker-dealers and mutual funds are required to implement reasonably-designed AML Programs and report suspicious activity. These rules are not limited in their application to activities involving digital assets that are “securities” under the federal securities laws.21

Link:

Multiagency statement

FOR IMMEDIATE RELEASE
September 19, 2019
Contact: (202) 649-6870
 
OCC Enforcement Actions and Terminations

WASHINGTON—The Office of the Comptroller of the Currency (OCC) today released new enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with national banks and federal savings associations.

All Cease and Desist Orders, Civil Money Penalty Orders, and Removal/Prohibition Orders are issued with the consent of the parties, unless otherwise indicated as a Decision and Order issued by the Comptroller of the Currency.

Copies of the final actions are available for download by viewing the searchable database of all public enforcement actions taken since August 1989 at http://apps.occ.gov/EnforcementActions.

View the current actions by selecting the enforcement actions below. You may also submit a request electronically to obtain copies through the OCC’s online FOIA site, https://foia-pal.occ.gov or by writing to the Comptroller of the Currency, Communications Division, Suite 3E-218, Washington, DC 20219. When ordering, please specify the appropriate enforcement action number. 

Notices Filed

Action Type No. Name/Bank/City State Date
Notices Filed N19-007 Eric M. Clevenger, PNC Bank, National Association, Wilmington Delaware 08/26/2019

 

Removal/Prohibition Orders

Action Type No. Name/Bank/City State Date
Removal/Prohibition Orders 2019-046 Nodia Harris, The Huntington National Bank, Columbus Ohio 08/19/2019
Removal/Prohibition Orders 2019-047 Lori Christine Woodson, The City National Bank and Trust Company of Lawton, Oklahoma, Lawton Oklahoma 09/03/2019
Removal/Prohibition Orders 2019-048 Teanna Smith, Wells Fargo Bank, National Association, Sioux Falls South Dakota 08/28/2019
Removal/Prohibition Orders 2019-049 Adrian Hawkins, Capital One, National Association, McLean Virginia 08/26/2019

 

Terminations of Existing Enforcement Actions

Action Type No. Type/Bank/City/Old EA# State Date
Terminations of Existing Enforcement Actions 2019-050 C&D,Interamerican Bank, a FSB, Miami (EA# 2012-229) Florida 08/09/2019
Terminations of Existing Enforcement Actions 2019-051 FA, The First National Bank of Lacon, Lacon (EA# 2016-091) Illinois 08/01/2019
Terminations of Existing Enforcement Actions 2019-052 FA, Community National Bank in Monmouth, Monmouth (EA# 2017-054) Illinois 06/05/2019
Terminations of Existing Enforcement Actions 2019-053 FA, Homestead Savings Bank, Albion (EA# 2014-118) Michigan 08/26/2019

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General Correspondence Address

Office of the Comptroller of the Currency
400 7th Street, SW
Washington, D.C. 20219

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OCC Notice

For a period of over 3 years, GE appears to have violated the Cuban Assets Control Regulations (CACR) 289 times, resulting in a settlement of $2,718,581, as opposed to a base penalty of $3,377,119 and a maximum statutory penalty of $17,785,000.

This is what happened:

Specifically, between December 2010 and February 2014, the GE Companies appear to have violated § 515.201(b) of the CACR on 289 occasions by accepting payment from The Cobalt Refinery Company (“Cobalt”) for goods and services provided to a Canadian customer of GE.

Since June 1995, Cobalt had been identified as a specially designated national (SDN) of Cuba and appeared on OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SDN List”). Publicly available information also demonstrated that GE’s former Canadian customer is a corporation with strong historic and then-current economic ties to the Cuban mining industry through its business partnerships and joint ventures with the Cuban government. Cobalt is one of three entities owned by a public joint venture between GE’s Canadian customer and the Cuban government. From at least 1996 until the GE Companies terminated their relationship with their Canadian customer, the GE Companies maintained — and renewed on at least 18 occasions — this customer relationship despite the obvious sanctions risk posed by the relationship.

On February 24, 2014, GE Working Capital Solutions discovered that from at least 2010 to 2014, the GE Companies received numerous payments directly from Cobalt for invoices issued to GE’s Canadian customer. While the GE Companies negotiated and entered into contracts with GE’s Canadian customer, and sent all of their invoices to GE’s Canadian customer, Cobalt paid the GE Companies for its goods and services in more than 65 percent of the total transactions. The GE Companies approved Cobalt as a third-party payer and, over a four-year period, failed to appropriately recognize the significant and widely published relationship between Cobalt and their Canadian customer and did not undertake sufficient diligence into their customer’s activities. The GE Companies deposited all checks received from Cobalt into GE’s bank account at a Canadian financial institution. The checks contained Cobalt’s full legal entity name as it appears on OFAC’s SDN List as well as an acronym for Cobalt (“Corefco”), but the GE Companies’ sanctions screening software, which screened only the abbreviation of the SDN’s name, never alerted on Cobalt’s name.

