On January 18, 2023, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an order identifying the virtual currency exchange Bitzlato Limited (Bitzlato) as a “primary money laundering concern” in connection with Russian illicit finance. The order, which is the first of its kind, was issued pursuant to Section 9714(a) of the Combating Russian Money Laundering Act.
BIS Extends Advanced Computing and Semiconductor Rules to Macau
On January 17, 2023, the US Department of Commerce’s Bureau of Industry and Security (BIS) issued an interim final rule (the “January 17 rule”), expanding its recent China-focused export controls, related to advanced computing and semiconductors, to Macau. These controls, initially imposed on China (including Hong Kong), were announced in an interim final rule on October 7, 2022 (the “October 7 rule”).
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Proposed Rule Lays Out Who Will Have Access to New Corporate Beneficial Ownership Information
On December 16, FinCEN issued a notice of proposed rulemaking (NPRM) entitled “Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities.” The NPRM is intended to implement the Corporate Transparency Act (CTA) and, in particular, to govern which entities may access corporate beneficial ownership information (BOI) that certain entities will soon be required to report to FinCEN under the CTA. Steptoe previously summarized FinCEN’s final rule on BOI reporting here.
CFIUS Announces First Ever Enforcement and Penalty Guidelines
On October 20, 2022, the US Department of the Treasury (Treasury) issued, for the first time, Enforcement and Penalty Guidelines (Guidelines) for the Committee on Foreign Investment in the United States (CFIUS or the Committee). The Guidelines describe three categories of conduct that may constitute a violation, the process CFIUS generally follows in imposing penalties, and some of the factors the Committee considers in determining whether a penalty is warranted and the scope of any such penalty. The Guidelines also encourage prompt and complete self-disclosure of any conduct that may constitute a violation.
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OFAC and FinCEN Announce Enforcement Actions Against Bittrex
On October 11, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) announced enforcement actions against Bittrex, Inc. (Bittrex), a privately-owned digital asset trading platform based in Bellevue, Washington, for apparent violations of anti-money laundering (AML) laws and of multiple sanctions programs. A settlement of over $24 million was announced by OFAC and a $29 million fine was announced by FinCEN. FinCEN will credit payment of the OFAC settlement amount toward Bittrex’s potential liability with FinCEN, meaning Bittrex will pay just over $29 million in total. Joint enforcement action between OFAC and FinCEN is uncommon—the settlements mark the first instance of parallel enforcement actions by OFAC and FinCEN in the digital asset sector.
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BIS Issues Expansive New Rules Targeting China
On October 7, 2022, in a move that was hailed by senior U.S. government officials as a paradigm shift in U.S. export controls policy toward China, the Department of Commerce’s Bureau of Industry and Security (BIS) issued an interim final rule that amends the Export Administration Regulations (EAR) to impose new and expanded controls on advanced computing integrated circuits (ICs), computer commodities that contain such ICs, and certain semiconductor manufacturing items. Transactions for supercomputer end-uses and transactions involving certain entities on the Entity List are now subject to additional export controls, as are certain semiconductor manufacturing items and transactions for certain IC end uses. U.S. person activities as they relate to certain semiconductor activities in China are also now restricted.
Certain aspects of the rule, specified below, including the availability of license exceptions, became effective immediately on October 7, 2022. The new restrictions on U.S. person activities under § 744.6 became effective on October 12, 2022. The remainder of the provisions with a delayed effective date are specified below and will become effective on October 21, 2022. BIS is also accepting public comments on the interim final rule through December 12, 2022.
Separately, also on October 7, 2022, BIS issued a final rule, which revised the Unverified List (UVL) and clarified the activities and criteria that may lead to the addition of an entity to the Entity List. BIS stated that a sustained lack of cooperation by the host government in a country where an end-use check is to be conducted, such as China, that effectively prevents BIS from determining compliance with the EAR, will be grounds for adding an entity to the Entity List.
