On May 21, 2024, the Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) jointly published a notice of proposed rulemaking (NPRM) that would require investment advisers registered under the Investment Advisers Act of 1940 (RIAs) and exempt reporting advisers (ERAs) (collectively, “investment advisers”) to maintain customer identification programs (CIPs). Many types of U.S. financial institutions are required to maintain CIPs as part of their anti-money laundering (AML) compliance program and must, as part of the CIP rules, collect, verify, and retain certain identifying information about customers. Importantly, the NPRM does not yet have the force and effect of law, but indicates how FinCEN and the SEC intend to implement more specific AML requirements for investment advisers, subject to written comments from the public before a final rule is promulgated.

The NPRM follows a February 2024 FinCEN proposal to designate RIAs and ERAs as “financial institutions” under the so-called Bank Secrecy Act (BSA), subjecting them to AML and countering the financing of terrorism (CFT) program requirements that are similar to those imposed on other types of U.S. financial institutions, including broker-dealers of securities. Although the February 2024 proposed rule was issued solely by FinCEN, as required by the USA PATRIOT Act of 2001 and the BSA, as amended, for CIPs, FinCEN is publishing this NPRM jointly with the SEC, the federal functional regulator for investment advisers.

These proposals follow a Treasury risk assessment finding that the investment adviser industry has served as an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, tax evasion, and other criminal activities. They are also part of a broader U.S. agenda to patch up potential gaps in regulations designed to counter illicit finance.Continue Reading FinCEN Proposes Expansion of CIP Requirements to Investment Advisers

On April 24, 2024, President Biden signed HR 815, “Making emergency supplemental appropriations for the fiscal year ending September 30, 2024, and for other purposes,” into law (the “National Security Supplemental” or the “NSS”). The National Security Supplemental appropriates funds to provide security assistance to Ukraine, Israel, and US partners in the Indo-Pacific and humanitarian aid for Gaza. Alongside the appropriations measures, the National Security Supplemental includes the “21st Century Peace through Strength Act”, a collection of fourteen sanctions, export controls, and related regulatory measures targeting Iran, Russia, and China, in addition to areas of concern including narcotics trafficking, terrorist financing, and misuse of information and communications technology and services (“ICTS”).

In this post, we assess these new developments and the areas where they will likely have the greatest impact.Continue Reading President Signs Expansive Sanctions Bill Into Law; Doubling of Limitations Period for IEEPA Violations Likely to Have Major Impact

The UK’s National Economic Crime Centre (“NECC”) recently issued an amber alert concerning the sanctions evasion, money laundering, and trafficking in cultural property risks presented to UK industries linked to artwork storage facilities and the art storage sector (the “Amber Alert”).  The Amber Alert highlights that criminals are finding ways to utilize the art market to conduct illicit activity and includes case studies and key indicators that those operating within the art storage sector can use to detect such activity.  This development underscores the UK government’s continued commitment to cracking down on the evasion of sanctions (particularly under the Russia sanctions regime), as well as an increased focus on identifying and targeting more avenues for sanctions evasion so that counter measures can be implemented to thwart those efforts.  It also highlights the increasingly interconnected approach the UK government and law enforcement are adopting to address activity with potential touchpoints to a range of financial and other crimes. Continue Reading UK NECC Publishes Amber Alert on Sanctions Evasion in the Art Storage Sector

On February 8, 2024, the U.S. Department of the Treasury, Financial Crimes Enforcement Network (FinCEN) published a notice of proposed rulemaking (2024 NPRM) about Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulations concerning persons involved in residential real estate closings and settlements. To promote U.S. AML/CFT objectives, the NPRM proposes a system of streamlined Suspicious Activity Reports (SARs) for certain U.S. real estate transactions. The NPRM does yet not have the force and effect of law, and FinCEN has requested public comments to be submitted until on or about April 16, 2024. A brief summary of the background and substantive provisions for the NPRM follows.Continue Reading Potential new SAR-like Reporting Requirements for Certain U.S. Real Estate Transactions

On October 19, 2023, the U.S. Department of the Treasury’s (“Treasury”) Financial Crimes Enforcement Network (FinCEN) announced a Notice of Proposed Rulemaking (NPRM) that would implement new recordkeeping and reporting requirements on domestic financial institutions and domestic financial agencies, related to transactions that they know, suspect, or have reason to suspect involve convertible virtual currency (CVC) mixing within or involving a non-U.S. jurisdiction. 

FinCEN issued the NPRM pursuant to Section 311 of the USA PATRIOT Act, which provides the Secretary of the Treasury (the “Secretary”) the authority to require domestic financial institutions and domestic financial agencies to take “special measures” where the Secretary finds reasonable grounds to conclude that a class of transactions, institution, account, or foreign jurisdiction is of “primary money laundering concern.”  The NPRM identifies international CVC mixing as a class of transactions of primary money laundering concern, highlighting the use of CVC mixing services by illicit actors including cyber criminals and terrorist groups.  According to FinCEN’s press release, the NPRM represents FinCEN’s first use of Section 311 to target a class of transactions.Continue Reading FinCEN Proposed Rule Targets Digital Asset Mixers

After months of anticipation, a federal judge has finally ruled in the closely watched case of Joseph Van Loon, et al. v. Department of Treasury, et al.  This important case addressed challenges to the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) decision to impose sanctions on Tornado Cash as a Specially Designated National and Blocked Person (SDN).  The judge granted summary judgement in favor of OFAC, finding it had sufficient legal authority to designate Tornado Cash, and denied summary judgement on the plaintiffs’ claims.  Shortly after that ruling, OFAC announced the SDN designation of Roman Semenov, one of three alleged co-founders of Tornado Cash, and the Department of Justice (DOJ) charged Semenov and Roman Storm, another Tornado Cash founder, with multiple alleged criminal violations related to anti-money laundering (AML) and economic sanctions laws. 

All three actions are critical developments that contain key insights on how the US government views the AML and sanctions obligations of decentralized protocols and individuals associated with those protocols.  The developments make clear that, at least in certain scenarios, individuals involved in the creation of a DeFi platform can be held responsible for the activities conducted on that platform where such conduct violates US economic sanctions or AML laws, or constitutes sanctionable activity under applicable executive orders. Continue Reading Critical Tornado Cash Developments Have Significant Implications for DeFi AML and Sanctions Compliance

The Department of the Treasury’s recently issued Illicit Finance Risk Assessment of Decentralized Finance is principally intended to provide insight on how illicit actors are abusing decentralized finance (DeFi) services, as well as anti-money laundering (AML) and countering the financing of terrorism (CFT) vulnerabilities unique to DeFi.  However, the report also contains critical insight on how Treasury, and, presumably, the Financial Crimes Enforcement Network (FinCEN) within Treasury, view the applicability of existing US AML/CFT regulations, issued pursuant to the Bank Secrecy Act (BSA), to DeFi projects. Continue Reading Risk Assessment Offers Treasury’s Most Extensive Comments to Date on DeFi Regulation

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. Continue Reading In Unprecedented Action FinCEN Identifies Virtual Currency Exchange as Primary Money Laundering Concern

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.Continue Reading Proposed Rule Lays Out Who Will Have Access to New Corporate Beneficial Ownership Information

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.
Continue Reading OFAC and FinCEN Announce Enforcement Actions Against Bittrex