In total, the GE Companies received 289 checks directly from Cobalt from on or about December 9, 2010 to on or about February 28, 2014 totaling approximately $8,018,615. Additionally, goods and services the GE Companies provided to its Canadian customer were, in turn, used to supply utility services and other benefits to Cobalt, which is co-located with GE’s Canadian customer.

And how OFAC ended up at the final figure:

OFAC determined the following to be aggravating factors:

  1. The GE Companies failed to take proper or reasonable care with respect to their U.S. economic sanctions obligations — particularly given GE’s commercial sophistication. GE failed to identify that (i) for at least four years it was receiving payments that were on their face from a SDN of Cuba that has been on the SDN List since 1995, and (ii) it was providing goods and services to a customer that provides a direct and indirect benefit to a facility owned and operated by that designated Cuban company;
  2. The GE Companies’ actions caused substantial harm to the objectives of the Cuba sanctions program by conducting a large volume of high-value transactions directly with a Cuban company on the SDN List over a period of many years; and
  3. The substance of GE’s disclosures and other communications with OFAC leave substantial uncertainty about the totality of the benefits conferred to a Cuban company on the SDN List by the GE Companies through their Canadian customer, which had substantial and public ties to Cuba and the Cuban mining industry. While OFAC considered certain jurisdictional limitations on GE’s ability to provide a full picture of the scope of work performed at the request of its Canadian customer, at all relevant times, GE had reason to know of its customer’s specific and longstanding relationship with Cobalt. GE should have treated its Canadian customer as higher risk due to the customer’s publicly known joint venture with Cuba and substantial reliance on Cuban-origin ore. Finally, despite the provision to GE of OFAC’s Office of Enforcement Data Delivery Standards, GE did not provide its primary submissions to OFAC in a clear and organized manner and the submissions contained numerous inaccuracies, placing a substantial resource burden on OFAC during the course of its investigation.

OFAC determined the following to be mitigating factors:

  1. None of the GE Companies has received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the earliest transaction giving rise to the alleged violations;
  2. GE identified the alleged violations by testing and auditing its compliance program. Additionally, GE implemented remedial measures and new processes to enhance its sanctions compliance procedures, including developing a training video for all company employees using the alleged violations as a case study; and
  3. GE cooperated with OFAC by executing and extending multiple statute of limitations tolling agreements.

And the lesson to be learned from all of this:

This enforcement action highlights the sanctions risks to U.S. companies and their foreign subsidiaries associated with (i) accepting payments from third parties and (ii) conducting transactions in foreign currency or at a foreign financial institution. Additionally, this action demonstrates the importance of conducting appropriate due diligence on customers and other counter-parties when initiating and renewing customer relationships. Ongoing compliance measures should be taken throughout the life of commercial relationships.

As noted in OFAC’s Framework for Compliance Commitments, U.S. companies can mitigate sanctions risk by conducting risk assessments and exercising caution when doing business with entities that are affiliated with, or known to transact with, OFAC-sanctioned persons or jurisdictions, or that otherwise pose high risks due to their joint ventures, affiliates, subsidiaries, customers, suppliers, geographic location, or the products and services they offer.

Link:

OFAC Enforcement Information

This is the fun part – right up front:

British Arab Commercial Bank plc Settles Potential Liability for Apparent Violations of the Sudanese Sanctions Regulations: British Arab Commercial Bank plc (BACB), a commercial bank located in London, the United Kingdom (UK), with no offices, business or presence under U.S jurisdiction, processed 72 apparent violations of the Sudanese Sanctions Regulations (SSR) (previously found at 31 C.F.R. Part 538) totaling $190,700,000. The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) has determined that BACB did not make a voluntary self- disclosure of the apparent violations, and that these apparent violations constitute an egregious case. The total base penalty amount for the apparent violations was $381,400,000. In consultation with BACB’s domestic regulator, the United Kingdom’s Prudential Regulation Authority, OFAC determined that the Bank’s operating capacity was such that it would face disproportionate impact if required to pay the proposed penalty of $228,840,000. As a result, and in view of BACB’s operating capacity, the fact that it has represented that it ceased the conduct described below, its entering into a settlement agreement, and its maintenance of the compliance commitments articulated in the settlement agreement, BACB will remit $4,000,000 to settle these potential violations and its obligations to pay OFAC the remainder of the proposed penalty amount shall be suspended

What they did was pretty ingenious, actually – they made USD payments to Sudan out of a nostril account of an unnamed bank, but funded that account in a separate transaction. So, the actual payments didn’t go through the US financial system, even though they involved funds that emanated there.

Links:

Enforcement Information

Settlement

The U.S. Department of State has concluded an administrative settlement with L3Harris Technologies, Inc. (L3Harris) of Melbourne, Florida, to resolve alleged violations of the Arms Export Control Act (AECA), 22 U.S.C. § 2751 et seq., and the International Traffic in Arms Regulations (ITAR), 22 C.F.R. Parts 120-130.  The Department of State and L3Harris have reached this settlement following an extensive compliance review by the Office of Defense Trade Controls Compliance in the Department’s Bureau of Political-Military Affairs.