The U.S. policy goals behind the new rules are ambitious and seek to degrade China’s advanced computing capabilities in an unprecedented manner. As summarized recently by National Security Advisor Jake Sullivan: “On export controls, we have to revisit the longstanding premise of maintaining ‘relative’ advantages over competitors in certain key technologies. We previously maintained a ‘sliding scale’ approach that said we need to stay only a couple of generations ahead. That is not the strategic environment we are in today. Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.”
The broad implications of these new rules, along with their efficacy from a policy standpoint, may take some time to come fully in to focus. For now, it is clear that any U.S. or non-U.S. individuals or entities that play any role in the global semiconductor supply chain—whether as manufacturers, producers, consumers, or otherwise—need to carefully review the new rules to determine what is required to comply and, if necessary, seek guidance or a license from BIS.
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Rare Executive Order Sharpens CFIUS Focus
On September 15, 2022, President Biden issued a new executive order (EO), entitled “Executive Order on Ensuring Robust Consideration of Evolving National Security Risks by the Committee on Foreign Investment in the United States,” that directs CFIUS to consider certain risk factors when reviewing covered transactions. CFIUS-related executive orders are rare and have typically been used to establish procedures and processes, rather than provide substantive guidance to the Committee. President Biden’s order is unusual in that it goes beyond process considerations and directs the Committee to consider specific substantive risks as part of its reviews. According to a White House fact sheet, this is the first EO “since CFIUS was established in 1975 to provide formal Presidential direction on the risks that the Committee should consider when reviewing a covered transaction.”
The EO does not alter the legal powers granted to CFIUS, including the scope of transactions which it can review. Nor does it contain any provisions regarding outbound investments (sometimes called “reverse CFIUS”), which was recently proposed in Congress and on which the Administration is considering taking executive action in the near term.
However, it provides important insight into the Administration’s thinking with respect to national security issues linked to foreign investment and puts both US businesses and foreign investors involved in certain industries, or engaged in certain activities, on notice that CFIUS may more closely scrutinize their deals.
OFAC Releases Preliminary Guidance on Implementation of the Russian Oil Price Cap
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) recently released preliminary guidance on the implementation of a price cap policy on Russian crude oil and petroleum products. This policy has major implications for maritime service providers and maritime supply chains.
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DFS’s First Enforcement Action Against a Blockchain Company: Lessons Learned
On August 1, Robinhood Crypto, LLC (RHC) entered a consent order with the New York State Department of Financial Services (DFS) requiring RHC to pay a $30 million fine for violating (1) New York’s virtual currency regulatory regime known as the BitLicense, (2) a Supervisory Agreement entered with DFS as a condition of its BitLicense, (3) anti-money laundering (AML) requirements applicable to money transmitters, and (4) other requirements related to transaction monitoring, filtering, and cybersecurity. The consent order, which is DFS’s first enforcement action under the BitLicense regime or against a digital currency business, offers several important takeaways for blockchain companies operating or seeking to operate in the state, including (1) the importance of scaling up compliance processes commensurate with business growth, (2) the risks of relying on compliance programs of affiliated entities, (3) the importance of well-developed reporting lines in compliance programs, and (4) the consequences of filing “improper” certifications under DFS’s transaction monitoring and cybersecurity rules.
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OFAC Designates Tornado Cash in First Action Against a Decentralized Platform
On August 8, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced the imposition of sanctions on the decentralized digital asset mixer Tornado Cash. The action marks the first time OFAC has targeted an on-chain decentralized protocol. To date, OFAC has not issued any guidance specific to decentralized finance (DeFi) as part of its broader sanctions guidance for the “virtual currency” industry, but the Tornado Cash action lays down an important marker and makes clear that OFAC will target projects or protocols engaged in illicit activity regardless of their centralized or decentralized status. (Our prior blog post on OFAC’s general virtual currency guidance is available here).
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