On November 8, 2021, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) designated a virtual currency exchange, Chatex, and its infrastructure support providers on the list of Specially Designated Nationals and Blocked Persons (SDN List) for their role in facilitating financial transactions for ransomware actors.[i]  The Financial Crimes Enforcement Network (FinCEN) also released an updated advisory on ransomware and the use of the financial system to facilitate ransomware payments.[ii]  These actions were taken in furtherance of a coordinated “whole-of-government” effort to disrupt criminal ransomware actors and the virtual currency exchanges used to launder ransom payments around the world.
Continue Reading OFAC Ramps up Targeting of Ransomware-linked Actors and FinCEN Updates Ransomware Advisory

On September 21, 2021, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC): (i) issued an updated advisory on potential sanctions risks for facilitating ransomware payments; and (ii) designated SUEX OTC, S.R.O. (SUEX), a virtual currency exchange, on the list of Specially Designated Nationals and Blocked Persons (SDN List) for its role in facilitating financial transactions for ransomware actors.[1]  These actions demonstrate the U.S. government’s increasing focus on virtual currencies as a key means of facilitating ransomware payments and related money laundering, as well as OFAC’s commitment to combating ransomware attacks and other malicious cyber activities.
Continue Reading OFAC Updates Ransomware Advisory and Sanctions Virtual Currency Exchange

On August 9, 2021, the SEC issued a cease-and-desist order against digital asset exchange Poloniex, Inc. for allegedly operating an unregistered exchange in violation of Section 5 of the Exchange Act in connection with its operation of a trading platform that facilitated the buying and selling of digital asset securities.[1]

In the cease-and-desist order, the SEC alleged that Poloniex met the definition of an “exchange” because it “provided the non-discretionary means for trade orders to interact and execute through the combined use of the Poloniex website, an order book, and the Poloniex trading engine.”  The SEC also found, based on internal communications, that Poloniex decided to be “aggressive,” ultimately listing token(s) it had internally determined carried a “medium” risk of being considered securities under the Securities Act of 1933 pursuant to the test set forth by the U.S. Supreme Court in SEC v. W.J. Howey.[2]  However, the SEC did not identify what digital asset(s) it determined were securities nor why, simply stating that Poloniex facilitated trading of “digital assets that were investment contracts and therefore securities.”

Without admitting or denying the SEC’s findings, Poloniex agreed to the entry of the order and a payment of $10,388,309 in disgorgement, prejudgment interest, and a civil penalty.
Continue Reading SEC Enforcement Action Against Poloniex Signals Heightened Scrutiny for Crypto Exchanges

While large financial institutions have traditionally been hesitant to enter new areas of financial products, particularly virtual assets, many more banks and companies have expressed interest in virtual currencies as cryptocurrency has become increasingly mainstream.  Given the use of such services by terrorist groups, it is important for banks and other financial institutions to consider

On February 18, 2021, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) announced a $507,375 settlement with BitPay, Inc. (BitPay), a payment processor for merchants accepting digital currency as payment for goods and services, for 2,102 apparent violations of multiple sanctions programs between 2013 and 2018.[1] The settlement highlights that financial service providers facilitating digital currency transactions must not only establish sanctions compliance programs to screen their own customers but also must monitor third-party non-customer transaction information.
Continue Reading OFAC Settles with Digital Currency Payment Processor for Sanctions Violations

On March 3, 2021, the U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”)—formerly the Office of Compliance Inspections and Examinations—released its 2021 Examination Priorities (“2021 Priorities”).  The 2021 Priorities generally retain perennial risk areas as the Division’s core focus, but do include several new and emerging risk areas reflecting broader policy shifts under new SEC leadership.

The 2021 Priorities include:  retail investors; information security and operational resilience; financial technology (“Fintech”), including digital assets; anti-money laundering; transition from the London Inter‑Bank Offered Rate (“LIBOR”); several areas covering registered investment advisers and investment companies; market infrastructure; and oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board programs and policies.  Although not formal priorities, the Division will also focus on climate-related risks and environmental, social and governance (“ESG”) matters in light of recent market developments and broader attention in these areas.
Continue Reading Turning the Page: Highlights of the SEC’s Division of Examination’s 2021 Priorities

In a landmark enforcement action related to a bank data breach, the Office of the Comptroller of the Currency (“OCC”) assessed an $80 million civil monetary penalty and entered into a cease and desist order with the bank subsidiaries of Capital One on August 6, 2020.  The actions follow a 2019 cyber-attack against Capital One.  The Federal Reserve Board also entered into a cease and desist order with the banks’ parent holding company.  The OCC actions represent the first imposition of a significant penalty against a bank in connection with a data breach or an alleged failure to comply with the OCC’s guidelines relating to information security.
Continue Reading OCC Imposes $80 Million Penalty in Connection with Bank Data Breach

On June 25, 2020, a federal district court in the Eastern District of Virginia held that a bank must produce in discovery a report generated by its cybersecurity forensic investigator following a 2019 data breach involving unauthorized access to personal information of customers and individuals who had applied for accounts.[1]  Even though the report was produced at the direction of outside counsel, the court rejected arguments that the forensic report is protected from disclosure by the work product doctrine.  Instead, the court determined that the report was not produced primarily in anticipation of litigation based on several factors, including the similarity of the report to past business-related work product by the investigator and the bank’s subsequent use and dissemination of the report.  This decision raises questions about the scope of work product protection for forensic expert and other similar reports in the context of an internal investigation.
Continue Reading Federal Court Compels Production of Data Breach Forensic Investigation Report

On January 7, 2020, the U.S. Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released its 2020 Examination Priorities (“2020 Priorities”).  While at first blush the themes appear consistent with and predictable from their 2019 priorities, on closer read OCIE has provided some new insights and some unexpected focus areas.  The themes for the 2020 Priorities are:  retail investors, information security, financial technology (“Fintech”) and innovation (including digital assets and electronic investment advice), several areas covering registered investment advisers and investment companies, anti-money laundering, market infrastructure (clearing agencies, national securities exchanges, alternative trading systems, transfer agents), and oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board programs and policies.  OCIE also stressed the challenges it faced in light of last year’s government shutdown and resource constraints, as the Division of Enforcement did in its 2019 Annual Report (see our analysis here), and the challenges in examining non-U.S. advisers due to limits that foreign data protection and privacy laws may place on cross-border information transfers.  In this post, we analyze the highlights in and our takeaways from the 2020 Priorities.
Continue Reading From the Expected to the Surprises: Highlights of SEC OCIE’s 2020 Priorities

On April 3, 2019, staff of the Securities and Exchange Commission released (1) a framework providing principles for analyzing whether a digital asset constitutes an investment contract, and thus a security, as defined in SEC v. W.J. Howey Co. and (2) a no-action letter permitting TurnKey Jet, Inc., without satisfying registration requirements under the Securities