The Department of State and L3Harris have reached an agreement pursuant to ITAR § 128.11 to address alleged unauthorized exports of defense articles, including technical data involving radios; providing a false statement regarding the promised payment of a commission; violating provisos, terms, and conditions of authorizations; and failing to properly manage temporary export licenses.

The settlement demonstrates the Department’s role in strengthening U.S. industry by protecting U.S.-origin defense articles, including technical data from unauthorized exports.  The settlement also highlights the importance of obtaining appropriate authorization from the Department for exporting controlled articles.

Under the terms of the 36-month Consent Agreement, L3Harris will pay a civil penalty of $13 million.  The Department has agreed to suspend $6.5 million of this amount on the condition that the funds have or will be used for Department-approved Consent Agreement remedial compliance measures.  In addition, an external Special Compliance Officer will be engaged by L3Harris to oversee the Consent Agreement, which will also require the company to conduct two external audits of its compliance program during the Agreement term as well as implement additional compliance measures.

L3Harris voluntarily disclosed to the Department the majority of the alleged AECA and ITAR violations, which are resolved under this settlement.  L3Harris also acknowledged the serious nature of the alleged violations, cooperated with the Department’s review, and instituted a number of compliance program improvements during the course of the Department’s review.  For these reasons, the Department has determined that it is not appropriate to administratively debar L3Harris at this time.

The Consent Agreement and related documents will be available for public inspection in the Public Reading Room of the Department of State and on the Penalties and Oversights Agreements section of the Directorate of Defense Trade Controls’ website.

For additional information, please contact the Bureau of Political-Military Affairs’ Office of Congressional and Public Affairs at pm-cpa@state.gov.

Link:

State Department Press Release

FOR IMMEDIATE RELEASE
August 15, 2019
Contact: (202) 649-6870
 

OCC Enforcement Actions and Terminations

WASHINGTON — The Office of the Comptroller of the Currency (OCC) today released new enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with national banks and federal savings associations.

All Cease and Desist Orders, Civil Money Penalty Orders, and Removal/Prohibition Orders are issued with the consent of the parties, unless otherwise indicated as a Decision and Order issued by the Comptroller of the Currency.

Copies of the final actions are available for download by viewing the searchable database of all public enforcement actions taken since August 1989 a http://apps.occ.gov/EnforcementActions/.

View the current actions by selecting the enforcement actions below. You may also submit a request electronically to obtain copies through the OCC’s online FOIA site, https://foia-pal.occ.gov/ or by writing to the Comptroller of the Currency, Communications Division, Suite 3E-218, Washington, DC 20219. When ordering, please specify the appropriate enforcement action number.

Civil Money Penalty Orders
No. Name/Bank/City Date
Arkansas
2019-035 Chris Elkins, Simmons First National Bank, Pine Bluff 7/23/2019
California
2019-034 Daniel Weiss, Rabobank, National Association, Roseville 7/17/2019
2019-036 MUFG Union Bank, National Association, San Francisco 7/29/2019
Delaware
2019-037 Wilmington Savings Fund Society, Federal Savings Bank, Wilmington 6/13/2019
Louisiana
2019-043 Carroll Green, Beauregard FSB, Deridder 8/5/2019
2019-044 Rafeal Webb Stark, Beauregard FSB, Deridder 8/5/2019
Pennsylvania
2019-045 Scott A. Heintzelman, The Northumberland National Bank, Northumberland 8/1/2019

 

Formal Agreements
No. Name/Bank/City Date
Kansas
2019-038 The First National Bank of Hope, Hope 7/17/2019
Michigan
2019-039  Sterling Bank and Trust, FSB, Southfield 6/18/2019

 

Notices Filed
No. Name/Bank/City Date
Oklahoma
N19-006 William Brian Mulder, Firstar Bank, National Association, Sallisaw 7/11/2019

 

Personal Cease and Desist Orders
No. Name/Bank/City Date
Arkansas
2019-035 Chris Elkins, Simmons First National Bank, Pine Bluff 7/23/2019

 

Removal / Prohibition Orders
No. Name/Bank/City Date
California
2019-034 Daniel Weiss, Rabobank, National Association, Roseville 7/17/2019
New York
2019-040 Lisa Moore, First Niagara Bank, National Association, Buffalo 7/12/2019
North Carolina
2019-041 Jessica de la Caridad Suarez, Bank of America, National Association, Charlotte 1/4/2019
Pennsylvania
2019-045 Scott A. Heintzelman, The Northumberland National Bank, Northumberland 8/1/2019
South Dakota
2019-042 Lisandra Abreu, Wells Fargo Bank, National Association, Sioux Falls 7/29/2019

Link:

OCC Notice