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Global broker-dealer assessed $14.5 million penalty for anti-money laundering compliance failures
On December 17, the Financial Industry Regulatory Authority (FINRA), the Financial Crimes Enforcement Network (FinCEN), and the SEC announced separate settlements (see here, here, and here) with a global broker-dealer following investigations into the firm’s anti-money laundering (AML) programs. According to FINRA, the broker-dealer and its affiliated securities firm allegedly failed to establish and implement AML processes reasonably designed to detect and report potentially high-risk transactions, including foreign currency wire transfers to and from countries known to be at high risk for money laundering, as well as penny stock transactions processed through the use of an omnibus account on behalf of undisclosed customers. FINRA alleged that from January 2004 to April 2017, the broker-dealer “processed thousands of foreign currency wires for billions of dollars, without sufficient oversight.”
In a separate investigation conducted by FinCEN in conjunction with FINRA and the SEC, the broker-dealer reached a settlement over allegations that it failed to, among other things, (i) develop and implement a risk-based AML program that “adequately addressed the risks associated with accounts that included both traditional brokerage and banking-like services”; (ii) implement policies and procedures, which would ensure the detection and reporting of suspicious activity through all accounts, particularly for those accounts with little to no securities training; (iii) “implement an adequate due diligence program for foreign correspondent accounts”; and (iv) provide sufficient staffing, leading to a backlog of alerts and decreased ability to file suspicious activity reports (SARs).
According to the SEC's investigation, from at least 2011 to 2013, the broker-dealer allegedly failed to file SARs as required by the Bank Secrecy Act’s reporting requirements and Section 17(a) of the Securities Exchange Act of 1934. Among other things, the SEC also claimed that the broker-dealer (i) provided customers with other services, such as cross-border wires, internal transfers between accounts and check writing, which increased its susceptibility to risks of money laundering and other types of associated illicit financial activity; and (ii) “did not properly review suspicious transactions flagged by its internal monitoring systems and failed to detect suspicious transactions involving the movement of funds between certain accounts in suspicious long-term patterns.”
After factoring in remedial actions, the broker-dealer has been assessed total civil money penalties of $14.5 million, including a $500,000 fine against the securities firm.
Agencies release proposed community bank Volcker Rule exemption
On December 18, the FDIC, the Federal Reserve Board, the OCC, the SEC, and the CFTC (collectively, the Agencies) issued a notice of proposed rulemaking to amend regulations implementing Section 13 of the Bank Holding Company Act (known as, the “Volcker Rule”) to be consistent with Sections 203 and 204 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). (Previously covered by InfoBytes here.) Consistent with Section 203 of the Act, the proposal would exempt community banks from the restrictions of the Volcker Rule if they, and every entity that controls them, have (i) total consolidated assets equal to or less than $10 billion; and (ii) total trading assets and liabilities that are equal to or less than five percent of their total consolidated assets.
The proposal also, consistent with Section 204 of the Act, would permit a hedge fund or private equity fund organized and offered by a banking entity to share a name with a banking entity that is its investment advisor, if (i) the advisor is not an insured depository institution, does not control a depository institution, and is not treated as a bank holding company under the International Banking Act; (ii) the advisor does not share a name with any such entities; and (iii) the shared name does not include "bank."
Comments will be due 60 days after publication in the Federal Register.
U.S.-based agriculture company discloses investigation
On November 30, a U.S.-based agriculture company disclosed in an SEC filing that it is cooperating with an investigation being conducted by the SEC and DOJ involving payments made to Mexican customs officials. The payments were made in connection with grain shipments crossing the U.S.-Mexican border by train. The company is a Fortune 100 company that is owned primarily by farmer and rancher cooperatives and has extensive operations in the energy sector in addition to agriculture.
The SEC filing states that the company voluntarily self-disclosed the potential violations and stressed the company’s full cooperation with the investigation, which includes “investigating other areas of potential interest to the government.” The DOJ has placed great emphasis on the importance of voluntary self-disclosure and cooperation in recent policy statements. See previous Scorecard coverage here. This investigation is noteworthy because while investigations in the energy sector are common, investigations in the agricultural sector are less so. The eventual resolution of this investigation may provide useful guidance for other agribusiness companies.
