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 December 2020, the FDIC approved a Final Rule to reframe the definition and exceptions for “brokered deposits”. Historically, the FDIC has broadly defined virtually any third party connecting a depositor with a bank as a “deposit broker” and the resulting deposits as “brokered deposits”. The Final Rule responds to long-standing industry criticisms seeking to narrow these terms. The Final Rule aims to permit substantially more deposits to be excluded from treatment as “brokered deposits” by narrowing the definition of “deposit broker” and by establishing a number of specific designated business exceptions that would automatically meet the “primary purpose” exception from the “deposit broker” definition. It is anticipated that the Final Rule will provide more flexibility for banks to enter into bank-fintech partnerships and other arrangements.

The Final Rule is effective April 1, 2021. However, entities may continue to rely on existing staff advisory opinions or other interpretations that predated the Final rule until January 1, 2022, at which point those opinions and interpretations will be moved to inactive status.

This alert memorandum discusses our key takeaways and summarizes the notable points from the Final Rule, including key modifications from the proposed rule.

On January 4, 2020, the Office of the Comptroller of the Currency (“OCC”) published an interpretive letter (the “Letter”) clarifying that national banks and federal savings associations (“banks”) may engage in and facilitate payment activities through new technological means, including serving as a node in a distributed ledger system such as those utilized by some stablecoins, facilitating customer conversion of fiat currency to or from digital currencies, and issuing stablecoins.

The Letter reasons that payment services are a core banking function, and that independent node verification networks (“INVNs”) and stablecoins are merely new means of effecting pre-existing permissible bank activities.

The letter follows other recent actions by former Acting Comptroller of the Currency Brian Brooks to clarify the authority of national banks to engage in certain digital asset activities, including the issuance of two other interpretive letters last year clarifying permissible cryptocurrency-related activities for banks (custodying digital assets and holding certain stablecoin reserves).  The Acting Comptroller, whose resignation became effective today, also spearheaded an initiative to grant national bank and national trust bank charters to fintech companies.

The Letter notes that banks “should consult with OCC supervisors, as appropriate, prior to engaging in these activities.”  This guidance, OCC precedents in expanding permissible bank activities, and the controversy surrounding recent crypto-related charter applications may lead to a deliberative approach by the OCC to banks expanding into these activities. Continue Reading OCC Affirms Authority of National Banks to Engage in Additional Cryptocurrency-Related Activities, Including Issuing Stablecoins

On September 15, 2020, the Securities and Exchange Commission issued a cease‑and‑desist order against Unikrn, Inc. concerning its 2017 initial coin offering  of UnikoinGold .  The SEC found that the Unikrn ICO violated the prohibition in Section 5 of the Securities Act of 1933 against the unregistered public offer or sale of securities.  The SEC imposed several remedies, including requiring Unikrn to permanently disable the UnikoinGold token and a civil money penalty of $6.1 million. Continue Reading SEC Issues Enforcement Action Against Unikrn, Inc. for its ICO, Prompting Rare Public Dissent from Commissioner Hester Peirce

On August 21, the Financial Crimes Enforcement Network, together with the federal banking agencies, released a statement to clarify banks’ customer due diligence obligations for politically exposed persons. The Statement affirms that (i) there is no regulatory requirement, and no supervisory expectation, for banks’ Bank Secrecy Act / anti-money laundering programs to include “unique, additional due diligence steps” for customers who are PEPs and (ii) there is no regulatory requirement for banks to screen customers and their beneficial owners for PEPs.  Instead, the Statement confirms that PEP customers should be subject to the same risk-based approach to CDD that applies to any other customer, but that PEP status (and screening for PEPs) may be a factor in developing a customer risk profile and assessing money laundering risk.  It also reminds banks of the continued U.S. national security and law enforcement interest in detecting and combatting public corruption and other criminality involving PEPs.

Please click here to read the full alert memorandum.

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 July 22, 2020, the Office of the Comptroller of the Currency (“OCC”) published an interpretive letter clarifying that providing cryptocurrency custody services to customers is a permissible activity for national banks and federal savings associations.  This letter marks an important milestone in the expansion of permissible banking activities related to digital assets. Continue Reading OCC Interpretation Opens the Door for Banks to Enter the Crypto Custody Business

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 March 24, the Commodity Futures Trading Commission (“CFTC”) released its Final Interpretive Guidance on Actual Delivery for Digital Assets (“Final Interpretation”), addressing longstanding questions regarding which digital asset transactions could be deemed “retail commodity transactions” under the Commodity Exchange Act (“CEA”).  The Final Interpretation comes two years after the CFTC issued proposed interpretive guidance (“Proposed Interpretation”). Continue Reading CFTC Issues Final Interpretive Guidance on Actual Delivery for Digital Assets