SEC settles with Texas offshore drilling company for violations of FCPA internal controls provision
On November 19, the SEC announced a settlement with a Texas offshore drilling company based on the improper activities of the company’s predecessor in connection with a Brazilian oil company bribery scheme. The Administrative Order found that the offshore drilling company had “failed to devise a system of internal accounting controls with regard to [its] transactions with [its] former outside director, largest shareholder, and only supplier of drilling assets . . . and failed to properly implement internal accounting controls related to its use of third-party marketing agents,” noting the company’s “ineffective anticorruption compliance program.” According to the Order, these failures permitted payments that “created a risk that [it] was providing or reimbursing funds that [a director] intended to use to make improper payments to" the Brazilian company at the center of a massive FCPA scheme.
The settlement with the SEC concludes the company’s involvement in the Brazilian company's investigations. According to the drilling company, they received a cooperation letter from the DOJ last year confirming the company’s full cooperation in the Brazilian company's investigation, and that the DOJ would not move forward with any actions against the drilling company.
Further coverage of the Brazilian oil company matter is available here.
SEC releases 2018 report on whistleblower program
On November 15, the SEC released its 2018 Annual Report to Congress on its Whistleblower Program, as required under § 924(d) of the Dodd-Frank Act and § 21(F)(g)(5) of the Securities Exchange Act of 1934. The Report, which covers October 1, 2017 through September 30, 2018, indicates that the SEC received 202 FCPA-related whistleblower tips during the reporting year. Those 202 FCPA tips account for only 3.82 percent of the tips received in that period. While the overall number of whistleblower tips has steadily risen over the past 4 years, the number of FCPA tips has remained fairly steady. In 2015, there were 186 (4.74 percent of the tips received); in 2016 there were 238 (5.64 percent of the tips received); and in 2017 there were 210 (4.68 percent of the tips received). This relative consistency contrasts with the number of offering fraud tips, which jumped from 758 in 2017 to 1,054 in 2018.
In addition to providing statistics and background on the whistleblower program, the Report discusses rule amendments proposed earlier this year. In particular, the Report reviews proposed amendments to SEC Rule 21F-2 (Whistleblower Status and Retaliation Protection) that are intended to bring the rules in line with the Digital Realty Trust v. Somers decision. The proposed amendments would include instituting a uniform definition of whistleblower that requires the individual to have submitted the information “in writing” to the SEC.
Court holds SEC has not proven pre-ICO cryptocurrency is a “security”
On November 27, the U.S. District Court for the Southern District of California denied the SEC’s motion for a preliminary injunction against a cryptocurrency company, concluding the agency failed show the currency tokens were “securities” as defined under federal securities laws. According to the order, the SEC filed a complaint against the company in October alleging it falsely claimed its initial coin offering (ICO) was registered and approved by the SEC and other regulators, including using the agency’s seal in marketing materials. At the time of the filing, the SEC claimed the company had already raised more than $2.5 million in pre-ICO sales. The SEC moved for a preliminary injunction to freeze the company’s assets and prevent the company’s owner from buying or selling securities and other digital currency during the pendency of the case. Upon review, the court noted the SEC must establish the company previously violated federal securities laws and there is a reasonable likelihood that it will happen again. The SEC argued the allegedly fraudulent marketing materials used to raise money from 32 “test investors” violated federal securities laws, while the company argued the investors did not have an expectation to receive profits as they were working with the company on the exchange’s functionality and therefore, the currency tokens were not “securities.” The court denied the SEC’s motion, concluding that it could not determine whether the tokens were “securities” under federal law without full discovery as there were disputed issues of material facts, including what the test investors relied on in terms of marketing materials before they purchased the cryptocurrency tokens.
Two ICO issuers settle SEC charges for securities offering registration violations
On November 16, the SEC announced cryptocurrency-related settlements imposing civil money penalties against two companies that allegedly offered and sold digital tokens through initial coin offerings (ICO). The settlements are the SEC’s first cases imposing civil money penalties based solely on alleged ICO securities offering registration violations. According to the SEC, the two companies allegedly violated the Securities and Exchange Act of 1934 by offering and selling ICO tokens without (i) registering them pursuant to federal securities laws; or (ii) qualifying for an exemption to registration requirements. Under the terms of the settlement agreements (available here and here), the companies—who have neither admitted nor denied the findings—have each agreed to pay a $250,000 civil money penalty, and will also (i) return funds to impacted investors; (ii) register the digital tokens as securities; and (iii) file periodic reports with the SEC.
9th Circuit hears oral arguments on overturning FCPA whistleblower retaliation award
On November 14, 2018, a three judge panel for the United States Court of Appeals for the 9th Circuit heard oral arguments for a life science research and diagnostics company hoping to overturn a February 2017 jury verdict ordering the company to pay its former General Counsel and Secretary $11 million in punitive and compensatory damages. The former employee’s complaint alleged that the company had fired him for being an FCPA whistleblower. As detailed in a previous FCPA Scorecard post, the company paid $55 million in November 2014 to settle DOJ and SEC allegations that the company violated the FCPA in Russia, Thailand, and Vietnam. The former employee’s report to the Audit Committee had involved separate allegations that the company violated the FCPA in China, allegations that did not result in additional penalties against the company.
The company appealed the former employee's award on the grounds that the jury was erroneously instructed that the SEC’s rules or regulations forbid bribery of a foreign official; that the company’s alleged FCPA violations were the result of the former employee’s lack of due diligence; that the trial court wrongly excluded certain impeachment testimony and evidence related to the timing of his pursuit and hiring of a whistleblower attorney; and that he did not qualify as a “whistleblower” under Dodd-Frank in light of his reporting only internally and not to the SEC (pursuant to the U.S. Supreme Court’s decision in another case). During the argument, one member of the circuit panel reportedly expressed doubt concerning the company’s jury instruction argument, and another told counsel for the company, “I don’t see how this can be reversed on the theory you’re offering.”
For prior coverage of the company's matter, please see here and here.
SEC announces first settlement with a digital currency exchange
On November 8, the SEC announced its first enforcement action settlement with a digital currency platform for allegedly operating as an unregistered national securities exchange. According to the cease-and-desist order, the founder of the digital currency exchange, who has since sold the exchange to foreign buyers, allegedly violated federal securities laws by providing an online platform for secondary market trading of digital assets, including ERC20 tokens, without registering with the Commission or operating pursuant to a registration exemption. ERC20 tokens are digital assets issued and distributed on the Ethereum Blockchain using the ERC20 protocol, which, according to the SEC, is the standard coding protocol currently used by a significant majority of issuers in initial coin offerings. The order emphasizes that 92 percent of the trades on the exchange took place after the SEC released its Report of Investigation Pursuant To Section 21(a) Of The Securities Exchange Act of 1934: The DAO (the DAO Report) in July 2017, advising that non-exempt digital currency exchanges must register with the Commission. Without admitting or denying the findings, the founder agreed to pay $300,000 in disgorgement plus interest and a $75,000 penalty.
SEC launches FinHub to facilitate fintech innovation
On October 18, the SEC announced the launch of its Strategic Hub for Innovation and Financial Technology (FinHub). According to the SEC, FinHub will assist in facilitating public engagement on fintech-related topics, including blockchain/distributed ledger technology, digital marketplace financing, automated investment advice, and artificial intelligence/machine learning. Through FinHub, industry participants and the public will have the opportunity to engage directly with the SEC to discuss and test innovative ideas and technological developments. FinHub will also act as a clearinghouse for SEC staff to access and disseminate fintech-related information throughout the agency, and will “[s]erve as a liaison to other domestic and international regulators regarding emerging technologies in financial, regulatory, and supervisory systems.”
“FinHub provides a central point of focus for our efforts to monitor and engage on innovations in the securities markets that hold promise, but which also require a flexible, prompt regulatory response to execute our mission,” SEC Chairman Jay Clayton announced.